Table of Contents
As filed with the Securities
and Exchange Commission on November 9, 2009.
Registration
No. 333-162344
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C.
20549
AMENDMENT NO. 2
To
Form S-1
REGISTRATION
STATEMENT
UNDER
THE SECURITIES ACT OF
1933
SYMETRA FINANCIAL
CORPORATION
(Exact name of registrant as
specified in its charter)
| Delaware | 6311 | 20-0978027 | ||
|
(State or other jurisdiction
of incorporation or organization) |
(Primary Standard Industrial Classification Code Number) |
(I.R.S. Employer Identification Number) |
777 108th Avenue NE,
Suite 1200
Bellevue, WA 98004
(425) 256-8000
(Address, including zip code,
and telephone number, including area code, of registrant’s
principal executive offices)
Randall H. Talbot
President and Chief Executive
Officer
Symetra Financial
Corporation
777 108th Avenue NE,
Suite 1200
Bellevue, WA 98004
(425) 256-8000
(Name and address, including zip
code, and telephone number, including area code, of agent for
service)
Copies to:
|
William J. Whelan III, Esq. Cravath, Swaine & Moore LLP Worldwide Plaza 825 Eighth Avenue New York, NY 10019 (212) 474-1000 |
George C. Pagos, Esq. Senior Vice President, General Counsel and Secretary Symetra Financial Corporation 777 108th Avenue NE, Suite 1200 Bellevue, WA 98004 (425) 256-8000 |
Gary I. Horowitz, Esq. Simpson Thacher & Bartlett LLP 425 Lexington Avenue New York, NY 10017 (212) 455-2000 |
Approximate date of commencement of proposed sale to the
public: As soon as practicable after the
effective date of this Registration Statement.
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, check the
following
box. o
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act,
please check the following box and list the Securities Act
registration statement number of the earlier effective
registration statement for the same
offering. o
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. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following
box and list the Securities Act registration number of the
earlier effective registration statement for the same
offering. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
“large accelerated filer,” “accelerated
filer” and “smaller reporting company” in
Rule 12b-2
of the Exchange Act. (Check one):
| Large accelerated filer o | Accelerated filer o | Non-accelerated filer þ | Smaller reporting company o |
(Do not check if a smaller
reporting company)
CALCULATION OF REGISTRATION
FEE
|
Proposed Maximum |
Amount of |
|||||
|
Title of Each Class of |
Aggregate |
Registration |
||||
| Securities to be Registered | Offering Price(1)(2) | Fee(3) | ||||
|
Common Stock, $0.01 par value per share
|
$575,000,000.00 | $32,085.00 | ||||
| (1) | Includes shares issuable upon exercise of the underwriters’ over-allotment options. See “Underwriting.” | |
| (2) | Estimated solely for the purpose of calculating the amount of the registration fee pursuant to rule 457(o) under the Securities Act of 1933, as amended. | |
| (3) | The registration fee has been previously paid. |
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 this Registration
Statement shall become effective on such date as the Commission,
acting pursuant to said Section 8(a), may determine.
Table of Contents
|
The information in
this preliminary prospectus is not complete and may be changed.
We may not and the Selling Stockholders may not sell these
securities until the registration statement filed with the
Securities and Exchange Commission of which this preliminary
prospectus forms a part is effective. This preliminary
prospectus is not an offer to sell these securities and it is
not soliciting an offer to buy these securities in any state
where the offer or sale is not permitted. |
SUBJECT TO COMPLETION, DATED
NOVEMBER 9, 2009
PROSPECTUS
Shares
Common Stock
This is Symetra Financial Corporation’s initial public
offering. We are
selling shares
of our common stock in this offering. The Selling Stockholders
are
selling shares
of our common stock in the offering. We intend to use the net
primary proceeds from this offering for general corporate
purposes, which may include contributions of capital to our
insurance and other subsidiaries. We will not receive any
proceeds from the sale of shares by the Selling Stockholders.
See “Use of Proceeds.”
We expect the public offering price to be between
$ and
$ per share. Currently, no public
market exists for the shares. We intend to apply to list our
common stock on the New York Stock Exchange under the symbol
“SYA.”
Investing in our common stock involves risks that are
described in the “Risk Factors” section beginning on
page 12 of this prospectus.
| Per Share | Total | |||||||
|
Initial public offering price
|
$ | $ | ||||||
|
Underwriting discounts and commissions
|
$ | $ | ||||||
|
Proceeds to Symetra (before expenses)
|
$ | $ | ||||||
|
Proceeds to Selling Stockholders (before expenses)
|
$ | $ | ||||||
The underwriters may also purchase up to an
additional shares
of common stock from the Company and the Selling Stockholders at
the public offering price, less the underwriting discount,
within 30 days from the date of this prospectus to cover
over-allotments.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or determined if this prospectus is truthful or
complete. Any representation to the contrary is a criminal
offense.
The shares will be ready for delivery on or
about ,
2009.
Joint Book-Running Managers
| BofA Merrill Lynch | J.P. Morgan | Goldman, Sachs & Co. | Barclays Capital |
The date of this prospectus
is ,
2009.
TABLE OF
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| EX-4.2 | ||||||||
| EX-4.5 | ||||||||
| EX-9.1 | ||||||||
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| EX-10.4 | ||||||||
| EX-10.13 | ||||||||
| EX-10.19 | ||||||||
| EX-23.1 | ||||||||
You should rely only on the information contained in this
document or any free writing prospectus prepared by or on behalf
of us. We have not authorized anyone to provide you with
information that is different. This document may only be used
where it is legal to sell these securities. The information
contained in this document may only be accurate on the date of
this document.
“Symetra,” “Symetra Financial” and their
respective logos are our trademarks. Other service marks,
trademarks and trade names referred to in this prospectus are
the property of their respective owners.
Our insurance subsidiaries are domiciled in the states of
Washington and New York. These states have enacted laws that
require regulatory approval for the acquisition of
“control” of insurance companies. Under these laws,
there exists a presumption of “control” when an
acquiring party acquires 10% or more of the voting securities of
an insurance company or of a company which itself controls an
insurance company. Therefore, any person acquiring 10% or more
of our common stock would need the prior approval of the state
insurance regulators of these states or a determination from
such regulators that “control” has not been acquired.
Dealer
Prospectus Delivery Obligation
Until ,
2009 (the 25th day after the date of this prospectus), all
dealers that effect transactions in our common shares, whether
or not participating in this offering, may be required to
deliver a prospectus. This is in addition to the dealers’
obligation to deliver a prospectus when acting as an underwriter
and with respect to unsold allotments or subscriptions.
Table of Contents
PROSPECTUS
SUMMARY
The following is a summary of the information contained in
this prospectus, and it may not contain all the information that
is important to you. You should read the entire prospectus
carefully, especially the “Risk Factors” section, the
consolidated financial statements and the accompanying notes
included in this prospectus.
Unless the context otherwise requires, references in this
prospectus to “Symetra” refer to Symetra Financial
Corporation on a stand-alone, non-consolidated basis. References
to “we,” “our,” “us” and “the
Company” are to Symetra Financial Corporation together with
its subsidiaries, including our predecessor operations.
A glossary of selected insurance terms and defined terms used
throughout this prospectus can be found under “Glossary of
Selected Insurance and Defined Terms” on
page G-1.
Our
Business
We are a life insurance company focused on profitable growth in
select group health, retirement, life insurance and employee
benefits markets. Our operations date back to 1957 and many of
our agency and distribution relationships have been in place for
decades. We are headquartered in Bellevue, Washington and employ
approximately 1,100 people in 16 offices across the United
States, serving approximately 1.8 million customers.
As of September 30, 2009, our stockholders’ equity was
$1,480.5 million, our adjusted book value was
$1,450.7 million and we had total assets of
$22.2 billion. For the twelve months ended
September 30, 2009, our return on equity, or ROE, was 13.9%
and our operating return on average equity, or operating ROAE,
was 10.6%. We define adjusted book value as stockholders’
equity less accumulated other comprehensive income (loss), or
AOCI, and we define operating ROAE as net operating income
divided by average adjusted book value. Adjusted book value, net
operating income and operating ROAE are non-GAAP measures. For
reconciliations of adjusted book value to stockholders’
equity and net operating income to net income and for a summary
presentation of our operating results and financial position
determined in accordance with GAAP, please see
“— Summary Historical Consolidated Financial and
Other Data” on page 9.
We manage our business through the following five segments, four
of which are operating:
| • | Group. We offer medical stop-loss insurance, limited medical benefit plans, group life insurance, accidental death and dismemberment insurance and disability insurance mainly to employer groups of 50 to 5,000 individuals. In addition to our insurance products, we offer managing general underwriting, or MGU, services through Medical Risk Managers, Inc, or MRM. Our Group segment generated segment pre-tax operating income of $66.9 million during 2008 and $44.7 million during the nine months ended September 30, 2009. |
| • | Retirement Services. We offer fixed and variable deferred annuities, including tax sheltered annuities, individual retirement accounts, or IRAs, and group annuities to qualified retirement plans, including Section 401(k), 403(b) and 457 plans. Our Retirement Services segment generated segment pre-tax operating income of $36.6 million during 2008 and $41.3 million during the nine months ended September 30, 2009. |
| • | Income Annuities. We offer single premium immediate annuities, or SPIAs, to customers seeking a reliable source of retirement income and structured settlement annuities to fund third party personal injury settlements. In addition, we offer our existing structured settlement clients a variety of funding services product options. Our Income Annuities segment generated segment pre-tax operating income of $36.5 million during 2008 and $33.0 million during the nine months ended September 30, 2009. |
| • | Individual. We offer a wide array of term, universal and variable life insurance as well as bank-owned life insurance, or BOLI. Our Individual segment generated segment pre-tax operating income of $59.7 million during 2008 and $51.6 million during the nine months ended September 30, 2009. |
| • | Other. This segment consists of unallocated corporate income, composed primarily of investment income on unallocated surplus, unallocated corporate expenses, interest expense on |
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| debt, tax credits from certain investments, the results of small, non-insurance businesses that are managed outside of our operating segments, and inter-segment elimination entries. Our Other segment generated a segment pre-tax operating loss of $31.6 million during 2008 and $5.8 million during the nine months ended September 30, 2009. |
We distribute our products nationally through an extensive and
diversified independent distribution network. Our distributors
include financial institutions, employee benefits brokers, third
party administrators, specialty brokers, independent agents and
advisors. We believe that our multi-channel distribution network
allows us to access a broad share of the distributor and
consumer markets for insurance and financial services products.
For example, we currently distribute our annuity and life
insurance products through approximately 16,000 independent
agents, 26 key financial institutions and 4,300 independent
employee benefits brokers. We continually add new distribution
relationships to expand the breadth of partners offering our
products.
Market
Environment and Opportunities
We believe we are well positioned to capitalize on existing
market opportunities, including:
| • | Increasing need for retirement savings and income. There are significant demographic factors that indicate increased need for retirement solutions. These factors include: |
| – | according to the U.S. Census Bureau, there are 76.8 million baby-boomers (Americans born between 1946 and 1964) who are at or near retirement age; and |
| – | according to the U.S. Census Bureau, there are 61.6 million members of Generation X (Americans born between 1965 and 1979). We believe these members of Generation X are likely to fund their retirement from personal savings. |
Many of these individuals have experienced significant declines
in the value of their savings as a result of recent market
turmoil or have saved too little for retirement. According to
the Employee Benefit Research Institute, or EBRI, as of 2007,
approximately 78% of families with a head of household aged 55
to 65 participated in an employer-based retirement plan or IRA.
EBRI estimates that the median value of this population’s
employer-based retirement plans declined 14.7% from
approximately $81,000 in 2007 to approximately $69,100 in June
2009. As a result of these demographic factors, we expect
greater demand for retirement savings products that supplement
social security. In particular, we believe demand will continue
to grow for products like immediate annuities that offer income
streams that cannot be outlived.
| • | Shift in customer demand toward simple to understand products. The equity and bond market dislocation of the last 18 months shifted customer and distributor demand toward simple to understand and predictable products. Customers increasingly demand savings and income oriented products (such as fixed annuities) that offer transparency and stable returns that are higher than returns on savings accounts. Industry sales of savings and income oriented products have grown substantially while sales of equity market based products (such as variable annuities) have fallen. Illustrating this trend, Kehrer/LIMRA reported that industry sales of variable annuities declined by 26% in the first six months of 2009 compared to the equivalent 2008 period. Conversely, industry sales of fixed annuities grew by 46% over the same period. |
| • | Continued demand for affordable health insurance. According to the Kaiser Family Foundation, health insurance premiums in the United States increased 131% from 1999 to 2009; meanwhile, the Consumer Price Index increased only 28%. As health care costs continue to rise faster than inflation, the demand for affordable health insurance options has increased. According to the Self-Insurance Institute of America, 75 million people in the United States under the age of 65 receive their benefits through self-funded plans, including 47% of workers in smaller firms and 76% of workers in midsize firms. We believe we can grow our business by providing employees with affordable access to health insurance through employer-sponsored limited benefit employee health plans and by offering group medical stop-loss insurance to medium and large businesses that self-fund their medical plans. |
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Our
Competitive Strengths
Our competitive strengths enabled us to perform well across all
of our operating segments through the recent market turmoil.
Since January 1, 2008 we have added 26 distribution
partners, developed 14 new products and grown our assets under
management by $3.0 billion, or 17.4%. Our sales for the
first nine months of 2009 were $2.2 billion, an increase of
260% over our sales during the first nine months of 2007. Our
competitive strengths include:
Balance sheet focus. We are vigilant about
maintaining a strong balance sheet in all economic environments.
We believe our strong balance sheet will allow us to continue
growing our business and market share as many of our competitors
must first shore up their own balance sheets.
| • | Superior investment management. We pursue a value-oriented investment approach focused on disciplined matching of assets and liabilities and preservation of principal. We believe we have built a conservative asset portfolio illustrated by the following (as of September 30, 2009): |
| – | Subprime exposure of only $0.3 million |
| – | Alt-A exposure totaling less than 1% of invested assets, with 88% of Alt-A exposure being supported by fixed rate collateral |
| – | No exposure to option adjustable rate mortgages, or option ARMs |
| – | 99% of our commercial mortgage-backed security, or CMBS, portfolio is rated AAA and has a weighted-average credit enhancement of 28% |
| – | Minimal exposure to alternative assets, such as hedge funds and private equity funds | |
| – | Below investment grade fixed maturities represent less than 7% of invested assets |
This investment approach has resulted in what we believe to be
relatively strong performance. For example:
| – | Our total pre-tax net realized gains (losses) on sales and impairments of fixed maturities cost 41 basis points for the first nine months of 2009, cost 52 basis points for 2008, and cost an annualized average 19 basis points since January 1, 2005 |
| – | Our commercial mortgage portfolio has a weighted-average loan-to-value ratio of 54% and only one non-performing loan |
| – | Since January 1, 2005, our equity portfolio has grown at an annualized rate of 10.1% compared to an annualized return of (0.8)% for the S&P 500 Index |
| • | Disciplined liability risk management. We believe we have an attractive and diverse mix of businesses that, combined with our disciplined approach to asset/liability matching, enables us to stick to our strategy of offering simple to understand products without adding product features that create liability-side balance sheet volatility. Our liability portfolio includes: |
| – | No guaranteed living benefits, or GLBs, in variable annuity products | |
| – | No shadow accounts in universal life products | |
| – | No term products that are dependent on lapse-supported pricing and securitization of deficiency reserves | |
| – | No high commission/long surrender period indexed annuities |
Because we do not offer these product features, we avoided
having a complex derivative hedging portfolio similar to those
found on the balance sheets of many of our competitors.
| • | Strong financial position. We believe we have a strong and transparent balance sheet due to the lack of off-balance sheet obligations and embedded guarantees on variable products, and limited derivative and alternative investments. We have no value of business acquired, or VOBA, on our |
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balance sheet and minimal goodwill. We believe that we compare
favorably to our industry in terms of the following financial
strength metrics (as of September 30, 2009):
| – | Our deferred acquisition costs, or DAC, is 16% of stockholders’ equity and 17% of adjusted book value |
| – | Our goodwill is 2% of stockholders’ equity and adjusted book value |
| – | We have no outstanding debt balances maturing until 2016 |
| – | Stockholders’ equity is 102% and adjusted book value is 100% of regulatory capital |
| – | Our risk-based capital ratio is 361% |
| – | Our AOCI improved from $(1,052.6) million at December 31, 2008 to $29.8 million at September 30, 2009 |
Adjusted book value is a non-GAAP measure. For a reconciliation
of adjusted book value to stockholders’ equity and for a
summary presentation of our operating results and financial
position determined in accordance with GAAP, please see
“— Summary Historical Consolidated Financial and
Other Data” on page 9.
Powerful and expanding national distribution
network. We have a two-pronged approach to
expanding product sales by working with our existing
distribution relationships and by adding new distribution
partners.
| • | High quality distribution relationships. We offer consumers access to our products through a national multi-channel network, including financial institutions, employee benefits brokers, third party administrators, specialty brokers and independent agents. We are adept at designing simple to understand, yet innovative products to meet the changing demands of the market. By working closely with our distributors, we are able to anticipate opportunities in the marketplace and rapidly address them. By treating our distributors as clients and providing them with outstanding levels of service, we have cultivated strong relationships over decades that we believe allow us to avoid competing on price alone. In addition, we have flexible information technology platforms that allow us to integrate our products onto the operating platforms of our distributors, which we believe provides us with a competitive advantage in attracting new distributors. |
| • | Strong bank distribution channel. According to Kehrer/LIMRA, we were a top-five seller of fixed annuities through banks in the first six months of 2009. Our strong bank distribution relationships make us well-positioned to continue to take advantage of the increased investor demand for fixed annuities and to take market share away from financially stressed competitors. We also have increased our sales of single premium immediate annuities and single premium life insurance through existing and new bank distribution partners. During the first nine months of 2009, our sales of single premium immediate annuities through banks increased 18% and single premium life volumes increased 74% as compared to the first nine months of 2008. |
Leading group medical stop-loss insurance
provider. We have been a leading provider of group
medical stop-loss insurance since 1976. We have built a
consistently profitable platform with high levels of customer
service and disciplined underwriting practices. In the last
25 years, our group medical stop-loss insurance business
has experienced only two calendar years of net losses, the most
recent being 1999.
Diverse business mix. We believe that our
diverse mix of businesses offers us a greater level of financial
stability than many of our similarly-sized competitors across
business and economic cycles. Given our lack of reliance on any
particular product or line of business, we are able to allocate
resources to markets with the highest potential returns at any
given point in time. By doing so, we are able to avoid certain
markets when they are experiencing heavy competition and related
pricing pressure without sacrificing our ability to grow
revenues.
Proven management team. We have a high
quality management team with an average of 25 years of
insurance-industry experience, led by Randy Talbot who has been
our chief executive officer since 1998. Having
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spent a significant portion of his
34-year
insurance industry career operating an insurance brokerage,
Mr. Talbot intimately understands the needs of our
distributors. We also have an experienced board of directors,
which includes industry professionals who have worked closely
with us to develop our strategies and operating philosophies.
Our long-term incentive plan aligns management’s incentives
with our stockholders’ interests.
Our
Growth Strategies
The recent market turmoil and its effects on our competitors
present a compelling opportunity to continue adding business at
attractive returns. Further, we believe our growth strategies
are well aligned with the current market environment as well as
the long-term competitive dynamics of our industry. We believe
the following proven, long-term growth strategies position us
well to consistently grow stockholder value despite periods of
aggressive pricing by our competitors:
| • | Sell simple to understand products. We have built a reputation as a writer of simple to understand products that meet the needs of customers and our distribution partners. This reputation has been strengthened by the retrenchment of many of our competitors due to recent market events and the consistency of our presence and product lineup over the past several years. We believe independent distributors highly value our demonstrated ability to accept new business during turbulent conditions while maintaining strong financial performance. As a result, we are able to take advantage of the convergence of increasing customer desire for simple to understand products and the financial challenges of several market competitors. |
| • | Broaden and deepen distribution relationships. Our distribution strategy is to deliver multiple products through a single point of sale, thereby reducing our distribution costs. We believe that we have an unprecedented opportunity to expand our existing relationships and build new long-term relationships due to the recent market disruption that has distracted and refocused our competitors. Since January 1, 2008, we have added eight new bank relationships with approximately 6,100 sales representatives. In addition, we have added 18 new independent distribution relationships which added 2,400 new sales representatives actively selling our products. These new relationships, in tandem with existing relationships, have enabled us to grow our sales from $617 million during the first nine months of 2007 to $2.2 billion in the first nine months of 2009. |
| • | Effectively deploy capital. We intend to deploy our capital prudently while maximizing our profitability and long-term growth in stockholder value. Our capital management strategy is to maintain financial strength through conservative and disciplined risk management practices, capital efficient product design, effective asset/liability management and opportunistic market share growth in all our business segments. We will also maintain our conservative investment management philosophy, which includes holding a high quality investment portfolio and carefully matching our investment assets against the duration of our insurance product liabilities. This approach will enable us to remain flexible to allocate capital to opportunities within our business segments that offer the highest returns. |
Risks
Related to Our Business, Our Industry and this
Offering
Investing in shares of our common stock involves substantial
risk. The factors that could adversely affect our results and
performance are discussed under the heading “Risk
Factors” immediately following this summary. Before you
invest in our shares, you should carefully consider all of the
information in this prospectus, including matters set forth
under the heading “Risk Factors,” including:
| • | Impact of the credit crisis and economic downturn. The recent credit crisis, global capital markets conditions and economic downturn have adversely impacted and will continue to have an adverse impact on our business and on the financial services industry in general. Impacts have included and will include investment losses, less availability and/or more competition for appropriate investments to support our products, higher cash balances generating yields lower |
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| than needed to support our products, failure of key business partners, impacts on demand for our products from new and existing customers, reduced availability of capital, higher cost of capital and heightened scrutiny from regulators and ratings agencies. It is unclear what impact financial rescue programs instituted by the U.S. federal government will have on the markets and on our business. |
| • | Investment losses. The credit crisis and significant drop in the equity markets that began in the second half of 2007 and substantially increased during the fourth quarter of 2008 have resulted in, and may continue to result in, decreases in value of fixed maturity securities, equity securities and other investments in our investment portfolio, which have impacted and may continue to impact our results of operations and financial position. | |
| • | Exposure to interest rate fluctuations. Many of our insurance and investment products are sensitive to interest rate fluctuations and expose us to the risk that falling interest rates will reduce the “spread,” or the difference between the returns we earn on the investments that support our obligations under our insurance and investment products and the amounts that we must credit to policyholders and contractholders. Generally, persistently low interest rates would have an adverse effect on our financial condition, results of operations and cash flows. Generally, inflation could adversely impact our financial condition, results of operations and cash flows due to potential higher policyholder withdrawals and asset sales at undesirable prices. | |
| • | Reserve requirements. Our calculations of reserves for estimated future benefit payments are based upon estimates and assumptions with regard to our future experience. Future experience is subject to many uncertainties and we cannot predict the ultimate amounts we will pay for future benefits or the timing of the payments. If reserves are insufficient to cover actual benefits and payments, we could be required to increase our reserves, which could adversely affect our financial condition and results. | |
| • | Deviation from assumptions upon which pricing is established. The price and expected future profitability of our insurance and annuity products are based in part upon expected patterns of premiums, expenses and benefits, using a number of assumptions, including those related to persistency, mortality and morbidity. Significant deviations from these assumptions could have an adverse affect on our financial condition, results of operations and cash flows. | |
| • | Amortization of deferred policy acquisition costs. Deferred policy acquisition costs, or DAC, represent certain costs that vary with, and are primarily related to, the sale and issuance of insurance policies and investment contracts and are deferred and amortized over the estimated policy and contract lives. Unfavorable experience with regard to expenses, investment returns, mortality, morbidity, withdrawals or lapses may increase the amortization of DAC, resulting in higher expenses and lower profitability. | |
| • | Potential downgrade in financial strength ratings. A downgrade in our financial strength ratings could have an adverse effect on our financial condition, results of operations and cash flows in several ways, including reducing new sales of products, adversely affecting our relationship with sales agents, increasing the number of policy surrenders and withdrawals, requiring us to reduce prices in order to compete and adversely impacting our ability to obtain reinsurance. | |
| • | Highly regulated industry. Our insurance businesses are subject to a wide variety of laws and regulations in various jurisdictions. Compliance with applicable laws and regulations is time consuming and personnel intensive, and changes in these laws and regulations may materially increase our direct and indirect compliance efforts and other expenses of doing business. | |
| • | Proposals for national health care reform. We sell group medical stop-loss insurance and limited benefit employee health plans to employer groups. Proposals addressing the affordability and availability of health insurance, including reducing the number of uninsured, are pending in |
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| the U.S. Congress and in many states. While at this time we cannot predict whether or in what form these proposals will be enacted, national health care reform could have a material effect on the profitability or marketability of our health insurance products and services and on our financial condition, results of operations and cash flows. |
| • | Constraints related to holding company structure. As a holding company, we have no significant direct operations. Dividends and other permitted distributions from subsidiaries are expected to be our principal source of funds to meet ongoing cash requirements. These payments are limited by regulations in the jurisdictions in which our subsidiaries operate. If our subsidiaries are unable to pay dividends, we may have difficulty servicing our debt, paying dividends on our common stock and meeting our holding company expenses. |
Financial
Strength Ratings
Currently, the financial strength ratings of our primary life
insurance subsidiaries, Symetra Life Insurance Company and First
Symetra National Life Insurance Company of New York, are
“A” (“Excellent,” the third highest of 16
ratings) with a stable outlook from A.M. Best Company,
Inc., “A” (“Strong,” the sixth highest of 21
ratings) with a negative outlook from Standard &
Poor’s Rating Service, and “A+”
(“Strong,” the fifth highest of 24 ratings) with a
negative outlook from Fitch, Inc. Moody’s Investors
Service, Inc. rates Symetra Life Insurance Company as
“A3” (“Good,” the seventh highest of 21
ratings) with a stable outlook. Moody’s does not rate First
Symetra National Life Insurance Company of New York. These
financial strength ratings should not be relied on with respect
to making an investment in our common stock.
Use of
Proceeds
Our board of directors has not made any determination of
specific uses of proceeds at this time. However, we expect to
use the net primary proceeds from this offering for general
corporate purposes, which may include contributions of capital
to our insurance and other subsidiaries. We will not receive any
proceeds from the sale of shares by the Selling Stockholders.
The
Selling Stockholders
In addition to the sale of shares of our common stock by the
Company, members of the original investor group that formed
Symetra by acquiring a group of life insurance and investment
companies from Safeco Corporation on August 2, 2004 (which
we refer to as the “Acquisition”) may participate in
this offering as Selling Stockholders. Upon consummation of this
offering, affiliates of White Mountains Insurance Group, Ltd.
and Berkshire Hathaway Inc. will collectively continue to
beneficially own approximately % of
our outstanding common stock.
Our
Executive Offices
Symetra was incorporated in 2004 under the laws of Delaware. Our
principal executive offices are located at 777 108th Avenue
NE, Suite 1200, Bellevue, WA 98004. Our telephone number is
(425) 256-8000.
Our internet address is www.symetra.com. The information
contained on or accessible from our website does not constitute
a part of this prospectus and is not incorporated by reference
herein.
7
Table of Contents
The
Offering
| Common stock offered by Symetra | shares | |
| Common stock offered by the Selling Stockholders | shares | |
| Common stock to be outstanding after this offering | shares | |
| Over-allotment options | The underwriters have options to purchase a total of up to additional shares from the Company and the Selling Stockholders to cover over-allotments. | |
| Use of proceeds | We intend to use the net primary proceeds from this offering for general corporate purposes, which may include contributions of capital to our insurance and other subsidiaries. We will not receive any proceeds from the sale of shares by the Selling Stockholders. See “Use of Proceeds.” | |
| Listing | We will apply to list our common stock on the New York Stock Exchange, or NYSE, under the symbol “SYA.” | |
| Dividend policy | We intend to pay quarterly dividends on our common stock. The declaration, payment and amount of future dividends to holders of our common stock will be at the discretion of our board of directors and will depend on many factors, including our financial condition and results of operations, liquidity requirements, market opportunities, capital requirements of our subsidiaries, legal requirements, regulatory constraints and other factors that our board of directors deems relevant. Dividends on our common stock will also be paid to holders of our outstanding warrants on a one-to-one basis. | |
| Risk factors | See “Risk Factors” for a discussion of factors you should consider before investing in our common stock. |
All information in this prospectus, unless otherwise indicated
or the context otherwise requires:
| • | assumes the common stock will be sold at $ per share (the midpoint of the price range set forth on the cover of this prospectus); | |
| • | assumes no exercise of the underwriters’ over-allotment options; |
| • | excludes 7,746,840 remaining shares of common stock reserved for issuance pursuant to our Equity Plan; |
| • | excludes 870,000 shares of common stock reserved for issuance pursuant to our Employee Stock Purchase Plan; and | |
| • | assumes no exercise of outstanding warrants to purchase 18,975,744 shares of common stock at an exercise price of $11.49 per share. |
8
Table of Contents
SUMMARY
HISTORICAL CONSOLIDATED FINANCIAL AND OTHER DATA
The summary historical consolidated financial and other data,
except for non-GAAP financial measures, as of September 30,
2009 and for the nine months ended September 30, 2009 and
2008 have been derived from our unaudited interim historical
consolidated financial statements and the related notes, which
have been prepared on a basis consistent with our audited
consolidated financial statements and are included in this
prospectus. In the opinion of management, such unaudited
financial data, except for non-GAAP financial measures, reflects
all historical and recurring adjustments necessary for a fair
presentation of the results for these periods. The results of
operations for the nine months ended September 30, 2009 are
not necessarily indicative of the results to be expected for the
full year or any future period. The summary historical
consolidated financial and other data, except for non-GAAP
financial measures, as of December 31, 2008 and 2007 and
for the years ended December 31, 2008, 2007 and 2006 have
been derived from our audited consolidated financial statements
and the related notes that are included elsewhere in this
prospectus. The summary historical consolidated financial and
other data, except for non-GAAP financial measures, as of
December 31, 2006 have been derived from our audited
consolidated financial statements that are not included in this
prospectus. This summary data should be read in conjunction with
our historical consolidated financial statements and related
notes included in this prospectus, and with
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations.”
|
Nine Months Ended |
Twelve Months Ended |
|||||||||||||||||||
| September 30, | December 31, | |||||||||||||||||||
| 2009 | 2008 | 2008 | 2007 | 2006 | ||||||||||||||||
| (In millions, except per share data) | ||||||||||||||||||||
|
Consolidated Income Statement Data:
|
||||||||||||||||||||
|
Revenues:
|
||||||||||||||||||||
|
Premiums
|
$ | 430.2 | $ | 440.4 | $ | 584.8 | $ | 530.5 | $ | 525.7 | ||||||||||
|
Net investment income
|
829.4 | 718.0 | 956.5 | 973.6 | 984.9 | |||||||||||||||
|
Other revenues
|
43.2 | 52.0 | 67.8 | 68.7 | 56.1 | |||||||||||||||
|
Net realized investment gains (losses):
|
||||||||||||||||||||
|
Total
other-than-temporary
impairment losses on securities
|
(167.9 | ) | (61.7 | ) | (86.4 | ) | (16.2 | ) | (25.7 | ) | ||||||||||
|
Less: portion of losses recognized in other comprehensive income
|
94.2 | — | — | — | — | |||||||||||||||
|
Net impairment losses recognized in earnings
|
(73.7 | ) | (61.7 | ) | (86.4 | ) | (16.2 | ) | (25.7 | ) | ||||||||||
|
Other net realized investment gains (losses)
|
44.7 | (41.6 | ) | (71.6 | ) | 33.0 | 27.4 | |||||||||||||
|
Total net realized investment gains (losses)
|
(29.0 | ) | (103.3 | ) | (158.0 | ) | 16.8 | 1.7 | ||||||||||||
|
Total revenues
|
1,273.8 | 1,107.1 | 1,451.1 | 1,589.6 | 1,568.4 | |||||||||||||||
|
Benefits and expenses:
|
||||||||||||||||||||
|
Policyholder benefits and claims
|
262.1 | 260.1 | 348.5 | 267.1 | 264.3 | |||||||||||||||
|
Interest credited
|
629.2 | 569.1 | 766.1 | 752.3 | 765.9 | |||||||||||||||
|
Other underwriting and operating expenses
|
186.7 | 201.9 | 265.8 | 281.9 | 260.5 | |||||||||||||||
|
Interest expense
|
23.8 | 24.0 | 31.9 | 21.5 | 19.1 | |||||||||||||||
|
Amortization of deferred policy acquisition costs
|
36.4 | 17.7 | 25.8 | 18.0 | 14.6 | |||||||||||||||
|
Total benefits and expenses
|
1,138.2 | 1,072.8 | 1,438.1 | 1,340.8 | 1,324.4 | |||||||||||||||
|
Income from operations before income taxes
|
135.6 | 34.3 | 13.0 | 248.8 | 244.0 | |||||||||||||||
|
Provision (benefit) for income taxes:
|
||||||||||||||||||||
|
Current
|
(4.2 | ) | 34.2 | 23.8 | 62.8 | 92.4 | ||||||||||||||
|
Deferred
|
43.6 | (26.9 | ) | (32.9 | ) | 18.7 | (7.9 | ) | ||||||||||||
|
Total provision (benefit) for income taxes
|
39.4 | 7.3 | (9.1 | ) | 81.5 | 84.5 | ||||||||||||||
|
Net income
|
$ | 96.2 | $ | 27.0 | $ | 22.1 | $ | 167.3 | $ | 159.5 | ||||||||||
|
Net income per common share(1):
|
||||||||||||||||||||
|
Basic
|
$ | 0.86 | $ | 0.24 | $ | 0.20 | $ | 1.50 | $ | 1.43 | ||||||||||
|
Diluted
|
$ | 0.86 | $ | 0.24 | $ | 0.20 | $ | 1.50 | $ | 1.43 | ||||||||||
|
Weighted-average number of common shares outstanding:
|
||||||||||||||||||||
|
Basic
|
111.622 | 111.622 | 111.622 | 111.622 | 111.622 | |||||||||||||||
|
Diluted
|
111.623 | 111.622 | 111.622 | 111.622 | 111.622 | |||||||||||||||
|
Cash dividends declared per common share
|
$ | — | $ | — | $ | — | $ | 1.79 | $ | 0.90 | ||||||||||
|
Non-GAAP Financial Measure(2):
|
||||||||||||||||||||
|
Net operating income
|
$ | 115.2 | $ | 91.8 | $ | 122.9 | $ | 154.9 | $ | 159.8 | ||||||||||
|
Reconciliation to net income:
|
||||||||||||||||||||
|
Net income
|
$ | 96.2 | $ | 27.0 | $ | 22.1 | $ | 167.3 | $ | 159.5 | ||||||||||
|
Less: Net realized investment gains (losses) (net of taxes)(3)
|
(18.9 | ) | (67.1 | ) | (102.7 | ) | 10.9 | 1.1 | ||||||||||||
|
Add: Net realized and unrealized investment gains (losses) on
FIA options (net of taxes)(4)
|
0.1 | (2.3 | ) | (1.9 | ) | (1.5 | ) | 1.4 | ||||||||||||
|
Net operating income
|
$ | 115.2 | $ | 91.8 | $ | 122.9 | $ | 154.9 | $ | 159.8 | ||||||||||
9
Table of Contents
|
As of September 30, |
As of December 31, | |||||||||||||||
| 2009 | 2008 | 2007 | 2006 | |||||||||||||
| (In millions, except share and per share data) | ||||||||||||||||
|
Consolidated Balance Sheet Data:
|
||||||||||||||||
|
Total investments
|
$ | 20,035.2 | $ | 16,252.5 | $ | 16,905.0 | $ | 17,305.3 | ||||||||
|
Total assets
|
22,226.0 | 19,229.6 | 19,560.2 | 20,114.6 | ||||||||||||
|
Total debt
|
448.9 | 448.8 | 448.6 | 298.7 | ||||||||||||
|
Separate account assets
|
818.6 | 716.2 | 1,181.9 | 1,233.9 | ||||||||||||
|
Accumulated other comprehensive income (loss) (net of taxes)
(AOCI)
|
29.8 | (1,052.6 | ) | (12.5 | ) | (0.5 | ) | |||||||||
|
Total stockholders’ equity
|
1,480.5 | 286.2 | 1,285.1 | 1,327.3 | ||||||||||||
|
U.S. Statutory Financial Information:
|
||||||||||||||||
|
Statutory capital and surplus
|
$ | 1,331.7 | $ | 1,179.0 | $ | 1,225.0 | $ | 1,266.2 | ||||||||
|
Asset valuation reserve (AVR)
|
117.3 | 113.7 | 176.0 | 158.4 | ||||||||||||
|
Statutory capital and surplus and AVR
|
$ | 1,449.0 | $ | 1,292.7 | $ | 1,401.0 | $ | 1,424.6 | ||||||||
|
As of September 30, |
As of December 31, | |||||||||||||||
| 2009 | 2008 | 2007 | 2006 | |||||||||||||
|
Book value per common share(5)
|
$ | 13.25 | $ | 2.56 | $ | 11.51 | $ | 11.89 | ||||||||
|
Non-GAAP Financial Measures(6):
|
||||||||||||||||
|
Adjusted book value
|
$ | 1,450.7 | $ | 1,338.8 | $ | 1,297.6 | $ | 1,327.8 | ||||||||
|
Reconciliation to stockholders’ equity:
|
||||||||||||||||
|
Total stockholders’ equity
|
$ | 1,480.5 | $ | 286.2 | $ | 1,285.1 | $ | 1,327.3 | ||||||||
|
Less: AOCI
|
29.8 | (1,052.6 | ) | (12.5 | ) | (0.5 | ) | |||||||||
|
Adjusted book value
|
$ | 1,450.7 | $ | 1,338.8 | $ | 1,297.6 | $ | 1,327.8 | ||||||||
|
Add: Assumed proceeds from exercise of warrants
|
218.1 | 218.1 | 218.1 | 218.1 | ||||||||||||
|
Adjusted book value, as converted
|
$ | 1,668.8 | $ | 1,556.9 | $ | 1,515.7 | $ | 1,545.9 | ||||||||
|
Adjusted book value per common share(7)
|
$ | 15.66 | $ | 14.45 | $ | 14.01 | $ | 14.33 | ||||||||
|
Adjusted book value per common share, as converted(8)
|
$ | 14.95 | $ | 13.95 | $ | 13.58 | $ | 13.85 | ||||||||
| Twelve Months Ended | ||||||||||||||||
|
September 30, |
December 31, |
December 31, |
December 31, |
|||||||||||||
| 2009 | 2008 | 2007 | 2006 | |||||||||||||
|
ROE(9)
|
13.9 | % | 2.6 | % | 12.6 | % | 12.8 | % | ||||||||
|
Average stockholders’ equity(10)
|
$ | 658.0 | $ | 861.8 | $ | 1,328.3 | $ | 1,249.5 | ||||||||
|
Non-GAAP Financial Measure(11):
|
||||||||||||||||
|
Operating ROAE
|
10.6 | % | 9.2 | % | 11.2 | % | 12.1 | % | ||||||||
|
Average adjusted book value(12)
|
$ | 1,379.9 | $ | 1,329.8 | $ | 1,380.2 | $ | 1,324.2 | ||||||||
| (1) | Basic net income per common share assumes that all participating securities, including warrants, have been outstanding since the beginning of the period using the two-class method. Diluted net income per common share includes the dilutive impact of non-participating, unvested restricted stock awards, based on the application of the treasury stock method, weighted for the portion of the period they were outstanding. |
| (2) | Management considers certain non-GAAP financial measures, including net operating income, to be a useful supplement to comparable GAAP measures in evaluating our financial performance and condition. These measures have been reconciled to their most comparable GAAP financial measures. We believe that the non-GAAP presentation of net operating income is valuable because excluding certain realized investment gains and losses, many of which are driven by investment decisions and external economic developments unrelated to the insurance and underwriting aspects of the business, enhances understanding of the results of operations by highlighting the underlying performance of our insurance operations. These net realized gains (losses), though they are recurring, may mask trends in core business performance. As an example, changes in fair value on our equity trading portfolio are recorded as realized investment gains and losses. These gains and losses are volatile, as evidenced by $18.6 million |
footnotes continued on following page
10
Table of Contents
| net trading gains (net of taxes of $10.0 million) for the nine months ended September 30, 2009, compared to $26.1 million net trading losses (net of taxes of $14.1 million) for the nine months ended September 30, 2008. For a definition and discussion of these non-GAAP measures and other metrics used in our analysis, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Use of non-GAAP Financial Measures.” |
| (3) | Net realized investment gains (losses) are reported net of taxes of $(10.1) million, $(36.2) million, $(55.3) million, $5.9 million and $0.6 million for the nine months ended September 30, 2009 and 2008, and the twelve months ended December 31, 2008, 2007 and 2006, respectively. |
| (4) | Net realized and unrealized investment gains (losses) on fixed income annuity, or FIA, options are reported net of taxes of $0.1 million, $(1.3) million, $(1.0) million, $(0.8) million and $0.8 million for the nine months ended September 30, 2009 and 2008, and the twelve months ended December 31, 2008, 2007 and 2006, respectively. |
| (5) | Book value per common share is calculated based on stockholders’ equity divided by outstanding common shares and shares subject to outstanding warrants, totaling 111,705,199, as of September 30, 2009 and 111,622,039, as of December 31, 2008, 2007 and 2006. |
| (6) | Management considers certain non-GAAP financial measures, including adjusted book value per common share and adjusted book value per common share, as converted, to be useful supplements to comparable GAAP measures in evaluating our financial performance and condition. The numerators of these measures have been reconciled to total stockholders’ equity, their most comparable GAAP financial measure. We believe that these non-GAAP presentations are useful because they exclude AOCI, which is primarily composed of the net unrealized gains (losses) on our fixed maturities, net of taxes, and therefore fluctuates based on market conditions and other economic factors. The fair value of our fixed maturities can change significantly depending on the movement of interest rates and credit spreads. Since we purchase fixed maturities to back associated liabilities of similar duration, we typically hold these investments to maturity. Therefore, we do not expect to realize all of the unrealized gains (losses) in our AOCI balance. By only considering GAAP measures, such as stockholders’ equity, investors would not benefit from useful information that these non-GAAP measures provide. As an example, our AOCI improved $1,082.4 million, or 103%, from December 31, 2008 to September 30, 2009, due to credit market improvements and tightening of interest spreads. This contributed to a related increase in stockholders’ equity over the same period of $1,194.3 million, or 417%. As a comparison, our adjusted book value increased $111.9 million, or 8%, during the same period. For a definition and discussion of these non-GAAP measures and other metrics used in our analysis, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Use of non-GAAP Financial Measures.” |
| (7) | Adjusted book value per common share is calculated based on stockholders’ equity less AOCI, divided by outstanding common shares, adjusted to exclude unearned restricted shares, totaling 92,649,888 as of September 30, 2009 and 92,646,295 as of December 31, 2008, 2007 and 2006. |
| (8) | Adjusted book value per common share, as converted gives effect to the exercise of the outstanding warrants and is calculated based on stockholders’ equity less AOCI plus the assumed proceeds from the warrants, divided by outstanding common shares, adjusted to exclude unearned restricted shares and include shares subject to outstanding warrants, totaling 111,625,632 as of September 30, 2009 and 111,622,039, as of December 31, 2008, 2007 and 2006. |
| (9) | Return on stockholders’ equity is calculated as net income divided by average stockholders’ equity. | |
| (10) | Average stockholders’ equity is derived by averaging ending stockholders’ equity for the most recent five quarters. |
| (11) | Management considers certain non-GAAP financial measures, including operating ROAE, to be useful supplements to comparable GAAP measures in evaluating our financial performance. Operating ROAE is calculated based on net operating income divided by average adjusted book value. The numerator and denominator of this measure have been reconciled to net income and stockholders’ equity, respectively, their most comparable GAAP financial measures. We believe that the non-GAAP presentation of this measure is valuable because it enhances understanding of the efficiency with which we deploy our capital and enhances understanding of our results of operations by highlighting the underlying performance of our insurance operations. For a definition and discussion of these non-GAAP measures and other metrics used in our analysis, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Use of non-GAAP Financial Measures.” |
| (12) | Average adjusted book value is derived by averaging ending adjusted book value for the most recent five quarters. |
11
Table of Contents
RISK
FACTORS
You should carefully consider the following risks and other
information in this prospectus before deciding to invest in
shares of our common stock. Any of the risks described below
could materially adversely affect our business, financial
condition, results of operations and cash flows. In this event,
the trading price of our common stock could decline and you
could lose part or all of your investment.
Risks
Related to Our Business
Markets
in the United States and elsewhere have experienced extreme and
unprecedented volatility and disruption, with adverse
consequences to our liquidity, access to capital and cost of
capital. Market conditions such as we have experienced since the
second half of 2007 may significantly affect our ability to
meet liquidity needs, including capital that may be required by
our subsidiaries. We may seek additional debt or equity capital
but be unable to obtain such capital.
We need liquidity to pay our policyholder benefits, operating
expenses, interest on our debt and dividends on our capital
stock, and to pay down or replace certain debt obligations as
they mature. Without sufficient liquidity, we could be forced to
curtail our operations, and our business could suffer. The
principal sources of our liquidity are premiums earned on group
life, health and individual insurance products, annuity
considerations, deposit funds and cash flow from our investment
portfolio and assets, consisting mainly of cash or assets that
are generally readily convertible into cash. Sources of
liquidity in normal markets also include a variety of short- and
long-term instruments, including long-term debt and capital
securities.
Disruptions, uncertainty or volatility in the financial markets
may limit our access to capital required to operate our business
and maintain desired financial ratios. These market conditions
may limit our ability to access the capital necessary to grow
our business in a timely manner, replace capital withdrawn by
customers or raise new capital required by our subsidiaries as a
result of volatility in the markets. As a result, we may be
forced to delay raising capital, bear an unattractive cost of
capital or be unable to raise capital at any price, which could
decrease our profitability and significantly reduce our
financial flexibility. Actions we might take to access financing
may in turn cause rating agencies to reevaluate our ratings.
Future deterioration of our capital position at a time when we
are unable to access the long-term debt market could have a
material adverse effect on our liquidity. Our internal sources
of liquidity may prove to be insufficient.
Disruptions in the capital markets could adversely affect our
ability to access sources of liquidity, as well as threaten to
reduce our capital below a level that is consistent with our
existing objectives. If this occurs, we may need to:
| • | further access external sources of capital, including the debt or equity markets; | |
| • | reduce or eliminate future stockholder dividends of our common stock; | |
| • | utilize unused borrowings for general corporate purposes; | |
| • | undertake additional capital management activities, including reinsurance transactions; | |
| • | limit or curtail sales of certain products and/or restructure existing products; | |
| • | undertake asset sales or internal asset transfers; and | |
| • | seek temporary or permanent changes to regulatory rules. |
Certain of these actions may require regulatory approval
and/or the
approval of counterparties which are outside of our control or
have economic costs associated with them.
We rely on our revolving credit facility as a potential source
of liquidity which could be critical in enabling us to meet our
obligations as they come due, particularly during periods when
alternative sources of liquidity are limited. Our ability to
borrow under this facility is conditioned on our satisfaction of
covenants and other requirements contained in the facility, as
described in “Description of Certain
Indebtedness — Revolving Credit Facilities” on
page 163. Our failure to satisfy these covenants and other
requirements would
12
Table of Contents
restrict our access to the facility when needed and,
consequently, could have a material adverse effect on our
financial condition and results of operations.
Difficult
conditions in the credit and equity markets, and in the economy
generally, have adversely affected and may continue to adversely
affect our business and results of operations.
Conditions in the global capital markets and the economy
generally, both in the United States and elsewhere around the
world, have adversely affected our results of operations. The
stress experienced by global capital markets that began in the
second half of 2007 continued and substantially increased during
the fourth quarter of 2008 and early 2009. While the second and
third quarters of 2009 brought some turnaround in the capital
markets, concerns about the availability and cost of credit,
inflation, the U.S. mortgage market, the stability of banks
and other financial institutions, and a declining real estate
market in the United States continue and contribute to
heightened market volatility and dampen expectations for the
economy and the markets going forward. These factors, combined
with declining business and consumer confidence, increased
unemployment and volatile oil prices, have precipitated a
sustained recession.
In particular, the credit, financial and economic crisis has
had, or may have in the future, the following effects on our
business and results of operations:
| • | less supply of appropriate investments available for purchase to support our liabilities, therefore leading to higher cash balances yielding less than the credited rates to our customers. During 2009, we have carried higher cash balances, which have reduced our net investment income, as discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Overview — Current Outlook”; |
| • | significant losses in our investment portfolio, which have had an adverse effect on our stockholders’ equity, statutory capital and net income. Net realized investment losses before taxes were $29.0 million through September 30, 2009 and $158.0 million in 2008, as discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Investments”; |
| • | impairment of key business partners, including distribution partners and reinsurers (for example, in 2008, one of our largest distributors was acquired by another bank, as discussed in “Business — Distribution”); |
| • | reduced demand for certain financial and insurance products due to financial hardships experienced by consumers and concern about the stability of the financial services industry (for example, industry variable annuity sales declined in late 2008 and early 2009); |
| • | reduced demand for our insurance products and other related products and services in our group employer health insurance as employers have fewer employees requiring insurance coverage due to rising unemployment levels; |
| • | an elevated incidence of claims, lapses or surrenders of policies, as some of our policyholders have chosen or may choose to defer or stop paying insurance premiums altogether, particularly in our Individual segment; |
| • | increased scrutiny of our business and financial strength by ratings agencies (including negative ratings actions), regulators, agents who sell our products and other potential business partners (for example, in 2009, we were downgraded by Moody’s and put on negative watch by Standard & Poor’s); and |
| • | increased utilization of health benefits by some insureds who may anticipate unemployment or loss of benefits. |
In addition, general inflationary pressures may affect medical
costs, increasing the costs of paying claims.
13
Table of Contents
Our
investment portfolio is subject to various risks that may
diminish the value of our invested assets, reduce investment
returns and erode capital.
The performance of our investment portfolio depends in part upon
the level of and changes in interest rates and credit spreads,
the overall performance of the economy, the creditworthiness of
the specific obligors included in our portfolio, equity prices,
liquidity and other factors, some of which are beyond our
control. These factors could materially affect our investment
results in any period and had an adverse impact on our
investment results in 2008 and 2009. In addition, given our
reliance on external investment advisors, we could also be
exposed to operational risks that may include, but are not
limited to, a failure to follow our investment guidelines,
technological and staffing deficiencies and inadequate disaster
recovery plans.
Interest
rate and credit spread risk
Fluctuations in interest rates and credit spreads can negatively
affect the returns on our fixed maturity and short-term
investments and can cause unrealized losses or reduce unrealized
gains in our investment portfolios. Interest rates and credit
spreads are highly sensitive to many factors, including
governmental monetary policies, general investor sentiment,
domestic and international economic and political conditions and
other factors beyond our control.
The fair value of the fixed maturities in our portfolio and the
investment income from these securities fluctuate depending on
general economic and market conditions. The fair value generally
increases or decreases in an inverse relationship with
fluctuations in interest rates and credit spreads, while net
investment income realized by us from future investments in
fixed maturity securities will generally increase or decrease in
step with interest rates and credit spreads. In addition, actual
net investment income or cash flows from investments that carry
prepayment risk, such as mortgage-backed and certain other
asset-backed securities, may differ from those anticipated at
the time of investment as a result of interest rate
fluctuations. In periods of declining interest rates, mortgage
prepayments generally increase and mortgage-backed securities,
commercial mortgage obligations and other bonds in our
investment portfolio are more likely to be prepaid or redeemed
as borrowers seek to borrow at lower interest rates, and we may
be required to reinvest those funds in lower interest-bearing
investments.
Because substantially all of our fixed maturities are classified
as available-for-sale, changes in the fair value of these
securities as described above are reflected as a component of
comprehensive income. However, U.S. GAAP does not require
similar fair value accounting treatment for the insurance
liabilities that the fixed maturities support. Therefore,
changes in the fair value of our fixed maturities caused by
interest rate fluctuations are not offset in whole or in part by
similar adjustments to the fair value of our insurance
liabilities on the balance sheet.
In an attempt to mitigate these risks, we employ asset/liability
matching strategies to reduce the adverse effects of interest
rate volatility and to ensure that cash flows are available to
pay claims as they become due. Our asset/liability matching
strategies include:
| • | matching asset and liability cash flows; | |
| • | asset/liability duration management; | |
| • | structuring our fixed maturities and commercial mortgage loan portfolios to limit the effects of prepayments; and | |
| • | consistent monitoring of, and making appropriate changes to, the pricing of our products. |
However, because these strategies may fail to eliminate or
reduce the adverse effects of interest rate and credit spread
volatility, significant fluctuations in the level of interest
rates and credit spreads may have a material adverse effect on
our financial condition, results of operations and cash flows.
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Credit
risk
From time to time, issuers of the fixed maturities that we own
may default on principal and interest payments. Defaults by
third parties in the payment or performance of their obligations
could reduce our investment income and realized investment gains
or result in realized investment losses. Further, the value of
any particular fixed maturity security is subject to impairment
based on the creditworthiness of a given issuer. Our fixed
maturities portfolio also includes below investment grade
securities, which generally provide higher expected returns but
present greater risk and can be less liquid than investment
grade securities. Further, an issuer’s inability to
refinance or pay off debt could cause certain of our
investment-grade maturities to present more significant credit
risk than when we first invested. In addition, private equity
buyouts could cause certain of our investment-grade fixed
maturities to present more significant credit risk than when we
first invested. As of September 30, 2009, December 31,
2008 and December 31, 2007, our fixed maturities portfolio
was $18,542.3 million, $14,887.6 million and
$15,599.9 million, respectively. A significant increase in
defaults and impairments on our fixed maturities portfolio could
materially adversely affect our financial condition, results of
operations and cash flows. For the nine months ended
September 30, 2009 and 2008, and the years ended
December 31, 2008, 2007 and 2006, we had credit related
impairments of $47.5 million, $29.6 million,
$39.4 million, $0.7 million and $8.9 million,
respectively. For further information on our fixed maturities
portfolio and credit-related impairments, see
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations —
Investments.”
Issuers of the fixed maturities that we own may experience
threats and performance deterioration that trigger rating agency
downgrades. Although the issuers may not have defaulted on
principal and interest payments with respect to these
securities, we may be required by regulators and rating agencies
to hold more capital in support of these investments. We could
experience higher cost of capital and potential constraints on
our ability to grow our business and maintain our own ratings.
Liquidity
risk
Our investments in privately placed fixed maturities, mortgage
loans, policy loans and limited partnership interests, which
collectively represented 11% of total invested assets, as of
September 30, 2009, are relatively illiquid as compared to
publicly traded fixed maturities and equities. If we require
significant amounts of cash on short notice in excess of our
normal cash requirements, we may have difficulty selling these
investments in a timely manner, be forced to sell them for less
than we otherwise would have been able to realize, or both.
A
downgrade or a potential downgrade in our financial strength
ratings could result in a loss of business.
Financial strength ratings, which various ratings organizations
publish as measures of an insurance company’s ability to
meet contractholder and policyholder obligations, are important
to maintaining public confidence in our company and our
products, the ability to market our products and our competitive
position. Our principal life insurance company subsidiaries,
Symetra Life Insurance Company and First Symetra National Life
Insurance Company of New York, have financial strength ratings
of “A” (“Excellent,” third highest of 16
ratings) with a stable outlook from A.M. Best,
“A” (“Strong,” sixth highest of 21 ratings)
with a negative outlook from Standard & Poor’s,
or S&P and “A+” (“Strong,” fifth
highest of 24 ratings) with a negative outlook from Fitch.
Moody’s Investors Service, Inc. rates Symetra Life
Insurance Company as “A3” (“Good,” seventh
highest of 21 ratings) with a stable outlook. Moody’s does
not rate First Symetra National Life Insurance Company of New
York.
A downgrade in our financial strength ratings, or the announced
potential for a downgrade, could have an adverse effect on our
financial condition, results of operations and cash flows in
several ways, including:
| • | reducing new sales of insurance products, annuities and other investment products; | |
| • | limiting our ability to offer structured settlement products; |
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| • | adversely affecting our relationships with independent sales intermediaries and our dedicated sales specialists; | |
| • | materially increasing the number or amount of policy surrenders and withdrawals by contractholders and policyholders; | |
| • | requiring us to reduce prices for many of our products and services to remain competitive; and | |
| • | adversely affecting our ability to obtain reinsurance or obtain reasonable pricing on reinsurance. |
Defaults
or volatility of performance in our commercial mortgage loans
may adversely affect our profitability.
Our mortgage loans, which are collateralized by commercial
properties, are subject to default risk. The carrying value of
commercial mortgage loans is stated at outstanding principal
less a valuation allowance. Our allowance provides for the risk
of credit loss. The allowance includes a portfolio reserve for
probable incurred but not specifically identified losses and
loan specific reserves for non-performing loans. At
December 31, 2008, no mortgage loans were considered
non-performing and only one mortgage loan was
non-performing
as of September 30, 2009. The performance of our mortgage
loan portfolio, however, may decline in the future. In addition,
substantially all of our loans have balloon payment maturities.
An increase in the default rate of our mortgage loan
investments, caused by current or worsening economic conditions
or otherwise, could have a material adverse effect on our
business, results of operations and financial condition.
Further, any geographic concentration of our commercial mortgage
loans may have adverse effects on our loan portfolio and,
consequently, on our consolidated results of operations or
financial condition. While we seek to mitigate this risk by
having a broadly diversified portfolio, events or developments
that have a negative effect on any particular geographic region
or sector may have a greater adverse effect on our loan
portfolio. At September 30, 2009, approximately 29.4% of
our commercial mortgage loans were located in California, 20.0%
were located in Washington and 11.0% were located in Texas.
For additional information on our mortgage loan portfolio, see
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations —
Investments — Mortgage Loans.”
Gross
unrealized losses on fixed maturity and equity securities may be
realized or result in future impairments, resulting in a
reduction in our net income.
Fixed maturity and equity securities classified as
available-for-sale
are reported at their estimated fair value. Unrealized gains or
losses on
available-for-sale
securities are recognized as a component of AOCI and are,
therefore, excluded from net income. Our gross unrealized losses
on
available-for-sale
fixed maturity and equity securities at September 30, 2009
were $658.3 million. The portion of the gross unrealized
losses for fixed maturity and equity securities where the
estimated fair value has declined and remained below amortized
cost or cost by 20% or more for six months or greater was
$280.5 million at September 30, 2009. The accumulated
change in estimated fair value of these
available-for-sale
securities is recognized in net income when the gain or loss is
realized upon the sale of the security or in the event that the
decline in estimated fair value is determined to be
other-than-temporary and an impairment charge is taken. Realized
losses or impairments will have a material adverse affect on our
net income in a particular quarterly or annual period.
Fluctuations
in interest rates and interest rate spreads could adversely
affect our financial condition, results of operations and cash
flows.
Certain of our insurance and investment products, such as fixed
annuities and universal life insurance, are sensitive to
interest rate fluctuations and expose us to the risk that
falling interest rates will reduce the “spread,” or
the difference between the returns we earn on the investments
that support our obligations under these products and the
amounts that we must credit to policyholders and
contractholders. This risk is exacerbated due to the existence
of guaranteed minimum crediting rates established by our
contracts and regulatory authorities and restrictions on the
timing and frequency with which we can adjust our crediting
rates. Accordingly, falling interest rates could have an adverse
effect on our financial condition, results of
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operations and cash flows. Additionally, we may see interest
rate fluctuations due to potential future inflation resulting
from economic stimulus spending.
Our interest rate spreads and associated investment margins
related to these spreads vary by product as follows:
| • | The interest rate spread on our Retirement Services segment’s fixed deferred annuity products was 1.81%, 1.67% and 1.68% for the nine months ended September 30, 2009 and for the years ended December 31, 2008 and 2007, respectively, which yielded investment margins of $99.3 million, $89.8 million and $84.3 million, respectively. |
| • | The interest rate spread on our Income Annuities segment’s products was 0.56%, 0.59% and 0.60% for the nine months ended September 30, 2009 and for the years ended December 31, 2008 and 2007, respectively, which yielded investment margins of $67.6 million, $39.2 million and $43.0 million, respectively. |
| • | The interest rate spread on our Individual segment’s universal life insurance products was 1.24%, 1.14% and 1.23% for the nine months ended September 30, 2009 and for the years ended December 31, 2008 and 2007, respectively, which yielded investment margins of $7.7 million, $10.2 million and $10.2 million, respectively. |
During periods of rising interest rates, we may determine to
offer higher crediting rates on new sales of interest-sensitive
products and to increase crediting rates on existing in force
products, in each case in order to maintain or enhance product
competitiveness. In addition, periods of rising interest rates
may cause increased policy surrenders, withdrawals and requests
for policy loans as policyholders and contractholders allocate
their assets into higher yielding investments. Increases in
crediting rates, as well as surrenders and withdrawals, could
have an adverse effect on our financial condition, results of
operations and cash flows.
We calculate reserves for long-term disability and life waiver
of premium claims using net present value calculations based on
the actual interest rates in effect at the time claims are
funded, as well as our expectations for future interest rates.
Waiver of premium refers to a provision in a life insurance
policy pursuant to which an insured with total disability, which
has lasted for a minimum specified period, continues to receive
life insurance coverage but no longer has to pay premiums for
the duration of the disability or for a stated period. During
periods of declining interest rates, reserves for new claims are
calculated using lower discount rates, thereby increasing the
net present value of those claims and the required reserves.
Further, if actual interest rates used to establish reserves on
open claims prove to be lower than our original expectations, we
would be required to increase such reserves accordingly. As
such, the increase in net present value calculations caused by
declines in interest rates could have an adverse effect on our
financial condition, results of operations and cash flows.
Our term life insurance products also expose us to the risk of
interest rate fluctuations. The pricing and expected future
profitability of these products are based in part on expected
investment returns. Over time, term life insurance products
generally produce positive cash flows as customers pay periodic
premiums, which we invest as we receive them. Lower than
expected interest rates may reduce our ability to achieve our
targeted investment margins and may adversely affect our
financial condition, results of operations and cash flows.
Our
valuation of fixed maturity securities may include
methodologies, estimations and assumptions which are subject to
differing interpretations and could result in changes to
investment valuations that may materially adversely affect our
results of operations or financial condition.
Fixed maturities are reported at fair value on our consolidated
balance sheets and represent 93% of our invested assets. The
accounting guidance regarding Fair Value Measurements
establishes a three-level hierarchy that prioritizes the inputs
to valuation techniques used to measure fair value. The level in
the fair value hierarchy is based on the priority of the inputs
to the respective valuation technique. The fair value hierarchy
gives the highest priority to quoted prices in active markets
for identical assets or liabilities (Level 1) and the
lowest priority to unobservable inputs (Level 3). As of
September 30, 2009, approximately
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93% and 7% of our fixed maturities were categorized as
Level 2 and Level 3 investments, respectively. As of
December 31, 2008, approximately 95% and 5% of our fixed
maturities were categorized as Level 2 and Level 3
investments, respectively. The determination of estimated fair
values by management is made at a specific point in time,
primarily by obtaining prices from our pricing services, based
on objectively verifiable, observable market data. If such
information about a security is unavailable, we determine the
fair value using internal pricing models that typically utilize
significant, unobservable market inputs or inputs that are
difficult to corroborate with observable market data. The use of
different methodologies and assumptions may have a material
effect on the estimated fair value amounts. For additional
information on our valuation methodology, see Note 7 to our
audited consolidated financial statements.
During periods of market disruption, including periods of
significantly rising or high interest rates, rapidly widening
credit spreads or illiquidity, it may be difficult to value
certain of our securities (for example, corporate private
placements) if trading becomes less frequent
and/or
market data becomes less observable. There may be certain asset
classes that were in active markets with significant observable
data that become illiquid due to the current financial
environment. In such cases, more securities may require more
subjectivity and management judgment. As such, valuations may
include inputs and assumptions that are less observable or
require greater estimation as well as valuation methods that
require greater estimation, which could result in values that
are different from the value at which the investments may be
ultimately sold. Further, rapidly changing and unprecedented
credit and equity market conditions could materially impact the
valuation of securities as reported within our consolidated
financial statements and the
period-to-period
changes in value could vary significantly. Decreases in value
will have a material adverse effect on our results of operations
or financial condition.
Downturns
and volatility in equity markets could adversely affect the
marketability of our products and our
profitability.
Significant downturns and volatility in equity markets could
have an adverse effect on our business in various ways. Market
downturns and volatility may discourage purchases of separate
account products, such as variable annuities and variable life
insurance, which have returns linked to the performance of the
equity markets and may cause some existing customers to withdraw
cash values or reduce investments in those products.
Further, downturns and volatility in equity markets can have an
adverse effect on the revenues and returns from our separate
account products. Because these products depend on fees related
primarily to the value of assets under management, a decline in
the equity markets could reduce our revenues by reducing the
value of the investment assets we manage.
We hold common stock and equity-like investments, primarily in
our Income Annuities segment, that represent 1.2% of the fair
value of our total invested assets as of September 30,
2009. Investments in common stock or equity-like securities
generally provide higher expected total returns over the long
term but present greater risk to preservation of principal than
do our fixed income investments.
If our
reserves for future policy benefits and claims are inadequate,
we would be required to increase our reserve
liabilities.
We calculate and maintain reserves for estimated future benefit
payments to our policyholders and contractholders in accordance
with U.S. GAAP. We release these reserves as those future
obligations are extinguished. The reserves we establish
necessarily reflect estimates and actuarial assumptions with
regard to our future experience. These estimates and actuarial
assumptions involve the exercise of significant judgment. Our
future financial results depend upon the extent to which our
actual future experience is consistent with the assumptions we
have used in pricing our products and determining our reserves.
Many factors can affect future experience, including economic,
political and social conditions, inflation, healthcare costs and
changes in doctrines of legal liability and damage awards in
litigation. Therefore, we cannot predict the ultimate amounts we
will pay for actual future benefits or the timing of those
payments.
We regularly monitor our reserves. If we conclude that our
reserves are insufficient to cover actual or expected policy and
contract benefits and claims payments, we would be required to
increase our reserves and incur income statement charges in the
period in which we make the determination, which could adversely
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affect our financial condition and results of operations. There
were no significant adjustments to reserves due to inadequacy
during 2007, 2008 or the first nine months of 2009.
We may
face unanticipated losses if there are significant deviations
from our assumptions regarding the probabilities that our
insurance policies or annuity contracts will remain in force
from one period to the next or if morbidity and mortality rates
differ significantly from our pricing
expectations.
The prices and expected future profitability of our insurance
and annuity products are based in part upon expected patterns of
premiums, expenses and benefits, using a number of assumptions,
including those related to persistency, mortality and morbidity.
Persistency is the probability that a policy or contract will
remain in force from one period to the next. The effect of
persistency on profitability varies for different products. For
most of our products, actual persistency that is lower than our
assumptions could have an adverse impact on profitability,
especially in the early years of a policy or contract primarily
because we would be required to accelerate the amortization of
expenses we deferred in connection with the acquisition of the
policy or contract. In addition, we may need to sell investments
at a loss to fund withdrawals. For some of our life insurance
policies, actual persistency in later policy durations that is
higher than our persistency assumptions could have a negative
impact on profitability. If these policies remain in force
longer than we assumed, then we could be required to make
greater benefit payments than we had anticipated when we priced
these products.
In addition, we set prices for our insurance and certain annuity
products based upon expected claims and payment patterns, using
assumptions for, among other factors, morbidity rates and
mortality rates of our policyholders and contractholders. The
long-term profitability of these products depends upon how our
actual experience compares with our pricing assumptions. For
example, if morbidity rates are higher, or mortality rates are
lower, than our pricing assumptions, we could be required to
make greater payments under certain annuity contracts than we
had projected.
Because our assumptions are inherently uncertain, reserves for
future policy benefits and claims may prove to be inadequate if
actual experience is different from our assumptions. Although
certain of our products permit us to increase premiums or reduce
benefits during the life of the policy or contract, these
changes may not be sufficient to maintain profitability.
Moreover, many of our products either do not permit us to
increase premiums or reduce benefits or may limit those changes
during the life of the policy or contract. Therefore,
significant deviations in experience from our assumptions
regarding persistency and mortality and morbidity rates could
have an adverse effect on our financial condition, results of
operations and cash flows.
We may
be required to accelerate the amortization of deferred policy
acquisition costs, which would increase our expenses and reduce
profitability.
Deferred policy acquisition costs, or DAC, represent certain
costs which vary with and are primarily related to the sale and
issuance of our products and are deferred and amortized over the
estimated life of the related contracts. These costs include
commissions in excess of ultimate renewal commissions and
certain other sales incentives, solicitation and printing costs,
sales material and other costs, such as underwriting and
contract and policy issuance expenses. Under U.S. GAAP, DAC
is amortized through income over the lives of the underlying
contracts in relation to the anticipated recognition of premiums
or gross profits for most of our products.
Our amortization of DAC generally depends upon anticipated
profits from investments, surrender and other policy and
contract charges, mortality, morbidity and maintenance and
expense margins. Unfavorable experience with regard to expected
expenses, investment returns, mortality, morbidity, withdrawals
or lapses may cause us to increase the amortization of DAC,
resulting in higher expenses and lower profitability.
We regularly review our DAC asset balance to determine if it is
recoverable from future income. The portion of the DAC asset
balance deemed to be unrecoverable, if any, is charged to
expense in the period in which we make this determination. For
example, if we determine that we are unable to recover DAC from
profits over the life of a book of business of insurance
policies or annuity contracts, we would be required to recognize
the unrecoverable DAC amortization as a current-period expense.
As of September 30, 2009, we had $240.8 million of
DAC. Our amortization of DAC was $36.4 million during the
nine months ended September 30, 2009.
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The
occurrence of natural disasters, disease pandemics, terrorism or
military actions could adversely affect our financial condition,
results of operations and cash flows.
Our financial condition and results of operations are at risk of
material adverse effects that could arise from catastrophic
mortality and morbidity due to natural disasters, including
floods, tornadoes, earthquakes and hurricanes, disease pandemics
(e.g., H1N1 virus), terrorism and military actions. Such events
could also lead to unexpected changes in persistency rates as
policyholders and contractholders who are affected by the
disaster may be unable to meet their contractual obligations,
such as payment of premiums on our insurance policies or
deposits into our investment products. The continued threat of
terrorism and ongoing military actions may cause significant
volatility in global financial markets, and a natural disaster
or a disease pandemic could trigger an economic downturn in the
areas directly or indirectly affected by the disaster. The
effectiveness of external parties, including governmental and
nongovernmental organizations, in combating the spread and
severity of a disease pandemic could have a material impact on
the losses experienced by us. Further, in our group health and
life insurance operations, a localized event that affects the
workplace of one or more of our customers could cause a
significant loss due to mortality or morbidity claims.
We
rely on reinsurance arrangements to help manage our business
risks, and failure to perform by the counterparties to our
reinsurance arrangements may expose us to risks we had sought to
mitigate.
We utilize reinsurance to mitigate our risks in various
circumstances. Reinsurance does not relieve us of our direct
liability to our policyholders, even when the reinsurer is
liable to us. Accordingly, we bear credit risk with respect to
our reinsurers. The total reinsurance recoverable amount due
from reinsurers was $269.9 million as of September 30,
2009. Our reinsurers may be unable or unwilling to pay the
reinsurance recoverable owed to us now or in the future or on a
timely basis. A reinsurer’s insolvency, inability or
unwillingness to make payments under the terms of its
reinsurance agreement with us could have an adverse effect on
our financial condition, results of operations and cash flows.
This has not occurred in 2007, 2008 or through
September 30, 2009.
Reinsurance
may not be available, affordable or adequate to protect us
against losses.
As part of our overall risk management strategy, we purchase
reinsurance for certain risks underwritten by our various
business segments. For example, we reinsure the mortality risk
in excess of $0.5 million for most of our individual life
insurance policies. While reinsurance agreements generally bind
the reinsurer for the life of the business reinsured at
generally fixed pricing, market conditions beyond our control
determine the availability and cost of the reinsurance
protection for new business. In certain circumstances, the price
of reinsurance for business already reinsured may also increase.
Any decrease in the amount of reinsurance will increase our risk
of loss and any increase in the cost of reinsurance will reduce
our earnings. Accordingly, we may be forced to incur additional
expenses for reinsurance or may not be able to obtain sufficient
reinsurance on acceptable terms, which could adversely affect
our ability to write future business or result in the assumption
of more risk with respect to those policies we issue.
The availability and cost of these reinsurance arrangements are
subject to market conditions that are beyond our control. As a
result, in the future, we may not be able to enter into
reinsurance arrangements on attractive terms, if at all.
We may
be unable to attract and retain independent sales intermediaries
and dedicated sales specialists.
We distribute our products through financial intermediaries,
independent producers and dedicated sales specialists. We
compete with other financial institutions to attract and retain
commercial relationships in each of these channels, and our
success in competing for sales through these sales
intermediaries depends upon factors such as:
| • | the amount of sales commissions and fees we pay; | |
| • | the breadth of our product offerings; | |
| • | the strength of our brand; |
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| • | our perceived stability and our financial strength ratings; | |
| • | the marketing and services we provide to them; and | |
| • | the strength of the relationships we maintain with individuals at those firms. |
Our competitors may be effective in providing incentives to
existing and potential distribution partners to favor their
products or to reduce sales of our products. Our contracts with
our distribution partners generally allow either party to
terminate the relationship upon short notice. Our distribution
partners do not make minimum purchase commitments, and our
contracts do not prohibit our partners from offering products
that compete with ours. Accordingly, our distribution partners
may choose not to offer our products exclusively or at all, or
may choose to exert insufficient resources and attention to
selling our products.
Our future success is highly dependent on maintaining and
growing both existing and new distribution relationships. We may
have little or no contact with end customers of our products. As
a result, we have little to no brand awareness with end
customers which makes it more difficult to respond to evolving
customer needs, thereby increasing our reliance on our
distribution partners.
From time to time, due to competitive forces, we may experience
unusually high attrition in particular sales channels for
specific products. An inability to recruit productive
independent sales intermediaries and dedicated sales
specialists, or our inability to retain strong relationships
with the individual agents at our independent sales
intermediaries, could have an adverse effect on our financial
condition, results of operations and cash flows.
Consolidation
among distributors or potential distributors of our products may
adversely affect the profitability of our
business.
We distribute many of our products through financial
institutions such as banks and broker-dealers. As capital,
credit and equity markets continue to experience volatility,
bank and broker-dealer consolidation activity may increase and
negatively impact our sales, and such consolidation could
increase competition for access to distributors, result in
greater distribution expenses and impair our ability to market
our products to our current customer base or to expand our
customer base. As a result of recent consolidation in the
financial services industry, a single financial institution,
JPMorgan Chase & Co., accounted for 45.6% and 38.2% of our
total sales in 2008 and for the nine months ended
September 30, 2009, respectively, selling primarily fixed
annuity products. See “Business — Distribution.”
If our relationship with this financial institution were to
deteriorate, it is likely that we would experience a decline in
our sales of such products.
Intense
competition could adversely affect our ability to maintain or
increase our market share and profitability.
Our businesses are subject to intense competition. We believe
the principal competitive factors in the sale of our products
are product features, price, commission structure, marketing and
distribution arrangements, brand, reputation, financial strength
ratings and service. Many other companies actively compete for
sales in our retirement services, income annuity, individual and
group markets, including other major insurers, banks, other
financial institutions, mutual fund and asset management firms
and specialty providers.
In many of our product lines, we face competition from companies
that have greater market share or breadth of distribution, offer
a broader range of products, services or features, assume a
greater level of risk, have lower profitability expectations or
have higher financial strength ratings than we do. Many
competitors offer similar products and use similar distribution
channels. The substantial expansion of banks’ and insurance
companies’ distribution capacities and expansion of product
features in recent years have intensified pressure on margins
and production levels and have increased the level of
competition in many of our product lines.
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Our
risk management policies and procedures may not be effective or
may leave us exposed to unidentified or unanticipated risk,
which could negatively affect our business.
Management of operational, legal and regulatory risks requires
effective policies and procedures to record, verify and report
on a large number of transactions and events. We have devoted
resources to develop our policies and procedures to mitigate
these risks and expect to continue to do so in the future. Even
so, these policies and procedures may not be fully effective to
mitigate all of these risks. Many of our methods for managing
these risks and exposures are based upon historical statistical
models and observed market behavior. As such, our methods may
not be able to predict all future exposures. These could be
significantly greater than our historical measures have
indicated. In addition, our distribution network consists of a
large number of third party agents and requires the
implementation and oversight of policies and procedures to
ensure that we are not unduly subjected to reputational,
financial or other risks attributable to such third party
agents. Other risk management methods depend upon the evaluation
of information regarding markets and clients, or other matters
that are publicly available or otherwise accessible to us. This
information may not always be accurate, complete,
up-to-date
or properly evaluated.
Changes
in accounting standards issued by the Financial Accounting
Standards Board or other
standard-setting
bodies may adversely affect our financial
statements.
Our financial statements are subject to the application of
U.S. generally accepted accounting principles, which are
periodically revised
and/or
expanded by recognized authorities, including the Financial
Accounting Standards Board. On January 1, 2008, we adopted
accounting guidance for the fair value measurements, which,
among other things, defined fair value and established a
framework for measuring fair value. Determinations of fair
values are made at a specific point in time, based on available
market information and judgments about financial instruments,
including estimates of the timing, amounts of expected future
cash flows and the credit standing of the issuer. During periods
of market disruption, rapidly widening credit spreads or
illiquidity, it can be difficult to value certain types of
securities. As such, the value they were originally reported, or
later sold, at may differ materially from the valuations
determined as of the end of the applicable reporting period. In
addition, fluctuations in fair value during these periods can
create larger unrealized gains and losses than during normal
market conditions. Similarly, future accounting standards could
change the current accounting treatment that we apply to our
consolidated financial statements and such changes could have an
adverse effect on our reported financial condition and results
of operations.
The
failure to maintain effective and efficient information systems
could adversely affect our business.
Our business is dependent upon our ability to keep pace with
technological advances. Our ability to keep our systems fully
integrated with those of our clients is critical to the
operation of our business. Our failure to update our systems to
reflect technological advancements or to protect our systems may
adversely affect our relationships and ability to do business
with our clients.
In addition, our business depends significantly on effective
information systems, and we have many different information
systems for our various businesses. We have committed and will
continue to commit significant resources to develop, maintain
and enhance our existing information systems and develop new
information systems in order to keep pace with continuing
changes in information processing technology, evolving industry
and regulatory standards and changing customer preferences. Our
failure to maintain effective and efficient information systems
could have a material adverse effect on our financial condition
and results of operations. If we do not maintain adequate
systems, we could experience adverse consequences, including:
| • | inadequate information on which to base pricing, underwriting and reserving decisions; | |
| • | inadequate information for accurate financial reporting; | |
| • | the loss of existing customers; | |
| • | difficulty in attracting new customers; | |
| • | customer, provider and agent disputes; |
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| • | regulatory compliance problems, such as failure to meet prompt payment obligations; | |
| • | litigation exposure; or | |
| • | increases in administrative expenses. |
If we
are unable to maintain the availability of our systems and
safeguard the security of our data, our ability to conduct
business will likely be compromised, which may have a material
adverse effect on our financial condition, results of operations
and cash flows.
We use computer systems to store, retrieve, evaluate and use
customer and company data and information. Additionally, our
computer and information technology systems interface with and
rely upon third party systems. Our business is highly dependent
on our ability, and the ability of our affiliates, to access
these systems to perform necessary business functions. This
includes providing insurance quotes, processing premium
payments, providing customer support, filing and paying claims
and making changes to existing policies. Systems outages or
outright failures would compromise our ability to perform these
functions in a timely manner. This could hurt our relationships
with our business partners and customers and harm our ability to
conduct business. In the event of a disaster such as a blackout,
a computer virus, an industrial accident, a natural catastrophe,
a terrorist attack or war, our systems may not be available to
our employees, customers or business partners for an extended
period of time. If our employees are able to report to work, yet
our systems or our data are destroyed or disabled, they may be
unable to perform their duties for an extended period of time.
Our systems could also be subject to similar disruptions due to
physical and electronic break-ins or other types of unauthorized
tampering with our systems. This may interrupt our business
operations and may have a material adverse effect on our
financial condition, results of operations and cash flows.
Failure
to protect our clients’ confidential information and
privacy could adversely affect our business.
A number of our businesses are subject to privacy regulations
and to confidentiality obligations. For example, the collection
and use of patient data in our Group segment is the subject of
national and state legislation, including the Health Insurance
Portability and Accountability Act of 1996, or HIPAA, and
certain of the activities conducted by our businesses are
subject to the privacy regulations of the Gramm-Leach-Bliley
Act. We also have contractual obligations to protect certain
confidential information we obtain from our existing vendors and
clients. These obligations generally include protecting such
confidential information in the same manner and to the same
extent as we protect our own confidential information. The
actions we take to protect such confidential information vary by
business segment and may include, among other things:
| • | training and educating our employees regarding our obligations relating to confidential information; | |
| • | actively monitoring our record retention plans and any changes in state or federal privacy and compliance requirements; | |
| • | drafting appropriate contractual provisions into any contract that raises proprietary and confidentiality issues; | |
| • | maintaining secure storage facilities for tangible records; and | |
| • | limiting access to electronic information. |
In addition, we must develop, implement and maintain a
comprehensive written information security program with
appropriate administrative, technical and physical safeguards to
protect such confidential information. If we do not properly
comply with privacy regulations and protect confidential
information, we could experience adverse consequences, including
regulatory sanctions, such as penalties, fines and loss of
license, as well as loss of reputation and possible litigation.
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Our
business could be interrupted or compromised if we experience
difficulties arising from outsourcing
relationships.
We outsource certain technology and business functions to third
parties, including a significant portion of our information
technology function, and expect to continue to do so in the
future. If we do not maintain an effective outsourcing strategy
or third party providers do not perform as contracted, we may
experience operational difficulties, increased costs and a loss
of business that could have a material adverse effect on our
consolidated results of operations.
Our
credit facility subjects us to restrictive covenants that impose
operating and financial restrictions on our operations and could
limit our ability to grow our business.
We entered into a $200.0 million revolving credit facility
on August 16, 2007. On February 12, 2009, Bank of
America, N.A. issued a notice of default to Lehman Commercial
Paper, Inc., one of the lending institutions in the syndicate
with a commitment of $20.0 million, effectively limiting
our ability to borrow under the revolving credit facility to
$180.0 million at that time. On October 7, 2009,
Lehman Commercial Paper, Inc. assigned its interest in our
revolving credit facility to Barclays Bank PLC, effectively
restoring capacity in the facility to $200.0 million. As of
September 30, 2009, we had no balance outstanding under
this facility. In connection with this facility, we have made
covenants that may impose significant operating and financial
restrictions on us. These restrictions limit the incurrence of
additional indebtedness by our subsidiaries, limit the ability
of us and our subsidiaries to create liens and impose certain
other operating limitations. These restrictions could limit our
ability to obtain future financing or take advantage of business
opportunities. Furthermore, our credit facility requires us and
our insurance subsidiaries to maintain specified financial
ratios. Our ability to comply with these ratios may be affected
by events beyond our control, including prevailing economic,
financial and industry conditions. If we are unable to comply
with the covenants and ratios in our credit facility, we may be
deemed in default under the facility, or we may be required to
pay substantial fees or penalties to the lenders to obtain a
waiver of any such default. Either development could have a
material adverse effect on our business.
We may
need additional capital in the future, which may not be
available to us on favorable terms. Raising additional capital
could dilute your ownership in the Company and may cause the
market price of our common stock to fall.
We may need to raise additional funds through public or private
debt or equity financings in order to:
| • | fund liquidity needs; | |
| • | refinance our senior notes or our Capital Efficient Notes (CENts); | |
| • | satisfy letter of credit or guarantee bond requirements that may be imposed by our clients or by regulators; | |
| • | acquire new businesses or invest in existing businesses; | |
| • | grow our business; | |
| • | otherwise respond to competitive pressures; | |
| • | maintain adequate risk-based capital; or | |
| • | maintain our target ratings from rating agencies. |
Any additional capital raised through the sale of equity will
dilute your ownership percentage in our company and may decrease
the market price of our common stock. Furthermore, the
securities may have rights, preferences and privileges that are
senior or otherwise superior to those of our common stock. Any
additional financing we may need may not be available on terms
favorable to us.
To be eligible for borrowing under our revolving credit
facility, we must not be in default of any payment obligations,
covenants or other requirements set forth in the facility, and
the representations and
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warranties that we make under the facility must continue to be
true in all material respects. Accordingly, it is possible that
we may not meet these requirements in the future and may not be
eligible to borrow under our credit facility.
In connection with the CENts offering, we entered into a
covenant that may limit our ability to undertake certain
additional types of financing to repay or redeem the CENts.
Risks
Related to Our Industry
Our
industry is highly regulated and changes in regulations
affecting our businesses may reduce our profitability and limit
our growth.
Our insurance businesses are heavily regulated and are subject
to a wide variety of laws and regulations in various
jurisdictions. State insurance laws regulate most aspects of our
insurance businesses and our insurance subsidiaries are
regulated by the insurance departments of the various states in
which they are domiciled and licensed.
State laws in the United States grant insurance regulatory
authorities broad administrative powers with respect to various
aspects of our insurance businesses, including:
| • | licensing companies and agents to transact business; | |
| • | calculating the value of assets to determine compliance with statutory requirements; | |
| • | mandating certain insurance benefits; | |
| • | regulating certain premium rates; | |
| • | reviewing and approving policy forms; | |
| • | regulating unfair trade and claims practices, including the imposition of restrictions on marketing and sales practices, distribution arrangements and payment of inducements; | |
| • | establishing statutory capital and reserve requirements and solvency standards; | |
| • | fixing maximum interest rates on insurance policy loans and minimum rates for guaranteed crediting rates on life insurance policies and annuity contracts; | |
| • | requiring regular market conduct examinations; | |
| • | approving changes in control of insurance companies; | |
| • | restricting the payment of dividends and other transactions between affiliates; and | |
| • | regulating the types, amounts and valuation of investments. |
State insurance regulators and the National Association of
Insurance Commissioners, or NAIC, regularly re-examine existing
laws and regulations applicable to insurance companies and their
products. Changes in these laws and regulations, or in
interpretations thereof, are often made for the benefit of the
consumer at the expense of the insurer and thus could have an
adverse effect on our business.
Currently, the U.S. federal government does not regulate
directly the business of insurance. However, federal legislation
and administrative policies in several areas can significantly
and adversely affect insurance companies. These areas include
financial services regulation, securities regulation, pension
regulation, privacy, tort reform legislation and taxation. In
addition, various forms of direct federal regulation of
insurance have been proposed. These proposals include direct
federal regulation of insurance through an optional federal
charter and enhanced federal oversight through a Federal
Insurance Office. We cannot predict whether these or other
proposals will be adopted, or what impact, if any, such
proposals or, if enacted, such laws may have on our financial
condition, results of operations and cash flows.
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Many of our customers and independent sales intermediaries also
operate in regulated environments. Changes in the regulations
that affect their operations also may affect our business
relationships with them and their ability to purchase or to
distribute our products.
Compliance with applicable laws and regulations is time
consuming and personnel-intensive, and changes in these laws and
regulations may materially increase our direct and indirect
compliance efforts and other expenses of doing business.
U.S. federal and state securities laws apply to investment
products that are also securities, including variable annuities
and variable life insurance policies. As a result, some of our
subsidiaries and the policies and contracts they offer are
subject to regulation under these federal and state securities
laws. Some of our insurance subsidiaries’ separate accounts
are registered as investment companies under the Investment
Company Act of 1940. Some subsidiaries are registered as
broker-dealers under the Securities Exchange Act of 1934, as
amended, or Exchange Act, and are members of, and subject to
regulation by, the Financial Industry Regulatory Authority, or
FINRA. In addition, one of our subsidiaries also is registered
as an investment adviser under the Investment Advisers Act of
1940.
Securities laws and regulations are primarily intended to ensure
the integrity of the financial markets and to protect investors
in the securities markets or investment advisory or brokerage
clients. These laws and regulations generally grant supervisory
agencies broad administrative powers, including the power to
limit or restrict the conduct of business for failure to comply
with those laws and regulations.
Legal
and regulatory investigations and actions are increasingly
common in the insurance business and may result in financial
losses and harm our reputation.
We face a significant risk of litigation and regulatory
investigations and actions in the ordinary course of operating
our businesses, including the risk of class action lawsuits. Our
pending legal and regulatory actions include proceedings
specific to us and others generally applicable to business
practices in the industries in which we operate. In our
insurance operations, we may become subject to class actions and
we are or may become subject to individual suits relating, among
other things, to sales or underwriting practices, payment of
contingent or other sales commissions, claims payments and
procedures, product design, disclosure, administration,
additional premium charges for premiums paid on a periodic
basis, denial or delay of benefits and breaches of fiduciary or
other duties to customers. Plaintiffs in class action and other
lawsuits against us may seek very large or indeterminate
amounts, including punitive and treble damages, which may remain
unknown for substantial periods of time.
For example, the mutual fund and insurance industry has been the
focus of increased scrutiny and class action lawsuits related to
“revenue sharing” practices by mutual funds with
service providers and others in offering mutual fund investments
in qualified retirement plans. The lawsuits allege that service
providers were involved in self-dealing and prohibited
transactions under the Employee Retirement Income Security Act,
or ERISA. The outcome of these lawsuits is unknown. We have not
been the subject of any inquiries or lawsuits regarding these
practices. In addition, annuity sales to seniors are coming
under increased scrutiny by FINRA and state insurance
regulators, and have been the source of industry litigation in
situations where annuity sales have allegedly been unsuitable
for the seniors’ financial needs.
We are also subject to various regulatory inquiries, such as
information requests, subpoenas, market conduct exams and books
and record examinations, from state and federal regulators and
other authorities which may result in fines, recommendations for
corrective action or other regulatory actions.
Current or future investigations and proceedings could have an
adverse effect on our business. A substantial legal liability or
a significant regulatory action against us could have an adverse
effect on our business. Moreover, even if we ultimately prevail
in the litigation, regulatory action or investigation, we could
suffer significant reputational harm, which could have an
adverse effect on our business. Increased regulatory scrutiny
and any resulting investigations or proceedings could result in
new legal actions or precedents and industry-wide regulations or
practices that could adversely affect our business.
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Proposals
for national health care reform could have a material adverse
effect on the profitability or marketability of the health
insurance products that we sell.
In our Group segment, we sell group medical stop-loss insurance
and limited benefit employee health plans to employer groups.
Addressing the affordability and availability of health
insurance, including reducing the number of uninsured, is a
major initiative of President Obama and members of the
U.S. Congress, and proposals that would address these
issues are pending in the U.S. Congress and in many states.
The proposals vary, and include a public health plan and other
private health plans for individual and small business
customers, individual insurance mandates, potential tax
ramifications, including, among other things, a windfall profits
tax on health insurers, the expansion of eligibility under
existing Medicaid
and/or
Federal Employees Health Benefit Plan programs, minimum medical
benefit ratios for health plans, mandatory issuance of insurance
coverage, limitations on antitrust immunity and requirements
that would limit the ability of health plans and insurers to
vary premiums based on assessments of underlying risk. While
certain of these measures would adversely affect us, at this
time we cannot predict whether they will be enacted, and if
enacted, the extent of the impact of these proposals on our
business or results of operations. If any of these initiatives
ultimately becomes effective, it could have a material adverse
effect on the profitability or marketability of the health
insurance products and services we sell and on our financial
condition, results of operations and cash flows.
Medical
advances, such as genetic research and diagnostic imaging, and
related legislation could adversely affect the financial
performance of our life insurance and annuities
businesses.
Genetic research includes procedures focused on identifying key
genes that render an individual predisposed to specific diseases
such as particular types of cancer and other diseases. Other
medical advances, such as diagnostic imaging technologies, may
be used to detect the early onset of diseases such as cancer and
cardiovascular disease. We believe that if individuals learn
through medical advances that they are predisposed to particular
conditions that may reduce life longevity or require long-term
care, they will be more likely to purchase our life insurance
policies or not to permit existing polices to lapse. In
contrast, if individuals learn that they lack the genetic
predisposition to develop the conditions that reduce longevity,
they will be less likely to purchase our life insurance products
but more likely to purchase certain annuity products. In
addition, such individuals that are existing policyholders will
be more likely to permit their policies to lapse.
If we were to gain access to the same genetic or medical
information as our prospective policyholders and
contractholders, then we would be able to take this information
into account in pricing our life insurance policies and annuity
contracts. However, a growing body of law imposes limitations on
an insurer’s ability to use genetic information in
underwriting.
Medical advances also could lead to new forms of preventive
care. Preventive care could extend the life and improve the
overall health of individuals. If this were to occur, the
duration of payments under certain of our annuity products
likely would increase, thereby reducing net earnings in that
business.
Changes
in tax laws could make some of our products less attractive to
consumers and as a result have an adverse effect on our
business.
Congress, from time to time, considers legislation that could
make our products less attractive to consumers, including
legislation that would reduce or eliminate the benefits derived
from the tax deferred nature of life insurance and annuity
products.
In addition, changes in tax laws could increase our tax
liability or increase our reporting obligations. For example, in
May 2009, President Obama released additional information about
the tax proposals contained in his Fiscal Year 2010 Budget (the
“Budget”). There are several proposals included in the
Budget that are significant for life insurance companies. Those
proposals include: modifying the dividends-received deduction
for life insurance company separate accounts; requiring
information reporting for private separate accounts of life
insurance companies; imposing new reporting requirements and
transfer-for-value
rules on purchasers of certain life insurance contracts;
expanding the interest expense disallowance for corporate-owned
life insurance; requiring information reporting on payments to
corporations; and increasing information return
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penalties. These proposals not only could increase our tax
liabilities but also could reduce the attractiveness of certain
products we sell. These proposals may not be enacted or may be
modified by Congress prior to enactment.
Furthermore, the federal estate tax, which has undergone a
gradual repeal since 2001 that will continue to be phased in
through 2010, is scheduled to revert to pre-2001 law as of
January 1, 2011. The repeal of and continuing uncertainty
regarding the federal estate tax may adversely affect sales and
surrenders of some of our estate planning products.
Failures
elsewhere in the insurance industry could obligate us to pay
assessments through guaranty associations.
When an insurance company becomes insolvent, guaranty
associations in each of the 50 states levy assessments upon
all companies licensed to write insurance in the relevant lines
of business in that state, and use the proceeds to pay claims of
policyholder residents of that state, up to the state-specific
limit of coverage. The total amount of the assessment is based
on the number of insured residents in each state, and each
company’s assessment is based on its proportionate share of
premium volume in the relevant lines of business and could have
an adverse effect on our results of operations. The failure of a
large life, health or annuity insurer could trigger guaranty
association assessments which we would be obligated to pay.
Risks
Relating to this Offering and Ownership of Our Common
Stock
As a
holding company, Symetra Financial Corporation depends on the
ability of its subsidiaries to transfer funds to it to meet its
obligations and pay dividends.
Symetra Financial Corporation is a holding company for its
insurance and financial subsidiaries with no significant
operations of its own. Its principal sources of cash to meet its
obligations and to pay dividends consist of dividends from its
subsidiaries and permitted payments under tax sharing agreements
with its subsidiaries. State insurance regulatory authorities
limit the payment of dividends by insurance subsidiaries. Based
on our statutory results as of December 31, 2008, our
insurance subsidiaries may pay dividends to us of up to
$117.9 million in the aggregate during 2009 without
obtaining regulatory approval, provided that the aggregate
dividends paid over the twelve months preceding any dividend
payment made during 2009 do not exceed the $117.9 million
limit. Competitive pressures generally require our insurance
subsidiaries to maintain financial strength ratings, which are
partly based on maintaining certain levels of capital. These
restrictions and other regulatory requirements, such as minimum
required risk-based capital ratios, affect the ability of our
insurance subsidiaries to make dividend payments. Limits on the
ability of the insurance subsidiaries to pay dividends could
adversely affect our liquidity, including our ability to pay
dividends to stockholders and service our debt.
There are a number of other factors that could affect our
ability to pay dividends, including the following:
| • | lack of availability of cash to pay dividends due to changes in our operating cash flow, capital expenditure requirements, working capital requirements and other cash needs; | |
| • | unexpected or increased operating or other expenses or changes in the timing thereof; | |
| • | restrictions under Delaware law or other applicable law on the amount of dividends that we may pay; | |
| • | a decision by our board of directors to modify or revoke its policy to pay dividends; and | |
| • | the other risks described under “Risk Factors.” |
The failure to maintain or pay dividends could adversely affect
the trading price of our common stock.
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There
may not be an active, liquid trading market for our common
stock.
Prior to this offering, there has been no public market for our
common stock. We cannot predict the extent to which an active
trading market with adequate liquidity will develop. If an
active trading market does not develop, you may have difficulty
selling any of our common stock that you purchase and the value
of your shares may be impaired.
If
securities or industry analysts do not publish research or
reports about our business, if they change their recommendations
regarding our stock adversely or if our operating results do not
meet their expectations, our stock price could
decline.
The trading market for our common stock will be influenced by
the research and reports that industry or securities analysts
publish about us, our business or our industry. If one or more
of these analysts cease coverage of our company or fail to
publish reports on us regularly, we could lose visibility in the
financial markets, which in turn could cause our stock price or
trading volume to decline. Moreover, if one or more of the
analysts who cover our company downgrade our stock or if our
operating results do not meet their expectations, our stock
price could decline.
As a
public company, we will become subject to additional financial
and other reporting and corporate governance
requirements.
We have historically operated our business as a private company.
After this offering, we will become obligated to file with the
Securities and Exchange Commission, or SEC, annual and quarterly
information and other reports that are specified in
Section 13 of the Exchange Act. We will also be required to
ensure that we have the ability to prepare financial statements
that are fully compliant with all SEC reporting requirements on
a timely basis. We will also become subject to other reporting
and corporate governance requirements, including the
requirements of the NYSE and certain provisions of the
Sarbanes-Oxley Act of 2002 and the regulations promulgated
thereunder, which will impose significant compliance obligations
upon us. As a public company, we will be required to:
| • | prepare and distribute periodic public reports and other stockholder communications in compliance with our obligations under the federal securities laws and NYSE rules; | |
| • | create or expand the roles and duties of our board of directors and committees of the board; | |
| • | institute more comprehensive financial reporting and disclosure compliance functions; | |
| • | involve and retain to a greater degree outside counsel and accountants in the activities listed above; | |
| • | enhance our investor relations function; | |
| • | establish new internal policies, including those relating to disclosure controls and procedures; and | |
| • | comply with the Sarbanes-Oxley Act of 2002, in particular Section 404 and Section 302. |
These changes will require a significant commitment of
additional expense and other resources. We may not be successful
in implementing these requirements and implementing them could
adversely affect our business or operating results. In addition,
if we fail to implement the requirements with respect to our
internal accounting and audit functions, our ability to report
our operating results on a timely and accurate basis could be
impaired.
Significant
stockholders may be able to influence the direction of our
business.
Upon completion of this offering, our principal stockholders,
affiliates of White Mountains Insurance Group, Ltd. and
Berkshire Hathaway Inc., will beneficially own
approximately %
and % of our outstanding shares of
common stock, respectively. On matters that are brought to
stockholders for their vote, they would continue to have the
ability to significantly influence all matters requiring
stockholder approval,
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including the nomination and election of directors and the
determination of the outcome of any corporate transaction or
other matter submitted to our stockholders for approval,
including amendments to our certificate of incorporation,
potential mergers or acquisitions, asset sales and other
significant corporate transactions. The interests of our
principal stockholders may not coincide with the interests of
the other holders of our common stock.
Our
internal control over financial reporting does not currently
meet the standards required by Section 404 of the
Sarbanes-Oxley Act of 2002, and failure to achieve and maintain
effective internal control over financial reporting in
accordance with Section 404 of the Sarbanes-Oxley Act could
have a material adverse effect on our business and stock
price.
As a privately held company, we have not been required to
maintain internal control over financial reporting in a manner
that meets the standards of publicly traded companies required
by Section 404 of the Sarbanes-Oxley Act, standards that we
may be required to meet in the course of preparing our
consolidated financial statements as of and for the year ended
December 31, 2010. Although we have documentation of our
internal controls, we do not document or test our compliance
with these controls on a periodic basis in accordance with
Section 404 of the Sarbanes-Oxley Act. In connection with
our 2008, 2007 and 2006 audits, no material weaknesses in our
internal control over financial reporting were identified.
If, as a public company, we are not able to implement the
requirements of Section 404 in a timely manner or with
adequate compliance, our independent registered public
accounting firm may not be able to attest to the adequacy of our
internal control over financial reporting. If we are unable to
maintain adequate internal control over financial reporting, we
may be unable to report our financial information on a timely
basis, may suffer adverse regulatory consequences or violations
of applicable stock exchange listing rules and may breach the
covenants under our revolving credit facilities and our senior
notes. There could also be a negative reaction in the financial
markets due to a loss of investor confidence in us and the
reliability of our financial statements. Confidence in our
financial statements is also likely to suffer if we or our
independent registered public accounting firm report a material
weakness in our internal control over financial reporting. In
addition, we will incur incremental costs in order to improve
our internal control over financial reporting and comply with
Section 404, including increased auditing and legal fees
and costs associated with hiring additional accounting and
administrative staff.
Our
stock price may fluctuate significantly, and you may not be able
to resell your shares at or above the initial public offering
price.
The trading price of our common stock may be volatile and
subject to wide price fluctuations in response to various
factors, including:
| • | market conditions in the broader stock market in general; | |
| • | actual or anticipated fluctuations in our quarterly financial and operating results; | |
| • | changes in interest rates; | |
| • | introduction of new services or announcements of significant contracts, acquisitions or capital commitments by us or our competitors; | |
| • | regulatory or political developments; | |
| • | issuance of new or changed securities analysts’ reports or recommendations, or the announcement of any changes to our credit rating; | |
| • | additions or departures of key personnel; | |
| • | availability of capital; | |
| • | litigation and government investigations; | |
| • | legislative and regulatory developments; |
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| • | future sales of our common stock; | |
| • | investor perceptions of us and the life insurance industry; and | |
| • | economic conditions. |
These and other factors may cause the market price of our common
stock to fluctuate substantially, which may limit or prevent
investors from readily selling their shares of common stock and
may otherwise negatively affect the liquidity of our common
stock. Even factors that do not specifically relate to our
company may materially reduce the market price of our common
stock, regardless of our operating performance.
Future
sales, or the perception of future sales, of a substantial
amount of our common stock may depress the market price of our
common stock.
Future sales, or the perception of future sales, of a
substantial number of shares of our common stock in the public
market after this offering could have a material adverse effect
on the prevailing market price of our common stock.
Upon completion of this offering, we will
have shares
of common stock outstanding,
or shares
if we give effect to the exercise of all outstanding warrants.
All shares sold in this offering will be freely tradable without
restriction under the Securities Act, except for any shares that
may be held or acquired by affiliates of the Company, as that
term is defined in the Securities Act.
In connection with this offering, we, each of our executive
officers, directors and stockholders will have entered into
lock-up
agreements that prevent the sale of shares of our common stock
for 180 days after the date of this prospectus, subject to
an extension in certain circumstances described under
“Underwriting.” Following the expiration of the
lock-up
period, the
remaining shares
outstanding held by current stockholders of the Company will be
available for sale pursuant to Rule 144, subject to
compliance with the requirements and limitations under
Rule 144. Furthermore, our existing stockholders will have
the right, subject to certain conditions, to require us to
register the sale
of
of their shares of our common stock under the Securities Act. By
exercising their registration rights, and selling a large number
of shares, our stockholders could cause the prevailing market
price of our common stock to decline.
Purchasers
of common stock will experience immediate
dilution.
Based on the initial public offering price of
$ per share (the midpoint of the
price range shown on the cover page of this prospectus),
purchasers of our common stock in this offering will experience
an immediate dilution in the book value per share of common
stock of $ from the offering
price. Investors purchasing common stock in this offering will
contribute approximately % of the
total amount invested by stockholders since inception, but will
only own approximately % of the
shares of common stock outstanding. In addition, following this
offering, a significant number of warrants to purchase our
common stock will be outstanding. You will incur further
dilution if outstanding warrants to purchase common stock are
exercised. Also, our amended and restated certificate of
incorporation allows us to issue significant numbers of
additional shares, including shares that may be issued under the
Equity Plan and Employee Stock Purchase Plan, which could result
in further dilution to purchasers of our common stock in this
offering.
Anti-takeover
provisions in our charter documents could delay or prevent a
change of control of our company and may result in an
entrenchment of management and diminish the value of our common
stock.
Our certificate of incorporation and bylaws contain provisions
that could depress the trading price of our common stock by
acting to discourage, delay or prevent a change of control of
our company or changes in
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management that our stockholders might deem advantageous.
Specific provisions in our certificate of incorporation include:
| • | our ability to issue preferred stock with terms that the board of directors may determine, without stockholder approval; | |
| • | a classified board of directors; | |
| • | advance notice requirements for stockholder proposals and nominations; | |
| • | the absence of cumulative voting in the election of directors; and | |
| • | limitations on convening stockholder meetings. |
These provisions in our certificate of incorporation and bylaws
may frustrate attempts to effect a takeover transaction that is
in the best interests of our minority stockholders. Even in the
absence of a takeover attempt, the existence of these provisions
may adversely affect the prevailing market price of our common
stock if they are viewed as discouraging future takeover
attempts.
Applicable
insurance laws may make it difficult to effect a change of
control of our company.
Before a person can acquire control of a U.S. insurance
company, prior written approval must be obtained from the
insurance commissioner of the state where the insurer is
domiciled. Generally, state statutes provide that control over a
domestic insurer is presumed to exist if any person, directly or
indirectly, owns, controls, holds with the power to vote, or
holds proxies representing, 10% or more of the voting securities
of the domestic insurer. These statutes may frustrate or delay
attempts to effect a takeover transaction that would benefit our
stockholders.
32
Table of Contents
FORWARD-LOOKING
STATEMENTS
This prospectus contains “forward-looking” statements
that are intended to enhance the reader’s ability to assess
our future financial and business performance. Forward-looking
statements include, but are not limited to, statements that
represent our beliefs concerning future operations, strategies,
financial results or other developments, and contain words and
phrases such as “may,” “expects,”
“should,” “believes,”
“anticipates,” “estimates,”
“intends” or similar expressions. In addition,
statements that refer to our future financial performance,
anticipated growth and trends in our business and in our
industry and other characterizations of future events or
circumstances are forward-looking statements. Because these
forward-looking statements are based on estimates and
assumptions that are subject to significant business, economic
and competitive uncertainties, many of which are beyond our
control or are subject to change, actual results could be
materially different.
Consequently, such forward-looking statements should be regarded
solely as our current plans, estimates and beliefs with respect
to, among other things, future events and financial performance.
Except as required under the federal securities laws, we do not
intend, and do not undertake, any obligation to update any
forward-looking statements to reflect future events or
circumstances after the date of such statements.
You should review carefully the section captioned “Risk
Factors” in this prospectus for a complete discussion of
the material risks of an investment in our common stock.
33
Table of Contents
INDUSTRY
AND MARKET DATA
This prospectus includes industry and government data and
forecasts that we have prepared based, in part, upon industry
and government data and forecasts obtained from industry and
government publications and surveys. These sources include
publications and data compiled by the Employee Benefit Research
Institute, Kaiser Family Foundation, U.S. Census Bureau,
U.S. Department of Commerce, Bureau of Economic Analysis and the
Self-Insurance
Institute of America. Third party industry publications, surveys
and forecasts generally state that the information contained
therein has been obtained from sources believed to be reliable,
but there can be no assurance as to the accuracy or completeness
of included information. While we are responsible for the
adequacy and accuracy of the disclosure in this prospectus, we
have not independently verified any of the data from third party
sources nor have we ascertained the underlying economic
assumptions relied upon therein. Forecasts are particularly
likely to be inaccurate, especially over long periods of time.
While we are not aware of any misstatements regarding the
industry data presented herein, our estimates involve risks and
uncertainties and are subject to change based on various
factors, including those discussed in the section captioned
“Risk Factors.”
34
Table of Contents
DILUTION
If you invest in our common stock in this offering, your
interest in our company will be diluted to the extent of the
difference between the initial public offering price per share
of our common stock and the pro forma book value per share of
our common stock after giving effect to this offering.
Our book value per share represents the amount of our total
assets less total liabilities, divided by the total number of
shares of common stock then outstanding. As
of ,
2009, our book value was approximately
$ , or approximately
$ per share based on shares of our
common stock outstanding as of such date. After giving effect to
the sale of shares of our common stock at an assumed initial
public offering price of $ per
share (the midpoint of the price range set forth on the cover
page of this prospectus), and after deducting estimated
underwriting discounts and commissions and estimated offering
expenses payable by us, our book value as
of ,
2009, which we refer to as our pro forma book value, would have
been approximately $ , or
$ per share of our common stock.
This represents an immediate increase in the book value of
$ per share to our existing
stockholders, and an immediate dilution of
$ per share to new investors
purchasing shares of our common stock in this offering.
The following table illustrates this dilution on a per share
basis:
|
Assumed initial public offering price per share
|
$ | |||
|
Book value per share as
of ,
2009
|
$ | |||
|
Change in per share attributable to new investors
|
$ | |||
|
Pro forma book value per share after giving effect to this
offering
|
$ | |||
|
Dilution per share to new investors
|
$ | |||
The foregoing discussion and table do not give effect
to shares
of common stock that we will issue if the underwriters exercise
their options to purchase additional shares in full. To the
extent that these options are exercised, there may be further
dilution to new investors.
The following table summarizes, as
of ,
2009, the number of shares of our common stock we issued and
sold, the total consideration we received and the average price
per share paid to us by our existing stockholders prior to this
offering, and by new investors purchasing shares of common stock
in this offering. The table assumes an initial public offering
price of $ per share (the midpoint
of the price range set forth on the cover page of this
prospectus) and deducts estimated underwriting discounts and
commissions and estimated offering expenses payable by us:
|
Total |
Average |
|||||||||||||||||||
| Shares Purchased | Consideration |
Price per |
||||||||||||||||||
| Number | Percent | Amount | Percent | Share | ||||||||||||||||
|
Existing stockholders prior to this offering(1)
|
% | $ | % | $ | ||||||||||||||||
|
New investors in this offering
|
$ | |||||||||||||||||||
|
Total
|
||||||||||||||||||||
| 100 | % | $ | 100 | % | ||||||||||||||||
| (1) | The number of shares disclosed for the existing stockholders includes shares being sold by the Selling Stockholders in this offering. The number of shares disclosed for the new investors does not include the shares being purchased by the new investors from the Selling Stockholders in this offering. |
35
Table of Contents
A $1.00 increase (decrease) in the assumed initial public
offering price of $ per share
would increase or decrease our pro forma book value after giving
effect to this offering by $ and
increase or decrease the dilution to new investors by
$ per share, assuming the number
of shares offered by us, as set forth on the cover page of this
prospectus, remains the same and after deducting the estimated
underwriting discounts and commissions and estimated expenses
payable by us.
If the underwriters’ options to purchase additional shares
are exercised in full, the percentage of shares held by our
existing stockholders will decrease to
approximately % of the total number
of shares of our common stock outstanding after this offering
and the number of shares of our common stock held by new
investors will increase
to ,
or approximately % of the total
number of shares of our common stock outstanding after this
offering.
36
Table of Contents
USE OF
PROCEEDS
We expect to receive net primary proceeds from this offering of
approximately $ million. Our
board of directors has not made any determination of specific
uses of proceeds at this time. However, we expect to use the net
primary proceeds from this offering (including shares subject to
the underwriters’ options to purchase additional shares)
for general corporate purposes, which may include contributions
of capital to our insurance and other subsidiaries. Some of the
shares of common stock offered by this prospectus are being sold
by the Selling Stockholders. For information about the Selling
Stockholders, see “Principal and Selling
Stockholders.” We will not receive any of the proceeds from
the sale of shares by the Selling Stockholders.
37
Table of Contents
DIVIDEND
POLICY
We intend to pay quarterly cash dividends on our common stock at
an initial rate of approximately $
per share. The declaration, payment and amount of future
dividends to holders of our common stock will be at the
discretion of our board of directors and will depend on many
factors, including our financial condition and results of
operations, liquidity requirements, market opportunities,
capital requirements of our subsidiaries, legal requirements,
regulatory constraints and other factors as the board of
directors deems relevant. Dividends on our common stock will
also be paid to holders of our outstanding warrants on a
one-to-one
basis.
We are a holding company with no significant business operations
of our own. All of our business operations are conducted through
our subsidiaries. Dividends and loans from, and cash generated
by, our subsidiaries will be our principal sources of cash to
repay indebtedness, fund operations and pay dividends.
Accordingly, our ability to pay dividends to our stockholders
will depend on the earnings and distributions of funds from our
subsidiaries. See “Risk Factors — Risks Relating
to this Offering and Ownership of Our Common Stock —
As a holding company, Symetra Financial Corporation depends on
the ability of its subsidiaries to transfer funds to it to meet
its obligations and pay dividends.”
38
Table of Contents
CAPITALIZATION
The following table sets forth our cash and cash equivalents and
capitalization as of September 30, 2009 on an actual basis
and on an as adjusted basis to give effect to receipt of the net
primary proceeds from the sale by us in this offering of shares
of common stock, assuming that this offering had been
consummated on September 30, 2009. You should read this
table in conjunction with our consolidated financial statements
and related notes and the information provided in the section
captioned “Management’s Discussion and Analysis of
Financial Condition and Results of Operations.”
| As of September 30, 2009 | ||||||||
|
As |
||||||||
| Actual | Adjusted | |||||||
| (In millions) | ||||||||
|
Cash and cash equivalents
|
$ | 241.7 | $ | |||||
|
Borrowings and other obligations:
|
||||||||
|
Revolving credit facility(1)
|
$ | — | $ | — | ||||
|
CENts
|
149.8 | 149.8 | ||||||
|
Senior notes
|
299.1 | 299.1 | ||||||
|
Total borrowings and other obligations
|
$ | 448.9 | $ | 448.9 | ||||
|
Stockholders’ equity:
|
||||||||
|
Preferred stock, $0.01 par value; 10.0 million shares
authorized, none issued
|
— | — | ||||||
|
Common stock, $0.01 par value; 750.0 million shares
authorized, 92.7 million shares issued and outstanding
|
0.9 | |||||||
|
Additional paid-in capital
|
1,165.5 | |||||||
|
Total paid-in capital
|
1,166.4 | |||||||
|
Retained earnings
|
284.3 | |||||||
|
Accumulated other comprehensive income, net of taxes
|
29.8 | |||||||
|
Total stockholders’ equity
|
1,480.5 | |||||||
|
Total capitalization
|
$ | 1,929.4 | $ | |||||
| (1) | The revolving credit facility provides for borrowings of up to $200.0 million. On February 12, 2009, Bank of America, N.A. issued a notice of default to Lehman Commercial Paper, Inc., one of the lending institutions in the syndicate with a commitment of $20.0 million, effectively limiting our ability to borrow under the revolving credit facility to $180.0 million at that time. On October 7, 2009, Lehman Commercial Paper, Inc. assigned its interest in our revolving credit facility to Barclays Bank PLC, effectively restoring capacity in the facility to $200.0 million. As of September 30, 2009, we had no balance outstanding under this facility. |
39
Table of Contents
SELECTED
HISTORICAL CONSOLIDATED FINANCIAL DATA
The selected historical consolidated financial data, except for
non-GAAP financial measures, as of September 30, 2009 and
for the nine months ended September 30, 2009 and 2008 have
been derived from our unaudited interim historical consolidated
financial statements, which have been prepared on a basis
consistent with our audited consolidated financial statements,
included elsewhere in this prospectus. In the opinion of
management, such unaudited financial data, except for non-GAAP
financial measures, reflects all historical and recurring
adjustments necessary for a fair presentation of the results for
these periods. The results of operations for the nine months
ended September 30, 2009 are not necessarily indicative of
the results to be expected for the full year or any future
period. The selected historical consolidated financial data,
except for non-GAAP financial measures, as of December 31,
2008 and 2007 and for the years ended December 31, 2008,
2007 and 2006 have been derived from our audited consolidated
financial statements that are included elsewhere in this
prospectus. The selected historical consolidated financial data,
except for non-GAAP financial measures, presented below as of
December 31, 2006 and 2005 and for the year ended
December 31, 2005 and as of December 31, 2004 and for
the period from January 1, 2004 through August 1, 2004
and for the period from August 2, 2004 through
December 31, 2004 have been derived from our audited
consolidated financial statements that are not included in this
prospectus.
On August 2, 2004, we completed the Acquisition which was
accounted for using the purchase method of accounting, referred
to as purchase GAAP accounting, or PGAAP. We do not believe the
predecessor financial results prior to the Acquisition for the
period from January 1, 2004 through August 1, 2004 are
comparable to the results subsequent to the Acquisition. This
lack of comparability is primarily due to significant changes in
our operating costs and also because of PGAAP adjustments
impacting net investment income, policyholder benefits and
claims, interest credited amortization of deferred policy
acquisition costs, intangible assets and net realized investment
gains (losses). Under PGAAP, the purchase price is allocated to
the estimated fair value of the tangible and identifiable assets
acquired less liabilities assumed at the date of acquisition. In
conjunction with PGAAP for the Acquisition, we were required to
adjust our consolidated balance sheet to fair value and reset
our existing deferred policy acquisition costs, goodwill and
intangible asset balances at August 2, 2004 to zero.
In addition to our four operating segments and our Other
segment, during the year ended December 31, 2005 and prior,
our historical financial statements also include the results of
Symetra Asset Management Company and the majority of the
business of Symetra Services Corporation, which are presented in
our historical financial statements as discontinued operations.
40
Table of Contents
This selected historical consolidated financial data should be
read in conjunction with other information contained in this
prospectus, including “Management’s Discussion and
Analysis of Financial Condition and Results of Operations”
and our historical consolidated financial statements and related
notes included elsewhere in this prospectus.
| Predecessor | ||||||||||||||||||||||||||||||||
|
August 2 |
January 1 |
|||||||||||||||||||||||||||||||
|
Nine Months |
through |
through |
||||||||||||||||||||||||||||||
| Ended September 30, | Year Ended December 31, |
December 31, |
August 1, |
|||||||||||||||||||||||||||||
| 2009 | 2008 | 2008 | 2007 | 2006 | 2005 | 2004 | 2004 | |||||||||||||||||||||||||
| (In millions, except per share data) | ||||||||||||||||||||||||||||||||
|
Consolidated Income Statement Data:
|
||||||||||||||||||||||||||||||||
|
Revenues:
|
||||||||||||||||||||||||||||||||
|
Premiums
|
$ | 430.2 | $ | 440.4 | $ | 584.8 | $ | 530.5 | $ | 525.7 | $ | 575.5 | $ | 263.2 | $ | 357.9 | ||||||||||||||||
|
Net investment income
|
829.4 | 718.0 | 956.5 | 973.6 | 984.9 | 994.0 | 411.1 | 693.7 | ||||||||||||||||||||||||
|
Other revenues
|
43.2 | 52.0 | 67.8 | 68.7 | 56.1 | 58.6 | 27.1 | 43.9 | ||||||||||||||||||||||||
|
Net realized investment gains (losses):
|
||||||||||||||||||||||||||||||||
|
Total
other-than-temporary
impairment losses on securities
|
(167.9 | ) | (61.7 | ) | (86.4 | ) | (16.2 | ) | (25.7 | ) | (7.7 | ) | (0.1 | ) | (10.3 | ) | ||||||||||||||||
|
Less: portion of losses recognized in other comprehensive income
|
94.2 | — | — | — | — | — | — | — | ||||||||||||||||||||||||
|
Net impairment losses recognized in earnings
|
(73.7 | ) | (61.7 | ) | (86.4 | ) | (16.2 | ) | (25.7 | ) | (7.7 | ) | (0.1 | ) | (10.3 | ) | ||||||||||||||||
|
Other net realized investment gains (losses)
|
44.7 | (41.6 | ) | (71.6 | ) | 33.0 | 27.4 | 21.8 | 7.1 | 45.2 | ||||||||||||||||||||||
|
Total net realized investment gains (losses)
|
(29.0 | ) | (103.3 | ) | (158.0 | ) | 16.8 | 1.7 | 14.1 | 7.0 | 34.9 | |||||||||||||||||||||
|
Total revenues
|
1,273.8 | 1,107.1 | 1,451.1 | 1,589.6 | 1,568.4 | 1,642.2 | 708.4 | 1,130.4 | ||||||||||||||||||||||||
|
Benefits and Expenses:
|
||||||||||||||||||||||||||||||||
|
Policyholder benefits and claims
|
262.1 | 260.1 | 348.5 | 267.1 | 264.3 | 327.4 | 127.5 | 223.6 | ||||||||||||||||||||||||
|
Interest credited
|
629.2 | 569.1 | 766.1 | 752.3 | 765.9 | 810.9 | 360.2 | 556.4 | ||||||||||||||||||||||||
|
Other underwriting and operating expenses
|
186.7 | 201.9 | 265.8 | 281.9 | 260.5 | 273.2 | 123.3 | 187.2 | ||||||||||||||||||||||||
|
Fair value of warrants issued to investors
|
— | — | — | — | — | — | 101.5 | — | ||||||||||||||||||||||||
|
Interest expense
|
23.8 | 24.0 | 31.9 | 21.5 | 19.1 | 12.4 | 3.5 | — | ||||||||||||||||||||||||
|
Amortization of deferred policy acquisition costs
|
36.4 | 17.7 | 25.8 | 18.0 | 14.6 | 11.9 | 1.6 | 34.2 | ||||||||||||||||||||||||
|
Total benefits and expenses
|
1,138.2 | 1,072.8 | 1,438.1 | 1,340.8 | 1,324.4 | 1,435.8 | 717.6 | 1,001.4 | ||||||||||||||||||||||||
|
Income (loss) from continuing operations before income taxes
|
135.6 | 34.3 | 13.0 | 248.8 | 244.0 | 206.4 | (9.2 | ) | 129.0 | |||||||||||||||||||||||
|
Provision (benefit) for income taxes:
|
||||||||||||||||||||||||||||||||
|
Current
|
(4.2 | ) | 34.2 | 23.8 | 62.8 | 92.4 | 22.2 | 21.3 | 0.9 | |||||||||||||||||||||||
|
Deferred
|
43.6 | (26.9 | ) | (32.9 | ) | 18.7 | (7.9 | ) | 39.7 | 10.7 | 30.5 | |||||||||||||||||||||
|
Total provision (benefit) for income taxes
|
39.4 | 7.3 | (9.1 | ) | 81.5 | 84.5 | 61.9 | 32.0 | 31.4 | |||||||||||||||||||||||
|
Income (loss) from continuing operations
|
96.2 | 27.0 | 22.1 | 167.3 | 159.5 | 144.5 | (41.2 | ) | 97.6 | |||||||||||||||||||||||
|
Income (loss) from discontinued operations (net of taxes)
|
— | — | — | — | — | 1.0 | (2.4 | ) | 2.3 | |||||||||||||||||||||||
|
Net income (loss)
|
$ | 96.2 | $ | 27.0 | $ | 22.1 | $ | 167.3 | $ | 159.5 | $ | 145.5 | $ | (43.6 | ) | $ | 99.9 | |||||||||||||||
|
Net income per common share(1):
|
||||||||||||||||||||||||||||||||
|
Basic
|
$ | 0.86 | $ | 0.24 | $ | 0.20 | $ | 1.50 | $ | 1.43 | $ | 1.30 | ||||||||||||||||||||
|
Diluted
|
$ | 0.86 | $ | 0.24 | $ | 0.20 | $ | 1.50 | $ | 1.43 | $ | 1.30 | ||||||||||||||||||||
|
Weighted-average number of common shares outstanding:
|
||||||||||||||||||||||||||||||||
|
Basic
|
111.622 | 111.622 | 111.622 | 111.622 | 111.622 | 111.622 | ||||||||||||||||||||||||||
|
Diluted
|
111.623 | 111.622 | 111.622 | 111.622 | 111.622 | 111.622 | ||||||||||||||||||||||||||
|
Cash dividends declared per common share
|
$ | — | $ | — | $ | — | $ | 1.79 | $ | 0.90 | $ | — | $ | — | ||||||||||||||||||
|
Non-GAAP Financial Measure(2):
|
||||||||||||||||||||||||||||||||
|
Net operating income (loss)
|
$ | 115.2 | $ | 91.8 | $ | 122.9 | $ | 154.9 | $ | 159.8 | $ | 133.4 | $ | (46.9 | ) | $ | 75.5 | |||||||||||||||
|
Reconciliation to net income (loss):
|
||||||||||||||||||||||||||||||||
|
Net income (loss)
|
$ | 96.2 | $ | 27.0 | $ | 22.1 | $ | 167.3 | $ | 159.5 | $ | 145.5 | $ | (43.6 | ) | $ | 99.9 | |||||||||||||||
|
Less: Net realized investment gains (losses) (net of taxes)(3)
|
(18.9 | ) | (67.1 | ) | (102.7 | ) | 10.9 | 1.1 | 9.2 | 4.6 | 22.7 | |||||||||||||||||||||
|
Add: Net realized and unrealized investment gains (losses) on
FIA options (net of taxes)(4)
|
0.1 | (2.3 | ) | (1.9 | ) | (1.5 | ) | 1.4 | (2.9 | ) | 1.3 | (1.7 | ) | |||||||||||||||||||
|
Net operating income (loss)
|
$ | 115.2 | $ | 91.8 | $ | 122.9 | $ | 154.9 | $ | 159.8 | $ | 133.4 | $ | (46.9 | ) | $ | 75.5 | |||||||||||||||
41
Table of Contents
|
As of |
||||||||||||||||||||||||
| September 30, | As of December 31, | |||||||||||||||||||||||
| 2009 | 2008 | 2007 | 2006 | 2005 | 2004 | |||||||||||||||||||
| (In millions, except share and per share data) | ||||||||||||||||||||||||
|
Consolidated Balance Sheet Data:
|
||||||||||||||||||||||||
|
Total investments
|
$ | 20,035.2 | $ | 16,252.5 | $ | 16,905.0 | $ | 17,305.3 | $ | 18,332.8 | $ | 19,244.8 | ||||||||||||
|
Total assets
|
22,226.0 | 19,229.6 | 19,560.2 | 20,114.6 | 20,980.1 | 22,182.0 | ||||||||||||||||||
|
Total debt
|
448.9 | 448.8 | 448.6 | 298.7 | 300.0 | 300.0 | ||||||||||||||||||
|
Separate account assets
|
818.6 | 716.2 | 1,181.9 | 1,233.9 | 1,188.8 | 1,228.4 | ||||||||||||||||||
|
Accumulated other comprehensive income (loss) (net of taxes)
(AOCI)
|
29.8 | (1,052.6 | ) | (12.5 | ) | (0.5 | ) | 136.6 | 312.9 | |||||||||||||||
|
Total stockholders’ equity
|
1,480.5 | 286.2 | 1,285.1 | 1,327.3 | 1,404.9 | 1,435.8 | ||||||||||||||||||
|
U.S. Statutory Financial Information:
|
||||||||||||||||||||||||
|
Statutory capital and surplus
|
$ | 1,331.7 | $ | 1,179.0 | $ | 1,225.0 | $ | 1,266.2 | $ | 1,260.1 | $ | 1,138.4 | ||||||||||||
|
Asset valuation reserve (AVR)
|
117.3 | 113.7 | 176.0 | 158.4 | 140.9 | 107.6 | ||||||||||||||||||
|
Statutory capital and surplus and AVR
|
$ | 1,449.0 | $ | 1,292.7 | $ | 1,401.0 | $ | 1,424.6 | $ | 1,401.0 | $ | 1,246.0 | ||||||||||||
|
As of |
||||||||||||||||||||||||
| September 30, | As of December 31, | |||||||||||||||||||||||
| 2009 | 2008 | 2007 | 2006 | 2005 | 2004 | |||||||||||||||||||
|
Book value per common share(5)
|
$ | 13.25 | $ | 2.56 | $ | 11.51 | $ | 11.89 | $ | 12.59 | $ | 12.86 | ||||||||||||
|
Non-GAAP Financial Measures(6):
|
||||||||||||||||||||||||
|
Adjusted book value
|
$ | 1,450.7 | $ | 1,338.8 | $ | 1,297.6 | $ | 1,327.8 | $ | 1,268.3 | $ | 1,122.9 | ||||||||||||
|
Reconciliation to stockholders’ equity:
|
||||||||||||||||||||||||
|
Total stockholders’ equity
|
$ | 1,480.5 | $ | 286.2 | $ | 1,285.1 | $ | 1,327.3 | $ | 1,404.9 | $ | 1,435.8 | ||||||||||||
|
Less: AOCI
|
29.8 | (1,052.6 | ) | (12.5 | ) | (0.5 | ) | 136.6 | 312.9 | |||||||||||||||
|
Adjusted book value
|
$ | 1,450.7 | $ | 1,338.8 | $ | 1,297.6 | $ | 1,327.8 | $ | 1,268.3 | $ | 1,122.9 | ||||||||||||
|
Add: Assumed proceeds from exercise of warrants
|
218.1 | 218.1 | 218.1 | 218.1 | 218.1 | 218.1 | ||||||||||||||||||
|
Adjusted book value, as converted
|
$ | 1,668.8 | $ | 1,556.9 | $ | 1,515.7 | $ | 1,545.9 | $ | 1,486.4 | $ | 1,341.0 | ||||||||||||
|
Adjusted book value per common share(7)
|
$ | 15.66 | $ | 14.45 | $ | 14.01 | $ | 14.33 | $ | 13.69 | $ | 12.12 | ||||||||||||
|
Adjusted book value per common share, as converted(8)
|
$ | 14.95 | $ | 13.95 | $ | 13.58 | $ | 13.85 | $ | 13.32 | $ | 12.01 | ||||||||||||
| Twelve Months Ended | ||||||||||||||||||||
|
September 30, |
December 31, |
December 31, |
December 31, |
December 31, |
||||||||||||||||
| 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
|
ROE(9)
|
13.9 | % | 2.6 | % | 12.6 | % | 12.8 | % | 9.9 | % | ||||||||||
|
Average stockholders’ equity(10)
|
$ | 658.0 | $ | 861.8 | $ | 1,328.3 | $ | 1,249.5 | $ | 1,465.4 | ||||||||||
|
Non-GAAP Financial Measure(11):
|
||||||||||||||||||||
|
Operating ROAE
|
10.6 | % | 9.2 | % | 11.2 | % | 12.1 | % | 11.2 | % | ||||||||||
|
Average adjusted book value(12)
|
$ | 1,379.9 | $ | 1,329.8 | $ | 1,380.2 | $ | 1,324.2 | $ | 1,194.2 | ||||||||||
| (1) | Basic net income per common share assumes that all participating securities, including warrants, have been outstanding since the beginning of the period using the two-class method. Diluted net income per common share includes the dilutive impact of non-participating, unvested restricted stock awards, based on the application of the treasury stock method, weighted for the portion of the period they were outstanding. |
| (2) | Management considers certain non-GAAP financial measures, including net operating income (loss), to be a useful supplement to comparable GAAP measures in evaluating our financial performance and condition. These unaudited measures have been reconciled to their most comparable GAAP financial measures. We believe that the non-GAAP presentation of net operating income is valuable because excluding certain realized investment gains and losses, many of which are driven by investment decisions and external economic developments unrelated to the insurance and underwriting aspects of the business, enhances understanding of the results of operations by highlighting the underlying performance of our insurance operations. These net |
footnotes continued on following page
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| realized gains (losses), though they are recurring, may mask trends in core business performance. As an example, changes in fair value on our equity trading portfolio are recorded as realized investment gains and losses. These gains and losses are volatile, as evidenced by $18.6 million net trading gains (net of taxes of $10.0 million) for the nine months ended September 30, 2009, compared to $26.1 million net trading losses (net of taxes of $14.1 million) for the nine months ended September 30, 2008. For a definition and discussion of these non-GAAP measures and other metrics used in our analysis, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Use of non-GAAP Financial Measures.” |
| (3) | Net realized investment gains (losses) are reported net of taxes of $(10.1) million, $(36.2) million, $(55.3) million, $5.9 million, $0.6 million and $4.9 million for the nine months ended September 30, 2009 and 2008, and the twelve months ended December 31, 2008, 2007, 2006 and 2005, respectively. Prior and subsequent to the Acquisition, 2004 net realized investment gains were net of taxes of $2.4 million and $12.2 million, respectively. |
| (4) | Net realized and unrealized investment gains (losses) on FIA options are reported net of taxes of $0.1 million, $(1.3) million, $(1.0) million, $(0.8) million, $0.8 million and $(1.5) million for the nine months ended September 30, 2009 and 2008, and the twelve months ended December 31, 2008, 2007, 2006 and 2005, respectively. Prior and subsequent to the Acquisition, 2004 net realized investment gains were net of taxes of $(0.9) million, and $0.7 million, respectively. |
| (5) | Book value per common share is calculated based on stockholders’ equity divided by outstanding common shares and shares subject to outstanding warrants totaling 111,705,199, as of September 30, 2009 and 111,622,039 as of December 31, 2008, 2007, 2006, 2005 and 2004. |
| (6) | Management considers certain non-GAAP financial measures, including adjusted book value per common share and adjusted book value per common share, as converted, to be useful supplements to comparable GAAP measures in evaluating our financial performance and condition. The numerators of these measures have been reconciled to total stockholders’ equity, their most comparable GAAP financial measure. We believe that these non-GAAP presentations are useful because they exclude AOCI, which is primarily composed of the net unrealized gains (losses) on our fixed maturities, net of taxes, and therefore fluctuates based on market conditions and other economic factors. The fair value of our fixed maturities can change significantly depending on the movement of interest rates and credit spreads. Since we purchase fixed maturities to back associated liabilities of similar duration, we typically hold these investments to maturity. Therefore, we do not expect to realize all of the unrealized gains (losses) in our AOCI balance. By only considering GAAP measures, such as stockholders’ equity, investors would not benefit from useful information that these non-GAAP measures provide. As an example, our AOCI improved $1,082.4 million, or 103%, from December 31, 2008 to September 30, 2009, due to credit market improvements and tightening of interest spreads. This contributed to a related increase in stockholders’ equity over the same period of $1,194.3 million, or 417%. As a comparison, our adjusted book value increased $111.9 million, or 8%, during the same period. For a definition and discussion of these non-GAAP measures and other metrics used in our analysis, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Use of non-GAAP Financial Measures.” |
| (7) | Adjusted book value per common share is calculated based on stockholders’ equity less AOCI, divided by outstanding common shares, adjusted to exclude unearned restricted shares, totaling 92,649,888 as of September 30, 2009 and 92,646,295 as of December 31, 2008, 2007, 2006, 2005 and 2004. |
| (8) | Adjusted book value per common share, as converted gives effect to the exercise of the outstanding warrants and is calculated based on stockholders’ equity less AOCI plus the assumed proceeds from the warrants, divided by outstanding common shares, adjusted to exclude unearned restricted shares and include shares subject to outstanding warrants, totaling 111,625,632 as of September 30, 2009 and 111,622,039 as of December 31, 2008, 2007, 2006, 2005 and 2004. |
| (9) | Return on stockholders’ equity is calculated as net income divided by average stockholders’ equity. | |
| (10) | Average stockholders’ equity is derived by averaging ending stockholders’ equity for the most recent five quarters. |
| (11) | Management considers certain non-GAAP financial measures, including operating ROAE, to be useful supplements to comparable GAAP measures in evaluating our financial performance. Operating ROAE is calculated based on net operating income divided by average adjusted book value. The numerator and denominator of this measure have been reconciled to net income and stockholders’ equity, respectively, their most comparable GAAP financial measures. We believe that the non-GAAP presentation of this measure is valuable because it enhances understanding of the efficiency with which we deploy our capital and enhances understanding of our results of operations by highlighting the underlying performance of our insurance operations. For a definition and discussion of these non-GAAP measures and other metrics used in our analysis, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Use of non-GAAP Financial Measures.” |
| (12) | Average adjusted book value is derived by averaging ending adjusted book value for the most recent five quarters. |
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Table of Contents
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion in conjunction with
the audited and unaudited historical financial statements and
the accompanying notes included in this prospectus, as well as
the discussion under “Selected Historical Consolidated
Financial Data.” This discussion contains forward-looking
statements that involve risks and uncertainties. Our actual
results may differ materially from those discussed in or implied
by any of the forward-looking statements as a result of various
factors, including but not limited to those listed under
“Risk Factors” and “Forward-Looking
Statements.” Our fiscal year ends on December 31 of each
calendar year.
Management considers certain non-GAAP financial measures,
including net operating income (loss), adjusted book value,
adjusted book value, as converted and operating ROAE to be
useful to investors in evaluating our financial performance and
condition. These measures have been reconciled to their most
comparable GAAP financial measures. For a definition of these
non-GAAP measures and other metrics used in our analysis, see
“— Use of non-GAAP Financial
Measures.”
Overview
We are a life insurance company focused on profitable growth in
selected group health, retirement, life insurance and employee
benefits markets. Our operations date back to 1957 and many of
our agency and distribution relationships have been in place for
decades. We are headquartered in Bellevue, Washington and employ
approximately 1,100 people in 16 offices across the United
States, serving approximately 1.8 million customers.
As of September 30, 2009, our stockholders’ equity was
$1,480.5 million, our adjusted book value was
$1,450.7 million and we had total assets of
$22.2 billion. For the twelve months ended
September 30, 2009, our return on equity, or ROE, was 13.9%
and our operating return on average equity, or operating ROAE,
was 10.6%. We define adjusted book value as stockholders’
equity less accumulated other comprehensive income (loss), or
AOCI, and we define operating ROAE as net operating income
divided by average adjusted book value. Adjusted book value, net
operating income and operating ROAE are non-GAAP measures. For
reconciliations of adjusted book value to stockholders’
equity and net operating income to net income and for a summary
presentation of our operating results and financial position
calculated in accordance with GAAP, please see
“— Summary Historical Consolidated Financial and
Other Data” on page 9.
Our
Operations
We conduct our business through five segments, four of which are
operating:
| • | Group. We offer medical stop-loss insurance, limited medical benefit plans, group life insurance, accidental death and dismemberment insurance and disability insurance mainly to employer groups of 50 to 5,000 individuals. We also offer managing general underwriting, or MGU, services through MRM. | |
| • | Retirement Services. We offer fixed and variable deferred annuities, including tax sheltered annuities, individual retirement accounts, or IRAs, and group annuities to qualified retirement plans, including Section 401(k), 403(b) and 457 plans. | |
| • | Income Annuities. We offer single premium immediate annuities, or SPIAs, for customers seeking a reliable source of retirement income and structured settlement annuities to fund third party personal injury settlements. In addition, we offer our existing structured settlement clients a variety of funding services product options. | |
| • | Individual. We offer a wide array of term, universal and variable life insurance as well as bank-owned life insurance, or BOLI. | |
| • | Other. This segment consists of unallocated corporate income, composed primarily of investment income on unallocated surplus, unallocated corporate expenses, interest expense on |
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Table of Contents
| debt, tax credits from our tax preferred affordable housing investments, the results of small, non-insurance businesses that are managed outside of our operating segments, and inter-segment elimination entries. |
Current
Outlook
During the first nine months of 2009, the capital and credit
markets showed signs of improvement following a period of
extreme volatility and disruption for more than twelve months
that affected equity market returns, interest rates, liquidity,
access to capital and cost of capital. Economic conditions
remain uncertain, leaving us exposed to further challenges to
our financial condition and results from operations. If the
current economic environment were to deteriorate further, it
could lead to increased credit defaults, and additional
write-downs of our securities for
other-than-temporary
impairments.
The tight liquidity in the credit markets in 2008 and 2009
resulted in our maintaining higher balances of cash and cash
equivalent assets. Because of the maintenance of these higher
balances of cash and cash equivalent assets, fewer of our assets
were deployed in higher income earning assets, while our
liabilities are increasing based on increasing credited rates to
our customers. As a result, we have experienced lower growth in
our investment income than expected, especially in our
Retirement Services segment.
Despite the still challenging economic environment, we have seen
increases, in the first nine months of 2009 as compared to the
equivalent period of 2008, in sales of our fixed deferred
annuity product which offers our customers an easy to
understand, stable return on their retirement savings. We have
also experienced increases over the same period in sales of our
single premium life insurance product and SPIA products.
We believe that the recent market disruption has created a
tremendous opportunity to build our existing relationships and
add new long-term relationships because of our simple to
understand product designs and because many of our competitors
are in the midst of cleaning up their product suites and balance
sheets. We also seek to take advantage of favorable demographic
trends, including increasing retirement savings and income needs
and the growing demand for affordable health insurance.
Revenues
and Expenses
We earn revenues primarily from premiums earned on group life
and health and individual insurance products, cost of insurance,
or COI, charges primarily from our universal life and BOLI
products, net investment income, net realized investment gains
and other revenues. Other revenues include mortality and
expense, surrender and other administrative charges, revenues
from our non-insurance businesses and revenues from fee
arrangements with our reinsurance partners.
Each operating segment maintains its own portfolio of invested
assets. The realized gains (losses) incurred are reported in the
segment in which they occur. The unallocated portion of net
investment income and the unallocated realized gains (losses)
are reported in the Other segment.
Our primary expenses include interest credited, benefits and
claims and general business and operating expenses, including
commissions. We allocate certain corporate expenses to each of
our operating segments using multiple factors which include
headcount, allocated capital, account values and time study
results.
Critical
Accounting Policies and Estimates and Recently Issued Accounting
Standards
The accounting policies discussed in this section are those that
we consider to be particularly critical to an understanding of
our financial statements because their application places the
most significant demands on our ability to judge the effect of
inherently uncertain matters on our financial results. For all
of these policies, we caution that future events rarely develop
exactly as forecast, and our management’s best estimates
may require adjustment. For a discussion of recently adopted and
not yet adopted accounting standards, see Note 2 to our
audited consolidated financial statements and Note 2 to our
interim consolidated financial statements included elsewhere in
this prospectus.
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Table of Contents
Other-Than-Temporary
Impairments (OTTI)
One of the significant estimates related to
available-for-sale
securities is the evaluation of investments for OTTI. We analyze
investments that meet our impairment criteria to determine
whether the decline in value is
other-than-temporary.
The impairment review involves the finance investment management
team, as well as our portfolio asset managers. To make this
determination for each security, we consider both quantitative
and qualitative criteria including:
| • | how long and by how much the fair value has been below cost or amortized cost; | |
| • | the financial condition and near-term prospects of the issuer of the security, including any specific events that may affect its operations or earnings potential, or compliance with terms and covenants of the security; | |
| • | changes in the financial condition of the security’s underlying collateral; | |
| • | any downgrades of the security by a rating agency; | |
| • | any reduction or elimination of dividends or nonpayment of scheduled interest payments; and | |
| • | for fixed maturities, our intent to sell the security or whether it is more likely than not that we will be required to sell the security prior to recovery of its amortized cost considering any regulatory developments and our liquidity needs. |
Based on the analysis, we make a judgment as to whether the loss
is
other-than-temporary.
The amount of the loss recorded in our consolidated statements
of operations is determined based on the accounting guidance in
effect during the period of the
other-than-temporary
determination. We adopted new accounting guidance for
impairments of our fixed maturities effective January 1,
2009. See Note 2 to our interim consolidated financial
statements included elsewhere in this prospectus.
Prior to January 1, 2009, under the then existing
accounting guidance, if the loss was determined to be
other-than-temporary,
we recorded an impairment charge equal to the difference between
the fair value and the amortized cost basis of the security
within net realized investment gains (losses) in our
consolidated statements of income in the period that we made the
determination. The fair value of the
other-than-temporarily
impaired investment became its new cost basis. We also recorded
an impairment charge if we did not have the intent
and/or the
ability to hold the security until the fair value was expected
to recover to amortized cost or until maturity, resulting in a
charge recorded for a security that may not have had credit
issues. This situation can exist as a result of certain
portfolio management or cash management strategies.
Effective January 1, 2009, we adopted new accounting
guidance for the recognition and disclosure of OTTI for our
fixed maturities. Our marketable equity securities,
available-for-sale consist primarily of non-redeemable preferred
stock, which are evaluated similarly to fixed maturities. The
adoption of the new accounting guidance required that OTTI
losses be separated into the amount representing the decrease in
cash flows expected to be collected (“credit loss”),
which is recognized in earnings, and the amount related to all
other factors (“noncredit loss”), which is recognized
in other comprehensive income (loss). In addition, the new
guidance replaces the requirement for management to assert that
we have the intent and ability to hold an impaired security
until recovery with the requirement that management assert that
it does not have the intent to sell the security and that it is
more likely than not that we will not be required to sell the
security before recovery of our amortized cost basis. For
securities we intend to sell or it is more likely than not that
we will be required to sell the security before recovery, the
impairment charge is equal to the difference between the fair
value and the amortized cost basis of the security in the period
of determination. In determining our intent to sell a security
or whether it is more likely than not that we will be required
to sell a security, we evaluate facts and circumstances such as
decisions to reposition our security portfolio, sales of
securities to meet any cash flow needs and sales of securities
to capitalize on favorable pricing.
If we do not intend to sell a security but believe we will not
recover all the security’s contractual cash flow, the
amortized cost is written down to our estimated recovery value
and recorded as a realized loss in our consolidated statements
of operations, as this is determined to be a credit loss. The
remainder of the decline in
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fair value is recorded as OTTI on fixed maturities not related
to credit losses in AOCI, as this is determined to be a
noncredit or recoverable loss. We determine the estimated
recovery values by using discounted cash flow models that
consider estimated cash flows under current and expected future
economic conditions with various assumptions regarding timing
and amount of principal and interest payments. The recovery
value is based on our best estimate of expected future cash
flows discounted at the security’s effective yield prior to
impairment. Our best estimate of future cash flows is based on
assumptions, including various performance indicators, such as
historical default and recovery rates, credit ratings, current
delinquency rates and the structure of the issuer/security.
These assumptions require the use of significant management
judgment and include the probability of issuer default and
estimates regarding timing and amount of expected recoveries. In
addition, projections of expected future fixed maturity security
cash flows may change based upon new information regarding the
performance of the issuer
and/or
underlying collateral. Future impairments may develop if actual
results underperform current cash flow modeling assumptions,
which may be the result of macroeconomic factors, changes in
assumptions used and specific deterioration in certain industry
sectors or company failures.
As a result of the adoption of the new OTTI accounting guidance,
we recorded a cumulative effect adjustment, resulting in an
increase of $15.7 million, net of tax, to retained earnings
as of January 1, 2009, with a corresponding decrease to
AOCI, to reclassify the noncredit portion of previously
other-than-temporarily
impaired fixed maturity securities. In addition, the amortized
cost basis of fixed maturity securities for which a noncredit
OTTI loss was previously recognized was increased by
$24.1 million.
As of September 30, 2009 and December 31, 2008, the
fair value of our
available-for-sale
securities that are below cost or amortized cost by 20% or more
were $0.7 billion and $2.5 billion, respectively. The
unrealized losses on these securities were $308.7 million
and $1.2 billion, respectively.
Fair
Value
On January 1, 2008, we adopted fair value accounting
guidance which allows companies, at their option, to make an
election on an individual instrument basis to report financial
assets and liabilities at fair value. The election must be made
at the inception of a transaction and may not be reversed. The
election may also be made for existing financial assets and
liabilities at the time of adoption. Unrealized gains and losses
on assets or liabilities for which the fair value option has
been elected are reported in earnings.
We elected the fair value option for investments in common
stock, which are presented as trading securities, and
investments in certain limited partnerships (including hedge
funds and private equity funds), regardless of ownership
percentage, which are presented as investments in limited
partnerships.
Also on January 1, 2008, we adopted the accounting guidance
related to the framework for fair value measurement. Fair value
is defined as the price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction
between market participants (an “exit price”). The
accounting guidance establishes a fair value hierarchy that
distinguishes between inputs based on market data from
independent sources (“observable inputs”) and a
reporting entity’s internal assumptions based upon the best
information available when external market data is limited or
unavailable (“unobservable inputs”). The fair value
hierarchy prioritizes fair value measurements into three levels
based on the nature of the inputs. The level in the fair value
hierarchy within which the fair value measurement falls is
determined based on the lowest level input that is significant
to the fair value measurement. For further discussion of the
levels of the fair value hierarchy, see Note 7 to our
audited consolidated financial statements included elsewhere in
this prospectus.
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Table of Contents
The availability of market observable information is the
principal factor in determining the level that our investments
are assigned in the fair value hierarchy. The following table
summarizes our investments carried at fair value and the
respective fair value hierarchy, based on input levels:
| As of September 30, 2009 | ||||||||||||||||||||
| Fair Value | Level 1 | Level 2 | Level 3 | Level 3 Percent | ||||||||||||||||
|
Types of Investments
|
||||||||||||||||||||
|
Fixed maturities, available-for-sale:
|
||||||||||||||||||||
|
U.S. government and agencies
|
$ | 45.7 | $ | — | $ | 45.7 | $ | — | — | % | ||||||||||
|
State and political subdivisions
|
484.9 | — | 477.7 | 7.2 | 0.1 | |||||||||||||||
|
Foreign governments
|
28.2 | — | 28.2 | — | — | |||||||||||||||
|
Corporate securities
|
12,414.0 | — | 11,508.9 | 905.1 | 4.8 | |||||||||||||||
|
Residential mortgage-backed securities
|
3,536.6 | — | 3,270.5 | 266.1 | 1.4 | |||||||||||||||
|
Commercial mortgage-backed securities
|
1,873.4 | — | 1,850.1 | 23.3 | 0.1 | |||||||||||||||
|
Other debt obligations
|
159.5 | — | 146.3 | 13.2 | 0.1 | |||||||||||||||
|
Total fixed maturities,
available-for-sale
|
18,542.3 | — | 17,327.4 | 1,214.9 | 6.5 | |||||||||||||||
|
Marketable equity securities,
available-for-sale
|
35.4 | 32.9 | — | 2.5 | 0.0 | |||||||||||||||
|
Marketable equity securities, trading
|
140.6 | 140.3 | — | 0.3 | 0.0 | |||||||||||||||
|
Short-term investments
|
2.5 | 2.5 | — | — | — | |||||||||||||||
|
Investments in limited partnerships
|
46.6 | — | — | 46.6 | 0.2 | |||||||||||||||
|
Other invested assets
|
6.1 | — | — | 6.1 | 0.1 | |||||||||||||||
|
Total Investments
|
$ | 18,773.5 | $ | 175.7 | $ | 17,327.4 | $ | 1,270.4 | 6.8 | % | ||||||||||
Valuation
of Fixed Maturities
Fixed maturities include bonds, mortgage-backed securities and
redeemable preferred stock. We classify all fixed maturities as
available-for-sale and carry them at fair value. We report net
unrealized investment gains and losses related to all of our
available-for-sale securities, which is equal to the difference
between the fair value and the cost or amortized cost, in
accumulated other comprehensive income (loss) in
stockholders’ equity. We report net realized gains and
losses in the consolidated statements of income (loss). These
investments are subject to impairment reviews to determine when
a decline in fair value is other-than-temporary (see
“— Other-Than-Temporary Impairments (OTTI)”
above).
We determine the fair value of fixed maturities primarily by
obtaining prices from third party independent pricing services,
and we do not adjust their prices or obtain multiple prices for
these securities. As of September 30, 2009 and
December 31, 2008, our pricing services priced 93.5% and
95.1%, respectively, of our fixed maturities. The third party
independent pricing services we use have policies and processes
to ensure that they are using objectively verifiable, observable
market data, including documentation on the observable market
inputs, by major security type, used to determine the prices.
Securities are priced using evaluated pricing models that vary
by asset class. The standard inputs for security evaluations
include benchmark yields, reported trades, broker/dealer quotes,
issuer spreads, two-sided markets, benchmark securities, bids,
offers and other reference data, including market research
publications. Because many fixed income securities do not trade
on a daily basis, evaluated pricing models apply available
information through processes such as benchmark curves,
benchmarking of like securities, sector groupings and matrix
pricing to prepare evaluations. In addition, models are used to
develop prepayment and interest rate scenarios, which take into
account market convention.
Our pricing services routinely review the inputs for the
securities they cover, including broker quotes, executed trades
and credit information, as applicable. We perform analyses on
the prices received from our pricing services to ensure that the
prices represent a reasonable estimate of fair value. We gain
assurance on
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the overall reasonableness and consistent application of input
assumptions valuation methodologies, and compliance with
accounting standards for fair value determination through
various processes including evaluation of pricing methodologies
and inputs, analytical reviews of changes in certain prices
between reporting periods and back-testing of selected sales
activity to determine whether there are any significant
differences between the market price used to value the security
prior to sale and the actual sales price. Through our analysis,
we have engaged our pricing services in discussion regarding the
valuation of a security; however, it has not been our practice
to adjust their prices.
If our pricing services determine that they do not have
sufficient objectively verifiable information about a security,
they will not provide a valuation for that security. In such
situations, we determine the security’s fair value using
internal pricing models that typically utilize significant,
unobservable market inputs or inputs that are difficult to
corroborate with observable market-based data.
As of September 30, 2009, $875.9 million, or
approximately 5% of our fixed maturities portfolio, was invested
in corporate private placement securities, which are not
actively traded. The fair values of these assets are determined
using a discounted cash flow approach. The valuation model
requires the use of inputs that are not market-observable and
involves significant judgment. The discount rate is based on the
current Treasury curve adjusted for credit and liquidity
factors. The appropriate illiquidity adjustment is estimated
based on illiquidity spreads observed in transactions involving
other similar securities. We consider this approach appropriate
for this asset class, which comprises 72.1% of our Level 3
fixed maturities.
For disclosure purposes, our fixed maturities are assigned to a
level within the fair value hierarchy. To make this assessment
we use judgment to determine whether the market for a given
security is active and if significant pricing inputs are
observable. We determine the existence of an active market by
assessing whether transactions occur with sufficient frequency
and volume to provide reliable pricing information, as discussed
below.
When we have significant observable market inputs, which is
generally the case when the security is priced by our pricing
services, it is classified as a Level 2 measurement. When
there is not sufficient observable market information and the
security is priced using internal pricing models, which is
generally the case for corporate private placements and other
securities our pricing services are unable to price, it is
classified as a Level 3 measurement. The inputs used to
measure the fair value of securities priced using internal
pricing models may fall into different levels of the fair value
hierarchy. It has been our experience that, in these situations,
the lowest level input that is significant to the determination
of fair value is a Level 3 input and thus, we typically
report securities valued using internal pricing models as
Level 3 measurements. In limited situations, private
placement securities are valued through the use of a single
broker quote because the security is very thinly traded. In such
situations, we consider the fair value a Level 3
measurement.
Fixed maturities categorized as Level 3 investments
increased $540.6 million from December 31, 2008 to
September 30, 2009. This is primarily due to purchases near
the end of the third quarter of $263.5 million of
residential mortgage-backed securities backed by reverse
mortgages, which is a new asset class for which we did not have
significant observable inputs; the purchase of
$125.0 million of private placement securities; and an
increase in the fair value of private placement securities of
$112.3 million due to the tightening of credit spreads
during the first nine months of 2009. As of September 30,
2009 and December 31, 2008, we had net unrealized gains
(losses) of $27.6 million and $(103.8) million,
respectively, on our Level 3 fixed maturities. For the
nine months ended September 30, 2009 and 2008 and the
year ended December 31, 2008, we reported net realized
losses of $4.0 million, $11.6 million and
$12.1 million, respectively, on our Level 3 fixed
maturities.
We believe that the amount we may realize upon settlement or
maturity of our fixed maturities may differ significantly from
the estimated fair value of the security, as we do not actively
trade our fixed maturity portfolio. Our investment management
objective is to support the expected cash flows of our
liabilities and to produce stable returns over the long term. To
meet this objective, we intend to hold our fixed maturities
until maturity or until market conditions are favorable for the
sale of such investments.
49
Table of Contents
We estimate that a 1% increase in interest rates would cause the
fair value of our fixed maturity portfolio that is subject to
interest rate risk to decline by approximately
$1.02 billion and $0.81 billion, based on our
securities positions as of September 30, 2009 and
December 31, 2008, respectively (see
“— Quantitative and Qualitative Disclosures about
Market Risk — Sensitivity Analysis” on
page 106 for further information).
Valuation
of Marketable Equity Securities
Marketable equity securities, trading consists of investments in
common stock. Marketable equity securities,
available-for-sale
primarily consists of non-redeemable preferred stock. Both
consist primarily of investments in publicly traded companies.
The fair values of our marketable equity securities are
primarily based on quoted market prices in active markets for
identical assets. We classify the majority of these securities
as Level 1.
The impact of changes in the fair value of our trading portfolio
is recorded in net realized investment gains (losses) in the
consolidated statements of income. The impact of changes in the
fair value of our
available-for-sale
portfolio is recorded as an unrealized gain or loss in AOCI, a
separate component of equity. The
available-for-sale
marketable equity portfolio is subject to impairment reviews to
determine when a decline in fair value is
other-than-temporary.
We estimate that a 10% decline in market prices would cause the
fair value of our equity investments to decline by approximately
$24.3 million and $21.4 million as of
September 30, 2009 and December 31, 2008, respectively
(see “— Quantitative and Qualitative Disclosures
about Market Risk — Sensitivity Analysis” on
page 106 for further information).
Valuation
of Investments in Limited Partnerships — Hedge Funds
and Private Equity Funds
The fair value of our investments in limited partnership hedge
funds and private equity funds is based upon our proportionate
interest in the underlying partnership’s or fund’s net
asset value (NAV). We use the NAV as the starting point in
determining fair value. We believe it is the strongest component
given that only in rare circumstances would an investor fail to
get the NAV on the redemption date. Most funds contain a put
feature through the redemption rights provisions, with no
redemption fees, which allows us to put our equity interest in
the hedge fund at the NAV. Adjustments to a hedge fund’s
NAV may be required to reflect, among other items, redemption
fees, halts to redemptions and gates. We have considered these
factors and concluded that these factors, if triggered and
material, would warrant an adjustment to the fair value.
Currently, no adjustment to the NAV is believed necessary. We
classify these securities as Level 3.
We elected the fair value option of accounting for our
investments in hedge funds and private equity funds.
Accordingly, the impact of changes in the fair value of these
investments is recorded in our consolidated statements of income
and reported through net investment income.
50
Table of Contents
Deferred
Policy Acquisition Costs
We defer as assets certain costs, generally commissions,
distribution costs and other underwriting costs, that vary with,
and are primarily related to, the production of new and renewal
business. We limit our deferral to acquisition expenses
contained in our product pricing assumptions. The following
table summarizes our DAC asset balances by segment:
|
As of |
As of |
As of |
||||||||||
| September 30, 2009 | December 31, 2008 | December 31, 2007 | ||||||||||
| (In millions) | ||||||||||||
|
Group
|
$ | 3.5 | $ | 3.3 | $ | 3.5 | ||||||
|
Retirement Services
|
240.5 | 158.7 | 81.6 | |||||||||
|
Income Annuities
|
19.7 | 14.5 | 10.9 | |||||||||
|
Individual
|
51.7 | 43.0 | 33.9 | |||||||||
|
Total unamortized balance at end of period
|
$ | 315.4 | $ | 219.5 | $ | 129.9 | ||||||
|
Accumulated effect of net unrealized (gains) losses
|
(74.6 | ) | 28.0 | 3.0 | ||||||||
|
Balance at end of period
|
$ | 240.8 | $ | 247.5 | $ | 132.9 | ||||||
In our Group segment, the DAC amortization period for group
medical stop-loss policies is one year as these policies are
repriced on an annual basis.
In our Retirement Services, Income Annuities and Individual
segments, we amortize acquisition costs over the premium paying
period or over the lives of the policies in proportion to the
future estimated gross profits, or EGPs, of each of these
product lines, as follows:
| • | Retirement Services. The DAC amortization period is typically 20 years for the deferred annuities, although most of the DAC amortization occurs within the first 10 years because the EGPs are highest during that period. It is common for deferred annuity policies to lapse after the surrender charge period expires. | |
| • | Income Annuities. The DAC amortization period for SPIAs, including structured settlement annuities, is the benefit payment period. The benefit payment periods vary by policy; however, nearly all benefits are paid within 80 years of contract issue. | |
| • | Individual. The DAC amortization period related to universal life and variable life policies is typically 25 years and 20 years, respectively. DAC amortization related to our term life insurance policies is the premium paying period, which ranges from 10 to 30 years. |
To determine the EGPs, we make assumptions as to lapse and
withdrawal rates, expenses, interest margins, mortality
experience, long-term equity market returns and investment
performance. Estimating future gross profits is a complex
process requiring considerable judgment and forecasting of
events well into the future.
Changes to assumptions can have a significant impact on DAC
amortization. In the event actual experience differs from our
assumptions or our future assumptions are revised, we adjust our
EGPs, which could result in a significant increase in
amortization expense. We true up our assumptions with actual
experience on a quarterly basis. For future assumptions we
complete a study and refine our estimates of future gross
profits annually during the third quarter. Upon completion of an
assumption study, we revise our assumptions to reflect our
current best estimate, thereby changing our estimate of
projected EGPs used in the DAC asset amortization models. The
following would generally cause an increase in DAC amortization
expense: increases to lapse and withdrawal rates in the current
period, increases to expected future lapse and withdrawal rates,
increases to future expected expense levels, increases to
interest margins in the current period, decreases to expected
future interest margins and decreases to current or expected
equity market
51
Table of Contents
returns. EGPs are adjusted quarterly to reflect actual
experience to date or to change underlying key assumptions based
on experience studies.
We regularly conduct DAC recoverability analyses. We compare the
current DAC asset balance with the estimated present value of
future profitability of the underlying business. The DAC asset
balances are considered recoverable if the present value of
future profits is greater than the current DAC asset balance.
In connection with our recoverability analyses, we perform
sensitivity analyses on our two most significant DAC asset
balances, which currently consist of our Retirement Services
deferred annuity product and our Individual universal life
product DAC asset balances, to capture the effect that certain
key assumptions have on DAC asset balances. The sensitivity
tests are performed independently, without consideration for any
correlation among the key assumptions. The following depicts the
sensitivities for our deferred annuity, universal life and BOLI
DAC asset balances: if we changed our future lapse and
withdrawal rate assumptions by a factor of 10%, the effect on
the DAC asset balance is approximately $2.5 million; if we
changed our future expense assumptions by a factor of 10%, the
effect on the DAC asset balance is less than $0.1 million.
The DAC asset balance on the date of our Acquisition,
August 2, 2004, was reset to zero in accordance with PGAAP.
Because of this, quarterly updates to our DAC models to reflect
actual experience have led to immaterial changes in the DAC
asset balance and amortization, and the magnitude of the
sensitivities is currently relatively small. We expect the DAC
asset balance to grow as we continue to write new business, and
as this occurs, we would expect the sensitivities to grow
accordingly. In addition, depending on the amount and the type
of new business written in the future we may determine that
other assumptions may produce significant variations in our
financial results.
Funds
Held Under Deposit Contracts
Liabilities for fixed deferred annuity contracts and universal
life policies, including BOLI, are computed as deposits net of
withdrawals made by the policyholder, plus amounts credited
based on contract specifications, less contract fees and charges
assessed, plus any additional interest. The unamortized PGAAP
reserve, related to the Acquisition, is also included in this
balance. As of September 30, 2009, our funds held under
deposit contracts totaled $18.6 billion.
For SPIAs, including structured settlements, liabilities are
based on discounted amounts of estimated future benefits.
Contingent future benefits are discounted with best-estimate
mortality assumptions, which include provisions for longer life
spans over time. The interest rate pattern used to calculate the
reserves for SPIAs is set at issue for policies issued
subsequent to the Acquisition or based upon prevailing market
interest rates on August 2, 2004 for policies in existence
on the Acquisition date. The interest rates within the pattern
vary over time and start with interest rates that prevailed at
contract issue or on the Acquisition date. As of
September 30, 2009, the weighted-average implied interest
rate on the existing book of business is currently at 6.0% and
will grade to an ultimate assumed level of 6.7% in approximately
17 years.
Future
Policy Benefits
We compute liabilities for future policy benefits under
traditional individual life and group life insurance policies on
the level premium method, which uses a level premium assumption
to fund reserves. We select the level of premiums at issuance so
that the actuarial present value of future benefits equals the
actuarial present value of future premiums. We set the interest,
mortality and persistency assumptions in the year of issue and
include provisions for adverse deviations. These liabilities are
contingent upon the death of the insured while the policy is in
force. We derive mortality assumptions from both
company-specific and industry statistics. We discount future
benefits at interest rates that vary by year of policy issue,
are set initially at a rate consistent with portfolio rates at
the time of issue, and graded to a lower rate, such as the
statutory valuation interest rate, over time. Assumptions are
made at the time each policy is issued, and do not change over
time unless the liability amount is determined to be inadequate
to cover future policy benefits.
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Table of Contents
The provisions for adverse deviations are intended to provide
coverage for the risk that actual experience may be worse than
locked-in best-estimate assumptions.
We periodically compare our actual experience with our estimates
of actuarial liabilities for future policy benefits. To the
extent that actual policy benefits differ from the reserves
established for future policy benefits, such differences are
recorded in the results of operations in the period in which the
variances occur, which could result in a decrease in profits, or
possibly losses. No revisions to assumptions within the future
policy benefits liabilities have been necessary and therefore we
have not experienced any impact in our financial results due to
changes in assumptions.
Policy
and Contract Claims
Liabilities for policy and contract claims primarily represent
liabilities for claims under group medical coverages and are
established on the basis of reported losses. We also provide for
claims incurred but not reported, or IBNR, based on expected
loss ratios, claims paying completion patterns and historical
experience. We continually review estimates for reported but
unpaid claims and IBNR. Any necessary adjustments are reflected
in current operating results. If expected loss ratios increase
or expected claims paying completion patterns extend, the IBNR
amount increases.
Income
Taxes
The application of GAAP requires us to evaluate the
recoverability of our deferred tax assets and establish a
valuation allowance, if necessary, to reduce our deferred tax
asset to an amount that is more likely than not to be
realizable. Considerable judgment and the use of estimates are
required in determining whether a valuation allowance is
necessary, and if so, the amount of such valuation allowance. In
evaluating the need for a valuation allowance, we consider many
factors, including: the nature and character of the deferred tax
assets and liabilities; future reversals of existing temporary
differences; operating income carry-backs or loss carry-forwards
and their expirations; and any tax planning strategies we would
employ to avoid a tax benefit expiring unused.
Our deferred tax assets are primarily related to unrealized
losses, reserves, capitalization of policy acquisition costs and
investment impairments. Due to the unprecedented volatility and
disruption within the capital markets over the past year, the
associated deferred tax assets within our investment portfolio
have also been subject to this volatility. To assess the impact
of this volatility, we reviewed the liquidity requirements of
our invested assets as they relate to the liabilities associated
with our insurance and investment products to determine the
future reversals and the utilization of capital loss carry-backs
and carry-forwards related to our investment timing differences.
Based upon the results of our valuation allowance determination,
management believes it is more likely than not that the deferred
tax asset will be realized.
Use of
non-GAAP Financial Measures
Certain tables in this prospectus include non-GAAP financial
measures. We believe these measures provide useful information
to investors in evaluating our financial performance and
condition. In the following paragraphs, we provide a definition
of these non-GAAP measures.
Net
Operating Income
Net operating income (loss) is a non-GAAP measure of the
performance of the Company. Net operating income (loss) consists
of net income (loss), less after-tax net realized investment
gains (losses), plus after-tax realized and unrealized
investment gains (losses) on our fixed income annuity (FIA)
options.
We believe that the presentation of net operating income, as we
measure it for management purposes, enhances understanding of
the results of operations by highlighting the underlying
performance of our
53
Table of Contents
insurance operations. Certain net realized investment gains
(losses), even though they are recurring items, are driven by
investment decisions and external economic developments
unrelated to the insurance and underwriting aspects of our
business. These net realized gains (losses) may mask the trends
in core business performance. By disclosing net operating income
in addition to net income, we aim to provide our investors with
a view into the performance of our operations that might
otherwise be masked by unrelated factors. However, net operating
income is not a substitute for net income determined in
accordance with GAAP. The adjustments made to derive net
operating income are important to understanding our overall
results from operations and, if evaluated without proper
context, net operating income possesses material limitations. As
an example, we could produce a low level of net income in a
given period, despite strong operating performance, if in that
period we generate significant net realized losses from our
investment portfolio. We could also produce a high level of net
income in a given period, despite poor operating performance, if
in that period we generate significant net realized gains from
our investment portfolio. As a result, management compensates
for these limitations by also considering net income when
evaluating the financial performance of the Company.
Our net realized investment gains (losses) are mainly composed
of other-than-temporary impairments (OTTI), net gains (losses)
on changes in fair value of our trading securities and net
realized gains (losses) on sales of securities. The timing and
amount of our OTTI losses depends largely on the timing and
severity of market credit cycles and management judgments
regarding recoverability estimates.
The timing and amount of gains (losses) on trading securities
depends largely on equity market performance and broader
economic conditions. As an example, changes in fair value on our
equity trading portfolio produced $18.6 million net trading
gains (net of taxes of $10.0 million) for the nine months
ended September 30, 2009, compared to $26.1 million
net trading losses (net of taxes of $14.1 million) for the
nine months ended September 30, 2008.
Net realized investment gains (losses) on sales of securities
are credit and interest-related gains (losses). The timing of
sales that would result in gains (losses) is largely subject to
our discretion and influenced by market opportunities. As an
example, we experienced net realized losses on sales of
$0.6 million (net of taxes of $0.3 million) for the
nine months ended September 30, 2009, compared to net
realized gains on sales of $8.5 million net realized gains
on sales (net of taxes of $4.6 million) for the nine months
ended September 30, 2008.
Net operating income includes investment gains (losses) on our
FIA options in our Retirement Services segment. We include these
gains (losses) because they specifically reflect our management
of certain liabilities associated with our core insurance
business. Each year we use the realized gains from our FIA
options to fund the interest credited on our FIA products. Since
the investment performance from our FIA options is reported in
realized investment gains (losses), we include this in our net
operating income measure. See “— Segment
Operating Results — Retirement Services” on
page 65 for further information regarding realized gains
(losses) related to our Retirement Services segment.
Our management and board of directors use net operating income
to evaluate operations, including assessing the effectiveness of
operating and strategic decisions, management of insurance
liabilities and financial planning. For instance, we use net
operating income to help determine the renewal interest rates to
credit to policyholders in Retirement Services. Because one of
the limitations of net operating income is that it excludes the
net realized investment gains (losses) described above, our
management and board of directors also separately review net
realized investment gains (losses) in connection with their
review of our investment portfolio. Additionally, our management
and board of directors examine our GAAP net income as part of
their review of the overall financial results of the Company.
Net income (loss) is the most directly comparable GAAP measure.
Net operating income (loss) should not be considered a
substitute for net income. For a reconciliation of net operating
income to net income, see page 41 of “Selected
Historical Consolidated Financial Data.”
54
Table of Contents
Adjusted
Book Value and Adjusted Book Value, as Converted
Adjusted book value is a non-GAAP financial measure of the
financial performance and condition of the Company. Adjusted
book value consists of stockholders’ equity, less AOCI.
We believe that adjusted book value is useful for evaluating our
financial condition because it excludes AOCI, which is primarily
composed of the net unrealized gains (losses) on our fixed
maturities, net of taxes. The amount of AOCI primarily
fluctuates based on factors outside of our control, including
the impact of credit market conditions and other economic
factors on the fair value of our fixed maturities. The fair
value of fixed maturities can change significantly depending on
the movement of interest rates and the credit spreads. As an
example, increases in the fair value of our fixed maturities
improved AOCI by $1,082.4 million, or 103%, from
December 31, 2008 to September 30, 2009, due to credit
market improvements and tightening of interest spreads. This
contributed to a related increase in stockholders’ equity
over the same period of $1,194.3 million, or 417%. As a
comparison, our adjusted book value increased
$111.9 million, or 8%, during the same period.
We purchase fixed maturities to back insurance liabilities of
similar duration and we typically expect to hold our fixed
maturities to maturity using the principal and interest cash
flows to pay our insurance liabilities over time. Therefore, we
do not expect to realize the unrealized gains (losses) in our
AOCI balance. As an example, for the nine months ended
September 30, 2009 our AOCI improved by
$1,082.4 million. In that same period, we had net realized
gains on sales of fixed maturities of $1.4 million (net of
taxes of $0.7 million). As a result, we believe it is
useful for investors to see financial measures that remove the
changes in fair values of our investments, and related effects
on AOCI, from stockholders’ equity. However, adjusted book
value is not a substitute for stockholders’ equity
determined in accordance with GAAP and only considering adjusted
book value on its own would present material limitations to an
analysis of our financial condition. For example, AOCI may
deteriorate due to higher interest rates, credit spreads and
issues specific to particular investments. By not considering
the size of gross unrealized losses within AOCI, an investor may
fail to appreciate the current size of losses that could be
realized if we became forced to sell our available-for-sale
securities. As a result, when evaluating our financial
condition, we compensate for these limitations by also
considering stockholders’ equity and the unrealized losses
on invested assets, which are provided in our investment
disclosures.
Adjusted book value per common share is a non-GAAP financial
measure of the financial performance and condition of the
Company. Adjusted book value per common share is calculated as
adjusted book value, divided by outstanding common shares,
adjusted to exclude unearned restricted shares, totaling
92,649,888 as of September 30, 2009 and 92,646,295 as of
December 31, 2008, 2007, 2006, 2005 and 2004.
Adjusted book value per common share, as converted gives effect
to the exercise of the outstanding warrants and is calculated as
adjusted book value plus the assumed proceeds from the warrants,
divided by outstanding common shares, adjusted to exclude
unearned restricted shares and include shares subject to
outstanding warrants, totaling 111,625,632 as of
September 30, 2009 and 111,622,039 as of December 31,
2008, 2007, 2006, 2005 and 2004.
We believe that the presentation of adjusted book value,
adjusted book value per common share and adjusted book value per
common share, as converted enhances understanding of the
financial performance and condition of the company. Our
management and the board of directors use these measures for
assessing the effectiveness of operating and strategic
decisions, management of insurance liabilities, financial
planning and business risk assessment. For instance, we use
adjusted book value as one measure to establish growth goals and
capital plans. However, because adjusted book value excludes
AOCI, our management and the board of directors also review AOCI
in connection with their review of our investment portfolio.
Additionally, our management and the board of directors examine
stockholders’ equity as part of their review of the overall
financial condition of the Company.
55
Table of Contents
Stockholders’ equity is the most directly comparable GAAP
measure to adjusted book value. Adjusted book value should not
be considered a substitute for stockholders’ equity. For a
reconciliation of adjusted book value to stockholders’
equity, see page 42 of “Selected Historical
Consolidated Financial Data.”
Operating
ROAE
Operating ROAE is a non-GAAP measure of the performance of the
Company. Operating ROAE consists of net operating income, a
non-GAAP measure, divided by average adjusted book value, a
non-GAAP measure. The denominator, adjusted book value, excludes
significant variances in AOCI driven by changes in interest
rates and credit spreads. For example, our AOCI improved
$1,082.4 million, or 103%, from December 31, 2008 to
September 30, 2009. For the twelve months ended
September 30, 2009, our ROE, which includes the improvement
of AOCI, was 13.9% and our operating ROAE was 10.6%. The
numerator and denominator of operating ROAE have been reconciled
to net income and stockholders’ equity, respectively, their
most comparable GAAP financial measures. ROE is the most
directly comparable GAAP measure. Operating ROAE should not be
considered a substitute for ROE.
We believe that analysis of operating ROAE enhances
understanding of the efficiency with which we deploy our capital
and provides an enhanced view of the performance of the
insurance and underwriting aspects of our business. However,
operating ROAE has material limitations and should not be
considered on its own. As an example, we could produce a high
operating ROAE in a given period, despite poor overall
performance, if in that period we generate significant net
realized losses from our investment portfolio. We could also
produce a high ROE in a given period, despite poor performance,
if we have significant unrealized losses in our investment
portfolio reducing our stockholders’ equity and, therefore,
increasing ROE. To compensate for these limitations, we consider
operating ROAE in tandem with ROE.
Our management and board of directors use operating ROAE to
evaluate operations, including assessing effectiveness of
capital deployment, financial planning and capital planning. For
instance, we use operating ROAE in our financial plan to
determine if we are effectively deploying capital in the
upcoming year. We review our actual performance versus planned
performance to assess if we are achieving desired returns on
capital. However, because operating ROAE excludes realized and
unrealized gains (losses), which bear on our overall
performance, our management and board of directors review ROE to
assess financial performance and return on capital including the
impact of realized and unrealized gains (losses) from our
investment portfolio.
56
Table of Contents
Results
of Operations
Total
Company
The following discussion should be read in conjunction with our
audited consolidated financial statements and the related notes
included elsewhere in this prospectus. Set forth below is a
summary of our consolidated financial results for the nine
months ended September 30, 2009 and 2008 and for the years
ended December 31, 2008, 2007 and 2006:
|
Nine Months Ended |
Twelve Months Ended |
|||||||||||||||||||
| September 30, | December 31, | |||||||||||||||||||
| 2009 | 2008 | 2008 | 2007 | 2006 | ||||||||||||||||
| (In millions, except per share data) | ||||||||||||||||||||
|
Revenues:
|
||||||||||||||||||||
|
Premiums
|
$ | 430.2 | $ | 440.4 | $ | 584.8 | $ | 530.5 | $ | 525.7 | ||||||||||
|
Net investment income
|
829.4 | 718.0 | 956.5 | 973.6 | 984.9 | |||||||||||||||
|
Other revenues
|
43.2 | 52.0 | 67.8 | 68.7 | 56.1 | |||||||||||||||
|
Net realized investment gains (losses)(1):
|
||||||||||||||||||||
|
Total
other-than-temporary
impairment losses on securities
|
(167.9 | ) | (61.7 | ) | (86.4 | ) | (16.2 | ) | (25.7 | ) | ||||||||||
|
Less: portion of losses recognized in other comprehensive income
|
94.2 | — | — | — | — | |||||||||||||||
|
Net impairment losses recognized in earnings
|
(73.7 | ) | (61.7 | ) | (86.4 | ) | (16.2 | ) | (25.7 | ) | ||||||||||
|
Other net realized investment gains (losses)
|
44.7 | (41.6 | ) | (71.6 | ) | 33.0 | 27.4 | |||||||||||||
|
Total net realized investment gains (losses)
|
(29.0 | ) | (103.3 | ) | (158.0 | ) | 16.8 | 1.7 | ||||||||||||
|
Total revenues
|
1,273.8 | 1,107.1 | 1,451.1 | 1,589.6 | 1,568.4 | |||||||||||||||
|
Benefits and Expenses:
|
||||||||||||||||||||
|
Policyholder benefits and claims
|
262.1 | 260.1 | 348.5 | 267.1 | 264.3 | |||||||||||||||
|
Interest credited
|
629.2 | 569.1 | 766.1 | 752.3 | 765.9 | |||||||||||||||
|
Other underwriting and operating expenses
|
186.7 | 201.9 | 265.8 | 281.9 | 260.5 | |||||||||||||||
|
Interest expense
|
23.8 | 24.0 | 31.9 | 21.5 | 19.1 | |||||||||||||||
|
Amortization of deferred policy acquisition costs
|
36.4 | 17.7 | 25.8 | 18.0 | 14.6 | |||||||||||||||
|
Total benefits and expenses
|
1,138.2 | 1,072.8 | 1,438.1 | 1,340.8 | 1,324.4 | |||||||||||||||
|
Income from operations before income taxes
|
135.6 | 34.3 | 13.0 | 248.8 | 244.0 | |||||||||||||||
|
Provision (benefit) for income taxes:
|
||||||||||||||||||||
|
Current
|
(4.2 | ) | 34.2 | 23.8 | 62.8 | 92.4 | ||||||||||||||
|
Deferred
|
43.6 | (26.9 | ) | (32.9 | ) | 18.7 | (7.9 | ) | ||||||||||||
|
Total provision (benefit) for income taxes
|
39.4 | 7.3 | (9.1 | ) | 81.5 | 84.5 | ||||||||||||||
|
Net income
|
$ | 96.2 | $ | 27.0 | $ | 22.1 | $ | 167.3 | $ | 159.5 | ||||||||||
|
Net income per common share(2):
|
||||||||||||||||||||
|
Basic
|
$ | 0.86 | $ | 0.24 | $ | 0.20 | $ | 1.50 | $ | 1.43 | ||||||||||
|
Diluted
|
$ | 0.86 | $ | 0.24 | $ | 0.20 | $ | 1.50 | $ | 1.43 | ||||||||||
|
Weighted-average number of common shares outstanding:
|
||||||||||||||||||||
|
Basic
|
111,622 | 111,622 | 111.622 | 111.622 | 111.622 | |||||||||||||||
|
Diluted
|
111,623 | 111,622 | 111.622 | 111.622 | 111.622 | |||||||||||||||
|
Non-GAAP Financial Measures(3):
|
||||||||||||||||||||
|
Net operating income
|
$ | 115.2 | $ | 91.8 | $ | 122.9 | $ | 154.9 | $ | 159.8 | ||||||||||
|
Reconciliation to Net Income:
|
||||||||||||||||||||
|
Net income
|
96.2 | 27.0 | $ | 22.1 | $ | 167.3 | $ | 159.5 | ||||||||||||
|
Less: Net realized investment gains (losses) (net of taxes)
|
(18.9 | ) | (67.1 | ) | (102.7 | ) | 10.9 | 1.1 | ||||||||||||
|
Add: Net realized and unrealized investment gains (losses) on
FIA options (net of taxes)
|
0.1 | (2.3 | ) | (1.9 | ) | (1.5 | ) | 1.4 | ||||||||||||
|
Net operating income
|
$ | 115.2 | $ | 91.8 | $ | 122.9 | $ | 154.9 | $ | 159.8 | ||||||||||
| (1) | We adopted new OTTI accounting guidance effective January 1, 2009, which changed the recognition and measurement of OTTI for fixed maturities. |
footnotes continued on following page
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| (2) | Basic net income per common share assumes that all participating securities, including warrants, have been outstanding since the beginning of the period using the two-class method. Diluted net income per common share includes the dilutive impact of non-participating, unvested restricted stock awards, based on the application of the treasury stock method, weighted for the portion of the period they were outstanding. |
| (3) | Management considers certain non-GAAP financial measures, including net operating income, to be a useful supplement to comparable GAAP measures in evaluating our financial performance and condition. These unaudited measures have been reconciled to their most comparable GAAP financial measures. We believe that the non-GAAP presentation of net operating income is valuable because excluding certain realized capital gains and losses, many of which are driven by investment decisions and external economic developments unrelated to the insurance and underwriting aspects of the business, enhances understanding of the results of operations by highlighting the underlying performance of our insurance operations. These realized gains (losses), though they are recurring, may mask trends in core business performance. For a definition and discussion of this non-GAAP measure and other metrics used in our analysis, see “— Use of non-GAAP Financial Measures.” |
Nine
Months Ended September 30, 2009 Compared to the Nine Months
Ended September 30, 2008
Summary of results. Net income increased
$69.2 million to $96.2 million from $27.0 million
as a result of an increase in net operating income, which
increased $23.4 million, or 25.5%, to $115.2 million
from $91.8 million, and a decrease in net realized
investment losses of $48.2 million, net of taxes. Net
realized investment losses decreased mainly due to a
$68.8 million increase in changes in fair value on our
trading portfolio as the equity markets increased in 2009
compared to equity market declines in 2008. The increase in net
operating income is primarily due to a $33.4 million increase in
the investment margin (net investment income, less interest
credited) in our Retirement Services segment, an increase in the
fair value of our limited partnerships of $21.6 million and
a reduction in other underwriting and operating expenses of
$15.2 million. Our increased sales during 2009 allowed us
to fully defer our acquisition costs, resulting in an increase
in DAC and driving a reduction in overall underwriting and
operating expenses. Offsetting these increases to income was a
decrease in our Group segment’s pre-tax operating income of
$7.0 million driven by an increase in our overall loss
ratio from 65.5% to 67.8% on lower premiums.
Net investment income. Net investment income
represents the income earned on our investments, including gains
or losses on changes in the fair value on our investments in
limited partnerships, primarily hedge funds and private equity
funds. Net investment income increased $111.4 million, or
15.5%, to $829.4 million from $718.0 million. This
increase was due to a positive volume variance of
$81.0 million as average invested assets increased
$2.0 billion to $19.6 billion from $17.6 billion
driven by increased fixed deferred annuity sales and lower
withdrawals; and a positive rate variance of $30.4 million
as yields increased to 5.64% from 5.44%. The yield increase is
primarily driven by $1.7 million in fair value gains on our
limited partnership investments, versus $19.9 million in fair
value losses in 2008. Overall yields on our fixed maturities
also increased as we were able to invest in higher yielding
assets in our Retirement Services segment.
Other revenues. Other revenues include mortality
expense, surrender and other administrative charges, revenues
from our non-insurance businesses and reinsurance allowance
fees. Other revenues decreased $8.8 million, or 16.9%, to
$43.2 million from $52.0 million. The decrease was due
in part to a $3.6 million decrease in our Retirement
Services segment, whose other revenues are mainly fees on
variable account values, which have decreased overall due to
lower account values. Our Individual segment experienced a
decrease of $2.3 million primarily related to a decrease in
reinsurance allowance fees on new term insurance business sold
in 2009. In addition, our Group segment experienced a
$1.6 million decrease primarily due to lower client
retention and production by our third party administrator.
Net realized investment losses. Net realized
investment losses consist of realized gains (losses) from sales
of our investments, realized losses from investment impairments
and changes in fair value on our trading portfolio and FIA
options. Net realized investment losses decreased
$74.3 million, or 71.9%, to $29.0 million from
$103.3 million. For the nine months ended
September 30, 2009, gross realized gains were
$82.4 million, including gross equity gains of
$36.5 million, offset by gross realized losses of
$111.4 million, including impairments of $73.7 million
and gross equity losses of $7.9 million. For the nine
months ended September 30, 2008, gross realized gains were
$42.8 million, including gross equity gains of
$12.2 million,
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offset by gross realized losses of $146.1 million,
including impairments of $61.7 million and gross equity
losses of $52.4 million. The increase in impairments was
due to an increase in credit related losses as a result of
issuer credit concerns, primarily in Q1 of 2009. See
“— Investments” for further information.
Policyholder benefits and claims. Policyholder
benefits and claims consist of benefits paid and reserve
activity on group life and health and individual life products.
In addition, we record, as a reduction of this expense, PGAAP
reserve amortization related to our fixed deferred annuities and
BOLI policies. The PGAAP reserve is amortized as a reduction to
policyholder benefits according to our expected pattern of
profitability of the book of business of policies in force on
the Acquisition date. The PGAAP reserve related to our fixed
deferred annuities was fully amortized as of September 30,
2009. Policyholder benefits and claims increased
$2.0 million, or 0.8%, to $262.1 million from
$260.1 million. This was primarily due to a
$4.5 million increase in our Retirement Services segment,
driven by a reduction in the benefit received from the
amortization of the PGAAP reserve. This was partially offset by
a $2.1 decrease in our Group segment, driven by lower claims due
to a smaller premium base. The Group loss ratio is above our
long-term expectations, as we have experienced increases in both
the number and the size of claims exceeding $0.5 million,
in particular related to claims for premature births.
Interest credited. Interest credited represents
interest credited to policyholder reserves and contractholder
general account balances. Interest credited increased
$60.1 million, or 10.6%, to $629.2 million from
$569.1 million due to a $60.0 million increase in
deferred annuities interest credited in our Retirement Services
segment and a $4.4 million increase in our Individual
segment, partially offset by a $3.7 million decrease in our
Income Annuities segment. Our Retirement Services segment
increased due to a $1.8 billion, or 37%, increase in
average fixed account value from increased sales of fixed
deferred annuities and decreased policy lapses. Our Individual
segment increased primarily due to growth in the BOLI account
value related to increased sales and strong persistency. The
decrease in our Income Annuities’ segment interest credited
is driven by a lower reserve balance and higher mortality gains
in 2009.
Other underwriting and operating expenses. Other
underwriting and operating expenses represent non-deferrable
costs related to the acquisition and ongoing maintenance of
insurance and investment contracts, including certain
commissions, policy issuance expenses and other general
operating costs. Other underwriting and operating expenses
decreased $15.2 million, or 7.5%, to $186.7 million
from $201.9 million. The majority of the decline was
attributable to increased deferral of new business acquisition
costs, mainly in our Retirement Services, Income Annuities and
Individual segments, which was driven by increased sales. This
decline is also attributable to a $7.0 million reduction in
overall operating expenses, primarily payroll and employee
related expenses due to attrition and disciplined expense
management.
Amortization of deferred policy acquisition
costs. Amortization of previously capitalized DAC is
recorded as an expense. Amortization of DAC increased
$18.7 million to $36.4 million from
$17.7 million. This increase was due primarily to an
$18.4 million increase in our Retirement Services segment,
due to growth in the block of business, an increase in margins
in 2009 and a $1.1 million increase due to the unlocking of
future DAC assumptions.
Provision for income taxes. The provision for income
taxes increased $32.1 million to $39.4 million from
$7.3 million. This is primarily due to the increase in
income from operations before income taxes in 2009, compared to
2008. The effective tax rate increased 7.8% to 29.0% from 21.2%.
The difference between the U.S. corporate federal income
tax rate of 35.0% and the annualized effective rate of 29.0% is
due almost entirely to tax credits from tax-advantaged federal
affordable housing investments.
Twelve
Months Ended December 31, 2008 Compared to the Twelve
Months Ended December 31, 2007
Summary of results. Net income decreased
$145.2 million, or 86.8%, to $22.1 million from
$167.3 million as a result of an increase in net realized
investment losses and a decrease in net operating income. We
experienced net realized investment losses of
$158.0 million, including impairments of $86.4 million
and net losses on our common stock of $69.2 million,
resulting from volatile markets in 2008. In 2008, we elected to
record changes in fair value on equity securities in income.
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Net operating income decreased $32.0 million, or 20.7%, to
$122.9 million from $154.9 million. This is primarily
due to decreases in fair value on our investments in hedge funds
and private equity funds recorded in net investment income,
which totaled $24.4 million in 2008 compared to gains of
$7.0 million in 2007. Additionally, the decrease was driven
by an increase in the loss ratio in our Group segment and an
increase in interest expense. The overall loss ratio in Group
increased to 65.8% from 54.3% as a result of an increase in paid
claims, primarily attributable to the medical stop-loss product.
Interest expense increased as a result of issuing the
$150.0 million of CENts in October 2007. The decreases in
net operating income were mitigated by strong sales of fixed
deferred annuities, which drove an increase in our fixed
annuities account value and an increase in the investment margin
related to these products.
Premiums. Premiums consist primarily of revenues
from our group life and health and individual life insurance
products, and COI charges on our universal life insurance and
BOLI polices. Premiums increased $54.3 million, or 10.2%,
to $584.8 million from $530.5 million. This increase
was primarily due an increase of $57.7 million in our Group
segment, as a result of strong sales of our medical stop-loss
product. This was partially offset by a $3.5 million
decrease in our Individual segment related to reinsured policies.
Net investment income. Net investment income
decreased $17.1 million, or 1.8%, to $956.5 million
from $973.6 million. Of this decrease, $38.9 million
was the result of a negative rate variance as yields decreased
to 5.38% from 5.60%, of which $35.6 million related mainly
to
mark-to-market
losses on investments in limited partnerships. This decrease was
partially offset by a $21.8 million positive volume
variance as average invested assets increased to
$17.8 billion from $17.4 billion resulting from
positive net cash flows of fixed deferred annuities.
Net realized investment gains (losses). Net realized
investment gains (losses) decreased $174.8 million, to a
$158.0 million loss from a $16.8 million gain. For the
year ended December 31, 2008, gross realized gains of
$43.7 million including gross equity gains of
$3.6 million, offset by gross realized losses were
$201.7 million, including impairments of $86.4 million
and gross equity losses of $72.8 million. During 2008, the
majority of realized gains (losses) from trading activity and
impairment was in the Income Annuities segment. For the year
ended December 2007, gross realized gains were
$63.1 million, partially offset by gross losses of
$46.3 million, including impairments of $16.2 million.
Gross gains included $14.4 million related to gains on
sales of common stock and $37.1 million representing gains
from the sales of mainly corporate securities, the majority of
which is in the Income Annuities segment. See
“— Investments” for further information.
Policyholder benefits and claims. Policyholder
benefits and claims consist of benefits paid and reserve
activity on group life and health and individual life products.
In addition, we record, as a reduction of this expense, PGAAP
reserve amortization related to our fixed deferred annuities and
BOLI policies. The PGAAP reserve is amortized as a reduction to
policyholder benefits according to our expected pattern of
profitability of the book of business of policies in force on
the Acquisition date. Policyholder benefits and claims increased
$81.4 million, or 30.5%, to $348.5 million from
$267.1 million. This increase was primarily due to an
$82.8 million increase in our Group segment caused by an
increase in medical stop loss paid claims, and a
year-over-year
increase in reserve changes. Our Group claims increased due to
growth in the block of business and a higher loss ratio on that
business.
Interest credited. Interest credited increased
$13.8 million, or 1.8%, to $766.1 million from
$752.3 million. Of this increase, $11.4 million was
primarily due to growth in the BOLI account values from new BOLI
sales and strong persistency, and a $10.9 million increase
primarily related to an increase in average fixed account value
in Retirement Services. These were partially offset by a
$7.0 million decrease in Income Annuities due to lower
required interest on lower reserves and higher mortality gains
in 2008.
Other underwriting and operating expenses. Other
underwriting and operating expenses decreased
$16.1 million, or 5.7%, to $265.8 million from
$281.9 million. This decrease was primarily due to a
$4.5 million decrease in professional services expenses,
primarily IT related, and a reduction in general management
expenses, which were primarily related to management bonuses. In
addition, strong 2008 sales resulted in an increase in
deferrable policy acquisition costs.
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Table of Contents
Interest expense. Interest expense represents
interest on debt. Interest expense increased $10.4 million,
or 48.4%, to $31.9 million from $21.5 million. This
increase was due to interest expense on the $150.0 million
CENts issued in October 2007. See “— Liquidity
and Capital Resources” for further information.
Provision (benefit) for income taxes. The provision
(benefit) for income taxes decreased $90.6 million, to a
$9.1 million benefit from an $81.5 million provision.
The effective tax rate decreased to (70.0)% from 32.8% primarily
due to the significant reduction in income from continuing
operations, an increase in affordable housing credits, a
favorable decrease in prior year adjustments, and the favorable
impact of the settlement of the 2004 — 2005 IRS
examination of our life insurance subsidiaries.
Twelve
Months Ended December 31, 2007 Compared to the Twelve
Months Ended December 31, 2006
Summary of results. Net income increased
$7.8 million, or 4.9%, to $167.3 million from
$159.5 million due to a decrease in net operating income,
offset by an increase in net realized investment gains excluding
gains (losses) on the FIA options. Net operating income
decreased $4.9 million, or 3.1%, to $154.9 million
from $159.8 million. In 2007, total revenues increased to
$1.59 billion from $1.57 billion in 2006. Key drivers
in our 2007 performance include a 55.2% medical
stop-loss — loss ratio in our Group segment along with
increased premiums from increased sales, which was offset by
lower profitability in our Retirement Services segment due to a
decrease in account value as withdrawals exceeded new deposits
and a decrease in the interest spread, driven by a decrease in
PGAAP reserve amortization.
Premiums. Premiums increased $4.8 million, or
0.9%, to $530.5 million from $525.7 million. Premiums
increased primarily due to strong 2007 sales of medical
stop-loss coverage.
Net investment income. Net investment income
decreased $11.3 million, or 1.1%, to $973.6 million
from $984.9 million. Of this decrease, $32.1 million
was due to a decrease in average invested assets to
$17.4 billion from $18.0 billion, primarily in our
Retirement Services segment. This decrease was partially offset
by a positive rate variance of $20.8 million, which
increased to 5.60% from 5.48%. The increase in yield was
primarily due to the reinvestment of funds in higher yielding
securities, an increase in the yield on short-term investments,
the receipt of prepayment consent fees and a reduction in
investment advisory fee expense.
Other revenues. Other revenues include mortality
expense, surrender and other administrative charges, revenues
from our non-insurance businesses and revenues from fee
arrangements with our reinsurance partners. Other revenues
increased $12.6 million, or 22.5%, to $68.7 million
from $56.1 million. The increase is primarily due to an
increase in fee revenue generated by our newly acquired
subsidiary MRM and an increase in fee revenue in our
broker-dealer operations.
Net realized investment gains. Net realized
investment gains increased $15.1 million, to
$16.8 million from $1.7 million. For the twelve months
ended December 31, 2007, gross realized gains were
$63.1 million, partially offset by gross realized losses
were $46.3 million, including impairments of
$16.2 million. Gross gains included $14.4 million
related to gains on sales of common stock and $37.1 million
representing gains from the sales of corporate securities, the
majority of which is in the Income Annuities segment, as part of
our portfolio rebalancing to increase yields. For the twelve
months ending December 31, 2006, gross realized gains were
$56.4 million, including $26.8 million in fixed
maturity gains as part of our rebalancing strategy and
$18.3 million in equity gains. Gross realized losses were
$54.7 million, including impairments of $25.7 million.
Policyholder benefits and claims. Policyholder
benefits and claims increased $2.8 million, or 1.1%, to
$267.1 million from $264.3 million. This increase was
primarily due to a $25.7 million reduction in our group
benefits and claims, partially offset by a $10.7 million
reduction in PGAAP reserve amortization, a $5.8 million
increase in our Individual segment’s paid claims and a
$6.5 million increase in the change in reserves in our
Individual segment.
Interest credited. Interest credited decreased
$13.6 million, or 1.8%, to $752.3 million from
$765.9 million. Of this decrease, $20.7 million was
the result of a decrease in fixed account values in our
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Retirement Services segment. This was partially offset by an
$8.1 million increase in our Individual segment that was
primarily due to growth in the BOLI account values.
Other underwriting and operating expenses. Other
underwriting and operating expenses increased
$21.4 million, or 8.2%, to $281.9 million from
$260.5 million. The increase is primarily due to a
$9.0 million increase in corporate shared services
expenses, a $5.5 million increase in distribution expenses,
$2.7 million of expense related to our acquisition of MRM,
and a $1.5 million increase in premium taxes. The increase
in corporate shared services expenses includes $3.5 million
of expenses related to our terminated 2007 initial public
offering, or IPO, process and a $3.0 million increase in
all employee bonus expenses. The increase in distribution
expenses is also due to an increase in employee payroll and
related benefit expenses and an increase in incentive
compensation. The increase in premium taxes was due to new BOLI
sales.
Provision for income taxes. The provision for income
taxes decreased $3.0 million, to $81.5 million from
$84.5 million. The effective tax rate decreased 1.8% to
32.8% from 34.6% due primarily to an increase in affordable
housing credits, and the impact of prior year adjustment related
to the 2006 tax year.
Segment
Operating Results
The following table reconciles segment pre-tax operating income,
which is used to measure our segments’ performance, to
income from operations before income taxes in our consolidated
statements of income. More information about the results of each
segment follows this table.
Pre-Tax
Operating Income by Segment
|
Nine Months |
Twelve Months Ended |
|||||||||||||||||||
| Ended September 30, | December 31, | |||||||||||||||||||
| 2009 | 2008 | 2008 | 2007 | 2006 | ||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||
|
Group
|
$ | 44.7 | $ | 51.7 | $ | 66.9 | $ | 91.6 | $ | 68.1 | ||||||||||
|
Retirement Services
|
41.3 | 27.4 | 36.6 | 34.2 | 62.4 | |||||||||||||||
|
Income Annuities
|
33.0 | 28.0 | 36.5 | 45.1 | 45.8 | |||||||||||||||
|
Individual
|
51.6 | 43.0 | 59.7 | 58.7 | 66.4 | |||||||||||||||
|
Other
|
(5.8 | ) | (16.1 | ) | (31.6 | ) | 0.1 | 1.8 | ||||||||||||
|
Total segment pre-tax operating income
|
164.8 | 134.0 | 168.1 | 229.7 | 244.5 | |||||||||||||||
|
Add: Net realized investment gains (losses)
|
(29.0 | ) | (103.3 | ) | (158.0 | ) | 16.8 | 1.7 | ||||||||||||
|
Less: Net realized and unrealized investment gains (losses) on
FIA options
|
0.2 | (3.6 | ) | (2.9 | ) | (2.3 | ) | 2.2 | ||||||||||||
|
Income from operations before income taxes
|
$ | 135.6 | $ | 34.3 | $ | 13.0 | $ | 248.8 | $ | 244.0 | ||||||||||
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Group
The following table sets forth the results of operations
relating to our Group segment:
|
Nine Months Ended |
Twelve Months Ended |
|||||||||||||||||||
| September 30, | December 31, | |||||||||||||||||||
| 2009 | 2008 | 2008 | 2007 | 2006 | ||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||
|
Revenues:
|
||||||||||||||||||||
|
Premiums
|
$ | 324.1 | $ | 338.8 | $ | 449.8 | $ | 392.1 | $ | 387.3 | ||||||||||
|
Net investment income
|
13.3 | 13.4 | 17.8 | 18.1 | 18.0 | |||||||||||||||
|
Other revenues
|
12.7 | 14.3 | 19.0 | 15.2 | 10.2 | |||||||||||||||
|
Net realized investment losses:
|
||||||||||||||||||||
|
Total
other-than-temporary
impairment losses on securities
|
(8.5 | ) | (0.1 | ) | (0.1 | ) | — | — | ||||||||||||
|
Less: portion of losses recognized in other comprehensive income
|
6.3 | — | — | — | — | |||||||||||||||
|
Net impairment losses recognized in earnings
|
(2.2 | ) | (0.1 | ) | (0.1 | ) | — | — | ||||||||||||
|
Other net realized investment losses
|
(0.7 | ) | — | — | (0.1 | ) | (0.1 | ) | ||||||||||||
|
Total net realized investment losses
|
(2.9 | ) | (0.1 | ) | (0.1 | ) | (0.1 | ) | (0.1 | ) | ||||||||||
|
Total revenues
|
347.2 | 366.4 | 486.5 | 425.3 | 415.4 | |||||||||||||||
|
Benefits and Expenses:
|
||||||||||||||||||||
|
Policyholder benefits and claims
|
219.9 | 222.0 | 295.9 | 213.1 | 230.8 | |||||||||||||||
|
Other underwriting and operating expenses
|
79.7 | 86.7 | 115.7 | 112.3 | 105.7 | |||||||||||||||
|
Amortization of deferred policy acquisition costs
|
5.8 | 6.1 | 8.1 | 8.4 | 10.9 | |||||||||||||||
|
Total benefits and expenses
|
305.4 | 314.8 | 419.7 | 333.8 | 347.4 | |||||||||||||||
|
Segment pre-tax income
|
41.8 | 51.6 | 66.8 | 91.5 | 68.0 | |||||||||||||||
|
Less: Net realized investment losses
|
(2.9 | ) | (0.1 | ) | (0.1 | ) | (0.1 | ) | (0.1 | ) | ||||||||||
|
Segment pre-tax operating income
|
$ | 44.7 | $ | 51.7 | $ | 66.9 | $ | 91.6 | $ | 68.1 | ||||||||||
The following table sets forth selected historical operating
metrics relating to our Group segment as of, or for, the periods
ended:
|
Nine Months Ended |
Twelve Months Ended |
|||||||||||||||||||
| September 30, | December 31, | |||||||||||||||||||
| 2009 | 2008 | 2008 | 2007 | 2006 | ||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||
|
Group loss ratio(1)
|
67.8 | % | 65.5 | % | 65.8 | % | 54.3 | % | 59.6 | % | ||||||||||
|
Expense ratio(2)
|
24.2 | % | 24.8 | % | 24.8 | % | 27.8 | % | 27.7 | % | ||||||||||
|
Combined ratio(3)
|
92.0 | % | 90.3 | % | 90.6 | % | 82.1 | % | 87.3 | % | ||||||||||
|
Medical stop-loss — loss ratio(4)
|
69.4 | % | 66.7 | % | 67.9 | % | 55.2 | % | 62.4 | % | ||||||||||
|
Total sales(5)
|
$ | 77.9 | $ | 103.6 | $ | 112.6 | $ | 86.2 | $ | 69.1 | ||||||||||
| (1) | Group loss ratio represents policyholder benefits and claims divided by premiums earned. | |
| (2) | Expense ratio is equal to other underwriting and operating expenses of our insurance operations and amortization of DAC divided by premiums earned. | |
| (3) | Combined ratio is equal to the sum of the loss ratio and the expense ratio. | |
| (4) | Medical stop-loss — loss ratio represents medical stop-loss policyholder benefits and claims divided by medical stop-loss premiums earned. | |
| (5) | Total sales represent annualized first-year premiums. |
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Table of Contents
Nine
Months Ended September 30, 2009 Compared to the Nine Months
Ended September 30, 2008
Group summary of results. Our Group segment pre-tax
income decreased $9.8 million, or 19.0%, to
$41.8 million from $51.6 million, primarily due to a
$7.0 million decrease in segment pre-tax operating income
and a $2.8 million increase in net realized investment
losses. The decrease in segment pre-tax operating income was
primarily the result of an increase in the loss ratio on our
medical stop-loss business.
Premiums. Premiums decreased $14.7 million, or
4.3%, to $324.1 million from $338.8 million. This
decrease was primarily due to a $12.9 million decrease in
medical stop-loss premiums, as pricing increases have led to
lower sales and renewals in 2009 and a $2.2 million
decrease in premium on our limited medical benefits product.
Net realized investment losses. Net realized
investment losses increased $2.8 million to
$2.9 million from $0.1 million. This increase was
predominately due to a $2.1 million increase in impairments
on fixed maturities.
Policyholder benefits and claims. Policyholder
benefits and claims decreased $2.1 million, or 0.9%, to
$219.9 million from $222.0 million. This decrease was
primarily driven by lower claims due to a smaller premium base.
The loss ratio is above our long-term expectations as we have
experienced more claims exceeding $0.5 million, many of
which relate to claims for premature births.
Other underwriting and operating expenses. Other
underwriting and operating expenses decreased $7.0 million,
or 8.1%, to $79.7 million from $86.7 million. This is
primarily due to a $3.0 million decrease in commission
expense due to a decrease in sales and lower average
commissions, and a $3.1 million decrease in other operating
expenses due partially to a decrease in the number of employees.
Twelve
Months Ended December 31, 2008 Compared to the Twelve
Months Ended December 31, 2007
Group summary of results. Our Group segment’s
pre-tax income decreased $24.7 million, or 27.0%, to
$66.8 million from $91.5 million, primarily due to
higher paid medical stop-loss claims as shown in the increase in
the loss ratio, applied to a larger book of business driven by
strong sales growth and renewals in 2008. In 2008, we adjusted
pricing to grow the block. As a result, we generated more
premiums, and experienced an increase in the actual loss ratio.
Premiums. Premiums increased $57.7 million, or
14.7%, to $449.8 million from $392.1 million. This was
primarily due to a $58.4 million increase in medical
stop-loss premiums, as a result of an increase in new sales and
strong renewals.
Other revenues. Other revenues increased
$3.8 million, or 25.0%, to $19.0 million from
$15.2 million. Our subsidiary MRM, acquired in May 2007,
generated revenues of $11.1 million in 2008, versus
$6.4 million in 2007. This was partially offset by a
decrease in revenues from our third party administrator.
Policyholder benefits and claims. Policyholder
benefits and claims increased $82.8 million, or 38.9%, to
$295.9 million from $213.1 million. This was primarily
driven by the larger book of business on increased sales and
renewals and the higher loss ratio described above.
Other underwriting and operating expenses. Other
underwriting and operating expenses increased $3.4 million,
or 3.0%, to $115.7 million from $112.3 million. This
is primarily due to a $3.4 million increase in commission
expense as a result of strong sales. The overall expense ratio
improved by 3.0% in 2008.
Twelve
Months Ended December 31, 2007 Compared to the Twelve
Months Ended December 31, 2006
Group summary of results. Our Group segment’s
pre-tax income increased $23.5 million, or 34.6%, to
$91.5 million from $68.0 million, primarily due to
lower paid claims on our medical stop-loss product which was
reflected in the reduction of our loss ratio to 55.2% from
62.4%. The 55.2% medical loss ratio was better than our
expectations.
64
Table of Contents
Premiums. Premiums increased $4.8 million, or
1.2%, to $392.1 million from $387.3 million. This was
primarily due to a $6.4 million increase in medical
stop-loss premiums, partially offset by a $1.5 million
decrease in premiums from other products.
Other revenues. Other revenues increased
$5.0 million, or 49.0%, to $15.2 million from
$10.2 million. Our newly acquired subsidiary, MRM,
generated revenues of $6.4 million, partially offset by a
decrease in revenues from our third party administrator as a
result of lower production.
Policyholder benefits and claims. Policyholder
benefits and claims decreased $17.7 million, or 7.7%, to
$213.1 million from $230.8 million. Paid claims
decreased $25.7 million, primarily related to strong
underwriting results and an unusual number of paid claims in
excess of $0.5 million in 2006 that did not recur in 2007.
This is partially offset by an increase in the change in claims
due and unpaid of $8.4 million.
Other underwriting and operating expenses. Other
underwriting and operating expenses increased $6.6 million,
or 6.2%, to $112.3 million from $105.7 million. This
is primarily due to increases in direct expenses and
distribution expenses of $4.2 million and
$2.7 million, respectively, and a $1.7 million
reduction in DAC deferrals. The increase in direct expenses is
primarily due to the acquisition of MRM, which contributed
$2.7 million in expenses in 2007. This is partially offset
by a $3.2 million decrease in commission expense, which is
related to lower average commission costs on business written.
Retirement
Services
The following table sets forth the results of operations
relating to our Retirement Services segment:
|
Nine Months Ended |
Twelve Months Ended |
|||||||||||||||||||
| September 30, | December 31, | |||||||||||||||||||
| 2009 | 2008 | 2008 | 2007 | 2006 | ||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||
|
Revenues:
|
||||||||||||||||||||
|
Premiums
|
$ | 0.1 | $ | 0.1 | $ | 0.1 | $ | — | $ | 0.1 | ||||||||||
|
Net investment income
|
281.8 | 188.4 | 261.1 | 244.3 | 269.8 | |||||||||||||||
|
Other revenues
|
12.3 | 15.9 | 20.2 | 24.5 | 22.8 | |||||||||||||||
|
Net realized investment losses:
|
||||||||||||||||||||
|
Total
other-than-temporary
impairment losses on securities
|
(53.1 | ) | (12.9 | ) | (20.7 | ) | (4.9 | ) | (11.8 | ) | ||||||||||
|
Less: portion of losses recognized in other comprehensive income
|
23.4 | — | — | — | — | |||||||||||||||
|
Net impairment losses recognized in earnings
|
(29.7 | ) | (12.9 | ) | (20.7 | ) | (4.9 | ) | (11.8 | ) | ||||||||||
|
Other net realized investment gains (losses)
|
12.2 | (4.1 | ) | (0.1 | ) | (4.9 | ) | (5.2 | ) | |||||||||||
|
Total net realized investment losses
|
(17.5 | ) | (17.0 | ) | (20.8 | ) | (9.8 | ) | (17.0 | ) | ||||||||||
|
Total revenues
|
276.7 | 187.4 | 260.6 | 259.0 | 275.7 | |||||||||||||||
|
Benefits and Expenses:
|
||||||||||||||||||||
|
Policyholder benefits and claims
|
(2.2 | ) | (6.7 | ) | (6.8 | ) | (8.3 | ) | (16.5 | ) | ||||||||||
|
Interest credited
|
187.2 | 127.2 | 176.4 | 165.5 | 186.2 | |||||||||||||||
|
Other underwriting and operating expenses
|
41.3 | 44.5 | 57.4 | 69.1 | 61.7 | |||||||||||||||
|
Amortization of deferred policy acquisition costs
|
26.8 | 8.4 | 14.9 | 6.0 | 1.1 | |||||||||||||||
|
Total benefits and expenses
|
253.1 | 173.4 | 241.9 | 232.3 | 232.5 | |||||||||||||||
|
Segment pre-tax income
|
23.6 | 14.0 | 18.7 | 26.7 | 43.2 | |||||||||||||||
|
Less: Net realized investment losses
|
(17.5 | ) | (17.0 | ) | (20.8 | ) | (9.8 | ) | (17.0 | ) | ||||||||||
|
Add: Net realized and unrealized investment gains (losses) on
FIA options
|
0.2 | (3.6 | ) | (2.9 | ) | (2.3 | ) | 2.2 | ||||||||||||
|
Segment pre-tax operating income
|
$ | 41.3 | $ | 27.4 | $ | 36.6 | $ | 34.2 | $ | 62.4 | ||||||||||
65
Table of Contents
The following table sets forth selected historical operating
metrics relating to our Retirement Services segment as of, or
for, the periods ended:
|
Nine Months Ended |
Twelve Months Ended |
|||||||||||||||||||
| September 30, | December 31, | |||||||||||||||||||
| 2009 | 2008 | 2008 | 2007 | 2006 | ||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||
|
Account values — Fixed annuities
|
$ | 7,464.1 | $ | 5,202.9 | $ | 5,724.9 | $ | 4,445.4 | $ | 4,922.5 | ||||||||||
|
Account values — Variable annuities
|
736.9 | 821.1 | 645.7 | 1,059.2 | 1,115.5 | |||||||||||||||
|
PGAAP reserve balance
|
— | 2.9 | 2.2 | 9.9 | 18.4 | |||||||||||||||
|
Interest spread on average account values(1)
|
1.81 | % | 1.71 | % | 1.67 | % | 1.68 | % | 1.76 | % | ||||||||||
|
Total sales(2)
|
$ | 1,966.5 | $ | 1,142.4 | $ | 1,766.5 | $ | 692.3 | $ | 573.2 | ||||||||||
| (1) | Interest spread is the difference between net investment yield earned and the credited interest rate to policyholders. The investment yield is the approximate yield on invested assets in the general account attributed to the segment. The credited interest rate is the approximate rate credited on policyholder fixed account values within the segment. Interest credited is subject to contractual terms, including minimum guarantees. Interest spread tends to move gradually over time to reflect market interest rate movements and may reflect actions by management to respond to competitive pressures and profit targets. | |
| (2) | Total sales represent deposits for new policies. |
Nine
Months Ended September 30, 2009 Compared to the Nine Months
Ended September 30, 2008
Retirement Services summary of results. Our
Retirement Services segment pre-tax income increased
$9.6 million, or 68.6%, to $23.6 million from
$14.0 million due to an increase in segment pre-tax
operating income, partially offset by an increase in net
realized investment losses due to increased investment
impairments. Segment pre-tax operating income increased
$13.9 million, or 50.7%, to $41.3 million from
$27.4 million due to an increase in sales and positive net
cash flows of fixed deferred annuities, which drove an increase
in fixed annuities account value of $2.3 billion. We also
experienced an increase in the interest spread on average
account values, which increased to 1.81% from 1.71%. Although
our yields increased, the 2009 yield was unfavorably impacted by
an increase in uninvested cash caused by the increase in sales
in a tight credit environment. This dampened growth in margins
until the cash was invested, limiting the growth of segment
pre-tax income. In addition, the increase in sales allowed us to
fully defer acquisition expenses resulting in lower other
underwriting and operating expenses. Offsetting this was an
increase in DAC amortization of $18.4 million related to
our growing DAC asset balance.
Net investment income. Net investment income
increased $93.4 million, or 49.6%, to $281.8 million
from $188.4 million. Of this increase, $79.3 million
was driven by higher average invested assets, which increased to
$6.89 billion from $4.85 billion, and
$14.1 million was driven by a positive rate variance as
yields increased to 5.45% from 5.18%. Overall yields on our
fixed maturities also increased as we were able to invest in
higher yielding assets.
Other revenues. Other revenues decreased
$3.6 million, or 22.6%, to $12.3 million from
$15.9 million, which was primarily due to a reduction in
fees on variable account values.
Net realized investment losses. Net realized
investment losses increased $0.5 million to
$17.5 million from $17.0 million. For the nine months
ended September 30, 2009, gross realized gains were
$20.7 million, offset by gross realized losses of
$38.2 million, including impairments of $29.7 million.
For the nine months ended September 30, 2008, gross
realized gains were $2.9 million, offset by gross realized
losses of $19.9 million, including impairments of
$12.9 million. In addition, the realized and unrealized
gains and losses on FIA options increased $3.8 million to a
$0.2 million gain, from a $3.6 million loss as the
S&P 500 increased in the first nine months of 2009 versus a
decrease in the first nine months of 2008.
Policyholder benefits and claims. Policyholder
benefits and claims decreased $4.5 million, or 67.2%, to a
$2.2 million benefit from a $6.7 million benefit. This
decrease was primarily driven by a reduced benefit from PGAAP
reserve amortization, which was fully amortized as of
September 30, 2009. The PGAAP reserve
66
Table of Contents
was amortized as a reduction to policyholder benefits according
to our expected pattern of profitability of the block of
business of policies in force at the time of the Acquisition.
Interest credited. Interest credited increased
$60.0 million, or 47.2%, to $187.2 million from
$127.2 million due to a 37% increase in average fixed
account values resulting from increased sales and higher
persistency.
Other underwriting and operating expenses. Other
underwriting and operating expenses decreased $3.2 million,
or 7.2%, to $41.3 million from $44.5 million. This
decrease is primarily due to increased sales in 2009, which
resulted in an increase in deferrable policy acquisition costs.
In addition, we received a $1.0 million guaranteed fund
assessment refund in 2009, which decreased operating expenses.
Amortization of deferred policy acquisition
costs. Amortization of deferred policy acquisition
costs increased $18.4 million to $26.8 million from
$8.4 million. This increase was primarily driven by an
increased DAC asset balance to amortize due to increased sales
and an increase in margins in 2009, as well as a
$1.1 million increase due to the unlocking of future DAC
assumptions.
Twelve
Months Ended December 31, 2008 Compared to the Twelve
Months Ended December 31, 2007
Retirement Services summary of results. Our
Retirement Services’ segment pre-tax income decreased
$8.0 million, or 30.0%, to $18.7 million from
$26.7 million, due to an increase in segment pre-tax
operating income offset by an increase in net realized
investment losses. Segment pre-tax operating income increased
$2.4 million, or 7.0%, to $36.6 million from
$34.2 million. Segment pre-tax operating income benefited
from strong sales and higher persistency leading to a growing
block of business producing greater investment margin (net
investment income less interest credited). Increased sales also
resulted in an increase in DAC deferrals which contributed
positively to lower net operating expense. Partially offsetting
this was a decrease in other revenues of $4.3 million
driven by lower fees on variable annuities due to the declines
in the equity markets and an $8.9 million increase in
amortization of DAC.
Net investment income. Net investment income
increased $16.8 million, or 6.9%, to $261.1 million
from $244.3 million. Of this increase, $17.0 million
was a result of an increase in average invested assets, which
increased to $5.1 billion from $4.7 billion. This was
partially offset by a $0.2 million negative rate variance
as yields decreased to 5.15% from 5.16%. Investment yields were
unfavorably impacted in the latter half of 2008 by increased
uninvested cash.
Other revenues. Other revenues decreased
$4.3 million, or 17.6%, to $20.2 million from
$24.5 million due to lower fees on variable annuities
caused by a decline in the equity markets which impacted our
variable annuities account value.
Net realized investment losses. Net realized
investment losses increased $11.0 million to
$20.8 million from $9.8 million. For the year ended
December 31, 2008, gross realized gains were
$11.0 million, offset by gross realized losses of
$31.8 million, including impairments of $20.7 million.
For the year ended December 31, 2007, gross realized gains
were $8.6 million, offset by gross realized losses of
$18.4 million, including impairments of $4.9 million.
Interest credited. Interest credited increased
$10.9 million, or 6.6%, to $176.4 million from
$165.5 million. This is due primarily to an increase in
average fixed account values and higher crediting rates on new
business.
Other underwriting and operating expenses. Other
underwriting and operating expenses decreased
$11.7 million, or 16.9%, to $57.4 million from
$69.1 million. This change was primarily driven by
increased sales in 2008, which resulted in an increase in
deferrable policy acquisition costs. In 2008, we were able to
fully defer acquisition expenses as a result of the increase in
sales.
Amortization of deferred policy acquisition
costs. Amortization of DAC increased $8.9 million
to $14.9 million from $6.0 million. This change was
primarily driven by a growing book of business and corresponding
DAC asset.
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Table of Contents
Twelve
Months Ended December 31, 2007 Compared to the Twelve
Months Ended December 31, 2006
Retirement Services summary of results. Our
Retirement Services segment pre-tax income decreased
$16.5 million, or 38.2%, to $26.7 million from
$43.2 million due to a decrease in segment pre-tax
operating income of $28.2 million offset by a
$11.7 million decrease in net realized investment losses
excluding losses on FIA options. Segment pre-tax operating
income decreased $28.2 million, or 45.2%, to
$34.2 million from $62.4 million. Segment pre-tax
operating income decreased due to a decline in account value as
withdrawals exceeded new deposits, a decrease in the interest
spread on average account values driven by lower amortization of
the PGAAP reserve, increased operating expenses and increased
DAC amortization.
Net investment income. Net investment income
decreased $25.5 million, or 9.5%, to $244.3 million
from $269.8 million. Of this decrease, $34.4 million
was a result of a decrease in average invested assets to
$4.7 billion from $5.4 billion. This decrease was
partially offset by a positive rate variance of
$8.9 million due to improved yields related to our
investment portfolio rebalancing strategy, which increased to
5.16% from 4.97%.
Net realized investment losses. Net realized
investment losses decreased $7.2 million, or 42.4%, to
$9.8 million from $17.0 million. For the year ended
December 31, 2007, gross realized gains were
$8.6 million, offset by gross realized losses of
$18.4 million, including impairments of $4.9 million.
For the year ended December 31, 2006, gross realized gains
were $8.6 million, offset by gross realized losses of
$25.6 million, including impairments of $11.8 million.
Policyholder benefits and claims. Policyholder
benefits and claims increased $8.2 million, or 49.7%, to
$8.3 million from $16.5 million. This increase was
primarily driven by differences in the amount of PGAAP reserve
amortization. The PGAAP reserve is amortized as a reduction to
policyholder benefits according to our expected pattern of
profitability of the book of business of policies in force at
the time of the Acquisition. This pattern resulted in higher
PGAAP reserve amortization in the years immediately following
the Acquisition.
Interest credited. Interest credited decreased
$20.7 million, or 11.1%, to $165.5 million from
$186.2 million. This decrease is primarily due to a
decrease in fixed account values as withdrawals exceeded
deposits and a $5.2 million decrease in interest credited
on our FIA products, which resulted from 3.5% growth in the
S&P 500 Index in 2007 compared to 13.6% growth in the
S&P 500 Index in 2006. These decreases were partially
offset by a $5.5 million increase related to higher
crediting rates and persistency.
Other underwriting and operating expenses. Other
underwriting and operating expenses increased $7.4 million,
or 12.0%, to $69.1 million from $61.7 million. This
increase was primarily due to a $3.3 million increase in
allocated corporate expenses, and a $2.9 million increase
in distribution expenses.
Amortization of deferred policy acquisition
costs. Amortization of deferred policy acquisition
costs increased $4.9 million to $6.0 million from
$1.1 million. This increase is primarily driven by a
growing block of business and corresponding DAC, which increased
to $84.3 million from $54.5 million at
December 31, 2006. We experienced an increase in our DAC
asset balance despite the decrease in fixed account value as
customer withdrawals were primarily on products without DAC
asset balances.
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Table of Contents
Income
Annuities
The following table sets forth the results of operations
relating to our Income Annuities segment:
|
Nine Months Ended |
Twelve Months Ended |
|||||||||||||||||||
| September 30, | December 31, | |||||||||||||||||||
| 2009 | 2008 | 2008 | 2007 | 2006 | ||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||
|
Revenues:
|
||||||||||||||||||||
|
Net investment income
|
$ | 318.1 | $ | 316.9 | $ | 423.4 | $ | 439.3 | $ | 439.0 | ||||||||||
|
Other revenues
|
0.4 | 0.6 | 0.9 | 0.8 | 0.8 | |||||||||||||||
|
Net realized investment gains (losses):
|
||||||||||||||||||||
|
Total
other-than-temporary
impairment losses on securities
|
(76.6 | ) | (22.6 | ) | (35.4 | ) | (8.0 | ) | (9.4 | ) | ||||||||||
|
Less: portion of losses recognized in other comprehensive income
|
49.5 | — | — | — | — | |||||||||||||||
|
Net impairment losses recognized in earnings
|
(27.1 | ) | (22.6 | ) | (35.4 | ) | (8.0 | ) | (9.4 | ) | ||||||||||
|
Other net realized investment gains (losses)
|
34.8 | (31.4 | ) | (64.2 | ) | 31.0 | 26.2 | |||||||||||||
|
Total net realized investment gains (losses)
|
7.7 | (54.0 | ) | (99.6 | ) | 23.0 | 16.8 | |||||||||||||
|
Total revenues
|
326.2 | 263.5 | 324.7 | 463.1 | 456.6 | |||||||||||||||
|
Benefits and Expenses:
|
||||||||||||||||||||
|
Interest credited
|
268.7 | 272.4 | 364.5 | 371.5 | 371.8 | |||||||||||||||
|
Other underwriting and operating expenses
|
15.6 | 16.1 | 21.9 | 22.4 | 21.6 | |||||||||||||||
|
Amortization of deferred policy acquisition costs
|
1.2 | 1.0 | 1.4 | 1.1 | 0.6 | |||||||||||||||
|
Total benefits and expenses
|
285.5 | 289.5 | 387.8 | 395.0 | 394.0 | |||||||||||||||
|
Segment pre-tax income (loss)
|
40.7 | (26.0 | ) | (63.1 | ) | 68.1 | 62.6 | |||||||||||||
|
Less: Net realized investment gains (losses)
|
7.7 | (54.0 | ) | (99.6 | ) | 23.0 | 16.8 | |||||||||||||
|
Segment pre-tax operating income
|
$ | 33.0 | $ | 28.0 | $ | 36.5 | $ | 45.1 | $ | 45.8 | ||||||||||
The following table sets forth selected historical operating
metrics relating to our Income Annuities segment as of, or for,
the periods ended:
|
Nine Months Ended |
Twelve Months Ended |
|||||||||||||||||||
| September 30, | December 31, | |||||||||||||||||||
| 2009 | 2008 | 2008 | 2007 | 2006 | ||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||
|
Reserves(1)
|
$ | 6,722.7 | $ | 6,796.3 | $ | 6,761.2 | $ | 6,895.4 | $ | 7,012.6 | ||||||||||
|
Interest spread(2)
|
0.56 | % | 0.58 | % | 0.59 | % | 0.60 | % | 0.66 | % | ||||||||||
|
Mortality gains (losses)(3)
|
$ | 3.8 | $ | 3.5 | $ | 2.1 | $ | (0.1 | ) | $ | 6.3 | |||||||||
|
Total sales(4)
|
168.0 | 106.3 | 140.8 | 140.2 | 96.6 | |||||||||||||||
| (1) | Reserves represent the present value of future income annuity benefits and assumed expenses, discounted by the assumed interest rate. This metric represents the amount of our in force book of business. | |
| (2) | Interest spread is the difference between net investment yield earned and the credited interest rate on policyholder reserves. The investment yield is the approximate yield on invested assets, excluding equities, in the general account attributed to the segment. The credited interest rate is the approximate rate credited on policyholder reserves within the segment and excludes the gains and losses from funding services and mortality. | |
| (3) | Mortality gains (losses) represent the difference between actual and expected reserves released on death of a life contingent annuity. | |
| (4) | Sales represent deposits for new policies. |
69
Table of Contents
Nine
Months Ended September 30, 2009 Compared to the Nine Months
Ended September 30, 2008
Income Annuities summary of results. Our Income
Annuities segment pre-tax income increased $66.7 million to
$40.7 million from a $26.0 million loss, primarily due
to $7.7 million of net realized investment gains in 2009,
compared to $54.0 million of net realized investment losses
in 2008, and a $5.0 million increase in segment pre-tax
operating income. The increase in net realized investment gains
(losses) was due to an increase in gains from our trading
portfolio of equity securities, which experienced net gains of
$29.0 million in 2009 compared to net losses of
$33.4 million in 2008, primarily due to changes in the fair
value of our equity securities due to improvements in the equity
markets in 2009. Segment pre-tax operating income increased
$5.0 million, to $33.0 million from
$28.0 million, which was primarily due to a positive rate
variance on investments.
Net investment income. Net investment income
increased $1.2 million, or 0.4%, to $318.1 million
from $316.9 million. Of this increase, $4.5 million
was the result of a positive rate variance as yields increased
to 6.09% from 6.00%. In part, the increase in the yields was due
to the transfer of all of our investments in limited
partnerships from our Income Annuities segment to our Other
segment during the third quarter of 2008, in exchange for equity
securities and cash. We experienced $1.8 million of losses
on our investments in limited partnerships in 2008, primarily
due to declines in fair value related to the equity markets. In
addition, the increase in yield was due to adjustments to
investment income related to changes in prepayment speeds on the
underlying collateral of certain mortgage-backed fixed
maturities, which increased investment income $2.5 million
in 2009 versus a decrease of $0.1 million in 2008. The
increase in investment income resulting from the increase in
yields was partially offset by a $3.3 million decrease as
average invested assets declined by $72.3 million, to
$7.0 billion from $7.1 billion as a result of
decreased reserves.
Net realized investment gains (losses). Net realized
investment gains (losses) increased $61.7 million to a
$7.7 million gain from a $(54.0) million loss. For the
nine months ended September 30, 2009, gross realized gains
were $48.9 million, including gross equity gains of
$35.2 million, partially offset by gross realized losses of
$41.2 million, including impairments of $27.1 million
and gross equity losses of $6.2 million. For the nine
months ended September 30, 2008, gross realized gains were
$15.0 million, including gross equity gains of
$2.0 million, offset by gross realized losses of
$69.0 million, including impairments of $22.6 million,
and gross equity losses of $35.4 million.
Interest credited. Interest credited decreased
$3.7 million, or 1.4%, to $268.7 million from
$272.4 million. This is primarily driven by lower reserves,
as benefit payments outpaced new sales.
Twelve
Months Ended December 31, 2008 Compared to the Twelve
Months Ended December 31, 2007
Income Annuities summary of results. Our Income
Annuities segment pre-tax income (loss) decreased
$131.2 million to a $63.1 million loss from a
$68.1 million gain due to $99.6 million in net
realized losses in 2008 compared to $23.0 million in net
realized gains in 2007. Segment pre-tax operating income
decreased $8.6 million, or 19.1%, to $36.5 million
from $45.1 million, which was primarily due to lower
investment yields driven by
mark-to-market
losses on our investments in limited partnerships.
Net investment income. Net investment income
decreased $15.9 million, or 3.6%, to $423.4 million
from $439.3 million. Of this decrease, $9.5 million
was a result of a negative rate variance as yields decreased to
6.01% from 6.15%, and $6.4 million of the decrease was due
to a decrease in average invested assets to $7.0 billion
from $7.1 billion as a result of decreased reserves. In
addition, this decrease was due to lower performance in our
investments in limited partnerships. These losses totaled
$1.8 million in 2008 compared to $7.0 million in gains
in 2007. During the third quarter of 2008, we transferred all
investments in limited partnerships held by our Income Annuities
segment to the holding company, included in our Other segment,
in exchange for marketable equity securities.
Net realized investment gains (losses). Net
investment gains (losses) decreased $122.6 million to a
$99.6 million loss from a $23.0 million gain. For the
year ended December 31, 2008, gross realized gains were
$15.2 million, offset by gross realized losses of
$114.8 million, including impairments of $35.4 million
and losses in the fair value of our equity portfolio of
$61.2 million. For the year ended December 31, 2007,
70
Table of Contents
gross realized gains were $40.4 million, offset by gross
realized losses of $17.4 million, including impairments of
$8.0 million.
Interest credited. Interest credited decreased
$7.0 million, or 1.9%, to $364.5 million from
$371.5 million. This decrease primarily related to a
$4.1 million decrease in interest as a result of lower
reserves as benefit payments exceeded new deposits, and
$2.2 million due to an increase in mortality gains.
Twelve
Months Ended December 31, 2007 Compared to the Twelve
Months Ended December 31, 2006
Income Annuities summary of results. Our Income
Annuities segment pre-tax income increased $5.5 million, or
8.8%, to $68.1 million from $62.6 million. Segment
pre-tax operating income decreased $0.7 million, or 1.5%,
to $45.1 million from $45.8 million. Segment pre-tax
operating income decreased due to a decrease in the interest
spread on reserves, which was driven by higher crediting rates.
A slight increase in employee payroll and benefit operating
expenses also decreased operating results.
Net investment income. Net investment income
increased $0.3 million, to $439.3 million from
$439.0 million. Of this increase, $6.3 million related
to improved yields on assets and investments in limited
partnerships to 6.15% from 6.06%. This increase was partially
offset by a $6.0 million decrease related to a decrease in
average invested assets, which decreased to $7.1 billion
from $7.2 billion.
Net realized investment gains. Net investment gains
increased $6.2 million, or 36.9%, to $23.0 million
from $16.8 million. For the year ended December 31,
2007, gross realized gains were $40.4 million, offset by
gross realized losses of $17.4 million, including
impairments of $8.0 million. For the year ended
December 31, 2006, gross realized gains were
$34.2 million, offset by gross realized losses of
$17.4 million, including impairments of $9.4 million.
We had higher realized gains in 2007 primarily due to gains
related to a significant tender offer related to certain fixed
maturities in our investment portfolio.
Interest credited. Interest credited decreased
$0.3 million, or less than 0.1%, to $371.5 million
from $371.8 million. Of this decrease, $5.0 million
relates to a decrease in reserves and $2.5 million relates
to an increase in gains from funding services activity. These
decreases are offset by a $6.4 million change in mortality
from mortality losses in the current year versus mortality gains
in the prior year.
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Table of Contents
Individual
The following table sets forth the results of operations
relating to our Individual segment:
|
Nine Months Ended |
Twelve Months Ended |
|||||||||||||||||||
| September 30, | December 31, | |||||||||||||||||||
| 2009 | 2008 | 2008 | 2007 | 2006 | ||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||
|
Revenues:
|
||||||||||||||||||||
|
Premiums
|
$ | 106.0 | $ | 101.5 | $ | 134.9 | $ | 138.4 | $ | 138.3 | ||||||||||
|
Net investment income
|
198.0 | 190.6 | 254.6 | 244.1 | 232.8 | |||||||||||||||
|
Other revenues
|
9.9 | 12.2 | 16.0 | 15.0 | 12.9 | |||||||||||||||
|
Net realized investment gains (losses):
|
||||||||||||||||||||
|
Total
other-than-temporary
impairment losses on securities
|
(17.7 | ) | (12.7 | ) | (15.9 | ) | (1.9 | ) | (2.9 | ) | ||||||||||
|
Less: portion of losses recognized in other comprehensive income
|
9.1 | — | — | — | — | |||||||||||||||
|
Net impairment losses recognized in earnings
|
(8.6 | ) | (12.7 | ) | (15.9 | ) | (1.9 | ) | (2.9 | ) | ||||||||||
|
Other net realized investment gains (losses)
|
0.7 | (0.5 | ) | (0.9 | ) | 0.4 | (0.9 | ) | ||||||||||||
|
Total net realized investment losses
|
(7.9 | ) | (13.2 | ) | (16.8 | ) | (1.5 | ) | (3.8 | ) | ||||||||||
|
Total revenues
|
306.0 | 291.1 | 388.7 | 396.0 | 380.2 | |||||||||||||||
|
Benefits and Expenses:
|
||||||||||||||||||||
|
Policyholder benefits and claims
|
44.4 | 44.8 | 59.4 | 62.3 | 50.0 | |||||||||||||||
|
Interest credited
|
175.7 | 171.3 | 227.7 | 216.3 | 208.2 | |||||||||||||||
|
Other underwriting and operating expenses
|
39.6 | 43.0 | 57.3 | 57.7 | 57.4 | |||||||||||||||
|
Amortization of deferred policy acquisition costs
|
2.6 | 2.2 | 1.4 | 2.5 | 2.0 | |||||||||||||||
|
Total benefits and expenses
|
262.3 | 261.3 | 345.8 | 338.8 | 317.6 | |||||||||||||||
|
Segment pre-tax income
|
43.7 | 29.8 | 42.9 | 57.2 | 62.6 | |||||||||||||||
|
Less: Net realized investment losses
|
(7.9 | ) | (13.2 | ) | (16.8 | ) | (1.5 | ) | (3.8 | ) | ||||||||||
|
Segment pre-tax operating income
|
$ | 51.6 | $ | 43.0 | $ | 59.7 | $ | 58.7 | $ | 66.4 | ||||||||||
The following table sets forth selected historical operating
metrics relating to our Individual segment as of, and for the
periods ended:
|
Nine Months Ended |
Twelve Months Ended |
|||||||||||||||||||
| September 30, | December 31, | |||||||||||||||||||
| 2009 | 2008 | 2008 | 2007 | 2006 | ||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||
|
Insurance in force(1)
|
$ | 50,215.6 | $ | 51,643.7 | $ | 51,313.5 | $ | 52,055.6 | $ | 52,295.3 | ||||||||||
|
Mortality ratio(2)
|
77.9 | % | 82.8 | % | 79.2 | % | 84.0 | % | 74.7 | % | ||||||||||
|
BOLI account value(3)
|
$ | 3,754.9 | $ | 3,663.9 | $ | 3,700.4 | $ | 3,527.2 | $ | 3,346.8 | ||||||||||
|
UL account value(3)
|
584.8 | 578.0 | 580.3 | 573.6 | 565.1 | |||||||||||||||
|
PGAAP reserve balance
|
38.9 | 52.0 | 49.2 | 62.0 | 77.1 | |||||||||||||||
|
BOLI ROA(4)
|
1.23 | % | 1.21 | % | 1.13 | % | 1.13 | % | 1.18 | % | ||||||||||
|
UL interest spread(5)
|
1.24 | % | 1.17 | % | 1.14 | % | 1.23 | % | 1.31 | % | ||||||||||
|
Total sales, excluding BOLI(6)
|
$ | 7.8 | $ | 4.8 | $ | 7.2 | $ | 8.5 | $ | 9.3 | ||||||||||
|
BOLI sales(7)
|
2.5 | 2.9 | 2.9 | 4.6 | — | |||||||||||||||
| (1) | Insurance in force represents dollar face amounts of policies. | |
| (2) | Mortality ratio represents actual mortality experience as a percentage of an industry mortality benchmark. This benchmark is an expected level of claims that is derived by applying our current in force business to the Society of Actuaries 1990-95 Basic Select and Ultimate Mortality Table. | |
| (3) | BOLI account value and UL account value represent our liability to our policyholders. |
footnotes continued on following page
72
Table of Contents
| (4) | The BOLI ROA is a measure of the gross margin on our BOLI book of business. This metric is calculated as the difference between our BOLI revenue earnings rate and our BOLI policy benefits rate. The revenue earnings rate is calculated as revenues divided by average invested assets. The policy benefits rate is calculated as total policy benefits divided by average account value. The policy benefits used in this metric do not include expenses. | |
| (5) | UL interest spread is the difference between net investment yield earned and the credited interest rate to policyholders. The investment yield is the approximate yield on invested assets in the general account attributed to the UL policies. The credited interest rate is the approximate rate credited on UL policyholder fixed account values. Interest credited to UL policyholders’ account values is subject to contractual terms, including minimum guarantees. Interest credited tends to move gradually over time to reflect market interest rate movements and may reflect actions by management to respond to competitive pressures and profit targets. | |
| (6) | Total sales, excluding BOLI represent annualized first year premiums and deposits for new policies excluding BOLI sales. | |
| (7) | BOLI sales represent 10% of new BOLI total deposits. |
Nine
Months Ended September 30, 2009 Compared to the Nine Months
Ended September 30, 2008
Individual Summary of Results. Our Individual
segment pre-tax income increased $13.9 million, or 46.6%,
to $43.7 million from $29.8 million due to an increase
of $8.6 million in segment pre-tax operating income and a
decrease of $5.3 million in net realized investment losses.
Segment pre-tax operating income increased $8.6 million, or
20.0%, to $51.6 million from $43.0 million driven by
increased BOLI ROA on increased BOLI account value, increased UL
interest spread, lower operating expenses and an improved
mortality ratio.
Premiums. Premiums increased $4.5 million, or
4.4%, to $106.0 million from $101.5 million. This
increase is primarily related to the annual increases in COI
charges on the BOLI block of business due to aging of the
covered BOLI lives and a decrease in ceded premium related to
term insurance.
Net investment income. Net investment income
increased $7.4 million, or 3.9%, to $198.0 million
from $190.6 million. Of this increase, $6.5 million
related to an increase in the average invested assets, which
increased to $4.9 billion from $4.8 billion. In
addition, there was a positive rate variance of
$0.9 million as a result of an increase in yields to 5.38%
from 5.36%.
Net realized investment losses. Net realized
investment losses decreased $5.3 million, or 40.2%, to
$7.9 million from $13.2 million. For the nine months
ended September 30, 2009, gross realized gains were
$9.9 million offset by gross realized losses of
$17.8 million, including impairments of $8.6 million.
For the nine months ended September 30, 2008, gross
realized gains were $1.2 million, offset by gross realized
losses of $14.4 million, including impairments of
$12.7 million.
Policyholder benefits and claims. Policyholder
benefits and claims decreased $0.4 million, or 0.9%, to
$44.4 million from $44.8 million. This decrease was
due to a $2.3 million decrease in the change in reserves,
primarily term reserves, due to a smaller block of business and
smaller reserve requirements on new sales. This was partially
offset by a $2.0 million increase in incurred claims,
primarily BOLI separate account claims.
Interest credited. Interest credited increased
$4.4 million, or 2.6%, to $175.7 million from
$171.3 million. This increase was primarily related to
growth in BOLI account value, which is growing as a result of
new sales and strong persistency. Interest related to the growth
in BOLI account value was offset by decreases related to BOLI
separate account claims experience. BOLI separate account
interest credited is favorably impacted by BOLI separate account
claims.
Other underwriting and operating expenses. Other
underwriting and operating expenses decreased $3.4 million,
or 7.9%, to $39.6 million from $43.0 million. This
decrease was primarily driven by increases of $3.2 million
in DAC deferrals as increased sales resulted in an increase in
deferral of acquisition related expense.
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Table of Contents
Twelve
Months Ended December 31, 2008 Compared to the Twelve
Months Ended December 31, 2007
Individual Summary of Results. Our Individual
segment pre-tax income decreased $14.3 million, or 25.0%,
to $42.9 million from $57.2 million due to an increase
in segment pre-tax operating income offset by an increase in net
realized investment losses of $15.3 million. Segment
pre-tax operating income increased $1.0 million, or 1.7%,
to $59.7 million from $58.7 million due to an increase
in net investment income and favorable mortality, partially
offset by decreased premiums and an increase in interest
credited on our BOLI block of business.
Premiums. Premiums decreased $3.5 million, or
2.5%, to $134.9 million from $138.4 million. This is
primarily related to lower sales and adjustments associated with
reinsured policies that increased ceded premiums, partially
offset by an increase in BOLI COI charges related to the
increase in our BOLI account value due to new sales and the
aging of covered BOLI lives.
Net investment income. Net investment income
increased $10.5 million, or 4.3%, to $254.6 million
from $244.1 million. Of this increase, $13.2 million
related to an increase in the average invested assets, which
increased to $4.8 billion from $4.5 billion mainly due
to growth in BOLI account value. This increase was partially
offset by a negative rate variance of $2.7 million due to
decreasing yields, which decreased to 5.33% from 5.38%.
Net realized investment losses. Net realized
investment losses increased $15.3 million to
$16.8 million from $1.5 million. For the year ended
December 31, 2008, gross realized gains were
$1.3 million, offset by gross realized losses of
$18.1 million, including impairments of $15.9 million.
For the year ended December 31, 2007, gross realized gains
were $2.4 million, offset by gross realized losses of
$3.9 million, including impairments of $1.9 million.
Policyholder benefits and claims. Policyholder
benefits and claims expense decreased $2.9 million, or
4.7%, to $59.4 million from $62.3 million. Of this
decrease, $1.5 million was due to ceded maintenance reserve
credit in 2008. In addition, mortality, which excludes BOLI
experience, improved from 84.0% to 79.2% as claims decreased
$0.8 million, but was offset by a decrease in the change in
reserves primarily related to a $2.5 million adjustment
from a refinement of our reserve methodology in 2007 in
connection with an actuarial reserving software conversion. In
addition, the benefit received from PGAAP reserve amortization
decreased $2.2 million.
Interest credited. Interest credited increased
$11.4 million, or 5.3%, to $227.7 million from
$216.3 million. This increase was primarily due to an
increase in our BOLI account values caused by new sales and
strong persistency and a decrease in BOLI separate account
claims, which resulted in an increase in interest credited
related to BOLI separate account business.
Twelve
Months Ended December 31, 2007 Compared to Twelve Months
Ended December 31, 2006
Individual Summary of Results. Our Individual
segment pre-tax income decreased $5.4 million, or 8.6%, to
$57.2 million from $62.6 million. Segment pre-tax
operating income decreased $7.7 million, or 11.6%, to
$58.7 million from $66.4 million. This decrease in
segment pre-tax operating income and pre-tax income was
primarily due to a higher mortality ratio and lower BOLI ROA.
Net investment income. Net investment income
increased $11.3 million, or 4.9%, to $244.1 million
from $232.8 million. Of this increase, $3.7 million
related to improved yields, which increased to 5.38% from 5.30%,
and a $7.6 million increase related to an increase in the
average invested assets, which increased to $4.5 billion
from $4.4 billion.
Net realized investment losses. Net realized
investment losses decreased $2.3 million, or 60.5%, to
$1.5 million from $3.8 million. For the year ended
December 31, 2007, gross realized gains were
$2.4 million, offset by gross realized losses of
$3.9 million, including impairments of $1.9 million.
For the year ended December 31, 2006, gross realized gains
were $2.1 million, offset by gross realized losses of
$5.9 million, including impairments of $2.9 million.
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Table of Contents
Policyholder benefits and claims. Policyholder
benefits and claims expense increased $12.3 million, or
24.6%, to $62.3 million from $50.0 million. This is
primarily due to an increase in claims and unfavorable reserve
adjustments. Claims increased $5.8 million mainly related
to variable universal life, term life and BOLI separate account
claims. On a net basis, we also recorded $6.5 million of
unfavorable reserve adjustments which were due to changes in
reserve assumptions and a refinement of our reserve methodology
implemented in connection with an actuarial reserving software
conversion and a reduction in the benefit received from PGAAP
reserve amortization.
Other
The following table sets forth the results of operations
relating to our Other segment:
|
Nine Months Ended |
Twelve Months Ended |
|||||||||||||||||||
| September 30, | December 31, | |||||||||||||||||||
| 2009 | 2008 | 2008 | 2007 | 2006 | ||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||
|
Revenues:
|
||||||||||||||||||||
|
Net investment income (losses)
|
$ | 18.2 | $ | 8.7 | $ | (0.4 | ) | $ | 27.8 | $ | 25.3 | |||||||||
|
Other revenues
|
7.9 | 9.0 | 11.7 | 13.2 | 9.4 | |||||||||||||||
|
Net realized investment gains (losses):
|
||||||||||||||||||||
|
Total
other-than-temporary
impairment losses on securities
|
(12.0 | ) | (13.4 | ) | (14.3 | ) | (1.4 | ) | (1.6 | ) | ||||||||||
|
Less: portion of loss recognized in other comprehensive income
|
5.9 | — | — | — | — | |||||||||||||||
|
Net impairment losses recognized in earnings
|
(6.1 | ) | (13.4 | ) | (14.3 | ) | (1.4 | ) | (1.6 | ) | ||||||||||
|
Other net realized investment gains (losses)
|
(2.3 | ) | (5.6 | ) | (6.4 | ) | 6.6 | 7.4 | ||||||||||||
|
Total net realized investment gains (losses)
|
(8.4 | ) | (19.0 | ) | (20.7 | ) | 5.2 | 5.8 | ||||||||||||
|
Total revenues
|
17.7 | (1.3 | ) | (9.4 | ) | 46.2 | 40.5 | |||||||||||||
|
Benefits and Expenses:
|
||||||||||||||||||||
|
Interest credited
|
(2.4 | ) | (1.8 | ) | (2.5 | ) | (1.0 | ) | (0.3 | ) | ||||||||||
|
Other underwriting and operating expenses
|
10.5 | 11.6 | 13.5 | 20.4 | 14.1 | |||||||||||||||
|
Interest expense
|
23.8 | 24.0 | 31.9 | 21.5 | 19.1 | |||||||||||||||
|
Total benefits and expenses
|
31.9 | 33.8 | 42.9 | 40.9 | 32.9 | |||||||||||||||
|
Segment pre-tax income (loss)
|
(14.2 | ) | (35.1 | ) | (52.3 | ) | 5.3 | 7.6 | ||||||||||||
|
Less: Net realized investment gains (losses)
|
(8.4 | ) | (19.0 | ) | (20.7 | ) | 5.2 | 5.8 | ||||||||||||
|
Segment pre-tax operating income (loss)
|
$ | (5.8 | ) | $ | (16.1 | ) | $ | (31.6 | ) | $ | 0.1 | $ | 1.8 | |||||||
Nine
Months Ended September 30, 2009 Compared to the Nine Months
Ended September 30, 2008
Other segment summary of results. Our Other segment
pre-tax loss decreased $20.9 million, or 59.5%, to
$14.2 million from $35.1 million due to a decrease of
$10.6 million in net realized investment losses and a
decrease in segment pre-tax operating loss. Our segment pre-tax
operating loss decreased $10.3 million, or 64.0%, to a loss
of $5.8 million from a loss of $16.1 million primarily
due to an increase in net investment income of $9.5 million
as a result of improved yields driven by income from our
investments in limited partnerships due to increases in their
fair value in 2009 compared to 2008 as a result of improvements
in the equity markets in 2009.
Net investment income. Net investment income is
primarily non-allocated net investment income related to
insurance surplus and corporate assets, including income (loss)
on our investments in limited partnerships (hedge funds and
private equity funds), which were transferred to the holding
company in exchange for equity securities and cash and included
in our Other segment beginning in September 2008. Net
75
Table of Contents
investment income increased $9.5 million to
$18.2 million from $8.7 million. This increase was due
to an $11.8 million positive rate variance as yields more
than doubled to 5.45% from 1.91%. This increase was driven by
income from our investments in limited partnerships due to
increases in their fair value in 2009 compared to 2008, as a
result of improvements in the equity markets in 2009.
Investments in our limited partnerships produced
$1.7 million of investment income in 2009, as compared to
$18.1 million in losses in 2008. This was partially offset
by a negative volume variance of $7.0 million as
non-allocated average invested assets declined to
$380.5 million from $586.6 million.
Net realized investment losses. Net realized
investment losses decreased $10.6 million, or 55.8%, to
$8.4 million from $19.0 million. For the nine months
ended September 30, 2009, gross realized gains were
$2.9 million offset by gross realized losses of
$11.3 million, including impairments of $6.1 million.
For the nine months ended September 30, 2008, gross
realized gains were $23.7 million, including gross equity
gains of $10.2 million, offset by gross realized losses of
$42.7 million, including impairments of $13.4 million
and gross equity losses of $16.4 million.
Twelve
Months Ended December 31, 2008 Compared to the Twelve
Months Ended December 31, 2007
Other segment summary of results. Our Other segment
pre-tax income (loss) decreased $57.6 million to a
$52.3 million loss from a $5.3 million gain due to an
increase of $25.9 million in net realized investment gains
(losses) to a $20.7 million loss from a $5.2 million
gain in 2007. Segment pre-tax operating income (loss) decreased
$31.7 million to a $31.6 million loss from a
$0.1 million gain. This is primarily due to a decrease in
net investment income (loss) of $28.2 million and
additional interest expense incurred in connection with our
$150.0 million CENts offering in the fourth quarter of 2007.
Net investment income. Net investment income
(losses) decreased $28.2 million to a $0.4 million
loss from a $27.8 million gain. This decrease was driven
primarily by a $24.9 million negative rate variance as
yields decreased to (0.08)% from 4.69% primarily due to
$22.5 million in losses on investments in limited
partnerships, and a $3.3 million decrease due to a decrease
in non-allocated average invested assets, to $522.6 million
from $592.2 million.
Net realized investment gains (losses). Net realized
investment gains (losses) decreased by $25.9 million to a
$20.7 million loss from a $5.2 million gain. For the
year ended December 31, 2008, gross realized gains were
$16.2 million, offset by gross realized losses of
$36.9 million, including impairments of $14.3 million
and losses in the fair value of our equities trading portfolio
of $7.0 million. For the year ended December 31, 2007,
gross realized gains were $11.7 million, partially offset
by gross realized losses of $6.5 million, including
impairments of $1.4 million.
Other underwriting and operating expenses. Other
underwriting and operating expenses decreased $6.9 million,
or 33.8%, to $13.5 million from $20.4 million. The
decrease was due to $3.0 million in costs related to our
terminated IPO process during 2007 and a $1.4 million
decrease in depreciation expense as certain significant assets
became fully depreciated.
Interest expense. Interest expense increased
$10.4 million, or 48.4%, to $31.9 million from
$21.5 million. This increase was due to interest expense on
the $150.0 million CENts issued in October 2007.
Twelve
Months Ended December 31, 2007 Compared to the Twelve
Months Year Ended December 31, 2006
Other segment summary of results. Our Other segment
pre-tax income decreased $2.3 million, or 30.3%, to
$5.3 million from $7.6 million. Segment pre-tax
operating income decreased $1.7 million, or 94.4%, to
$0.1 million from $1.8 million. This is primarily due
to increased operating expenses related to our terminated IPO
process in 2007 and increased amortization of information
technology assets as well as additional interest expense
incurred in connection with the $150.0 million CENts issued
in October 2007.
Net investment income. Net investment income
increased $2.5 million, or 9.9%, to $27.8 million from
$25.3 million. This increase was related to a
$56.1 million increase in non-allocated average invested
assets, to $592.2 million at December 31, 2007 from
$536.1 million at December 31, 2006.
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Table of Contents
Other revenues. Other revenues increased
$3.8 million, or 40.4%, to $13.2 million from
$9.4 million, due to increased revenue from our
broker-dealer operations.
Net realized investment gains. Net realized
investment gains decreased by $0.6 million, or 10.3%, to
$5.2 million from $5.8 million. For the year ended
December 31, 2007, gross realized gains were
$11.7 million, partially offset by gross realized losses of
$6.5 million, including impairments of $1.4 million.
For the year ended December 31, 2006, gross realized gains
were $11.5 million, partially offset by gross realized
losses of $5.7 million, including impairments of
$1.6 million.
Other underwriting and operating expenses. Other
underwriting and operating expenses increased $6.3 million,
or 44.7%, to $20.4 million from $14.1 million in 2006.
This increase was primarily due to $3.0 million of
additional operating expenses related to our terminated IPO
process during 2007 and $1.3 million of increased
amortization of information technology assets.
Interest expense. Interest expense increased
$2.4 million, or 12.6%, to $21.5 million from
$19.1 million in 2006. This increase was due to interest
expense on the $150.0 million CENts issued in October 2007.
Investments
Our investment portfolio is structured with the objective of
supporting the expected cash flows of our liabilities and to
produce stable returns over the long term. The composition of
our portfolio reflects our asset management philosophy of
protecting principal and receiving appropriate reward for credit
risk. Our investment portfolio mix as of September 30, 2009
consisted in large part of high quality fixed maturities and
commercial mortgage loans, as well as a smaller allocation of
high yield fixed maturities, marketable equity securities,
investments in limited partnerships (which includes private
equity funds, affordable housing and hedge funds) and other
investments. We believe that prudent levels of investments in
marketable equity securities within our investment portfolio
offer enhanced long-term, after-tax total returns to support our
longest duration liabilities.
The following table presents the composition of our investment
portfolio:
|
As of September 30, |
As of December 31, |
|||||||
| 2009 | 2008 | |||||||
| (Dollars in millions) | ||||||||
|
Types of Investments
|
||||||||
|
Fixed maturities,
available-for-sale:
|
||||||||
|
Public
|
$ | 17,666.4 | $ | 14,255.4 | ||||
|
Private
|
875.9 | 632.2 | ||||||
|
Marketable equity securities,
available-for-sale(1)
|
35.4 | 38.1 | ||||||
|
Marketable equity securities, trading(2)
|
140.6 | 106.3 | ||||||
|
Mortgage loans
|
1,095.2 | 988.7 | ||||||
|
Policy loans
|
73.9 | 75.2 | ||||||
|
Investments in limited partnerships(3)
|
133.4 | 138.3 | ||||||
|
Other invested assets(4)
|
14.4 | 18.3 | ||||||
|
Total
|
$ | 20,035.2 | $ | 16,252.5 | ||||
| (1) | Amount primarily represents nonredeemable preferred stock. | |
| (2) | Amount represents investments in common stock. |
| (3) | As of September 30, 2009 and December 31, 2008, these amounts included $46.6 million and $56.3 million, respectively, of investments in hedge funds and private equity funds carried at fair value. The remaining balance is comprised of investments in affordable housing projects and state tax credit refunds, which are carried at amortized cost. |
| (4) | As of September 30, 2009 and December 31, 2008, these amounts included investments such as a note receivable, warrants, options and short-term investments. |
77
Table of Contents
The increase in invested assets in the first nine months of 2009
is primarily due to portfolio growth generated by fixed deferred
annuity sales of $1.9 billion and a net increase in the
fair value of our fixed maturities driven by credit spreads
tightening. As of September 30, 2009, net unrealized gains
(losses) on our fixed maturities increased $1.8 billion
from a $(1.6) billion loss at December 31, 2008 to a
$0.2 billion gain at September 30, 2009.
Investment
Returns
Return on invested assets is an important element of our
financial results. During the second half of 2008, there were
significant declines and high volatility in equity markets, a
lack of liquidity in the credit markets and a widening of credit
spreads on fixed maturities. During the nine months ended
September 30, 2009, primarily in the second and third
quarter of 2009, the equity markets improved and credit spreads
tightened, which led to an increase in the fair value of our
investment portfolio.
The following tables set forth the income yield and investment
income excluding realized gains (losses) for each major
investment category:
|
Nine Months Ended |
Nine Months Ended |
|||||||||||||||
| September 30, 2009 | September 30, 2008 | |||||||||||||||
| Yield(1) | Amount | Yield(1) | Amount | |||||||||||||
| (Dollars in millions) | ||||||||||||||||
|
Types of Investments
|
||||||||||||||||
|
Fixed maturities,
available-for-sale
|
5.93 | % | $ | 781.4 | 5.81 | % | $ | 691.2 | ||||||||
|
Marketable equity securities,
available-for-sale
|
5.76 | 2.3 | 5.17 | 2.0 | ||||||||||||
|
Marketable equity securities, trading
|
1.61 | 1.9 | 2.18 | 2.1 | ||||||||||||
|
Mortgage loans
|
6.33 | 49.3 | 6.45 | 43.4 | ||||||||||||
|
Policy loans
|
5.91 | 3.3 | 5.88 | 3.4 | ||||||||||||
|
Investments in limited partnerships
|
||||||||||||||||
|
Hedge funds and private equity funds
|
17.87 | 8.6 | (16.72 | ) | (10.8 | ) | ||||||||||
|
Affordable housing(2)
|
(8.65 | ) | (6.9 | ) | (12.40 | ) | (9.1 | ) | ||||||||
|
Other income producing assets(3)
|
1.00 | 4.0 | 3.46 | 10.5 | ||||||||||||
|
Gross investment income before investment expenses
|
5.74 | 843.9 | 5.55 | 732.7 | ||||||||||||
|
Investment expenses
|
(0.10 | ) | (14.5 | ) | (0.11 | ) | (14.7 | ) | ||||||||
|
Net investment income
|
5.64 | % | $ | 829.4 | 5.44 | % | $ | 718.0 | ||||||||
| (1) | Yields are determined based on monthly averages calculated using beginning and end-of-period balances. Yields are based on carrying values except for fixed maturities and equity securities. Yields for fixed maturities are based on amortized cost. Yields for equity securities are based on cost. | |
| (2) | Negative yield from affordable housing investments is offset by positive U.S. federal income tax benefits. | |
| (3) | Includes income from other invested assets, short-term investments and cash and cash equivalents. |
78
Table of Contents
The net investment income yield on our investment portfolio
after investment expenses, excluding realized gains (losses),
was 5.64% and 5.44% as of September 30, 2009 and 2008,
respectively. The increase is primarily due to an increase in
the yield on fixed maturities as we invested the
$1.9 billion of cash generated from 2009 sales of fixed
deferred annuities in higher yielding investments. In addition,
the yield on investments in limited partnerships increased as a
result of an increase in the fair value of our hedge funds and
private equity funds in 2009 as compared to declines in the fair
value for the same period in 2008.
|
Year |
Year |
Year |
||||||||||||||||||||||
|
Ended December 31, |
Ended December 31, |
Ended December 31, |
||||||||||||||||||||||
| 2008 | 2007 | 2006 | ||||||||||||||||||||||
| Yield(1) | Amount | Yield(1) | Amount | Yield(1) | Amount | |||||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||||||
|
Types of Investments
|
||||||||||||||||||||||||
|
Fixed maturities,
available-for-sale
|
5.82 | % | $ | 930.7 | 5.74 | % | $ | 911.4 | 5.61 | % | $ | 930.3 | ||||||||||||
|
Marketable equity securities,
available-for-sale
|
6.44 | 3.4 | 3.79 | 5.8 | 4.14 | 6.8 | ||||||||||||||||||
|
Marketable equity securities, trading
|
2.06 | 2.7 | — | — | — | — | ||||||||||||||||||
|
Mortgage loans
|
6.49 | 59.4 | 6.18 | 50.0 | 6.12 | 48.8 | ||||||||||||||||||
|
Policy loans
|
5.89 | 4.5 | 6.07 | 4.7 | 6.07 | 4.9 | ||||||||||||||||||
|
Investments in limited partnerships
|
||||||||||||||||||||||||
|
Hedge funds and private equity funds
|
(28.98 | ) | (24.4 | ) | 9.39 | 7.0 | 8.48 | 4.7 | ||||||||||||||||
|
Affordable housing(2)
|
(12.24 | ) | (12.0 | ) | (8.81 | ) | (7.0 | ) | — | — | ||||||||||||||
|
Other income producing assets(3)
|
2.69 | 11.5 | 6.27 | 20.9 | 4.82 | 13.4 | ||||||||||||||||||
|
Gross investment income before investment expenses
|
5.49 | 975.8 | 5.71 | 992.8 | 5.61 | 1,008.9 | ||||||||||||||||||
|
Investment expenses
|
(0.11 | ) | (19.3 | ) | (0.11 | ) | (19.2 | ) | (0.13 | ) | (24.0 | ) | ||||||||||||
|
Net investment income
|
5.38 | % | $ | 956.5 | 5.60 | % | $ | 973.6 | 5.48 | % | $ | 984.9 | ||||||||||||
| (1) | Yields are determined based on monthly averages calculated using beginning and end-of-period balances. Yields are based on carrying values except for fixed maturities and equity securities. Yields for fixed maturities are based on amortized cost. Yields for equity securities are based on cost. | |
| (2) | Negative yield from affordable housing investments is offset by positive U.S. federal income tax benefits. | |
| (3) | Includes income from other invested assets, short-term investments and cash and cash equivalents. |
The decrease in our net investment yield from 5.60% in 2007 to
5.38% in 2008 is primarily due to declines in the fair value of
hedge funds and private equity funds. This decrease is mainly a
result of equity market declines and volatility in the latter
part of 2008. Yields of our fixed maturities grew due to sales
of fixed maturities in the latter part of 2008 and re-investment
opportunities at higher yields.
79
Table of Contents
The following table sets forth the detail of our net realized
gains (losses) before taxes. As the following table indicates,
our gross gains on trading securities significantly increased
and gross losses on trading securities significantly decreased
in the nine months ended September 30, 2009 as compared to
2008 as a result of improved market conditions. The gross
realized gains on sales during 2008 are the result of sales from
our equity security trading portfolio and portfolio management
activity that resulted in lengthening the duration of our fixed
maturities in our Income Annuities investment portfolio.
| Nine Months Ended September 30, | Year Ended December 31, | |||||||||||||||||||
| 2009 | 2008 | 2008 | 2007 | 2006 | ||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||
|
Gross realized gains on sales:
|
||||||||||||||||||||
|
Fixed maturities
|
$ | 17.0 | $ | 10.2 | $ | 10.3 | $ | 37.1 | $ | 26.8 | ||||||||||
|
Marketable equity securities,
available-for-sale
|
— | — | — | 14.4 | 18.3 | |||||||||||||||
|
Marketable equity securities, trading
|
2.3 | 14.6 | 14.8 | — | — | |||||||||||||||
|
Total gross realized gains on sales
|
19.3 | 24.8 | 25.1 | 51.5 | 45.1 | |||||||||||||||
|
Gross realized losses on sales:
|
||||||||||||||||||||
|
Fixed maturities
|
(14.9 | ) | (6.1 | ) | (7.0 | ) | (15.1 | ) | (18.4 | ) | ||||||||||
|
Marketable equity securities,
available-for-sale
|
— | — | — | (3.5 | ) | (1.4 | ) | |||||||||||||
|
Marketable equity securities, trading
|
(5.3 | ) | (5.6 | ) | (8.5 | ) | — | — | ||||||||||||
|
Total gross realized losses on sales
|
(20.2 | ) | (11.7 | ) | (15.5 | ) | (18.6 | ) | (19.8 | ) | ||||||||||
|
Impairments:
|
||||||||||||||||||||
|
Public fixed maturity securities(1)
|
(42.6 | ) | (25.9 | ) | (31.9 | ) | — | (8.9 | ) | |||||||||||
|
Private fixed maturity securities
|
(4.9 | ) | (3.7 | ) | (7.5 | ) | (0.7 | ) | — | |||||||||||
|
Total credit-related
|
(47.5 | ) | (29.6 | ) | (39.4 | ) | (0.7 | ) | (8.9 | ) | ||||||||||
|
Other(2)
|
(26.2 | ) | (32.1 | ) | (47.0 | ) | (15.5 | ) | (16.8 | ) | ||||||||||
|
Total impairments
|
(73.7 | ) | (61.7 | ) | (86.4 | ) | (16.2 | ) | (25.7 | ) | ||||||||||
|
Gains (losses) on trading securities(3):
|
||||||||||||||||||||
|
Gross gains
|
36.5 | 12.2 | 3.6 | — | — | |||||||||||||||
|
Gross losses
|
(7.9 | ) | (52.4 | ) | (72.8 | ) | — | — | ||||||||||||
|
Total net gains (losses) on trading securities
|
28.6 | (40.2 | ) | (69.2 | ) | — | — | |||||||||||||
|
Other net investment gains (losses)(4):
|
||||||||||||||||||||
|
Other gross gains
|
26.6 | 5.3 | 15.0 | 11.6 | 11.3 | |||||||||||||||
|
Other gross losses
|
(9.6 | ) | (19.8 | ) | (27.0 | ) | (11.5 | ) | (9.2 | ) | ||||||||||
|
Net realized gains (losses) before taxes
|
$ | (29.0 | ) | $ | (103.3 | ) | $ | (158.0 | ) | $ | 16.8 | $ | 1.7 | |||||||
| (1) | Public fixed maturities includes publicly traded securities and highly marketable private placements for which there is an actively traded market. | |
| (2) | As a result of new accounting guidance, beginning January 1, 2009, “other” includes only those impairments for which the Company had the intent to sell the security prior to recovery. Prior to January 1, 2009, under accounting guidance in effect at that time, “other” also included impairments where we did not have the intent and ability to hold the security to recovery. | |
| (3) | As of January 1, 2008, changes in fair value related to certain marketable equity securities are recognized in net realized gains (losses) due to the election of the fair value option. | |
| (4) | Primarily consists of changes in fair value on derivatives instruments, the impact on DAC and deferred sales inducements and gains (losses) on calls and redemptions. |
80
Table of Contents
Impairments for the nine months ended September 30, 2009
were $73.7 million, of which 64.5% were related to credit
concerns of the issuer and 35.5% were due to our intent to sell
the security. We implemented new accounting guidance for
impairments on January 1, 2009 (see
“— Critical Accounting Policies and Estimates and
Recently Issued Accounting Standards”). Credit-related
impairments increased by $17.9 million for the nine months
ended September 30, 2009, compared to the same period last
year, primarily as a result of increased credit concerns,
especially related to issuers of securities in our high yield
portfolio. The amount recognized as credit-related impairments
is determined by management as the difference between a
security’s estimated recovery value and the amortized cost
of the security.
The following table summarizes our five largest aggregate losses
from impairments and remaining holdings, if any, by each
issuer’s industry for the nine months ended
September 30, 2009, which represent $33.8 million, or
45.9%, of total impairments during this period.
|
Nine Months |
||||||||||||
|
Ended |
As of September 30, 2009 | |||||||||||
| September 30, 2009 |
Cost or Amortized |
Fair |
||||||||||
|
Industry
|
Impairment | Cost(1) | Value | |||||||||
| (Dollars in millions) | ||||||||||||
|
Other diversified financial services (public)
|
$ | (14.4 | ) | $ | 20.1 | $ | 18.1 | |||||
|
Publishing (public)
|
(6.7 | ) | — | — | ||||||||
|
Consumer finance (public)
|
(4.3 | ) | 90.6 | 64.1 | ||||||||
|
Broadcast and cable T.V. (public)
|
(4.3 | ) | — | — | ||||||||
|
Specialty chemicals (public)
|
(4.1 | ) | — | — | ||||||||
|
Totals
|
$ | (33.8 | ) | $ | 110.7 | $ | 82.2 | |||||
| (1) | As of September 30, 2009, the cost or amortized cost represents our estimated recovery value, based on our discounted cash flow analysis. |
For the consumer finance industry issuer identified above, we
had $3.6 million in losses on the partial disposition of
our holdings. The remaining holdings primarily represent
non-agency, prime residential mortgage-backed securities, the
amortized cost of which we believe is recoverable.
Impairments for the year ended December 31, 2008 were
$86.4 million, of which 45.6% were related to credit
concerns about the issuer. Impairments increased by
$70.2 million from 2007 to 2008, primarily due to credit
issues, including bankruptcies and corporate security defaults,
and our belief that certain investment declines were
other-than-temporary.
The following table summarizes our five largest aggregate losses
on impairments and remaining holdings, if any, by each
issuer’s industry for the year ended December 31,
2008, which represent $40.6 million, or 47.0%, of the total
impairments during this period. We had no significant losses on
dispositions during this period.
|
Year Ended |
As of December 31, 2008 | |||||||||||
| December 31, 2008 |
Cost or Amortized |
Fair |
||||||||||
|
Industry
|
Impairment | Cost | Value | |||||||||
| (Dollars in millions) | ||||||||||||
|
Paper products (public)
|
$ | (9.6 | ) | $ | 1.1 | $ | 1.1 | |||||
|
FNMA (public)
|
(8.0 | ) | 0.4 | 0.1 | ||||||||
|
Other diversified financial services (public)
|
(7.8 | ) | 6.7 | 4.6 | ||||||||
|
Commercial printing (public)
|
(7.8 | ) | 0.2 | 0.2 | ||||||||
|
Specialized finance (public)
|
(7.4 | ) | 7.0 | 5.1 | ||||||||
|
Totals
|
$ | (40.6 | ) | $ | 15.4 | $ | 11.1 | |||||
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Table of Contents
Fixed
Maturity Securities
Fixed maturities consist principally of publicly traded and
privately placed debt securities, and represented 92.5% and
91.6% of invested assets as of September 30, 2009 and
December 31, 2008, respectively.
The fair value of publicly traded and privately placed fixed
maturities represented 95.3% and 4.7%, respectively, of total
fixed maturities as of September 30, 2009. We invest in
privately placed fixed maturities in an attempt to enhance the
overall value of the portfolio, increase diversification and
obtain higher yields than can ordinarily be obtained with
comparable public market securities.
Fixed
Maturity Securities Credit Quality
The Securities Valuation Office, or SVO, of the NAIC, evaluates
the investments of insurers for regulatory reporting purposes
and assigns fixed maturities to one of the six categories called
“NAIC Designations.” NAIC designations of
“1” or “2” include fixed maturities
considered investment grade, which include securities rated BBB-
or higher by Standard & Poor’s. NAIC designations
of “3” through “6” are referred to as below
investment grade, which include securities rated BB+ or lower by
Standard & Poor’s. As a result of time lags
between the funding of investments, the finalization of legal
documents and the completion of the SVO filing process, the
fixed maturities portfolio generally includes securities that
have not yet been rated by the SVO as of each balance sheet
date. Pending receipt of SVO ratings, the categorization of
these securities by NAIC designation is based on the expected
ratings indicated by internal analysis.
The following table presents our fixed maturities by NAIC
designation and S&P equivalent credit ratings as well as
the percentage, based upon fair value, that each designation
comprises:
| As of September 30, 2009 | As of December 31, 2008 | |||||||||||||||||||||||||
|
Amortized |
Fair |
% of Total |
Amortized |
Fair |
% of Total |
|||||||||||||||||||||
|
NAIC
|
S&P Equivalent
|
Cost | Value | Fair Value | Cost | Value | Fair Value | |||||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||||||||
|
1
|
AAA, AA, A | $ | 10,509.2 | $ | 10,817.9 | 58.4 | % | $ | 9,028.3 | $ | 8,566.3 | 57.5 | % | |||||||||||||
|
2
|
BBB | 6,374.5 | 6,454.5 | 34.8 | 6,385.1 | 5,553.8 | 37.3 | |||||||||||||||||||
| Total investment grade | 16,883.7 | 17,272.4 | 93.2 | 15,413.4 | 14,120.1 | 94.8 | ||||||||||||||||||||
|
3
|
BB | 812.9 | 709.6 | 3.8 | 639.3 | 475.6 | 3.2 | |||||||||||||||||||
|
4
|
B | 348.2 | 292.8 | 1.6 | 313.1 | 216.1 | 1.5 | |||||||||||||||||||
|
5
|
CCC & lower | 256.7 | 206.8 | 1.1 | 158.6 | 73.1 | 0.5 | |||||||||||||||||||
|
6
|
In or near default | 79.7 | 60.7 | 0.3 | 4.0 | 2.7 | 0.0 | |||||||||||||||||||
| Total below investment grade | 1,497.5 | 1,269.9 | 6.8 | 1,115.0 | 767.5 | 5.2 | ||||||||||||||||||||
|
Total
|
$ | 18,381.2 | $ | 18,542.3 | 100.0 | % | $ | 16,528.4 | $ | 14,887.6 | 100.0 | % | ||||||||||||||
As of September 30, 2009 securities with an amortized cost
and fair value of $829.9 million and $850.9 million,
respectively, have no rating from a nationally recognized
securities rating agency. We derived the equivalent S&P
credit quality rating for these securities based on the
securities’ NAIC rating designation.
Below investment grade securities comprised 6.8% and 5.2% of our
fixed maturities portfolio, respectively, as of
September 30, 2009 and December 31, 2008. Most of
these securities were purchased while classified as below
investment grade, as high yield investments. At
September 30, 2009, our below investment grade securities
primarily consisted of corporate securities and residential
mortgage-backed securities (RMBS), which represented 79.6% and
16.9%, respectively, of the fair value of below investment grade
fixed maturities. At December 31, 2008, 97% of the fair
value of our below investment grade securities were corporate
securities.
As of September 30, 2009 and December 31, 2008, the
gross unrealized losses on these securities were
$252.5 million and $352.0 million, respectively, which
included $80.0 million of non-credit related OTTI
82
Table of Contents
recorded in other comprehensive income (OCI) as of
September 30, 2009. As of September 30, 2009,
$167.8 million, or 66.5%, of the gross unrealized losses
were related to corporate securities and $60.7 million, or
24.0%, were related to RMBS. Of the $60.7 million gross
unrealized losses on RMBS, $36.5 million was non-credit
related OTTI recorded through OCI. As of December 31, 2008,
the gross unrealized losses were primarily related to corporate
securities. For the nine months ended September 30, 2009,
we recorded $72.6 million of OTTI in net realized
investment losses related to below investment grade fixed
maturities based on their rating as of September 30, 2009,
of which $56.8 million and $12.1 million were related
to corporate securities and RMBS, respectively. For the year
ended December 31, 2008, we recorded $73.7 million of
OTTI in net realized investment losses related to below
investment grade securities based on their ratings as of
December 31, 2008, of which $65.7 million was related
to corporate securities and no impairments related to RMBS.
We monitor our investments for indicators of possible
credit-related impairments, with a focus on securities that
represent a significant risk of impairment, namely securities
for which the fair value has declined below amortized cost by
20% or more for a period of six months or more or for which we
have concerns about the creditworthiness of the issuer based on
qualitative information. When evaluating a security for possible
impairment, we consider, among other factors, its rating and
evaluate whether the issuer’s circumstances have changed
significantly since acquisition. For each security where
circumstances have changed, we review our current best estimate
of the underlying cash flows relative to our initial estimates
and the amounts necessary for a full recovery of our basis in
the investment. Based on the analyses, an impairment is recorded
if the investment is not deemed recoverable. For securities
where we recorded a credit-related OTTI, the amortized cost as
of September 30, 2009 in the table above represents
management’s estimated recovery value, based on our best
estimate of discounted cash flows for the security. Prior to
2009, securities we recorded as OTTI were written down to their
fair value, which became the security’s amortized cost on
the date of impairment. (See “— Critical
Accounting Policies and Estimates and Recently Issued Accounting
Standards” for a detailed discussion of our impairment
analysis accounting policy and process.) As of
September 30, 2009, we did not have the intent to sell
these securities or consider it more likely than not that we
would be required to sell the securities prior to recovery of
their amortized costs. Furthermore, based upon our cash flow
modeling and the expected continuation of contractually required
principal and interest payments, we considered these securities
to be temporarily impaired as of September 30, 2009.
We had securities with an NAIC 6 designation with the total fair
value of $60.7 million as of September 30, 2009, which
included net unrealized losses of $19.0 million. Of these
unrealized losses, $12.1 million, or 63.7%, was from a
single issuer. This issuer is current on its contractual
payments and our analysis of the underlying credit and
management’s best estimates of discounted future cash flows
support the recoverability of the amortized cost.
Certain of our fixed maturities are supported by guarantees from
monoline bond insurers. As of September 30, 2009, fixed
maturities with monoline guarantees had an amortized cost of
$600.2 million and a fair value of $562.1 million,
with gross unrealized losses of $46.4 million. As of
December 31, 2008, fixed maturities with monoline
guarantees had an amortized cost of $602.4 million and a
fair value of $511.4 million, with gross unrealized losses
of $98.8 million. The majority of these securities were
municipal bonds. Of the monoline bond insurers, MBIA represented
the highest concentration, guaranteeing 63.7% and 40.7% of the
fair value at September 30, 2009 and December 31,
2008, respectively. The credit ratings of our fixed maturities
set forth in the table above reflect, where applicable, the
guarantees provided by monoline bond insurers. The credit
ratings of the monoline bond insurers, including MBIA, have
declined over the last two years. Any further decline may lead
to declines in the ratings of certain of our fixed maturities.
As of September 30, 2009, 92.9% of the fixed maturities
supported by guarantees from monoline bond insurers had
investment grade credit ratings, and the overall credit quality
of these securities was an NAIC 2 designation, the S&P
equivalent credit rating of BBB. Excluding the benefits of
monoline insurance, the overall credit quality of these
securities remains an NAIC 2 designation. For municipal
bonds, which comprised 69.1% of fixed maturities supported by
monoline guarantees as of September 30, 2009, the overall
credit quality of these securities was an NAIC 1
designation, the S&P equivalent credit rating of AAA, AA or
A. Excluding the benefits of monoline insurance, the overall
credit quality of these securities remains an NAIC 1
designation.
83
Table of Contents
Fixed
Maturity Securities and Unrealized Losses by Duration
The following table sets forth unrealized losses by the length
of time for which the underlying
available-for-sale
security has been in an unrealized loss position for consecutive
months.
|
As of September 30, |
As of December 31, |
|||||||||||||||
| 2009 | 2008 | |||||||||||||||
|
Gross |
Gross |
|||||||||||||||
|
Unrealized |
Unrealized |
|||||||||||||||
| Losses | % of Total | Losses | % of Total | |||||||||||||
| (Dollars in millions) | ||||||||||||||||
|
6-months or less:
|
||||||||||||||||
|
Less than 20%
|
$ | 7.9 | 1.2 | % | $ | 136.4 | 7.3 | % | ||||||||
|
20% or more
|
3.8 | 0.6 | 113.6 | 6.1 | ||||||||||||
| 11.7 | 1.8 | 250.0 | 13.4 | |||||||||||||
|
More than
6-months:
|
||||||||||||||||
|
Less than 20%
|
341.6 | 53.4 | 555.6 | 30.0 | ||||||||||||
|
20% or more
|
286.9 | 44.8 | 1,051.7 | 56.6 | ||||||||||||
| 628.5 | 98.2 | 1,607.3 | 86.6 | |||||||||||||
|
Total
|
$ | 640.2 | 100.0 | % | $ | 1,857.3 | 100.0 | % | ||||||||
As of September 30, 2009, $83.2 million of the total
gross unrealized losses are related to the
“non-credit” portion of OTTI (see
“— Critical Accounting Policies and Estimates and
Recently Issued Accounting Standards” for a detailed
discussion of our impairment policy). We have not recognized the
gross unrealized losses as OTTI, as each security is current on
its contractual payments and our analysis of the underlying
credit and management’s best estimate of discounted cash
flows supported the recovery of the amortized cost of the
security. We believe the recoverable value of these investments
based on expected future cash flows is greater than or equal to
the amortized cost, we do not have the intent to sell the
security and it is more likely than not that we will not be
required to sell the security before recovery of amortized cost.
While the declines in fair value were mainly due to credit
spread widening and increased liquidity discounts, primarily
related to our securities with maturities due after ten years,
the economic environment has shown signs of recovery during the
second and third quarter of 2009.
84
Table of Contents
Fixed
Maturity Securities and Unrealized Gains and Losses by Security
Sector
The following table sets forth the fair value of our fixed
maturities by sector, as well as the associated gross unrealized
gains and losses and the percentage of the total fixed
maturities each sector comprises of the total as of the dates
indicated:
| As of September 30, 2009 | ||||||||||||||||||||||||
|
Other-than- |
||||||||||||||||||||||||
|
Cost or |
Gross |
Gross |
% of |
Temporary |
||||||||||||||||||||
|
Amortized |
Unrealized |
Unrealized |
Fair |
Total Fair |
Impairments |
|||||||||||||||||||
| Cost | Gains | Losses | Value | Value | in AOCI(1) | |||||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||||||
|
Security Sector
|
||||||||||||||||||||||||
|
Corporate Securities:
|
||||||||||||||||||||||||
|
Consumer discretionary
|
$ | 1,096.2 | $ | 43.6 | $ | (38.8 | ) | $ | 1,101.0 | 5.9 | % | $ | (9.0 | ) | ||||||||||
|
Consumer staples
|
1,735.4 | 111.3 | (13.9 | ) | 1,832.8 | 9.9 | (1.4 | ) | ||||||||||||||||
|
Energy
|
642.5 | 30.7 | (6.7 | ) | 666.5 | 3.6 | (0.6 | ) | ||||||||||||||||
|
Financials
|
2,121.9 | 40.1 | (204.5 | ) | 1,957.5 | 10.6 | (8.0 | ) | ||||||||||||||||
|
Health care
|
856.9 | 74.7 | (3.7 | ) | 927.9 | 5.0 | (1.9 | ) | ||||||||||||||||
|
Industrials
|
1,993.9 | 127.2 | (23.7 | ) | 2,097.4 | 11.3 | (1.4 | ) | ||||||||||||||||
|
Information technology
|
343.0 | 31.8 | (0.1 | ) | 374.7 | 2.0 | — | |||||||||||||||||
|
Materials
|
1,018.3 | 36.5 | (57.1 | ) | 997.7 | 5.4 | (12.8 | ) | ||||||||||||||||
|
Telecommunication services
|
596.1 | 26.0 | (15.0 | ) | 607.1 | 3.3 | (1.1 | ) | ||||||||||||||||
|
Utilities
|
1,819.4 | 74.6 | (51.1 | ) | 1,842.9 | 9.9 | (0.5 | ) | ||||||||||||||||
|
Other
|
8.0 | 0.5 | — | 8.5 | — | — | ||||||||||||||||||
|
Total corporate securities
|
12,231.6 | 597.0 | (414.6 | ) | 12,414.0 | 66.9 | (36.7 | ) | ||||||||||||||||
|
U.S. government and agencies
|
42.4 | 3.3 | — | 45.7 | 0.2 | (0.1 | ) | |||||||||||||||||
|
State and political subdivisions
|
518.7 | 3.9 | (37.7 | ) | 484.9 | 2.6 | (1.8 | ) | ||||||||||||||||
|
Foreign governments
|
26.9 | 1.3 | — | 28.2 | 0.2 | — | ||||||||||||||||||
|
Residential mortgage-backed securities:
|
||||||||||||||||||||||||
|
Agency
|
2,878.3 | 131.5 | (0.6 | ) | 3,009.2 | 16.3 | — | |||||||||||||||||
|
Non-agency:
|
||||||||||||||||||||||||
|
Prime
|
472.7 | 0.4 | (77.9 | ) | 395.2 | 2.1 | (28.2 | ) | ||||||||||||||||
|
Alt-A
|
155.0 | 0.1 | (23.2 | ) | 131.9 | 0.7 | (8.3 | ) | ||||||||||||||||
|
Subprime
|
0.3 | — | — | 0.3 | — | — | ||||||||||||||||||
|
Total residential mortgage-backed securities
|
3,506.3 | 132.0 | (101.7 | ) | 3,536.6 | 19.1 | (36.5 | ) | ||||||||||||||||
|
Commercial mortgage-backed securities
|
1,883.7 | 54.6 | (64.9 | ) | 1,873.4 | 10.1 | (0.1 | ) | ||||||||||||||||
|
Other debt obligations
|
171.6 | 9.2 | (21.3 | ) | 159.5 | 0.9 | (8.0 | ) | ||||||||||||||||
|
Total
|
$ | 18,381.2 | $ | 801.3 | $ | (640.2 | ) | $ | 18,542.3 | 100.0 | % | $ | (83.2 | ) | ||||||||||
| (1) | Effective January 1, 2009, we prospectively adopted new Other-Than-Temporary-Impairment (OTTI) accounting guidance, which changed the recognition and measurement of OTTI for debt securities. See “— Critical Accounting Policies and Estimates and Recently Issued Accounting Standards.” |
During the nine months ended September 30, 2009 we
increased our investments in corporate securities with cash
generated from sales, primarily fixed deferred annuities. We
have purchased new issues of investment grade corporate
securities with a focus on increasing yield while retaining
quality.
85
Table of Contents
Our fixed maturities holdings are diversified by industry and
issuer. The portfolio does not have significant exposure to any
single issuer. As of September 30, 2009 and
December 31, 2008 the fair value of our combined corporate
securities holdings in the ten issuers in which we had the
greatest exposure was $1,128.4 million and
$901.5 million, or approximately 9.1% and 9.7% of our
corporate securities investments, respectively. Our exposure to
the largest single issuer of corporate securities held at fair
value as of September 30, 2009 and December 31, 2008
was $155.5 million and $149.4 million, which was 1.3%
and 1.6% of our corporate securities investments, respectively.
The following table sets forth the fair value of our fixed
maturities by sector as of December 31, 2008:
| As of December 31, 2008 | ||||||||||||||||||||
|
Cost or |
Gross |
Gross |
% of |
|||||||||||||||||
|
Amortized |
Unrealized |
Unrealized |
Fair |
Total Fair |
||||||||||||||||
| Cost | Gains | Losses | Value | Value | ||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||
|
Security Sector
|
||||||||||||||||||||
|
Corporate Securities:
|
||||||||||||||||||||
|
Consumer discretionary
|
$ | 891.5 | $ | 2.0 | $ | (153.6 | ) | $ | 739.9 | 5.0 | % | |||||||||
|
Consumer staples
|
1,533.2 | 16.6 | (111.7 | ) | 1,438.1 | 9.7 | ||||||||||||||
|
Energy
|
414.5 | 9.9 | (43.1 | ) | 381.3 | 2.6 | ||||||||||||||
|
Financials
|
2,040.7 | 7.1 | (403.8 | ) | 1,644.0 | 11.0 | ||||||||||||||
|
Health care
|
548.8 | 17.1 | (22.0 | ) | 543.9 | 3.6 | ||||||||||||||
|
Industrials
|
1,523.7 | 16.6 | (136.9 | ) | 1,403.4 | 9.4 | ||||||||||||||
|
Information technology
|
300.6 | 1.3 | (31.8 | ) | 270.1 | 1.8 | ||||||||||||||
|
Materials
|
834.6 | 3.7 | (152.7 | ) | 685.6 | 4.6 | ||||||||||||||
|
Telecommunication services
|
619.7 | 5.2 | (103.5 | ) | 521.4 | 3.5 | ||||||||||||||
|
Utilities
|
1,829.9 | 23.7 | (203.0 | ) | 1,650.6 | 11.1 | ||||||||||||||
|
Other
|
26.9 | 1.9 | (0.6 | ) | 28.2 | 0.2 | ||||||||||||||
|
Total corporate securities
|
10,564.1 | 105.1 | (1,362.7 | ) | 9,306.5 | 62.5 | ||||||||||||||
|
U.S. government and agencies
|
155.5 | 5.2 | (3.9 | ) | 156.8 | 1.1 | ||||||||||||||
|
State and political subdivisions
|
488.8 | 0.9 | (64.8 | ) | 424.9 | 2.8 | ||||||||||||||
|
Foreign governments
|
31.4 | 3.2 | — | 34.6 | 0.2 | |||||||||||||||
|
Residential mortgage-backed securities:
|
||||||||||||||||||||
|
Agency
|
2,412.5 | 84.4 | (0.2 | ) | 2,496.7 | 16.8 | ||||||||||||||
|
Non-agency:
|
||||||||||||||||||||
|
Prime
|
570.9 | 0.2 | (97.8 | ) | 473.3 | 3.2 | ||||||||||||||
|
Alt-A
|
191.8 | — | (36.3 | ) | 155.5 | 1.0 | ||||||||||||||
|
Subprime
|
0.9 | — | (0.1 | ) | 0.8 | 0.0 | ||||||||||||||
|
Total residential mortgage-backed securities
|
3,176.1 | 84.6 | (134.4 | ) | 3,126.3 | 21.0 | ||||||||||||||
|
Commercial mortgage-backed securities
|
1,912.7 | 17.5 | (255.2 | ) | 1,675.0 | 11.3 | ||||||||||||||
|
Other debt obligations
|
199.8 | — | (36.3 | ) | 163.5 | 1.1 | ||||||||||||||
|
Total
|
$ | 16,528.4 | $ | 216.5 | $ | (1,857.3 | ) | $ | 14,887.6 | 100.0 | % | |||||||||
86
Table of Contents
Fixed
Maturity Securities by Contractual Maturity Date
The following table sets forth the amortized cost and fair value
of our fixed maturities by contractual maturity dates as of the
dates indicated:
| As of September 30, 2009 | As of December 31, 2008 | |||||||||||||||
|
Years to Maturity
|
Amortized Cost | Fair Value | Amortized Cost | Fair Value | ||||||||||||
| (Dollars in millions) | ||||||||||||||||
|
Due in one year or less
|
$ | 430.2 | $ | 435.2 | $ | 384.9 | $ | 379.4 | ||||||||
|
Due after one year through five years
|
2,941.9 | 3,046.0 | 2,573.2 | 2,382.7 | ||||||||||||
|
Due after five years through ten years
|
4,259.7 | 4,445.9 | 2,967.4 | 2,609.9 | ||||||||||||
|
Due after ten years
|
5,187.8 | 5,045.7 | 5,314.3 | 4,550.8 | ||||||||||||
|
Residential mortgage-backed securities
|
3,506.3 | 3,536.6 | 3,176.1 | 3,126.3 | ||||||||||||
|
Commercial mortgage-backed securities
|
1,883.7 | 1,873.4 | 1,912.7 | 1,675.0 | ||||||||||||
|
Other debt obligations(1)
|
171.6 | 159.5 | 199.8 | 163.5 | ||||||||||||
|
Total
|
$ | 18,381.2 | $ | 18,542.3 | $ | 16,528.4 | $ | 14,887.6 | ||||||||
| (1) | Other debt obligations includes $41.4 million and $30.5 million of amortized cost and fair value, respectively, of collateralized debt obligations at September 30, 2009. At December 31, 2008, collateralized debt obligations were recorded in the ten years or greater category, with an amortized cost and fair value of $20.1 million and $6.3 million, respectively. |
A large portion of our portfolio is due after ten years. Fixed
maturities in this maturity category primarily back our long
duration reserves in our Income Annuities segment, which can
exceed a period of 30 years. The majority of the unrealized
losses on our investment portfolio as of September 30, 2009
and December 31, 2008 related to these longer duration
assets, which are more sensitive to interest rate fluctuations
and credit spreads.
Residential
Mortgage-Backed Securities (RMBS)
We purchase RMBS to diversify the portfolio risk from primarily
corporate credit risk to a mix of credit and cash flow risk. We
classify our investments in RMBS as agency, prime, Alt-A and
subprime. Agency RMBS are guaranteed or otherwise supported by
the Federal National Mortgage Association, the Federal Home Loan
Mortgage Corporation or the Government National Mortgage
Association. Prime RMBS are loans to the most credit-worthy
customers with high quality credit profiles.
The following table sets forth the fair value of the
Company’s investment in agency, prime, Alt-A and subprime
RMBS and the percentage of total invested assets they represent:
| As of September 30, 2009 | As of December 31, 2008 | |||||||||||||||
|
% of Total |
% of Total |
|||||||||||||||
| Fair Value | Invested Assets | Fair Value | Invested Assets | |||||||||||||
| (Dollars in millions) | ||||||||||||||||
|
Agency
|
$ | 3,009.2 | 15.0 | % | $ | 2,496.7 | 15.4 | % | ||||||||
|
Non-agency:
|
||||||||||||||||
|
Prime
|
395.2 | 2.0 | 473.3 | 2.9 | ||||||||||||
|
Alt-A
|
131.9 | 0.6 | 155.5 | 1.0 | ||||||||||||
|
Subprime
|
0.3 | — | 0.8 | — | ||||||||||||
|
Subtotal non-agency
|
527.4 | 2.6 | 629.6 | 3.9 | ||||||||||||
|
Total
|
$ | 3,536.6 | 17.6 | % | $ | 3,126.3 | 19.3 | % | ||||||||
The majority of our RMBS investments are AAA rated. As of
September 30, 2009, agency represented 85.1% of our RMBS
holdings and we had nominal investments in subprime securities.
We classified $131.9 million of securities as Alt-A because
we viewed each security to have overall collateral
87
Table of Contents
credit quality between prime and subprime, based on a review of
the characteristics of their underlying mortgage loan pools,
such as credit scores and financial ratios. Of the total Alt-A
securities, $76.6 million, or 58.1%, had an S&P
equivalent credit rating of AAA as of September 30, 2009.
The following table sets forth the amortized cost of our
non-agency RMBS by credit quality and year of origination
(vintage). There were eight securities totaling
$102.5 million that were rated below investment grade by
Moody’s, S&P or Fitch, while the others rated them
investment grade.
| As of September 30, 2009 | ||||||||||||||||||||||||||||
| Highest Rating Agency Rating | ||||||||||||||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||||||||||
|
Total |
As of |
|||||||||||||||||||||||||||
|
BB and |
Amortized |
December 31, |
||||||||||||||||||||||||||
|
Vintage
|
AAA | AA | A | BBB | Below | Cost | 2008 | |||||||||||||||||||||
|
2009
|
$ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||
|
2008
|
— | — | — | — | — | — | — | |||||||||||||||||||||
|
2007
|
17.4 | — | — | — | 83.7 | 101.1 | 137.0 | |||||||||||||||||||||
|
2006
|
0.6 | 6.5 | 22.4 | 33.0 | 126.6 | 189.1 | 269.3 | |||||||||||||||||||||
|
2005
|
12.9 | 10.8 | 24.6 | 68.3 | — | 116.6 | 126.4 | |||||||||||||||||||||
|
2004 & prior
|
220.5 | — | — | — | 0.7 | 221.2 | 230.9 | |||||||||||||||||||||
|
Total
|
$ | 251.4 | $ | 17.3 | $ | 47.0 | $ | 101.3 | $ | 211.0 | $ | 628.0 | $ | 763.6 | ||||||||||||||
|
% of cost
|
40.0 | % | 2.8 | % | 7.5 | % | 16.1 | % | 33.6 | % | 100.0 | % | ||||||||||||||||
The following table sets forth the fair value of our non-agency
RMBS by credit quality and year of origination (vintage):
| As of September 30, 2009 | ||||||||||||||||||||||||||||
| Highest Rating Agency Rating | ||||||||||||||||||||||||||||
| (Dollars in millions) |
As of |
|||||||||||||||||||||||||||
|
BB and |
Total Fair |
December 31, |
||||||||||||||||||||||||||
|
Vintage
|
AAA | AA | A | BBB | Below | Value | 2008 | |||||||||||||||||||||
|
2009
|
$ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||
|
2008
|
— | — | — | — | — | — | — | |||||||||||||||||||||
|
2007
|
14.9 | — | — | — | 72.1 | 87.0 | 116.7 | |||||||||||||||||||||
|
2006
|
0.6 | 6.2 | 21.5 | 29.5 | 92.9 | 150.7 | 220.3 | |||||||||||||||||||||
|
2005
|
8.1 | 10.4 | 18.6 | 52.1 | — | 89.2 | 98.5 | |||||||||||||||||||||
|
2004 & prior
|
199.8 | — | — | — | 0.7 | 200.5 | 194.1 | |||||||||||||||||||||
|
Total
|
$ | 223.4 | $ | 16.6 | $ | 40.1 | $ | 81.6 | $ | 165.7 | $ | 527.4 | $ | 629.6 | ||||||||||||||
|
% of fair value
|
42.4 | % | 3.1 | % | 7.6 | % | 15.5 | % | 31.4 | % | 100.0 | % | ||||||||||||||||
As of September 30, 2009 and December 31, 2008, 75% of
our non-agency RMBS are prime. As of September 30, 2009 and
December 31, 2008, 56% and 64% have super senior
subordination, respectively.
On a fair value basis, our Alt-A portfolio was 88% fixed rate
collateral and 12% hybrid adjustable rate mortgages, or ARM,
with no exposure to option ARM mortgages. Generally, fixed rate
mortgages have performed better than both option ARMs and hybrid
ARMs in the current economic environment.
As of September 30, 2009, our Alt-A, prime and total
non-agency RMBS had an estimated weighted- average credit
enhancement of 14.5%, 8.3% and 9.9%, respectively. Credit
enhancement refers to the weighted-average percentage of the
outstanding capital structure that is subordinate in the
priority of cash flows and absorbs losses first.
88
Table of Contents
Commercial
Mortgage-Backed Securities (CMBS)
The following table sets forth the fair value of our investment
in CMBS and the percentage of total invested assets they
represent:
| As of September 30, 2009 | As of December 31, 2008 | |||||||||||||||
|
% of Total |
% of Total |
|||||||||||||||
| Fair Value | Invested Assets | Fair Value | Invested Assets | |||||||||||||
|
Agency
|
$ | 442.5 | 2.2 | % | $ | 434.9 | 2.7 | % | ||||||||
|
Non-agency
|
1,430.9 | 7.1 | 1,240.1 | 7.6 | ||||||||||||
|
Total
|
$ | 1,873.4 | 9.3 | % | $ | 1,675.0 | 10.3 | % | ||||||||
We purchase CMBS to diversify the portfolio risk from primarily
corporate credit risk to a mix of credit and cash flow risk.
There have been disruptions in the CMBS market due to weakness
in commercial real estate market fundamentals and reduced
underwriting standards by some originators of commercial
mortgage loans within the more recent vintage years (2006 and
later). This has increased market belief that default rates will
increase, reduced market liquidity and availability of capital,
and increased spreads and the repricing of risk. As of
September 30, 2009, on an amortized cost basis, 98.6% of
our CMBS were rated AAA, 0.5% were rated A and 0.9% were rated
BB and below.
The following table sets forth the amortized cost of our
non-agency CMBS by credit quality and year of origination
(vintage). There were five securities having a fair value of
$93.2 million and an amortized cost of $83.4 million
that were rated A by S&P, while Moody’s and Fitch
rated them AAA.
| As of September 30, 2009 | ||||||||||||||||||||||||||||
| Highest Rating Agency Rating | ||||||||||||||||||||||||||||
| (Dollars in millions) |
Total |
As of |
||||||||||||||||||||||||||
|
BB and |
Amortized |
December 31, |
||||||||||||||||||||||||||
|
Vintage
|
AAA | AA | A | BBB | Below | Cost | 2008 | |||||||||||||||||||||
|
2009
|
$ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||
|
2008
|
67.8 | — | — | — | — | 67.8 | 67.8 | |||||||||||||||||||||
|
2007
|
511.3 | — | — | — | 1.3 | 512.6 | 504.4 | |||||||||||||||||||||
|
2006
|
135.4 | — | — | — | 12.3 | 147.7 | 128.3 | |||||||||||||||||||||
|
2005
|
343.5 | — | — | — | — | 343.5 | 343.7 | |||||||||||||||||||||
|
2004 & prior
|
381.6 | — | 7.4 | — | — | 389.0 | 445.9 | |||||||||||||||||||||
|
Total
|
$ | 1,439.6 | $ | — | $ | 7.4 | $ | — | $ | 13.6 | $ | 1,460.6 | $ | 1,490.1 | ||||||||||||||
The following tables set forth the fair value of our non-agency
CMBS by credit quality and year of origination (vintage):
| As of September 30, 2009 | ||||||||||||||||||||||||||||
| Highest Rating Agency Rating | ||||||||||||||||||||||||||||
| (Dollars in millions) |
As of |
|||||||||||||||||||||||||||
|
BB and |
Total Fair |
December 31, |
||||||||||||||||||||||||||
|
Vintage
|
AAA | AA | A | BBB | Below | Value | 2008 | |||||||||||||||||||||
|
2009
|
$ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||
|
2008
|
59.3 | — | — | — | — | 59.3 | 54.7 | |||||||||||||||||||||
|
2007
|
491.1 | — | — | — | 1.2 | 492.3 | 400.8 | |||||||||||||||||||||
|
2006
|
131.3 | — | — | — | 8.6 | 139.9 | 102.2 | |||||||||||||||||||||
|
2005
|
349.2 | — | — | — | — | 349.2 | 284.4 | |||||||||||||||||||||
|
2004 & prior
|
384.2 | — | 6.0 | — | — | 390.2 | 398.0 | |||||||||||||||||||||
|
Total
|
$ | 1,415.1 | $ | — | $ | 6.0 | $ | — | $ | 9.8 | $ | 1,430.9 | $ | 1,240.1 | ||||||||||||||
89
Table of Contents
U.S. CMBS securities have historically utilized a
senior/subordinate credit structure to allocate cash flows and
losses, which includes super-senior, mezzanine and junior AAA
tranches. The credit enhancement on the most senior tranche
(super-senior) is 30%. The mezzanine AAAs typically have 20%
credit enhancement and the junior AAAs generally have 14% credit
enhancement. Credit enhancement refers to the weighted-average
percentage of outstanding capital structure that is subordinate
in the priority of cash flows and absorbs losses first. Credit
enhancement does not include any equity interest or principal in
excess of outstanding debt. The super senior class has priority
over the mezzanine and junior classes to all principal and
interest cash flows and will not experience any loss of
principal until both the entire mezzanine and junior tranches
are written down to zero. We believe this additional credit
enhancement is significant in a deep real estate downturn during
which expected losses increase substantially.
The following tables set forth the amortized cost of our AAA
non-agency CMBS by type and year of origination (vintage):
| As of September 30, 2009 | |||||||||||||||||||||||||||||||
| (Dollars in millions) | |||||||||||||||||||||||||||||||
| Super Senior (Post 2004) | Other Structures (2005 and Prior) |
Total AAA |
|||||||||||||||||||||||||||||
|
Securities at |
|||||||||||||||||||||||||||||||
|
Other |
Amortized |
||||||||||||||||||||||||||||||
|
Vintage
|
Super Senior | Mezzanine | Junior | Other Senior | Subordinate | Other | Cost | ||||||||||||||||||||||||
|
2009
|
$ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||||
|
2008
|
67.8 | — | — | — | — | — | 67.8 | ||||||||||||||||||||||||
|
2007
|
511.3 | — | — | — | — | — | 511.3 | ||||||||||||||||||||||||
|
2006
|
135.4 | — | — | — | — | — | 135.4 | ||||||||||||||||||||||||
|
2005
|
163.5 | 32.6 | — | 135.2 | — | 12.3 | 343.6 | ||||||||||||||||||||||||
|
2004 & prior
|
— | — | — | 312.2 | 48.9 | 20.4 | 381.5 | ||||||||||||||||||||||||
|
Total
|
$ | 878.0 | $ | 32.6 | $ | — | $ | 447.4 | $ | 48.9 | $ | 32.7 | $ | 1,439.6 | |||||||||||||||||
| As of December 31, 2008 | |||||||||||||||||||||||||||||||
| (Dollars in millions) | |||||||||||||||||||||||||||||||
| Super Senior (Post 2004) | Other Structures (2005 and Prior) |
Total AAA |
|||||||||||||||||||||||||||||
|
Securities at |
|||||||||||||||||||||||||||||||
|
Other |
Amortized |
||||||||||||||||||||||||||||||
|
Vintage
|
Super Senior | Mezzanine | Junior | Other Senior | Subordinate | Other | Cost | ||||||||||||||||||||||||
|
2009
|
$ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||||
|
2008
|
67.8 | — | — | — | — | — | 67.8 | ||||||||||||||||||||||||
|
2007
|
503.0 | — | — | — | — | — | 503.0 | ||||||||||||||||||||||||
|
2006
|
116.1 | — | — | — | — | — | 116.1 | ||||||||||||||||||||||||
|
2005
|
163.6 | 32.6 | — | 135.2 | — | 12.3 | 343.7 | ||||||||||||||||||||||||
|
2004 & prior
|
— | — | — | 349.1 | 58.6 | 25.8 | 433.5 | ||||||||||||||||||||||||
|
Total
|
$ | 850.5 | $ | 32.6 | $ | — | $ | 484.3 | $ | 58.6 | $ | 38.1 | $ | 1,464.1 | |||||||||||||||||
As the tables above indicate, our CMBS holdings are
predominately in the most senior tranche of the structure type.
As of September 30, 2009, on an amortized cost basis, 92.1%
of our AAA-rated CMBS were in the most senior tranche. As of
September 30, 2009, our CMBS holdings had a
weighted-average estimated credit enhancement of 27.6%. Adjusted
for defeased loans, which are loans whose cash flows have been
replaced by U.S. Treasury securities, the weighted-average
credit enhancement of our CMBS as of September 30, 2009 was
30.8%.
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Asset-Backed
Securities
The following table provides the amortized cost and fair value
of our asset-backed securities, by underlying collateral type,
as of September 30, 2009 and December 31, 2008. We are
not currently purchasing these types of securities.
| As of September 30, 2009 | As of December 31, 2008 | |||||||||||||||
| Amortized Cost | Fair Value | Amortized Cost | Fair Value | |||||||||||||
| (Dollars in millions) | ||||||||||||||||
|
Other asset-backed securities:
|
||||||||||||||||
|
Auto
|
$ | 12.4 | $ | 12.9 | $ | 13.4 | $ | 12.2 | ||||||||
|
Credit cards
|
68.0 | 74.2 | 105.0 | 97.6 | ||||||||||||
|
Franchise
|
13.7 | 9.7 | 17.6 | 13.0 | ||||||||||||
|
Manufactured homes
|
19.3 | 15.2 | 20.8 | 13.6 | ||||||||||||
|
Utility
|
10.9 | 11.9 | 16.4 | 15.8 | ||||||||||||
|
Other
|
5.9 | 5.0 | 6.5 | 5.0 | ||||||||||||
|
Total other asset-backed securities
|
$ | 130.2 | $ | 128.9 | $ | 179.7 | $ | 157.2 | ||||||||
Return on
Equity-Like Investments
Prospector manages our portfolio of equity-like investments,
including publicly traded common stock and convertible
securities. The following table compares our total return to the
benchmark S&P 500 Index for the nine months ended
September 30, 2009, and for the years ended
December 31, 2008, 2007 and 2006. We believe that these
equity and equity-like investments are suitable for funding
certain long duration liabilities in our Income Annuities
segment. See “Business — Investments —
Portfolio Managers” for further information regarding
Prospector.
|
Nine Months Ended |
||||||||||||||||
| September 30, | Year Ended December 31, | |||||||||||||||
| 2009 | 2008 | 2007 | 2006 | |||||||||||||
|
Public equity
|
25.2 | % | (30.6 | )% | 10.2 | % | 26.1 | % | ||||||||
|
S&P 500 Index (total return)
|
19.3 | (37.0 | ) | 5.5 | 15.8 | |||||||||||
|
Difference
|
5.9 | % | 6.4 | % | 4.7 | % | 10.3 | % | ||||||||
Mortgage
Loans
Our mortgage loan department originates new commercial mortgages
and manages our existing commercial mortgage loan portfolio. The
commercial mortgage holdings are secured by first-mortgage liens
on income-producing commercial real estate, primarily in the
retail, industrial and office building sectors. All loans are
underwritten consistently to our standards based on
loan-to-value
ratios and debt service coverage based on income and detailed
market, property and borrower analysis using our long-term
experience in commercial mortgage lending. Most loans have
personal guarantees and are inspected and evaluated annually. We
diversify our mortgage loans by geographic region, loan size and
scheduled maturities. Mortgage loans are reported net of an
allowance for losses and include a PGAAP adjustment.
As of September 30, 2009, 80.2% of our total mortgage loans
were under $5 million and our average loan balance was
$1.8 million.
Composition
of Mortgage Loans
The stress experienced in the U.S. financial markets and
unfavorable credit market conditions led to a decrease in
overall liquidity and availability of capital in the commercial
mortgage loan market, which has led to greater opportunities for
more selective loan originations. While we have begun to observe
some weakness in commercial real estate fundamentals, we have
only one non-performing loan in our commercial mortgage
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loan portfolio during the nine months ended September 30,
2009. We have experienced no other delinquencies or
non-performing loans in the years since the Acquisition.
The following table sets forth the carrying value of our
investments in commercial mortgage loans by geographic region:
| As of September 30, 2009 | As of December 31, 2008 | |||||||||||||||
| Carrying Value | % of Total | Carrying Value | % of Total | |||||||||||||
| (Dollars in millions) | ||||||||||||||||
|
Region:
|
||||||||||||||||
|
California
|
$ | 322.7 | 29.4 | % | $ | 265.3 | 26.8 | % | ||||||||
|
Washington
|
219.5 | 20.0 | 211.2 | 21.3 | ||||||||||||
|
Texas
|
120.5 | 11.0 | 101.2 | 10.2 | ||||||||||||
|
Oregon
|
67.5 | 6.1 | 65.8 | 6.7 | ||||||||||||
|
Colorado
|
45.1 | 4.1 | 46.8 | 4.7 | ||||||||||||
|
Arizona
|
37.4 | 3.4 | 31.9 | 3.2 | ||||||||||||
|
Minnesota
|
30.7 | 2.8 | 31.8 | 3.2 | ||||||||||||
|
Other
|
254.6 | 23.2 | 235.5 | 23.9 | ||||||||||||
|
Total
|
$ | 1,098.0 | 100.0 | % | $ | 989.5 | 100.0 | % | ||||||||
The following table sets forth the carrying value of our
investments in commercial mortgage loans by property type:
| As of September 30, 2009 | As of December 31, 2008 | |||||||||||||||
| Carrying Value | % of Total | Carrying Value | % of Total | |||||||||||||
| (Dollars in millions) | ||||||||||||||||
|
Property Type:
|
||||||||||||||||
|
Shopping Centers and Retail
|
$ | 434.5 | 39.6 | % | $ | 390.7 | 39.5 | % | ||||||||
|
Industrial
|
325.9 | 29.7 | 309.2 | 31.3 | ||||||||||||
|
Office Buildings
|
296.3 | 27.0 | 248.3 | 25.1 | ||||||||||||
|
Multi-Family
|
26.3 | 2.4 | 26.1 | 2.6 | ||||||||||||
|
Other
|
15.0 | 1.3 | 15.2 | 1.5 | ||||||||||||
|
Total
|
$ | 1,098.0 | 100.0 | % | $ | 989.5 | 100.0 | % | ||||||||
The following table sets forth the
loan-to-value
ratios for our mortgage loan portfolio:
|
As of |
||||||||
|
September 30, |
% of |
|||||||
|
Loan-to-Value Ratio
|
2009 | Portfolio | ||||||
| (Dollars in millions) | ||||||||
|
< or = 50%
|
$ | 427.4 | 38.9 | % | ||||
|
51% – 60%
|
294.7 | 26.9 | ||||||
|
61% – 70%
|
194.6 | 17.7 | ||||||
|
71% – 75%
|
67.3 | 6.1 | ||||||
|
76% – 80%
|
16.8 | 1.6 | ||||||
|
81% – 100%
|
93.6 | 8.5 | ||||||
|
> 100%
|
3.6 | 0.3 | ||||||
| $ | 1,098.0 | 100.0 | % | |||||
We use the
loan-to-value
ratio as our primary metric to assess the quality of our
mortgage loans. The
loan-to-value
ratio, which is expressed as a percentage, compares the amount
of the loan to the fair value of the underlying property
collateralizing the loan.
Loan-to-value
ratios greater than 100% indicate that the loan
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Table of Contents
amount is greater than the collateral value. A smaller
loan-to-value
ratio generally indicates a higher quality loan. As of
September 30, 2009 and December 31, 2008, our mortgage
loan portfolio had weighted-average
loan-to-value
ratios of 53.6% and 50.7%, respectively. The values used in
calculating these
loan-to-value
ratios are developed as part of our annual review of the
mortgage loan portfolio, which includes an internal evaluation
of the underlying collateral value.
For loans originated in the nine months ended September 30,
2009, 45.9% had a
loan-to-value
ratio of 50% or less, and no loans had a
loan-to-value
ratio of more than 70%. For loans originated during the year
ended December 31, 2008, 35.3% had a
loan-to-value
ratio of 50% or less, and no loans had a
loan-to-value
ratio of more than 75%.
Maturity
Date of Mortgage Loans
The following table sets forth our mortgage loans by contractual
maturity date:
|
As of |
As of |
|||||||||||||||
|
September 30, |
December 31, |
|||||||||||||||
| 2009 | 2008 | |||||||||||||||
|
Years to Maturity
|
Carrying Value | % of Total | Carrying Value | % of Total | ||||||||||||
| (Dollars in millions) | ||||||||||||||||
|
Due in one year or less
|
$ | 4.7 | 0.4 | % | $ | 5.0 | 0.5 | % | ||||||||
|
Due after one year through five years
|
96.2 | 8.8 | 78.8 | 8.0 | ||||||||||||
|
Due after five years through ten years
|
495.6 | 45.1 | 391.9 | 39.6 | ||||||||||||
|
Due after ten years
|
501.5 | 45.7 | 513.8 | 51.9 | ||||||||||||
|
Total
|
$ | 1,098.0 | 100.0 | % | $ | 989.5 | 100.0 | % | ||||||||
Mortgage
Loan Quality
Our allowance for losses on mortgage loans provides for the risk
of credit loss inherent in the lending process. The allowance
includes a portfolio reserve for probable incurred but not
specifically identified losses and loan specific reserves for
non-performing loans. We define non-performing loans as loans
for which it is probable that amounts due according to the terms
of the loan agreement will not be collected. The portfolio
reserve for incurred but not specifically identified losses
considers our past loan experience and the current credit
composition of the portfolio, and takes into consideration
market experience. We evaluate the allowance for losses on
mortgage loans as of each reporting period and record
adjustments when appropriate.
Our allowance for losses on mortgage loans was $6.1 million
and $5.0 million as of September 30, 2009 and
December 31, 2008, respectively. One loan was classified as
non-performing as of September 30, 2009, and a specific
reserve of $0.6 million was established.
Investments
in Limited Partnerships — Affordable Housing
Investments
We invest in tax-advantaged federal affordable housing
investments through limited liability partnerships. These
affordable housing investments are typically 15-year investments
that provide tax credits in years one through ten. As of
September 30, 2009, we were invested in seven limited
partnership interests related to the federal affordable housing
projects and other various state tax credit funds. We have
unconditionally committed to provide capital contributions
totaling approximately $115.4 million, of which the
unfunded portion of $44.2 million is expected to be
contributed over the next three years. These investments are
accounted for under the equity method and are recorded at
amortized cost in investments in limited partnerships, with the
present value of unfunded contributions recorded in other
liabilities.
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Table of Contents
Cumulative capital contributions of $71.2 million were paid
as of September 30, 2009, with the remaining expected cash
capital contributions payable as follows:
|
Expected Capital |
||||
| Contributions | ||||
| (Dollars in millions) | ||||
|
Remainder of 2009
|
$ | 4.2 | ||
|
2010
|
35.9 | |||
|
2011
|
2.2 | |||
|
2012
|
1.9 | |||
|
Total expected future capital contribution
|
$ | 44.2 | ||
Although these investments decrease our net investment income
over time on a pre-tax basis, they provide us with significant
tax benefits.
The following table provides detail on the impact to net income
of the amortization and the tax credits related to these
investments:
|
Nine Months Ended |
||||||||||||||||||||
| September 30, | Year Ended December 31, | |||||||||||||||||||
| 2009 | 2008 | 2008 | 2007 | 2006 | ||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||
|
Amortization related to affordable housing investments, net of
tax benefit
|
$ | (4.5 | ) | $ | (5.9 | ) | $ | (7.8 | ) | $ | (4.6 | ) | $ | (0.9 | ) | |||||
|
Affordable housing tax credits
|
7.2 | 6.4 | 8.3 | 4.5 | 1.0 | |||||||||||||||
|
Impact to net income
|
$ | 2.7 | $ | 0.5 | $ | 0.5 | $ | (0.1 | ) | $ | 0.1 | |||||||||
The following table provides the future estimated impact to net
income:
|
Impact to Net |
||||
| Income (Net of Tax) | ||||
| (Dollars in millions) | ||||
|
Remainder of 2009
|
$ | — | ||
|
2010
|
5.1 | |||
|
2011
|
6.2 | |||
|
2012 and beyond
|
17.0 | |||
|
Estimated impact to net income (net of taxes)
|
$ | 28.3 | ||
Financial
Strength Ratings
Rating organizations continually review the financial
performance and condition of most insurers and provide financial
strength ratings based on a company’s operating performance
and ability to meet obligations to policyholders. Ratings
provide both industry participants and insurance consumers
meaningful information on specific insurance companies and are
an important factor in establishing the competitive position of
insurance companies. In addition, ratings are important to
maintaining public confidence in us and our ability to market
our products.
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Table of Contents
Symetra Financial Corporation and our principal life insurance
subsidiaries, Symetra Life Insurance Company and First Symetra
National Life Insurance Company of New York, are rated by
A.M. Best, S&P, Moody’s and Fitch as follows as
of September 30, 2009:
| Financial Strength Ratings | ||||||||||||||||
| A.M. Best | S&P | Moody’s | Fitch | |||||||||||||
|
Financial Strength Rating
|
||||||||||||||||
|
Symetra Life Insurance Company
|
A | A | A3 | A+ | ||||||||||||
|
First Symetra National Life Insurance Company of New York
|
A | A | NR* | A+ | ||||||||||||
|
Issuer Credit/Default Ratings
|
||||||||||||||||
|
Symetra Financial Corporation
|
bbb+ | BBB | Baa3 | ** | A- | |||||||||||
|
Symetra Life Insurance Company
|
a+ | A | NR* | NR* | ||||||||||||
|
First Symetra National Life Insurance Company of New York
|
a+ | A | NR* | NR* | ||||||||||||
| * | “NR” indicates not rated |
| ** | Represents the senior debt rating. |
A.M. Best states that its “A” (Excellent)
financial strength rating is assigned to those companies that
have, in its opinion, an excellent ability to meet their ongoing
obligations to policyholders. The “A” (Excellent) is
the third highest of 16 ratings assigned by A.M. Best,
which range from “A++” to “S.”
A.M. Best describes its “a” issuer credit rating
for insurers as “excellent,” assigned to those
companies that have, in its opinion, a strong ability to meet
the terms of their ongoing senior financial obligations. Its
“bbb” issuer credit rating is described as
“good,” assigned to those companies that have, in its
opinion, an adequate ability to meet the terms of their
obligations but are more susceptible to changes in economic or
other conditions. A.M. Best issuer credit ratings range
from “aaa” (exceptional) to “rs” (regulatory
supervision/liquidation) and may be enhanced with a
“+” (plus) or “−” (minus) to
indicate whether credit quality is near the top or bottom of a
category.
Symetra Life Insurance Company and First Symetra National Life
Insurance Company of New York’s Financial Size Category, or
FSC, rankings, as determined by A.M. Best, are both XIII,
the third highest of 15. A.M. Best indicates that the FSC
is designed to provide an indicator of the size of a company in
terms of its statutory surplus and related accounts.
Standard & Poor’s states that an insurer with a
financial strength rating of “A” (Strong) has strong
financial security characteristics that outweigh any
vulnerabilities, and is highly likely to have the ability to
meet financial commitments, but is somewhat more likely to be
affected by adverse business conditions than are insurers with
higher ratings. The “A” range is the third highest of
the four ratings ranges that meet these criteria, and also is
the third highest of nine financial strength ratings ranges
assigned by S&P, which range from “AAA” to
“R.” A plus (+) or minus (-) shows relative standing
in a rating category. Accordingly, the “A” rating is
the sixth highest of S&P’s 21 ratings categories.
S&P describes companies assigned an “A” issuer
credit rating as having a strong capacity to meet financial
commitments, but somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than
higher-rated companies. Companies assigned a “BBB”
issuer credit rating have adequate capacity to meet financial
commitments, but adverse economic conditions are more likely to
lead to a weakened capacity to meet such commitments. S&P
issuer credit ratings range from “AAA” (extremely
strong) to “D,” indicating default.
Moody’s Investors Service states that insurance companies
rated “A3” (Good) offer good financial security.
However, elements may be present that suggest a susceptibility
to impairment sometime in the future. The “A” range is
the third highest of nine financial strength rating ranges
assigned by Moody’s which range from “Aaa” to
“C.” Numeric modifiers are used to refer to the
ranking within the group, with “1” being the highest
and “3” being the lowest. Accordingly, the
“A3” rating is the seventh highest of Moody’s 21
ratings categories. Moody’s credit rating is assigned to
our senior debt. A rating of “Baa” is defined as
subject to moderate credit risk, considered medium-grade, and
may possess certain speculative characteristics.
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Table of Contents
Fitch states that insurance companies with a financial strength
rating of “A+” (Strong) are viewed as possessing
strong capacity to meet policyholder and contract obligations.
Risk factors are moderate, and the impact of any adverse
business and economic factors is expected to be small. The
“A” rating category is the third highest of eight
financial strength categories, which range from “AAA”
to “D.” The symbol (+) or (-) may be appended to a
rating to indicate the relative position of a credit within a
rating category. These suffixes are not added to ratings in the
“AAA” category or to ratings below the “CCC”
category. Accordingly, the “A+” rating is the fifth
highest of Fitch’s 24 financial strength ratings
categories. Fitch describes its “A-” issuer default
rating as “high credit quality,” which denotes an
expectation of low default risk, but may be more vulnerable to
adverse business or economic conditions than higher ratings.
Fitch issuer default ratings range from “AAA” (highest
credit quality) to “D” (default).
A.M. Best, S&P, Moody’s and Fitch review their
ratings periodically and we cannot assure you that we will
maintain our current ratings in the future. Other agencies may
rate Symetra or our insurance subsidiaries on a solicited or
unsolicited basis.
The A.M. Best, S&P, Moody’s and Fitch ratings
included are not designed to be, and do not serve as, measures
of protection or valuation offered to investors in this
offering. These financial strength ratings should not be relied
on with respect to making an investment in our securities.
Liquidity
and Capital Resources
We conduct all our operations through our operating
subsidiaries. Dividends from our subsidiaries and permitted
payments of our tax sharing arrangements with our subsidiaries
are Symetra’s principal sources of cash to pay stockholder
dividends and meet Symetra’s obligations, including
payments of principal and interest on notes payable.
Our primary uses of funds at our holding company level include
payment of general operating expenses, payment of debt and other
expenses related to holding company debt and payment of
dividends to our stockholders. The declaration and payment of
future dividends to holders of our common stock will be at the
discretion of our board of directors.
Starting in late 2007, the global financial markets experienced
unprecedented disruption, adversely affecting the business
environment in general, as well as financial services companies
in particular. This disruption increased during the second half
of 2008. In managing through these challenging market
conditions, we benefit from the strength of our management
philosophy, diversification of our business and strong financial
fundamentals. We actively manage our liquidity in light of
changing market, economic and business conditions and we believe
that our liquidity levels are more than adequate to cover our
exposures, as evidenced by the following:
| • | We continue to increase sales and recorded sales growth of 63.4% for the nine months ended September 30, 2009 compared to the same period in 2008. Strong sales have led to strong cash inflows on our deposit contracts (annuities and universal life policies, including BOLI) of $2,187.7 million as of September 30, 2009, compared to $1,266.5 million as of September 30, 2008. |
| • | While certain lapses and surrenders occur in the normal course of business, these lapses and surrenders have not deviated materially from management expectations during the financial crisis. |
| • | The amount of accumulated other comprehensive income (loss), net of taxes on our balance sheet increased to $29.8 million as of September 30, 2009 from $(1,052.6) million as of December 31, 2008. The primary driver of this increase was an increase in the fair value of our available-for-sale securities, due to the market showing signs of stabilization during 2009 and credit spreads tightening. We believe we are positioned to hold these investments to maturity because of our mix of insurance products and our disciplined asset/liability matching. We have $7,352.1 million of illiquid liabilities consisting of reserves for structured settlements and SPIAs that cannot be surrendered, deferred annuities with five-year payout provisions or market value adjustments, traditional life insurance, and group life and health policies. |
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Table of Contents
| • | As of September 30, 2009, we had the ability to borrow on an unsecured basis up to a maximum principal amount of $180.0 million, under a $200.0 million revolving line of credit arrangement. On October 7, 2009, we added a new member to the syndicate of lending institutions in this revolving credit facility, effectively restoring our ability to borrow under the facility to $200.0 million. |
Liquidity
Requirements and Sources of Liquidity
The liquidity requirements of our insurance subsidiaries
principally relate to the liabilities associated with their
various insurance and investment products, operating costs and
expenses, the payment of dividends to us, and payment of income
taxes. Liabilities arising from insurance and investment
products include the payment of benefits, as well as cash
payments in connection with policy and contract surrenders and
withdrawals and policy loans. Historically, our insurance
subsidiaries have used cash flows from operations, cash flows
from invested assets and sales of investment securities to fund
their liquidity requirements.
In managing the liquidity of our insurance operations, we also
consider the risk of policyholder and contractholder withdrawals
of funds earlier than our assumptions when selecting assets to
support these contractual obligations. We use surrender charges
and other contract provisions to mitigate the extent, timing and
profitability impact of withdrawals of funds by customers from
annuity contracts and deposit liabilities. The following table
sets forth withdrawal characteristics of our general account
annuity reserves and deposit liabilities as of
September 30, 2009 and December 31, 2008.
| September 30, 2009 | December 31, 2008 | |||||||||||||||
| Amount | % of Total | Amount | % of Total | |||||||||||||
| (Dollars in millions) | ||||||||||||||||
|
Illiquid Liabilities
|
||||||||||||||||
|
Structured settlements & other SPIAs(1)
|
$ | 6,704.8 | 35.2 | % | $ | 6,761.7 | 39.0 | % | ||||||||
|
Deferred annuities with
5-year
payout provision or MVA(2)
|
393.3 | 2.0 | % | 397.5 | 2.3 | % | ||||||||||
|
Traditional insurance (net of reinsurance)(3)
|
185.4 | 1.0 | % | 186.7 | 1.1 | % | ||||||||||
|
Group health & life(3)
|
68.6 | 0.3 | % | 71.5 | 0.4 | % | ||||||||||
|
Total illiquid liabilities
|
7,352.1 | 38.5 | % | 7,417.4 | 42.8 | % | ||||||||||
|
Somewhat Liquid Liabilities
|
||||||||||||||||
|
Bank-owned life insurance (BOLI)(4)
|
3,827.2 | 20.1 | % | 3,772.4 | 21.8 | % | ||||||||||
|
Deferred annuities with surrender charges > 5%
|
4,575.2 | 24.0 | % | 2,792.5 | 16.1 | % | ||||||||||
|
Universal life with surrender charges > 5%
|
146.8 | 0.8 | % | 139.1 | 0.8 | % | ||||||||||
|
Total somewhat liquid liabilities
|
8,549.2 | 44.9 | % | 6,704.0 | 38.7 | % | ||||||||||
|
Fully Liquid Liabilities
|
||||||||||||||||
|
Deferred annuities with surrender charges of: 3-5%
|
422.4 | 2.2 | % | 355.9 | 2.1 | % | ||||||||||
|
0-3%
|
53.1 | 0.3 | % | 39.9 | 0.2 | % | ||||||||||
|
No surrender charges(5)
|
1,983.1 | 10.4 | % | 2,056.3 | 11.9 | % | ||||||||||
|
Universal life and whole life with surrender charges < 5%
|
439.2 | 2.3 | % | 443.9 | 2.6 | % | ||||||||||
|
Total Fully Liquid Liabilities
|
2,897.8 | 15.2 | % | 2,896.0 | 16.8 | % | ||||||||||
|
Other Policyholder Liabilities
|
272.5 | 1.4 | % | 302.4 | 1.7 | % | ||||||||||
|
Total Policyholder Liabilities(6)
|
$ | 19,071.6 | 100.0 | % | $ | 17,319.8 | 100.0 | % | ||||||||
| (1) | These contracts cannot be surrendered. The benefits are specified in the contracts as fixed amounts to be paid over the next several decades. |
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| (2) | In a liquidity crisis situation, we could invoke the five-year payout provision so that the contract value with interest is paid out ratably over five years. | |
| (3) | The surrender value on these contracts is generally zero. | |
| (4) | The biggest deterrent to surrender is the taxation on the gain within these contracts, which includes a 10% non-deductible penalty tax. Banks can exchange certain of these contracts with other carriers, tax-free. However, a significant portion of this business may not qualify for this tax-free treatment due to the employment status of the original covered employees. | |
| (5) | Approximately half of this business has been with the Company for over a decade, contains lifetime minimum interest guarantees of 4.0% to 4.5%, and has been free of surrender charges for many years. This business has experienced high persistency given the high lifetime guarantees that have not been available in the market on new issues for many years. | |
| (6) | Represents the sum of funds held under deposit contracts, future policy benefits and other policyholders’ funds on the consolidated balance sheets. |
Liquid
Assets
Our insurance subsidiaries maintain investment strategies
intended to provide adequate funds to pay benefits without
forced sales of investments. Products having liabilities with
longer durations, such as certain life insurance policies and
structured settlement annuities, are matched with investments
having similar estimated lives such as long-term fixed
maturities, mortgage loans and marketable equity securities.
Shorter-term liabilities are matched with fixed maturities that
have short- and medium-term fixed maturities. In addition, our
insurance subsidiaries hold highly liquid, high quality,
short-term investment securities and other liquid
investment-grade fixed maturities to fund anticipated operating
expenses, surrenders and withdrawals.
We define liquid assets to include cash, cash equivalents,
short-term investments, publicly traded fixed maturities and
public equity securities. As of September 30, 2009 and
December 31, 2008, our insurance subsidiaries had liquid
assets of $18.0 billion and $14.7 billion,
respectively, of our total liquid assets of $18.1 billion
and $14.9 billion, respectively. The portion of total
company liquid assets comprised of cash and cash equivalents and
short-term investments was $244.2 million and
$477.4 million as of September 30, 2009 and
December 31, 2008, respectively. Our fixed maturities
portfolio included below investment grade securities that
comprised 6.8% and 5.2% of the total fair value of our total
fixed maturities as of September 30, 2009 and
December 31, 2008, respectively. In addition, our fixed
maturities portfolio included non-rated securities that
comprised 4.6% and 4.8% of the total fair value of our fixed
maturities as of these dates.
We consider attributes of the various categories of liquid
assets (for example, type of asset and credit quality) in
calculating internal liquidity measures in order to evaluate the
adequacy of our insurance operations’ liquidity under a
variety of stress scenarios. We believe that the liquidity
profile of our assets is sufficient to satisfy current liquidity
requirements, including under foreseeable stress scenarios.
Given the size and liquidity profile of our investment
portfolios, we believe that claim experience varying from our
projections does not constitute a significant liquidity risk.
Our asset/liability management process takes into account the
expected maturity of investments and expected claim payments as
well as the specific nature and risk profile of the liabilities.
Historically, there has been no significant variation between
the expected maturities of our investments and the payment of
claims.
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Table of Contents
Capitalization
Our capital structure consists of notes payable and
stockholders’ equity. The following table summarizes our
capital structure as of the dates indicated:
|
September 30, |
December 31, | |||||||||||||||
| 2009 | 2008 | 2007 | 2006 | |||||||||||||
| (Dollars in millions) | ||||||||||||||||
|
Notes payable
|
$ | 448.9 | $ | 448.8 | $ | 448.6 | $ | 298.7 | ||||||||
|
Stockholders’ equity
|
1,480.5 | 286.2 | 1,285.1 | 1,327.3 | ||||||||||||
|
Total capital
|
$ | 1,929.4 | $ | 735.0 | $ | 1,733.7 | $ | 1,626.0 | ||||||||
Our capitalization increased $1,194.4 million as of
September 30, 2009 as compared to December 31, 2008.
This increase was driven by net income of $96.2 million, a
cumulative effect adjustment related to new accounting guidance,
which increased retained earnings as of January 1, 2009 by
$15.7 million and a decrease in AOCI. AOCI increased
primarily due to changes in net unrealized gains (losses) on
available-for-sale
securities of $1,136.5 million, partially offset by OTTIs
not related to credit losses of $38.4 million.
Our capitalization decreased $998.7 million as of
December 31, 2008, as compared to December 31, 2007.
Accumulated other comprehensive loss increased by
$1,040.1 million, primarily due to changes in net
unrealized losses of $1,021.0 million. The increase in net
unrealized losses was concentrated in our corporate fixed
securities due to credit spreads widening and increased
liquidity discounts during the volatile markets in 2008.
Our capitalization increased $107.7 million as of
December 31, 2007 as compared to December 31, 2006 as
we issued $150.0 million aggregate principal amount of
CENts at an issue price of $149.8 million. We used the
proceeds from the CENts and dividends from life insurance
subsidiaries to pay two dividends to our stockholders, totaling
$200.0 million. In addition, net income for the year ended
December 31, 2007 was $167.3 million.
Debt
The following table summarizes our debt instruments:
| Maximum Amount Available as of | Amount Outstanding as of | |||||||||||||||||||||||||||
|
Maturity |
September 30, |
December 31, |
December 31, |
September 30, |
December 31, |
December 31, |
||||||||||||||||||||||
|
Description
|
Date | 2009 | 2008 | 2007 | 2009 | 2008 | 2007 | |||||||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||||||||||
|
Senior notes payable
|
4/1/2016 | $ | 300.0 | $ | 300.0 | $ | 300.0 | $ | 300.0 | $ | 300.0 | $ | 300.0 | |||||||||||||||
|
CENts
|
10/15/2067 | 150.0 | 150.0 | 150.0 | 150.0 | 150.0 | 150.0 | |||||||||||||||||||||
|
Revolving credit facilities:
|
||||||||||||||||||||||||||||
|
Bank of America, N.A
|
8/16/2012 | 180.0 | 200.0 | 200.0 | — | — | — | |||||||||||||||||||||
|
The Bank of New York:
|
||||||||||||||||||||||||||||
|
Holding company
|
n/a | — | — | 25.0 | — | — | — | |||||||||||||||||||||
|
Insurance subsidiary
|
n/a | — | — | 25.0 | — | — | — | |||||||||||||||||||||
|
Total notes payable and revolving credit facilities
|
$ | 630.0 | $ | 650.0 | $ | 700.0 | $ | 450.0 | $ | 450.0 | $ | 450.0 | ||||||||||||||||
Notes
Payable
Senior
Notes Due 2016
On March 30, 2006, we issued $300.0 million of
6.125% senior notes due April 1, 2016, which were
issued at a discount yielding $298.7 million. Proceeds from
the senior notes were used to pay down the outstanding principal
on a variable rate revolving line of credit. Interest on the
senior notes is payable semiannually in arrears, beginning on
October 2, 2006.
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Table of Contents
The senior notes do not contain any financial covenants or any
provisions restricting us from purchasing or redeeming capital
stock, paying dividends or entering into a highly leveraged
transaction, reorganization, restructuring, merger or similar
transaction. In addition, we are not required to repurchase,
redeem or modify the terms of any of the senior notes upon a
change of control or other event involving Symetra.
For a description of additional terms, see “Description of
Certain Indebtedness — 6.125% Senior Notes due
2016” on page 162.
Capital
Efficient Notes Due 2067
On October 10, 2007, we issued $150.0 million
aggregate principal amount CENts with a scheduled maturity date
of October 15, 2037 and, subject to certain limitations,
with a final maturity date of October 15, 2067. We issued
the CENts at a discount yielding $149.8 million. For the
initial ten-year period following the original issuance date, to
but not including October 15, 2017, the CENts carry a fixed
interest rate of 8.300% payable semi-annually. From
October 15, 2017 until the final maturity date of
October 15, 2067, interest on the CENts will accrue at a
variable annual rate equal to the three-month LIBOR plus 4.177%,
payable quarterly. We applied the net proceeds from the issuance
to pay a special cash dividend to stockholders on
October 19, 2007.
For a description of additional terms, see “Description of
Certain Indebtedness — Capital Efficient Notes due
2067” on page 162.
Revolving
Credit Facilities
Current Credit Facility. On August 16,
2007, we entered into a $200.0 million senior unsecured
revolving credit agreement with a syndicate of lending
institutions led by Bank of America, N.A. On February 12,
2009, Bank of America, N.A. issued a notice of default to Lehman
Commercial Paper, Inc., one of the lending institutions in the
syndicate with a commitment of $20.0 million, effectively
limiting our ability to borrow under the revolving credit
facility to $180.0 million at that time. On October 7,
2009, Lehman Commercial Paper, Inc. assigned its interest in our
revolving credit facility to Barclays Bank PLC, effectively
restoring capacity in the facility to $200.0 million. This
credit facility matures on August 16, 2012, and loans under
this facility bear interest at varying rates depending on our
credit rating. This facility requires us to maintain specified
financial ratios, and includes other customary restrictive and
affirmative covenants. This revolving credit facility is
available to provide support for working capital, capital
expenditures and other general corporate purposes.
For a description of additional terms of this facility, see
“Description of Certain Indebtedness — Revolving
Credit Facilities” on page 163.
Prior Facility. In June 2004, we entered into
a $370.0 million revolving credit facility with a syndicate
of lending institutions led by Bank of America, N.A. On
March 30, 2006, this revolving credit facility was reduced
to $70 million and, on August 17, 2007, this revolving
credit facility was closed and replaced with the current credit
facility led by Bank of America, N.A. described above.
Closed Facilities. In addition, in 2005, we
entered into two $25.0 million revolving credit facilities
with The Bank of New York to support our overnight repurchase
agreements program, which provides us with the liquidity to meet
general funding requirements. On March 7, 2008, we closed
both of these revolving credit facilities with The Bank of New
York. We did not borrow under these facilities while they were
in place.
Securities
Lending
We participate in a securities lending program as a mechanism
for generating additional investment income. Under the
securities lending arrangements, certain securities we own are
loaned to other institutions for short periods of time through a
lending agent. The securities lending counterparty is required
to provide initial collateral for the loaned securities, which
is then invested by the lending agent. The collateral is
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Table of Contents
required at a rate of 102% of the fair value of the loaned
securities, is controlled by the lending agent and may not be
sold or re-pledged. In the event that the lending agent does not
return the full amount of collateral to the securities lending
counterparty, we are obligated to make up any deficiency.
In late September 2008, we began reducing the exposure to
securities lending by recalling loans from some of the more
troubled financial services companies, and have reduced our
exposure from $105.7 million at December 31, 2008 to
$31.4 million at September 30, 2009. At
September 30, 2009, there was approximately
$0.5 million of unrealized losses related to the collateral
invested. We expect to continue to reduce our securities lending
portfolio during the remainder of 2009 and during 2010.
Dividends
and Regulatory Requirements
The payment of dividends and other distributions to us by our
insurance subsidiaries is controlled by insurance laws and
regulations. In general, dividends in excess of prescribed
limits are deemed “extraordinary” and require
insurance regulatory approval. During the twelve months ended
December 31, 2008, we received $100.0 million in
dividends from our insurance subsidiaries. These dividends were
considered extraordinary based on the timing of the dividend
payment. We received $166.4 million and $122.5 million
in dividends from our insurance subsidiaries in 2007 and 2006,
respectively.
Based on our statutory results, as of December 31, 2008,
our insurance subsidiaries may pay dividends of up to
$117.9 million to us during 2009 without needing to obtain
regulatory approval. To support the growing sales of our
products and maintain financial strength ratings, we target a
risk-based capital level of at least 350% in our life insurance
company, Symetra Life Insurance Company. To maintain this level,
we are currently not planning on paying dividends from our
insurance subsidiaries in 2009. As of September 30, 2009,
Symetra Life Insurance Company had a risk-based capital ratio of
361%.
Cash
Flows
The following table sets forth a summary of our consolidated
cash flows for the nine months ended September 30, 2009 and
2008, and for the years ended December 31, 2008, 2007 and
2006.
| Nine Months Ended September 30, | Year Ended December 31, | |||||||||||||||||||
| 2009 | 2008 | 2008 | 2007 | 2006 | ||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||
|
Net cash flows from operating activities
|
$ | 596.6 | $ | 557.6 | $ | 733.0 | $ | 813.8 | $ | 794.6 | ||||||||||
|
Net cash flows from investing activities
|
(1,916.7 | ) | (831.2 | ) | (976.8 | ) | 522.3 | 908.9 | ||||||||||||
|
Net cash flows from financing activities
|
1,093.8 | 284.9 | 457.9 | (1,335.4 | ) | (1,561.3 | ) | |||||||||||||
Operating
Activities
Cash flows from our operating activities are primarily driven by
the amounts and timing of cash received for premiums on our
group medical stop-loss, group life and term life insurance
products, income including dividends and interest on our general
account investments, as well as the amounts and timing of cash
disbursed for our payment of policyholder benefits and claims,
underwriting and operating expenses and income taxes. The
following discussion highlights key drivers in the level of cash
flows generated from our operating activities:
| • | Nine months ended September 30, 2009 and 2008. Net cash provided by operating activities for the nine months ended September 30, 2009 was $596.6 million, a $39.0 million increase over the same period in 2008. This increase was primarily the result of lower income taxes paid in 2009 due to tax refunds we received for prior year returns and a decrease in operating expenses due to reductions in spending, including payroll and travel-related expenditures. |
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Table of Contents
| • | Years ended December 31, 2008 and 2007. Net cash provided by operating activities for the year ended December 31, 2008 was $733.0 million, an $80.8 million decrease over the same period in 2007. This decrease was primarily the result of an increase in cash paid to settle policyholder benefits and claims related to our group medical stop-loss products, and an increase in paid commissions related to our deferred annuity products. In addition, interest payments in 2008 increased compared to 2007 as a result of the CENts sold in October 2007. | |
| • | Years ended December 31, 2007 and 2006. Net cash provided by operating activities for the year ended December 31, 2007 was $813.8 million, a $19.2 million increase over the same period in 2006. This increase was primarily the result of the timing of certain cash settlements related to certain receivables, changes in current and deferred taxes payable and an increase in realized investment gains due to trading activities. |
Investing
Activities
Cash flows from our investing activities are primarily driven by
the amounts and timing of cash received from our sales of
investments and from maturities and calls of fixed maturity
securities, as well as the amounts and timing of cash disbursed
for our purchases of investments. The following discussion
highlights key drivers in the level of cash flows generated from
our investing activities:
| • | Nine months ended September 30, 2009 and 2008. Net cash used in investing activities for the nine months ended September 30, 2009 was $1,916.7 million, a $1,085.5 million increase from the same period in 2008. The increase was primarily the result of higher purchases of fixed maturities, as we experienced an increase in sales primarily of fixed deferred annuities. This was partially offset by an increase in maturities, calls and paydowns. In addition, securities lending activity resulted in net cash used in investing of securities lending collateral of $4.0 million in 2008 compared to cash collateral returned of $72.3 million in 2009. |
| • | Years ended December 31, 2008 and 2007. Net cash used in investing activities for the year ended December 31, 2008 was $976.8 million, a $1,499.1 million decrease from the same period in 2007. The decrease was primarily the result of lower sales of fixed maturities due to decreased withdrawals from certain of our products. In addition, we originated $224.5 million in new mortgage loans in 2008, an increase of $74.5 million. | |
| • | Years ended December 31, 2007 and 2006. Net cash provided by investing activities during the year ended December 31, 2007 was $522.3 million, a $386.6 million decrease from the same period in 2006. The decrease was primarily the result of management of our fixed maturities and marketable equity securities, as purchases increased $887.1 million, and sales increased by $447.2 million. In addition, we used $22.0 million to acquire MRM. |
Financing
Activities
Cash flows from our financing activities are primarily driven by
the amounts and timing of cash received from deposits into
certain life insurance and annuity policies and proceeds from
our issuances of debt, as well as the amounts and timing of cash
disbursed to fund withdrawals from certain life insurance and
annuity policies, repayments of debt and dividend distributions
to our stockholders. The following discussion highlights key
drivers in the level of cash flows generated from our financing
activities:
| • | Nine months ended September 30, 2009 and 2008. Net cash provided by financing activities for the nine months ended September 30, 2009 was $1,093.8 million, an $808.9 million increase over the same period in 2008. This was primarily due to a $921.2 million increase in deposits primarily related to the sales of fixed deferred annuities referred to in investing activities above. This was partially offset by a $42.4 million increase in withdrawals for 2009 compared to 2008, primarily due to a BOLI withdrawal of $59.0 million in 2009, and a $76.3 million decrease in securities |
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Table of Contents
| lending collateral. Securities lending activity resulted in net cash collateral received of $4.0 million in 2008 compared to cash collateral returned of $72.3 million in 2009. |
| • | Years ended December 31, 2008 and 2007. Net cash provided by financing activities for the year ended December 31, 2008 was $457.9 million, a $1,793.3 million increase over the same period in 2007. This was primarily due to a $1,150.8 million increase in deposits and a $562.3 million decrease in withdrawals in 2008 over 2007. Sales of fixed deferred annuities increased in 2008 as our distribution channel strategy matured. Also, withdrawals decreased as products containing a surrender charge free period passed the surrender charge free window. In addition, in 2007, we received $149.8 million in proceeds from our CENts offering and paid $200.0 million in stockholder dividends. | |
| • | Years ended December 31, 2007 and 2006. Net cash used in financing activities during the year ended December 31, 2007 was $1,335.4 million, a $225.9 million decrease over the same period in 2006. We incurred a net cash outflow from financing activities in both periods as policyholder withdrawals exceeded deposits; however, compared to 2006 we experienced a $159.5 million increase in policyholder deposits as a result of sales, and a $131.7 million reduction in policyholder withdrawals as two large blocks of annuities exited an 18-month period of surrendering without charges in the fourth quarter of 2007. In addition, in 2007, we received $149.8 million in proceeds from our CENts offering and paid $200.0 million in stockholders dividends. In 2006 we received $298.7 million in proceeds from our senior debt offering and paid $100.0 million in stockholder dividends. |
Contractual
Obligations and Commitments
We enter into obligations with third parties in the ordinary
course of our operations. These obligations as of
December 31, 2008 are set forth in the table below.
However, we do not believe that our cash flow requirements can
be assessed based upon an analysis of these obligations as the
funding of these future cash obligations will be from future
cash flows from premiums, deposits, fees and investment income
that are not reflected in the table below. In addition, our
operations involve significant expenditures that are not based
upon commitments, including expenditures for income taxes and
payroll.
| Payments Due by Year | ||||||||||||||||||||
|
2014 and |
||||||||||||||||||||
|
Contractual Obligations
|
Total | 2009 | 2010-2011 | 2012-2013 | thereafter | |||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||
|
Insurance obligations(1)
|
$ | 41,330.3 | $ | 1,575.4 | $ | 2,959.0 | $ | 2,813.9 | $ | 33,982.0 | ||||||||||
|
Notes payable
|
450.0 | — | — | — | 450.0 | |||||||||||||||
|
Interest on notes payable
|
242.6 | 30.8 | 61.7 | 61.7 | 88.4 | |||||||||||||||
|
Securities collateral on securities lending(2)
|
105.7 | 105.7 | — | — | — | |||||||||||||||
|
Purchase and lending commitments:
|
||||||||||||||||||||
|
Investments in limited partnerships(3)
|
93.8 | 60.8 | 31.2 | 1.8 | — | |||||||||||||||
|
Commercial mortgage loans(4)
|
9.0 | 9.0 | — | — | — | |||||||||||||||
|
Other(5)
|
9.1 | 2.0 | 4.1 | 3.0 | — | |||||||||||||||
|
Operating lease obligations(6)
|
46.8 | 7.9 | 14.6 | 13.5 | 10.8 | |||||||||||||||
|
Licensing fees(7)
|
18.3 | 11.6 | 6.7 | — | — | |||||||||||||||
|
Total
|
$ | 42,305.6 | $ | 1,803.2 | $ | 3,077.3 | $ | 2,893.9 | $ | 34,531.2 | ||||||||||
footnotes continued on following page
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Table of Contents
| (1) | Includes estimated claim and benefit, policy surrender, reinsurance premiums and commission obligations on in force insurance policies and deposit contracts. Estimated claim and benefit obligations are based on mortality, morbidity and lapse assumptions comparable with our historical experience. In contrast to this table, our obligations recorded in our consolidated balance sheets do not incorporate future credited interest for deposit contracts or tabular interest for insurance policies. Therefore, the estimated obligations for insurance liabilities presented in this table significantly exceed the liabilities recorded in reserves for future annuity and contract benefits and the liability for policy and contract claims. Due to the significance of the assumptions used, the amounts presented could materially differ from actual results. We have not included the variable separate account obligations as these obligations are legally insulated from general account obligations and will be fully funded by cash flows from separate account assets. We expect to fund the obligations for insurance liabilities from cash flows from general account investments and future deposits and premiums. | |
| (2) | We have accepted cash collateral in connection with our securities lending program and reinvested this collateral in investments with a fair value of $105.7 million. Since the timing of the return of collateral is uncertain, the return of collateral has been included in the payments due in less than one year. For more information, see Note 6, “Securities Lending Program,” to our audited consolidated financial statements included elsewhere in this prospectus. | |
| (3) | We have investments in twelve limited partnership interests related to tax-advantaged affordable housing projects and various state tax credit funds, and five private equity partnerships. We will provide capital contributions to the five private equity partnerships through 2015 with a remaining committed amount of $37.0 million at the discretion of the general partner, subject to certain contribution limits. Since the timing of payment is uncertain, the unfunded amount has been included in the payment due in less than one year. For more information, see Note 17, “Commitments and Contingencies,” to our audited consolidated financial statements included elsewhere in this prospectus. Amounts recorded on the balance sheet are included in “other liabilities.” | |
| (4) | Unfunded mortgage loan commitments as of December 31, 2008. |
| (5) | In connection with the acquisition of MRM in May 2007, we committed to pay $14.0 million to the selling stockholder over a period of five years, including $10.2 million which is contingent upon the achievement of certain annual profitability targets. For more information, see Note 11, “Acquisitions,” to our audited consolidated financial statements included in this prospectus. |
| (6) | Includes minimum rental commitments on leases for office space, commercial real estate and certain equipment. For more information, see Note 17, “Commitments and Contingencies,” to our audited consolidated financial statements included elsewhere in this prospectus. | |
| (7) | Includes contractual commitments for a service agreement to outsource the majority of our information technology infrastructure. For more information, see Note 17, “Commitments and Contingencies,” to our audited consolidated financial statements included elsewhere in this prospectus. |
On August 1, 2009, we entered into a service agreement with
a third party service provider to outsource the majority of its
information technology infrastructure, effectively terminating
the previous agreement, referred to in the table under licensing
fees, scheduled to expire in July 2010 and renewing with the
same vendor. Under the terms of the service agreement, we agreed
to pay $4.3 million for the five months ended
December 31, 2009, $21.7 million in
2010-2011,
$21.5 million in
2012-2013
and $6.4 million in 2014 and thereafter. These amounts are
not included in the table above.
Off-balance
Sheet Transactions
We do not have off-balance sheet transactions.
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Table of Contents
Quantitative
and Qualitative Disclosures about Market Risk
We are subject to potential fluctuations in earnings, cash flows
and the fair value of certain assets and liabilities due to
changes in market interest rates and equity prices.
We enter into market-sensitive instruments primarily for
purposes other than trading, namely to support our insurance
liabilities.
Interest
Rate Risk
Our exposure to interest rate risk relates to the market price
and/or cash
flow variability associated with changes in market interest
rates.
An increase in market interest rates from current levels would
generally be a favorable development for us. If market interest
rates increase, we would expect to earn additional investment
income, to have increased annuity and universal life insurance
sales, and to limit the potential risk of margin erosion due to
minimum guaranteed crediting rates. However, an increase in
interest rates would also increase the unrealized net loss
position of the investment portfolio. In addition, if interest
rates rise quickly enough within a short time period, certain
lines of business that are interest sensitive are exposed to
lapses as policyholders seek higher yielding investments.
Our investment portfolios primarily consist of investment grade
fixed maturity securities, including public and privately-placed
corporate bonds, residential mortgage-backed securities and
commercial mortgage-backed securities. The carrying value of our
investment portfolio as of December 31, 2008 and 2007 was
$16.3 billion and $16.9 billion, respectively, of
which 91.6% in 2008 and 92.3% in 2007 was invested in fixed
maturities. The primary market risk to our investment portfolio
is interest rate risk associated with investments in fixed
maturity securities. The fair value of our fixed maturities
fluctuates depending on the interest rate environment. During
periods of declining interest rates, paydowns on mortgage-backed
securities and collateralized mortgage obligations increase and
we would generally be unable to reinvest the proceeds of such
prepayments at comparable yields. The weighted-average duration
of our fixed maturity portfolio was approximately 5.6 and
6.1 years as of December 31, 2008 and 2007,
respectively.
We manage our exposure to interest rate risk through asset
allocation limits, limiting the purchase of negatively convex
assets and asset/liability duration matching. Each line of
business has an investment policy based on its specific
liability characteristics.
Equity
Risk
We are exposed to equity price risk on our common stock and
other equity holdings. In addition, asset fees calculated as a
percentage of the separate account assets are a source of
revenue to us. Gains and losses in the equity markets result in
corresponding increases and decreases in our separate account
assets and asset fee revenue.
In addition, a decrease in the value of separate account assets
may cause an increase in guaranteed minimum death benefit, or
GMDBs, claims. However, most of our GMDBs on individual variable
annuities are reinsured. In recent years, the supply of
reinsurance has dwindled and costs have risen. Therefore, we
have not obtained GMDB reinsurance on new sales.
We manage equity price risk on investment holdings through
industry and issuer diversification and asset allocation
techniques.
Derivative
Financial Instruments
We make minimal use of derivative financial instruments as part
of our risk management strategy. We use indexed call options to
manage our exposure to changes in the S&P 500 Index. Our
exposure is related to
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our closed FIA block of business, which credits
policyholders’ account values based on gains in the
S&P 500 Index.
In addition, in 2007 and 2006, we entered into interest rate
swaps, which qualified as cash flow hedges of the forecasted
issuance of the CENts and the senior notes to hedge our exposure
to interest rate fluctuations prior to the note issuances.
As a matter of policy, we have not, and do not intend to, engage
in derivative market-making, speculative derivative trading or
other speculative derivatives activities.
Sensitivity
Analysis
Sensitivity analysis measures the impact of hypothetical changes
in interest rates and other market rates or prices on the
profitability of market-sensitive financial instruments.
The following discussion about the potential effects of changes
in interest rates and equity market prices is based on so-called
“shock-tests,” which model the effects of interest
rate and equity market price shifts on our financial condition
and results of operations. Although we believe shock tests
provide the most meaningful analysis, they are constrained by
several factors, including the necessity to conduct the analysis
based on a single point in time and by their inability to
include the extraordinarily complex market reactions that
normally would arise from the market shifts modeled. Although
the following results of shock tests for changes in interest
rates and equity market prices may have some limited use as
benchmarks, they should not be viewed as forecasts. These
forward-looking disclosures also are selective in nature and
address only the potential impacts on our financial instruments.
They do not include a variety of other potential factors that
could affect our business as a result of these changes in
interest rates and equity market prices.
One means of assessing exposure of our fixed maturities
portfolio to interest rate changes is a duration-based analysis
that measures the potential changes in fair value resulting from
a hypothetical change in interest rates of 100 basis points
across all maturities. This is sometimes referred to as a
parallel shift in the yield curve. Our investment manager uses
Derivative Solutions, a fixed-income analytics tool, to model
and calculate the duration and convexity of our asset portfolio.
Under this model, with all other factors constant and assuming
no offsetting change in the fair value of our liabilities, we
estimated that such an increase in interest rates would cause
the fair value of our fixed maturities portfolio to decline by
approximately $1.02 billion and $0.81 billion, based
on our securities positions as of September 30, 2009 and
December 31, 2008, respectively.
One means of assessing exposure to changes in equity market
prices is to estimate the potential changes in values on our
equity investments resulting from a hypothetical broad-based
decline in equity market prices of 10%. Using this assumption,
with all other factors constant, we estimate that such a decline
in equity market prices would cause the fair value of our
investment portfolio to decline by approximately
$24.3 million and $21.4 million as of
September 30, 2009 and December 31, 2008,
respectively. In addition, fluctuations in equity market prices
affect our revenues and returns related to our variable annuity
and life products, which depend upon fees that are related
primarily to the fair value of the underlying assets.
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BUSINESS
Overview
Our
Business
We are a life insurance company focused on profitable growth in
select group health, retirement, life insurance and employee
benefits markets. Our first day of operations as an independent
company was August 2, 2004, when Symetra completed the
Acquisition. Our operations date back to 1957 and many of our
agency and distribution relationships have been in place for
decades. We are headquartered in Bellevue, Washington and employ
approximately 1,100 people in 16 offices across the United
States, serving approximately 1.8 million customers.
As of September 30, 2009, our stockholders’ equity was
$1,480.5 million, our adjusted book value was
$1,450.7 million, and we had total assets of
$22.2 billion. For the twelve months ended
September 30, 2009, our return on equity, or ROE, was 13.9%
and our operating return on average equity, or operating ROAE,
was 10.6%. We define adjusted book value as stockholders’
equity less accumulated other comprehensive income (loss), or
AOCI, and we define operating ROAE as net operating income
divided by average adjusted book value. Adjusted book value, net
operating income and operating ROAE are non-GAAP measures. For
reconciliations of adjusted book value to stockholders’
equity and net operating income to net income and for a summary
presentation of our operating results and financial position
determined in accordance with GAAP, please see “—
Summary Historical Consolidated Financial and Other Data”
on page 9.
We manage our business through the following five segments, four
of which are operating:
| • | Group. We offer medical stop-loss insurance, limited medical benefit plans, group life insurance, accidental death and dismemberment insurance and disability insurance mainly to employer groups of 50 to 5,000 individuals. In addition to our insurance products, we offer managing general underwriting, or MGU, services through Medical Risk Managers, Inc, or MRM. Our Group segment generated segment pre-tax operating income of $66.9 million during 2008 and $44.7 million during the nine months ended September 30, 2009. |
| • | Retirement Services. We offer fixed and variable deferred annuities, including tax sheltered annuities, individual retirement accounts, or IRAs, and group annuities to qualified retirement plans, including Section 401(k), 403(b) and 457 plans. Our Retirement Services segment generated segment pre-tax operating income of $36.6 million during 2008 and $41.3 million during the nine months ended September 30, 2009. |
| • | Income Annuities. We offer single premium immediate annuities, or SPIAs, to customers seeking a reliable source of retirement income and structured settlement annuities to fund third party personal injury settlements. In addition, we offer our existing structured settlement clients a variety of funding services product options. Our Income Annuities segment generated segment pre-tax operating income of $36.5 million during 2008 and $33.0 million during the nine months ended September 30, 2009. |
| • | Individual. We offer a wide array of term, universal and variable life insurance as well as bank-owned life insurance, or BOLI. Our Individual segment generated segment pre-tax operating income of $59.7 million during 2008 and $51.6 million during the nine months ended September 30, 2009. |
| • | Other. This segment consists of unallocated corporate income, composed primarily of investment income on unallocated surplus, unallocated corporate expenses, interest expense on debt, tax credits from certain investments, the results of small, non-insurance businesses that are managed outside of our operating segments, and inter-segment elimination entries. Our Other segment generated a segment pre-tax operating loss of $31.6 million during 2008 and $5.8 million during the nine months ended September 30, 2009. |
See Note 22 to our audited consolidated financial statements for
selected financial information by segment for each of the last
three fiscal years.
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We distribute our products nationally through an extensive and
diversified independent distribution network. Our distributors
include financial institutions, employee benefits brokers, third
party administrators, specialty brokers, independent agents and
advisors. We believe that our multi-channel distribution network
allows us to access a broad share of the distributor and
consumer markets for insurance and financial services products.
For example, we currently distribute our annuity and life
insurance products through approximately 16,000 independent
agents, 26 key financial institutions and 4,300 independent
employee benefits brokers. We continually add new distribution
relationships to expand the breadth of partners offering our
products.
Market
Environment and Opportunities
We believe we are well positioned to capitalize on existing
market opportunities, including:
| • | Increasing need for retirement savings and income. There are significant demographic factors that indicate increased need for retirement solutions. These factors include: |
| • | according to the U.S. Census Bureau, there are 76.8 million baby-boomers (Americans born between 1946 and 1964) who are at or near retirement age; and |
| • | according to the U.S. Census Bureau, there are 61.6 million members of Generation X (Americans born between 1965 and 1979). We believe these members of Generation X are likely to fund their retirement from personal savings. |
Many of these individuals have experienced significant declines
in the value of their savings as a result of recent market
turmoil or have saved too little for retirement. According to
the Employee Benefit Research Institute, or EBRI, as of 2007,
approximately 78% of families with a head of household aged 55
to 65 participated in an employer-based retirement plan or IRA.
EBRI estimates that the median value of this population’s
employer-based retirement plans declined 14.7% from
approximately $81,000 in 2007 to approximately $69,100 in June
2009. As a result of these demographic factors, we expect
greater demand for retirement savings products that supplement
social security. In particular, we believe demand will continue
to grow for products like immediate annuities that offer income
streams that cannot be outlived.
| • | Shift in customer demand toward simple to understand products. The equity and bond market dislocation of the last 18 months shifted customer and distributor demand toward simple to understand and predictable products. Customers increasingly demand savings and income oriented products (such as fixed annuities) that offer transparency and stable returns that are higher than returns on savings accounts. Industry sales of savings and income oriented products have grown substantially while sales of equity market based products (such as variable annuities) have fallen. Illustrating this trend, Kehrer/LIMRA reported that industry sales of variable annuities declined by 26% in the first six months of 2009 compared to the equivalent 2008 period. Conversely, industry sales of fixed annuities grew by 46% over the same period. |
| • | Continued demand for affordable health insurance. According to the Kaiser Family Foundation, health insurance premiums in the United States increased 131% from 1999 to 2009; meanwhile, the Consumer Price Index increased only 28%. As health care costs continue to rise faster than inflation, the demand for affordable health insurance options has increased. According to the Self-Insurance Institute of America, 75 million people in the United States under the age of 65 receive their benefits through self-funded plans, including 47% of workers in smaller firms and 76% of workers in midsize firms. We believe we can grow our business by providing employees with affordable access to health insurance through employer-sponsored limited benefit employee health plans and by offering group medical stop-loss insurance to medium and large businesses that self-fund their medical plans. |
Our
Competitive Strengths
Our competitive strengths enabled us to perform well across all
of our operating segments through the recent market turmoil.
Since January 1, 2008 we have added 26 distribution
partners, developed 14 new products and grown our assets under
management by $3.0 billion, or 17.4%. Our sales for the
first nine
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months of 2009 were $2.2 billion, an increase of 260% over
our sales during the first nine months of 2007. Our competitive
strengths include:
Balance sheet focus. We are vigilant about
maintaining a strong balance sheet in all economic environments.
We believe our strong balance sheet will allow us to continue
growing our business and market share as many of our competitors
must first shore up their own balance sheets.
| • | Superior investment management. We pursue a value-oriented investment approach focused on disciplined matching of assets and liabilities and preservation of principal. We believe we have built a conservative asset portfolio illustrated by the following (as of September 30, 2009): |
| – | Subprime exposure of only $0.3 million |
| – | Alt-A exposure totaling less than 1% of invested assets, with 88% of Alt-A exposure being supported by fixed rate collateral |
| – | No exposure to option adjustable rate mortgages, or option ARMs |
| – | 99% of our commercial mortgage-backed security, or CMBS, portfolio is rated AAA and has a weighted-average credit enhancement of 28% |
| – | Minimal exposure to alternative assets, such as hedge funds and private equity funds | |
| – | Below investment grade fixed maturities represent less than 7% of invested assets |
This investment approach has resulted in what we believe to be
relatively strong performance. For example:
| – | Our total pre-tax net realized gains (losses) on sales and impairments of fixed maturities cost 41 basis points for the first nine months of 2009, cost 52 basis points for 2008, and cost an annualized average 19 basis points since January 1, 2005 |
| – | Our commercial mortgage portfolio has a weighted-average loan-to-value ratio of 54% and only one non-performing loan |
| – | Since January 1, 2005, our equity portfolio has grown at an annualized rate of 10.1% compared to an annualized return of (0.8)% for the S&P 500 Index |
| • | Disciplined liability risk management. We believe we have an attractive and diverse mix of businesses that, combined with our disciplined approach to asset/liability matching, enables us to stick to our strategy of offering simple to understand products without adding product features that create liability-side balance sheet volatility. Our liability portfolio includes: |
| – | No guaranteed living benefits, or GLBs, in variable annuity products | |
| – | No shadow accounts in universal life products | |
| – | No term products that are dependent on lapse-supported pricing and securitization of deficiency reserves | |
| – | No high commission/long surrender period indexed annuities |
Because we do not offer these product features, we avoided
having a complex derivative hedging portfolio similar to those
found on the balance sheets of many of our competitors.
| • | Strong financial position. We believe we have a strong and transparent balance sheet due to the lack of off-balance sheet obligations and embedded guarantees on variable products, and limited derivative and alternative investments. We have no value of business acquired, or VOBA, on our balance sheet and minimal goodwill. We believe that we compare favorably to our industry in terms of the following financial strength metrics (as of September 30, 2009): |
| – | Our deferred acquisition costs, or DAC, is 16% of stockholders’ equity and 17% of adjusted book value |
| – | Our goodwill is 2% of stockholders’ equity and adjusted book value |
| – | We have no outstanding debt balances maturing until 2016 |
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| – | Stockholders’ equity is 102% and adjusted book value is 100% of regulatory capital |
| – | Our risk-based capital ratio is 361% |
| – | Our AOCI improved from $(1,052.6) million at December 31, 2008 to $29.8 million at September 30, 2009 |
Adjusted book value is a non-GAAP measure. For a reconciliation
of adjusted book value to stockholders’ equity and for a
summary presentation of our operating results and financial
position determined in accordance with GAAP, please see
“— Summary Historical Consolidated Financial and
Other Data” on page 9.
Powerful and expanding national distribution
network. We have a two-pronged approach to
expanding product sales by working with our existing
distribution relationships and by adding new distribution
partners.
| • | High quality distribution relationships. We offer consumers access to our products through a national multi-channel network, including financial institutions, employee benefits brokers, third party administrators, specialty brokers and independent agents. We are adept at designing simple to understand, yet innovative products to meet the changing demands of the market. By working closely with our distributors, we are able to anticipate opportunities in the marketplace and rapidly address them. By treating our distributors as clients and providing them with outstanding levels of service, we have cultivated strong relationships over decades that we believe allow us to avoid competing on price alone. In addition, we have flexible information technology platforms that allow us to integrate our products onto the operating platforms of our distributors, which we believe provides us with a competitive advantage in attracting new distributors. |
| • | Strong bank distribution channel. According to Kehrer/LIMRA, we were a top-five seller of fixed annuities through banks in the first six months of 2009. Our strong bank distribution relationships make us well-positioned to continue to take advantage of the increased investor demand for fixed annuities and to take market share away from financially stressed competitors. We also have increased our sales of single premium immediate annuities and single premium life insurance through existing and new bank distribution partners. During the first nine months of 2009, our sales of single premium immediate annuities through banks increased 18% and single premium life volumes increased 74% as compared to the first nine months of 2008. |
Leading group medical stop-loss insurance
provider. We have been a leading provider of group
medical stop-loss insurance since 1976. We have built a
consistently profitable platform with high levels of customer
service and disciplined underwriting practices. In the last
25 years, our group medical stop-loss insurance business
has experienced only two calendar years of net losses, the most
recent being 1999.
Diverse business mix. We believe that our
diverse mix of businesses offers us a greater level of financial
stability than many of our similarly-sized competitors across
business and economic cycles. Given our lack of reliance on any
particular product or line of business, we are able to allocate
resources to markets with the highest potential returns at any
given point in time. By doing so, we are able to avoid certain
markets when they are experiencing heavy competition and related
pricing pressure without sacrificing our ability to grow
revenues.
Proven management team. We have a high
quality management team with an average of 25 years of
insurance-industry experience, led by Randy Talbot who has been
our chief executive officer since 1998. Having spent a
significant portion of his
34-year
insurance industry career operating an insurance brokerage,
Mr. Talbot intimately understands the needs of our
distributors. We also have an experienced board of directors,
which includes industry professionals who have worked closely
with us to develop our strategies and operating philosophies.
Our long-term incentive plan aligns management’s incentives
with our stockholders’ interests.
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Our
Growth Strategies
The recent market turmoil and its effects on our competitors
present a compelling opportunity to continue adding business at
attractive returns. Further, we believe our growth strategies
are well aligned with the current market environment as well as
the long-term competitive dynamics of our industry. We believe
the following proven, long-term growth strategies position us
well to consistently grow stockholder value despite periods of
aggressive pricing by our competitors:
| • | Sell simple to understand products. We have built a reputation as a writer of simple to understand products that meet the needs of customers and our distribution partners. This reputation has been strengthened by the retrenchment of many of our competitors due to recent market events and the consistency of our presence and product lineup over the past several years. We believe independent distributors highly value our demonstrated ability to accept new business during turbulent conditions while maintaining strong financial performance. As a result, we are able to take advantage of the convergence of increasing customer desire for simple to understand products and the financial challenges of several market competitors. |
| • | Broaden and deepen distribution relationships. Our distribution strategy is to deliver multiple products through a single point of sale, thereby reducing our distribution costs. We believe that we have an unprecedented opportunity to expand our existing relationships and build new long-term relationships due to the recent market disruption that has distracted and refocused our competitors. Since January 1, 2008, we have added eight new bank relationships with approximately 6,100 sales representatives. In addition, we have added 18 new independent distribution relationships which added 2,400 new sales representatives actively selling our products. These new relationships, in tandem with existing relationships, have enabled us to grow our sales from $617 million during the first nine months of 2007 to $2.2 billion in the first nine months of 2009. |
| • | Effectively deploy capital. We intend to deploy our capital prudently while maximizing our profitability and long-term growth in stockholder value. Our capital management strategy is to maintain financial strength through conservative and disciplined risk management practices, capital efficient product design, effective asset/liability management and opportunistic market share growth in all our business segments. We will also maintain our conservative investment management philosophy, which includes holding a high quality investment portfolio and carefully matching our investment assets against the duration of our insurance product liabilities. This approach will enable us to remain flexible to allocate capital to opportunities within our business segments that offer the highest returns. |
Group
Overview
We offer a full range of employment-based benefit products and
services targeted primarily at employers, unions and public
agencies with 50 to 5,000 employees. Group’s products
include group medical stop-loss insurance sold to employer
self-funded health plans; limited medical benefits insurance for
employees not able to participate in a traditional health plan,
such as part-time, seasonal and temporary workers; group life,
accidental death and dismemberment insurance; and disability
products. We purchase reinsurance coverage to limit our exposure
to losses from our group medical stop-loss, life, short-term
disability and long-term disability products. In general, we
retain group medical stop-loss risk up to $1.0 million per
individual and reinsure the remainder. We reinsure 50% of our
Group life risk and cap our liability at $0.5 million per
individual. Our short-term and long-term disability risk is 100%
reinsured, except for the short-term disability product sold
within limited benefit medical plans, which is not reinsured.
We sell through several types of distributors within the Group
segment, including third party administrators or TPAs, employee
benefits brokers, consultants and Administrative Services Only,
or ASO, arrangements. ASOs are fully insured networks that also
offer our group medical stop-loss insurance.
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We work closely with employee benefits brokers, consultants and
the employer to design benefit plans to meet the employer’s
particular requirements. Our customers primarily are small and
mid-size employers that require knowledgeable employee benefits
brokers, consultants and insurance company representatives to
understand their individual financial needs and employee
profiles, and to customize benefit plans that are appropriate
for them. We believe our extensive experience and expertise in
group medical stop-loss insurance, limited medical benefits
insurance, group life, accidental death and dismemberment
insurance and disability products provide us with opportunities
to support close broker relationships and to provide employers
innovative and customer-centric benefit plans.
Products
Group
Medical Stop-Loss
Our group medical stop-loss insurance, our leading product in
the Group segment, is provided to employers that self-fund their
employees’ health claim costs. Such employers provide a
health plan to their employees and pay all claims and
administrative costs. Our product helps employers manage health
expenses by reimbursing specific claim amounts above a certain
dollar deductible and by reimbursing aggregate claims above a
total dollar threshold. Group medical stop-loss is our biggest
Group product and represented 90.6% of earned premiums in our
Group segment for the nine months ended September 30, 2009.
Limited
Medical Benefits
Our limited medical benefits insurance is provided to employers
for health coverage to employees not otherwise eligible to
participate in traditional plans, such as part-time, seasonal
and temporary workers. The employer has a great deal of
flexibility in choosing benefits available to employees and
therefore managing total health costs incurred by the employer.
Our limited medical benefits product represented 7.0% of earned
premiums in our Group segment for the nine months ended
September 30, 2009.
Life
Insurance, Accidental Death and Dismemberment
Our group term life insurance product provides benefits in the
event of an insured employee’s death. The death benefit can
be based upon an individual’s earnings or occupation, or
can be fixed at a set dollar amount. Our products also include
optional accidental death and dismemberment coverage as a
supplement to our term life insurance policies. This coverage
provides benefits for an insured employee’s loss of life,
limb or sight as a result of accidental death or injury.
Disability
Insurance
Our group long-term disability coverage is designed to cover the
risk of employee loss of income during prolonged periods of
disability. Our group short-term disability coverage provides
partial replacement of an insured employee’s weekly
earnings in the event of disability resulting from an injury or
illness. Benefits can be a set dollar amount or based upon a
percentage of earnings. We reinsure 100% of the risk associated
with this business.
Underwriting
and Pricing
Group insurance pricing reflects the employer group’s
claims experience and the risk characteristics of each employer
group. The employer’s group claims experience is reviewed
at the time the policy is issued and each renewal year
thereafter, resulting in ongoing adjustments to pricing. The key
pricing and underwriting criteria are medical cost trends, the
employer’s selected provider network discount structure,
the employer group’s demographic composition, including the
age, gender and family composition of the employer group’s
members, the industry, geographic location, regional economic
trends, plan design and prior claims experience.
We face significant competition in the Group segment operations.
Our competitors include large and highly rated insurance
carriers. Some of these competitors have greater resources than
we do, and many of them offer similar products and use similar
distribution channels. We strive to write and renew only
business
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that meets our return targets, and this discipline sometimes
leads to a negative impact on our market share. However, this
remains consistent with our focus on profitability. Competition
is based primarily upon product pricing and features,
compensation and benefits structure and support offered.
Pricing in the medical stop-loss insurance market has proven to
be cyclical. Recently, we have seen generally disciplined
pricing in the medical stop-loss insurance market, which may
suggest a developing trend towards higher pricing for this
product line, based on our experience with previous pricing
cycles.
Retirement
Services
Overview
Our Retirement Services operation offers a full range of fixed
and variable deferred annuities in both the qualified and
non-qualified markets. Qualified contracts include IRAs, Roth
IRAs, tax-sheltered annuities (marketed to teachers and
not-for-profit
organizations) and Section 457 plans. We offer these
products to a broad range of consumers who want to accumulate
tax-deferred assets for retirement, desire a reliable source of
income during their retirement or seek to protect against
outliving their assets during retirement.
We offer our annuities primarily through financial institutions,
broker-dealers, independent agents, financial advisors and
worksite employee benefits specialists.
The demand for fixed annuities has increased as consumers seek
the simple to understand stable return offered by fixed annuity
products. We believe that demand for fixed annuity and other
investment products that help consumers supplement their social
security benefits with reliable retirement income will endure as
consumers rebuild and refocus on savings after the recent market
turmoil.
We offer a variety of simple variable annuity products that
position us to increase sales to consumers looking to maximize
earnings over the long-term and have a tolerance for some
volatility in their underlying investments.
We believe that the small to mid-sized employer market place
will be an area of fixed and variable annuity sales growth as
more employers eliminate traditional pensions and offer defined
contribution plans with lower administrative costs. As employers
drive down employee costs, we believe they still want to offer
competitive retirement benefit plans as long as the
administrative costs are reasonable. Our products are designed
to allow employers to provide their employees with attractive
retirement investments for a relatively low cost. Once those
retirement plan customers decide to retire or rollover their
funds, we offer a suite of IRAs, Roth IRAs, immediate annuities
and other retirement vehicles. It is our goal to capture and
hold those customers by offering products that address their
evolving needs and through excellent service to our distribution
partners and customers.
Products
Fixed
Annuities
We offer fixed single premium and flexible premium deferred
annuities that provide for a premium payment at time of issue,
an accumulation period and an annuity payout period beginning at
some future date. Our most popular products are our Select and
Custom series that offer three, five and seven-year surrender
charge periods and a choice of one, three, or five-year interest
rate lock periods. After the interest rate lock period, the
crediting rate is subject to change at our discretion (subject
to the minimum guaranteed rate in the contract) based upon
competitive factors, portfolio earnings rate, prevailing market
rates and product profitability. Our fixed annuity contracts are
supported by our general account, and the accrual of interest is
generally on a tax-deferred basis to the owner. The majority of
our fixed annuity contract owners retain their contracts through
the surrender penalty period. After one year in the annuity
contract, the contract owner may elect to take the accumulated
value of the annuity and convert it to a series of future
payments that are received over a selected period of time.
Our fixed annuity contracts permit the contract owners at any
time during the accumulation period to withdraw all or part of
the premium paid, plus the amount credited to their accounts,
subject to contract
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provisions such as surrender charges that vary depending upon
the terms of the product. The contracts impose surrender charges
that typically vary from 5.0% to 8.0% of the amount withdrawn,
starting in the year of contract issue and decreasing to zero
over a three to eight-year period. Approximately
$5.1 billion, or 68.6%, of the total account value of our
fixed annuities as of September 30, 2009, were subject to
surrender charges.
As market conditions change, we change the initial crediting
rate for newly issued fixed deferred annuities. We maintain the
initial crediting rate for a minimum period of one year or the
guarantee period, whichever is longer. Thereafter, we may adjust
the crediting rate annually for any given deposit. Most of our
recently issued annuity contracts have lifetime minimum
guaranteed crediting rates between 1.0% and 1.5%.
Our earnings from fixed annuities are based upon the spread
between the crediting rate on our fixed annuity contracts and
the returns we earn in our general account on our investment of
premiums, less acquisition and administrative expenses.
Variable
Annuities
We offer variable annuities that allow the contract owner to
make payments into a guaranteed-rate account and separate
accounts divided into subaccounts that invest in underlying
investment portfolios. Like a deferred fixed annuity, a deferred
variable annuity has an accumulation period and a payout period.
Although the fixed-rate account is credited with interest in a
manner similar to a fixed deferred annuity, there is no
guaranteed minimum rate of return for investments in the
subaccounts, and the contract owner bears the entire risk
associated with the performance of these subaccounts, subject to
the guaranteed minimum death benefit or any other benefit
offered under the contract.
Similar to our fixed annuities, our variable annuity contracts
permit the contract owner to withdraw all or part of the
premiums paid, plus the amount credited to the contract
owner’s account, subject to contract terms such as
surrender charges. The cash surrender value of a variable
annuity contract depends upon the allocation of payments between
fixed and variable subaccounts, how long the contract has been
in force, and the investment performance of the variable
subaccounts to which the contract owner has allocated assets.
Variable annuities provide us with fee revenue in the form of
flat-fee charges, mortality and expense risk charges, and asset
related administration charges. The mortality and expense risk
charge and asset related administration charge equal a
percentage of the contract owner’s assets in the separate
account and typically range from 1.00% to 1.55% per annum. In
addition, some contracts may offer the option for contract
owners to purchase additional features, such as GMDB, for
additional fees that are paid for through charges equal to a
percentage of the contract owner’s assets. Substantially
all of our GMDB risk on our individual variable annuities is
reinsured.
Our variable annuity strategy is to offer simple product designs
that emphasize long-term returns for the customer. We do not
offer the myriad of complex guaranteed living benefits found in
most of the products on the market. As a result, we are not a
significant writer of variable annuity business. Unlike some of
our competitors, we are not having to reprice our products to
properly charge for these features. Our Symetra Focus Variable
Annuity product is an example of our approach to the variable
annuity marketplace. Focus is one of the most cost-effective
products on the market. Because of the cost-effective design,
Focus is one of the few variable annuities available featuring
index investment options from Vanguard. The product’s
low-cost structure and investment options are designed to
benefit the clients. The lower cost structure allows our clients
to keep a greater share of investment returns in their accounts
as opposed to paying fees for benefits that may not be needed.
For clients that seek an income solution from their variable
product, we offer standard annuitization features and a
long-life benefit that is funded over time. Our long-life
benefit is unique in the industry and works like a multi-premium
immediate annuity, or MPIA, with a deferred payment start date.
Historically, we have seen variable annuity sales decline during
and after equity market declines and volatility, but we expect
Focus to garner more sales as consumers gain more confidence in
the equity market and the competition continues to reduce
guaranteed living benefit options or increase the costs of these
benefits.
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Retirement
Plans
We offer a wide range of annuities to fund employer-sponsored
retirement plans, which include 401(k) plans (including
traditional, Safe Harbor and SIMPLE profit sharing plans),
403(b) plans and Section 457 plans.
Underwriting
and Pricing
We price our products based upon our expected investment returns
and our expectations for mortality, longevity and the
probability that a policy or contract will remain in force from
one period to the next, referred to as persistency, for the
group of our contract owners as a whole, taking into account
mortality improvements in the general population and our
historical experience. We price deferred annuities by analyzing
longevity and persistency risk, volatility of expected earnings
on our assets under management, risk profile of the product,
special reserving and capital requirements, and the expected
expenses we will incur.
Income
Annuities
Overview
We offer immediate annuities that guarantee a series of payments
that continue either for a certain number of years or for the
remainder of an annuitant’s life.
We offer structured settlement contracts that provide an
alternative to a lump sum settlement, generally in a personal
injury lawsuit or worker’s compensation claim, and
typically are purchased by property and casualty insurance
companies for the benefit of an injured claimant. The structured
settlements provide scheduled payments over a fixed period or,
in the case of a life-contingent structured settlement, for the
life of the claimant, or a combination of fixed and life
contingent payments.
Products
Immediate
Annuities
We have recently experienced
year-over-year
increases in our sales of our immediate annuities products. We
anticipate further increases in sales given the demographic
trend of greater numbers of people approaching retirement age
and their corresponding need for dependable retirement income
that lasts their entire life. We believe that we are one of the
most innovative designers of immediate annuity products.
Immediate annuities differ from deferred annuities in that they
provide for contractually guaranteed payments that generally
begin within one year of issue. Generally the immediate
annuities available in the marketplace do not provide for
surrender or policy loans by the contractholder. We offer a
liquidity feature that allows the contractholder to withdraw
portions of the future payments. We also offer a feature that
allows benefits to be converted to a lump sum after death of the
annuitant. We recently introduced the Freedom Income product
that enables the customer to pick a payment start date several
years after contract purchase. This product is a cost effective
means of funding a future income stream.
Structured
Settlements
Structured settlement contracts provide an alternative to a lump
sum settlement, generally in a personal injury lawsuit or
worker’s compensation claim, and typically are purchased by
property and casualty insurance companies for the benefit of an
injured claimant. The structured settlements provide scheduled
payments over a fixed period or, in the case of a
life-contingent structured settlement, for the life of the
claimant, and may have a guaranteed minimum period of payments.
Structured settlement contracts also may provide for irregularly
scheduled payments to coincide with anticipated medical or other
claimant needs. These settlements offer tax-advantaged,
long-term financial security to the injured party and facilitate
claim settlement for the property and casualty insurance
carrier. Structured settlement contracts are long-term in
nature, guarantee a fixed benefit stream and generally do not
permit surrender or borrowing against the amounts outstanding
under the contract. In 2005, we introduced funding services to
clients with financial
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circumstances that may have changed from the time they
originally received a structured settlement. Our initial funding
service product provides an immediate lump sum payment to
replace future benefit payments and includes coordinating the
court approval process. In 2009, we expanded the funding service
product offerings to allow clients to receive a lump sum and to
change the timing of future benefit payments. This product has
been well received by our clients and the courts.
Our current financial strength ratings limit our ability to
offer structured settlement contracts. If our principal life
insurance company subsidiary, Symetra Life Insurance Company,
increases its financial strength ratings from “A”
(Excellent) to “A+” (Excellent) from A.M. Best,
courts will be more willing to approve structured settlement
contract arrangements from us. Improving this key rating will
allow us to participate fully in this market.
Underwriting
and Pricing
We price immediate annuities and structured settlements using
industry produced annuity mortality information, our mortality
experience and assumptions regarding continued improvement in
annuitant longevity, as well as assumptions regarding investment
yields at the time of issue and thereafter. Our structured
settlement contracts and traditional immediate annuities can be
underwritten in our medical department by medical doctors and
other trained medical personnel. If the medical department
determines the annuitant has a shorter or longer than standard
life expectancy, we can adjust our pricing to reflect that
information.
Our earnings from immediate annuities and structured settlement
annuities are driven by the spread on the returns we earn in our
general account on our investment of premiums and the interest
rate we used to determine the amount of income payments a client
receives at the time they purchase their annuity.
Earnings increase or decrease on these products depending on our
mortality experience.
Individual
Overview
Life insurance provides protection against financial hardship
after the death of an insured by providing cash payments to the
beneficiaries of the policyholder. Single premium life and
universal life insurance products also provide an efficient way
for assets to be transferred to heirs. Our principal individual
life insurance product is term life, which provides life
insurance coverage with guaranteed level premiums for a
specified period of time with little or no buildup of cash value
that is payable upon lapse of the coverage. In addition to term
life insurance, we offer universal life insurance products,
which are designed to provide protection for the entire life of
the insured and may include a buildup of cash value that can be
used to meet the policyholder’s particular financial needs
during the policyholder’s lifetime. We also sell bank-owned
life insurance, or BOLI, to financial institutions seeking a
fixed yield investment that efficiently matches future employee
benefit liabilities.
We price our traditional insurance policies based primarily upon
our own historical experience in the underwriting risk
categories that we target. We target individuals in preferred
risk categories and offer them attractive products at
competitive prices in addition to targeting more standard risks.
Persons in preferred risk categories include healthier
individuals who generally have family histories that do not
present increased mortality risk. We also have significant
expertise in evaluating people with health problems and offer
appropriately priced coverage for people who meet our
underwriting criteria.
We offer our life insurance products primarily through three
distribution channels: independent agents and financial
advisors, financial institutions, and specialty agents for BOLI.
We believe there are opportunities to expand our sales through
each of these distribution channels.
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Products
Term Life
Insurance
Our term life insurance policies provide a death benefit if the
insured dies while the coverage is in force. Term life policies
have little to no cash value buildup and therefore rarely have a
payment due if and when a policyholder decides to lapse the
policy. As of September 30, 2009, we had
$181.5 million of reserves associated with our term life
and other traditional life products.
Our primary term life insurance products have guaranteed level
premiums for initial terms of 10, 15, 20 or 30 years. After
the guaranteed period expires, premiums increase annually and
the policyholder has the option to continue under the current
policy by paying the increased premiums without demonstrating
insurability or qualifying for a new policy by submitting again
to the underwriting process. Coverage continues until the
insured reaches the policy expiration age or the policyholder
ceases to make premium payments or otherwise terminates the
policy, including potentially converting to a permanent plan of
insurance. The termination of coverage is called a lapse. For
newer policies, we seek to reduce lapses at the end of the
guaranteed period by gradually grading premiums to the attained
age scale of the insured over the five years following the
guaranteed period. After this phase-in period, premiums continue
to increase as the insured ages.
In 2009, we launched a new term insurance product designed
primarily for the mortgage term market. This product allows
customers to safeguard their home (often their most valuable
asset) in the event of death. This product includes an optional
return of premium feature allowing for the customer to pay
additional premiums for the comfort of knowing they will receive
back at a minimum what they paid in premiums.
We design and price our term insurance to limit the impact from
statutory reserves mandated by the valuation of life insurance
policies model regulation, also known in the insurance industry
as XXX deficiency reserves. We had $8.0 million of XXX
reserves as of September 30, 2009. Our product pricing is
not dependent on securitization of XXX deficiency reserves.
Universal
Life Insurance
Our universal life insurance policies provide policyholders with
lifetime death benefit coverage, the ability to accumulate
assets on a flexible, tax-deferred basis and the option to
access the cash value of the policy through a policy loan,
partial withdrawal or full surrender. Our universal life
products also allow policyholders to adjust the timing and
amount of premium payments. We credit premiums paid, less
certain expenses, to the policyholder’s account and from
that account deduct regular expense charges and certain risk
charges, known as COI, which generally increase from year to
year as the insured ages. Our universal life insurance policies
accumulate cash value that we pay to the insured when the policy
lapses or is surrendered. Most of our universal life policies
also include provisions for surrender charges for early
termination and partial withdrawals. As of September 30,
2009, we had $677.5 million of reserves associated with
various universal life products, including variable universal
life.
We credit interest on policyholder account balances at a rate
determined by us, but not less than a contractually guaranteed
minimum. Our in force universal life insurance policies
generally have minimum guaranteed crediting rates ranging from
3.0% to 4.5% for the life of the policy.
We design and price our universal life insurance products to
limit the impact from statutory reserves mandated by the
valuation of life insurance policies model regulation, also
known in the insurance industry as AXXX deficiency reserves. We
had $18.7 million of AXXX reserves as of September 30,
2009. Our product pricing is not dependent on securitization of
AXXX deficiency reserves.
Bank-Owned
Life Insurance (BOLI)
Our life insurance business also includes $3.9 billion of
BOLI statutory reserves. Many financial institutions purchased
several billion dollars of BOLI as a means of generating the
cash flow needed to fund benefit liabilities. A fixed rate BOLI
product is a highly stable, low-risk source of financing that
can offer net annual after-tax returns that are generally higher
than traditional bank investments. Over the last few years
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some financial institutions bought variable BOLI products and
experienced significant volatility and write-downs associated
with those products. Our book of BOLI business is 100% fixed.
Underwriting
and Pricing
We believe our rigorous underwriting and pricing practices are
significant drivers of the consistent profitability of our life
insurance business. Our fully underwritten term life insurance
is 50% to 90% reinsured, which limits mortality risk retained by
us. We set pricing assumptions for expected claims, lapses,
investment returns, expenses and customer demographics based on
our own relevant experience and other factors. Our strategy is
to price our products competitively for our target risk
categories and not necessarily to be equally competitive in all
categories.
Our fully underwritten policies place each insurable life
insurance applicant in one of eight primary risk categories,
depending upon current health, medical history and other
factors. Each of these eight categories has specific health
criteria, including the applicant’s history of using
nicotine products. We consider each life insurance application
individually and apply our guidelines to place each applicant in
the appropriate risk category, regardless of face value or net
amount at risk. We may decline an applicant’s request for
coverage if the applicant’s health or other risk factor
assessment is unacceptable to us. We do not delegate
underwriting decisions to independent sales intermediaries.
Instead, all underwriting decisions are made by our own
underwriting personnel or by our automated underwriting system.
We often share information with our reinsurers to gain their
insights on potential mortality and underwriting risks and to
benefit from their broad expertise. We use the information we
obtain from the reinsurers to help us develop effective
strategies to manage our underwriting risks. For specific
markets where fully underwritten products are not preferred by
the distributor, we have developed specially priced products to
support a “simplified issue” process. This process
enables us to reach applicants not called on by traditional
insurance agents. “Simplified issue” contracts are
typically generated via worksite sales to employees and sales to
retail bank customers. Insurance amounts are limited and
separate underwriting guidelines are applied for simplified
issue policies.
Other
Our Other segment consists primarily of unallocated surplus net
investment income, unallocated operating expenses including
interest expense on debt, tax credits from certain investments,
the results of small, non-insurance businesses that are managed
outside of our operating segments and intersegment elimination
entries.
Operating
Subsidiaries
Symetra Financial Corporation is a holding company, and we
conduct business through our subsidiaries. Our primary operating
subsidiaries are as follows:
|
Name
|
Operating Segment
|
Other Information
|
||
|
Symetra Life Insurance Company
|
All segments | Primary operating subsidiary | ||
|
First Symetra National Life Insurance Company of New York
|
Primarily Retirement Services | |||
|
Clearscape Funding Corporation
|
Other | |||
|
Symetra Assigned Benefits Service Company
|
Income Annuities | Structured settlements | ||
|
Symetra Securities, Inc.
|
Retirement Services | Broker-dealer; distributor | ||
|
Symetra Investment Services, Inc.
|
Other | Broker-dealer; distributor | ||
|
Medical Risk Managers, Inc.
|
Group | Managing general underwriter | ||
|
Health Network Strategies, LLC
|
Group | 60% owned joint venture |
Distribution
We distribute our products through an extensive and diversified
distribution network. We believe access to a variety of
distribution channels enables us to respond effectively to
changing consumer needs and distribution trends. We compete with
other financial services companies to attract and retain
relationships in each
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of these channels. Some of the factors that lead to our success
in competing for sales through these channels include amount of
sales commissions and fees we pay, breadth of our product
offerings, our perceived stability and our financial strength
ratings, marketing and training we provide and maintenance of
key relationships with individuals at those firms. We believe we
have a well diversified multi-channel distribution network to
capture a broad share of the distributor and consumer markets
for insurance and financial services products.
Our Group segment distributes their products through employee
benefits brokers, ASOs and TPAs.
Our Individual, Retirement Services and Income Annuities
segments distribute their products through the following
channels:
| • | financial institutions; | |
| • | brokerage general agencies and independent agents; and | |
| • | structure settlement specialty brokers. |
The following table sets forth our annualized first-year
premiums and deposits on new policies in our Group, Retirement
Services, Income Annuities and Individual segments:
Sales for
the Year Ended December 31, 2008
by Distribution Channel
by Distribution Channel
| Segment | ||||||||||||||||
|
Retirement |
Income |
|||||||||||||||
|
Distribution Channel
|
Group(1) | Services(2) | Annuities(3) | Individual(4) | ||||||||||||
| (In millions) | ||||||||||||||||
|
Financial institutions
|
$ | — | $ | 1,558.5 | $ | 70.7 | $ | 1.8 | ||||||||
|
Employee benefits brokers/TPAs
|
112.6 | — | — | — | ||||||||||||
|
Independent agents/BGAs
|
— | 208.0 | 45.7 | 5.3 | ||||||||||||
|
Structured settlements/BOLI
|
— | — | 24.4 | 2.9 | ||||||||||||
| (1) | Includes medical stop-loss, life, disability and limited medical benefits insurance. | |
| (2) | Includes deferred and variable annuities and retirement programs. | |
| (3) | Includes immediate annuities and structured settlements. | |
| (4) | Includes term, universal, single premium, BOLI and variable life insurance. |
Financial Institutions. We have agency agreements
with 26 key financial institutions, accounting for approximately
37,000 agents and registered representatives in all
50 states and the District of Columbia. We use financial
institutions to distribute a significant portion of our fixed
and variable annuities, as well as a growing portion of our life
insurance policies.
One financial institution, JPMorgan Chase & Co.,
accounted for 45.6% and 38.2% of our total sales in 2008 and for
the nine months ended September 30, 2009, respectively,
selling primarily fixed annuity products. In September of 2008,
JPMorgan Chase & Co. (which owns the Chase banking
business) acquired the banking operations of Washington Mutual,
Inc. Prior to that acquisition, Chase and Washington Mutual each
individually accounted for a significant portion of our total
sales. We do not believe that the acquisition has negatively
affected our distribution relationship with the combined
institution.
Under our two agreements with Chase Insurance Agency, Inc. (an
affiliate of JPMorgan Chase & Co.), Chase acts as a
writing agency in distributing certain of our annuity and life
insurance products and, with the consent of the policyowner,
also acts as servicing agent with regard to those products. In
exchange for these services, we pay commissions and service fees
to Chase on premiums paid to the Company and we pay trail
commissions, which are additional periodic commissions, to Chase
based on the value of the policies outstanding. These agreements
do not have a fixed term. With respect to future business, one
of the agreements is terminable by either party upon
30 days’ written notice to the other party and the
other agreement is terminable upon written notice.
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Employee Benefits Brokers, Third Party
Administrators. We distribute our Group segment
products through approximately 2,100 agencies in the employee
benefits broker/third party administrator channel. This
distribution channel is also supported by approximately 30 of
our employees located strategically across a nationwide network
of 14 regional offices.
Independent Agents, Brokerage General Agencies. We
distribute life insurance and fixed and deferred annuities
through approximately 16,000 independent agents located
throughout the United States from approximately 9,400 different
agencies. These independent agents market our products and those
of other insurance companies.
Structured Settlements. We distribute structured
settlements through approximately 560 settlement consultants
representing 85 agencies in 48 states and the District of
Columbia. We believe our ability to participate and compete
effectively in the sales of structured settlements will depend
on our ability to achieve upgrades from the ratings agencies.
Marketing
We promote and differentiate our products and services through
the breadth of our product offerings, technology services,
specialized support for our distributors and innovative
marketing programs to help distributors grow their business with
our products.
We have customized our marketing approach to promote our brand
to distributors of our products whom we believe have the most
influence in our customers’ purchasing decisions. We built
our brand among this constituency in three phases: an outreach
to our employees to understand and deliver on the brand, an
outreach to our independent producers in our sales channels and
a prudent consumer outreach. These programs include advertising
in trade and business periodicals, consumer advertising with a
small, prudent budget leveraged by its ties to our producers,
media outreach to both trade and consumer periodicals and
community outreach, including partnering with distributors.
At the product level, we simplify the sales process so that the
recommendation to purchase our product is as easy and seamless
as possible. This is accomplished through our product
collateral, technology in the sales process and ease of service
after the sale.
We seek to build recognition of our brand and maintain strong
relationships with leading distributors by providing a high
level of specialized support, such as product training, sales
solutions, and financial product design for targeted customers.
Reserves
Overview
We calculate and maintain reserves for estimated future benefit
payments to our policyholders and contractholders in accordance
with U.S. GAAP. We establish reserves at amounts that we
expect to be sufficient to satisfy our policy obligations. We
release these reserves as those future obligations are
extinguished. The reserves we establish necessarily reflect
estimates and actuarial assumptions with regard to our future
experience. These estimates and actuarial assumptions involve
the exercise of significant judgment. Our future financial
results depend significantly upon the extent to which our actual
future experience is consistent with the assumptions we have
used in pricing our products and determining our reserves. Many
factors can affect future experience, including economic and
social conditions, inflation, healthcare costs, changes in
doctrines of legal liability and damage awards in litigation.
Therefore, we cannot determine with complete precision the
ultimate amounts we will pay for actual future benefits or the
timing of those payments.
Individual
and Group Life Insurance and Group Health
Insurance
We establish reserves for life insurance policies based upon
generally recognized actuarial methods. We use mortality tables
in general use in the United States, modified where appropriate
to reflect relevant
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historical experience and our underwriting practices.
Persistency, expense and interest rate assumptions are based
upon relevant experience and expectations for future development.
The liability for policy benefits for universal life insurance
and BOLI policies is equal to the balance that accrues to the
benefit of policyholders, including credited interest, plus any
amount needed to provide for additional benefits. We also
establish reserves for amounts that we have deducted from the
policyholder’s balance to compensate us for services to be
performed in future periods. The BOLI life reserves were reset
to fair value on the date of the Acquisition.
Our reserves for unpaid group life and health insurance claims,
including our stop-loss medical and other lines, are estimates
of the ultimate net cost of both reported losses that have not
yet been settled and incurred but as yet unreported losses.
Reserves for incurred but as yet unreported claims are based
upon historic incidence rates, severity rates, reporting delays
and any known events that we believe will materially affect
claim levels.
Reserves for long-term disability claims are based upon factors
including recovery, mortality, expenses, Social Security and
other benefit offsets and interest rates. They represent the
actuarial present value of benefits and associated expenses for
current claims, reported claims that have not yet completed and
incurred claims that have not yet been reported. Claims on
long-term disability insurance policies consist of payments to
be made periodically, generally monthly, in accordance with the
contractual terms of the policy.
Retirement
Services and Income Annuities
For our investment contracts, which are primarily deferred
annuities, contractholder liabilities are equal to the
accumulated contract account values, which generally consist of
an accumulation of deposit payments, less withdrawals, plus
investment earnings and interest credited to the account, less
expense, mortality and product charges, if applicable. We also
maintain a separate reserve for any expected future payments in
excess of the account value due to the potential death of the
contractholder. The reserves were reset to fair value on the
date of the Acquisition.
Reserves for future policy benefits on our immediate fixed
annuity contracts are calculated based upon actuarial
assumptions regarding the interest to be earned on the assets
underlying the reserves and, if applicable, the annuitant’s
life expectancy. The reserves were reset to fair value on the
date of the Acquisition, with adjustments to future interest and
mortality assumptions.
Investments
Investment
Management Overview
In managing our investments, we are focused on disciplined
matching of our assets to our liabilities and preservation of
principal. Within this framework, we seek to generate
appropriate risk-adjusted returns through careful individual
security analysis.
For each of our operating segments and for our unallocated
surplus, we separate our investments into one or more distinct
portfolios. Our investment strategy for each portfolio is based
on the expected cash flow characteristics of the portion of the
liabilities of the business segment associated with the
portfolio. The strategies are regularly monitored through a
review of portfolio metrics, such as effective duration, yield
curve sensitivity, convexity, liquidity, asset sector
concentration and credit quality.
In general, we purchase high quality assets to pursue the
following investment strategies for our operating segments:
| • | Group. We invest in short duration fixed income corporate bonds. | |
| • | Retirement Services. We invest in short to medium duration fixed income corporate bonds, mortgage backed securities, commercial loans and a modest amount of below investment grade bonds. |
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| • | Income Annuities. The Income Annuities segment has liability payments that run well beyond 40 years. The majority of the segment’s portfolio is invested in long duration fixed income corporate bonds, mortgage-backed securities and commercial loans. In addition, we invest in equities to support liability payments due more than 40 years in the future. | |
| • | Individual. We invest in medium to long duration fixed income corporate bonds, mortgage-backed securities, commercial mortgages and a modest amount of below investment grade bonds. | |
| • | Other. We invest in short to medium duration fixed income assets. |
We are exposed to three primary sources of investment risk:
| • | Credit risk — risk relating to the uncertainty associated with the continued ability of a given obligor to make timely payments of principal and interest; | |
| • | Interest rate and credit spread risk — risk relating to the market price and/or cash flow variability associated with changes in market yield curves and credit spreads; and | |
| • | Equity risk — risk relating to adverse fluctuations in a particular common stock. |
Our ability to manage these risks while generating an
appropriate investment return is essential to our business and
our profitability.
We manage credit risk by analyzing issuers, transaction
structures and, for our commercial mortgage portfolio, real
estate properties. We use analytic techniques to monitor credit
risk. For example, we regularly measure the probability of
credit default and estimated loss in the event of such a
default, which provides us with early notification of worsening
credit. If an issuer downgrade causes our holdings of that
issuer to exceed our risk thresholds, we automatically undertake
a detailed review of the issuer’s credit. We also manage
credit risk through industry and issuer diversification and
asset allocation practices. For commercial real estate loans, we
manage credit risk through geographic and product-type
diversification and asset allocation. We routinely review
different issuers and sectors and conduct more formal quarterly
portfolio reviews.
We mitigate interest rate and credit spread risk through
rigorous management of the relationship between the duration of
our assets and the duration of our liabilities, seeking to
minimize risk of loss in both rising and falling interest rate
and widening credit spread environments.
We mitigate equity risk by limiting the size of our equity
portfolio to correlate with our exposure to long duration
obligations in our income annuities segment and the ability of
our capital base to absorb downside volatility without creating
capital ratio stress
and/or
constraints on growth. We invest in relatively concentrated
positions in the United States and other developed markets. The
investments are identified using a
bottom-up
fundamental analysis and value oriented investment approach.
Portfolio
Managers
Other than our commercial mortgage portfolio, which is managed
by our employees, we have hired professional investment advisors
to invest our assets. As of September 30, 2009, our
$18.4 billion (amortized cost) fixed income portfolio is
managed by White Mountains Advisors LLC, or WM Advisors, and our
$0.2 billion equity portfolio is managed by Prospector
Partners, LLC, or Prospector.
WM Advisors seeks to reduce and manage credit risk by focusing
on capital preservation, fundamental credit analysis,
value-oriented security selection and quick action as a
security’s outlook changes. WM Advisors directly invests
the bulk of our fixed income investments, while hiring
sub-advisors
for private placements, high yield bonds and bank loans. The
sub-advisors
work under WM Advisors’ direction to manage our credit and
interest rate risk and preserve the integrity of our
asset/liability matching. The
sub-advisors
are:
| • | Principal Global Investors, or Principal. Principal manages our investment grade private placement portfolio and some fallen angel below investment grade assets. As of September 30, 2009, Principal managed approximately $1.5 billion of our asset portfolio. |
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| • | Pioneer Investment Management, or Pioneer. Pioneer manages our high yield investment portfolio. Pioneer seeks to generate high current yield while preserving principal. As of September 30, 2009, Pioneer managed approximately $0.3 billion of our asset portfolio. |
| • | Wellington Management, or Wellington. Wellington manages our bank loan portfolio and some fallen angel below investment grade assets. As of September 30, 2009, Wellington managed approximately $44.0 million of our asset portfolio. |
Prospector manages our equity portfolio. Prospector’s
investment strategy is to maximize absolute total return through
investments in a variety of equity and equity-related
instruments, including convertible preferred and convertible
debt securities.
Our in-house mortgage loan department originates new commercial
mortgage loans and manages our existing commercial loan
portfolio. The commercial mortgage holdings are whole loans
secured by first liens on income producing properties. There are
no construction, development or land loans in the portfolio.
Over our 35 year history in this asset class, we have had
very strong investment experience through all parts of the real
estate cycle. This success is attributed to underwriting
standards that include large equity and debt service coverage
requirements, and strong real estate and borrower analysis.
Typically the loans have personal recourse. All aspects of the
investment process including origination, due diligence,
underwriting, approval and closing are handled internally.
For further information on our investment portfolio, see
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations —
Investments” and “Certain Relationships and Related
Transactions.”
Reinsurance
We engage in the industry practice of reinsuring portions of our
insurance risk with reinsurance companies through both treaty
and facultative reinsurance agreements. We use reinsurance to
diversify our risks and manage loss exposures primarily in our
Group and Individual segments. The use of reinsurance permits us
to write policies in amounts larger than the risk we are willing
to retain.
We cede insurance primarily on a treaty basis, under which risks
are ceded to a reinsurer on specific books of business where the
underlying risks meet certain predetermined criteria. To a
lesser extent, we cede insurance risks on a facultative basis,
under which the reinsurer’s prior approval is required on
each risk reinsured. The use of reinsurance does not discharge
us, as the insurer, from liability on the insurance ceded. We,
as the insurer, are required to pay the full amount of our
insurance obligations even in circumstances where we are
entitled or able to receive payments from our reinsurer. The
principal reinsurers to which we cede risks have A.M. Best
financial strength ratings ranging from “A+” to
“A-.”
We had reinsurance recoverables of $269.9 million and
$264.2 million as of September 30, 2009 and
December 31, 2008, respectively. The following table sets
forth our exposure to our principal reinsurers, including
reinsurance recoverables as of September 30, 2009 and the
A.M. Best ratings of those reinsurers as of that date:
|
Reinsurance |
A.M. Best |
|||||||
| Recoverable | Rating | |||||||
| (In millions) | ||||||||
|
RGA Reinsurance Company
|
$ | 100.1 | A+ | |||||
|
Transamerica Life Insurance Company
|
70.1 | A | ||||||
|
UNUM Life Insurance Company of America (UNUM)
|
49.8 | A− | ||||||
|
Lincoln National Life Insurance Company
|
23.5 | A+ | ||||||
In the table above, the reinsurance recoverables under our
agreements with RGA, UNUM and Lincoln represent our reinsurance
exposure to these parties under the reinsurance policies. The
reinsurance recoverable under our agreement with Transamerica
represents the assets withheld for our share of the coinsurance
policy.
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Under most of our reinsurance agreements, we obtain reinsurance
to mitigate some or all of the risk of the policies we issue,
particularly the risk of substantial loss from death of an
individual or catastrophic loss, and in other cases where the
reinsurer offers a particular expertise. Some of these
agreements are coinsurance arrangements, whereby we only obtain
reinsurance for a portion of the risk, and retain the remainder.
In some cases, we instead act as a reinsurer (or coinsurer) of
another life insurance company.
The following is a brief summary of our reinsurance agreements
with the parties listed in the table above:
| • | RGA Reinsurance Company. Under our agreements with RGA, RGA reinsures the risk of a large loss on term life insurance and universal life insurance policies. These are typically coinsurance or yearly renewable term arrangements, whereby we cede 50% or more of the claims liability to RGA. Reinsurance premiums are determined according to the amount reinsured with RGA per policy. These agreements do not have a fixed term. Either party can terminate these agreements with respect to future business with 90 days’ written notice to the other party. |
| • | Transamerica Life Insurance Company. Under an agreement with Transamerica, we act as their reinsurer with respect to 28.6% of a BOLI policy. BOLI is life insurance purchased by a bank to insure the lives of bank employees, usually officers and other highly compensated employees. BOLI policies are commonly used by banks to fund employee pension plans and benefit plans. Transamerica invests the policy premiums paid by the bank, and manages those investments subject to the terms of the policy. We have assumed 28.6% of the claims liability under this policy, and receive 28.6% of the proceeds generated under the policy. The term of this agreement is perpetual. We are only allowed to terminate this agreement in the event Transamerica fails to pay amounts due to us under this agreement or in the event of fraud, misrepresentation or breach of this agreement by Transamerica. |
| • | UNUM Life Insurance Company of America. We cede all of our Group Long-Term-Disability and Short-Term-Disability claims liability through a reinsurance pool. The pool of reinsurers may change each year for new claims. UNUM covers the substantial majority of this business. The premium rates are developed (on a policy-by-policy basis) by adding our expense load to the rate that the reinsurer charges for their claims cost and their expenses. When premiums are collected, we retain the portion that represents our expense load and send the remainder to the reinsurer. This agreement does not have a fixed term. Either we or the insurance pool can terminate the agreement with respect to future business by providing 90 days’ written notice to the other party. |
| • | Lincoln National Life Insurance Company. Under our agreements with Lincoln, we primarily cede claims liability under 10, 15 and 20-year term life insurance policies to Lincoln. These are typically coinsurance arrangements, whereby we cede 50% or more of the claims liability to Lincoln. Reinsurance premiums are determined in proportion to the amount reinsured with Lincoln per policy. These agreements do not have a fixed term. Either party can terminate these agreements with respect to future business upon 90 days’ written notice to the other party. |
Risk
Management
Overview
Risk management is a critical part of our business and we have
adopted risk management processes in virtually every aspect of
our operations, including product development, underwriting,
investment management, asset/liability management and technology
development projects. The primary objective of these risk
management processes is to reduce the variations we experience
from our expected results.
We use a risk model that draws on the risk-based capital
concepts. Risks are classified into four main categories:
| • | investment risks; |
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| • | pricing risks, including determination of adequate spreads or premiums, and estimation of claims, both expected and catastrophic; | |
| • | interest rate risk, including asset liability duration matching exposures; and | |
| • | other business risks, including business continuity, data security and other operational risks. |
Operations
and Technology
Service
and Support
We have a dedicated team of service and support personnel, as
well as Affiliated Computer Services, or ACS, based in Dallas,
Texas, our outsourced provider, that deliver automation
solutions to drive competitive advantage, to achieve earnings
growth objectives and to control the cost of doing business. We
mainly follow a buy-versus-build approach in providing
application and business processing services that accelerate
delivery and responsiveness. We also develop proprietary
software for competitive or economic benefits.
Operating
Centers
In August 2009, we signed a new outsourcing agreement with ACS.
The renewal of the agreement expires in July 2014, with two
one-year extensions at our election. The scope of the contract
with ACS includes the management of the following:
| • | data center: mainframe, Wintel systems, storage, web services and disaster recovery; | |
| • | distributed computing: field office services, desktop support and asset management; | |
| • | data network: network infrastructure, carrier services and secured remote access; | |
| • | voice communications: voice systems, wireless and contact center technologies; | |
| • | help desk supporting: infrastructure, packaged software and password resets; | |
| • | output processing: print and mail fulfillment, archive and online viewing; and | |
| • | content management: imaging and content management system. |
Under this agreement, we are obligated to pay an annual service
fee of approximately $10.8 million. These fees are subject
to adjustments based on a variety of factors, including product
utilization and reductions for failure to meet service level
standards.
The agreement may be terminated by us for convenience prior to
the end of the five-year term upon ninety days’ notice and
payment by us of a termination fee, which is currently
$4.7 million if the entire agreement is terminated. The
termination fee generally declines over time and is pro-rated
based on which service(s) are terminated and their related fixed
and variable costs, including depreciable asset and investment
costs and
non-amortizable
investment costs. In the event of termination, we have the right
to acquire hardware and software assets used by ACS to provide
services to us.
On September 28, 2009, ACS and Xerox Corporation announced
a definitive agreement for Xerox to acquire ACS. We do not
currently believe that this acquisition will materially affect
our relationship with ACS.
Competition
We face significant competition for customers and distributors
from insurance and other financial services companies in each of
our businesses. Our competitors include other large and highly
rated insurance carriers. Some of these competitors have greater
resources than we do, and many of them offer similar products
and use similar distribution channels. Competition in our
operating business segments is based on a number of factors,
including:
| • | quality of service; | |
| • | product features; | |
| • | price; | |
| • | commissions; |
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| • | ability to purchase attractive assets; | |
| • | scope of distribution; | |
| • | financial strength ratings; and | |
| • | name recognition. |
The relative importance of these factors depends on the
particular product and market. We compete for customers and
distributors with insurance companies and other financial
services companies in our various businesses.
Financial
Strength Ratings
Rating organizations continually review the financial
performance and condition of most insurers and provide financial
strength ratings based on a company’s operating performance
and ability to meet obligations to policyholders. Ratings
provide both industry participants and insurance consumers
meaningful information on specific insurance companies and are
an important factor in establishing the competitive position of
insurance companies. In addition, ratings are important to
maintaining public confidence in us and our ability to market
our products.
Symetra Financial Corporation and our principal life insurance
subsidiaries, Symetra Life Insurance Company and First Symetra
National Life Insurance Company of New York, are rated by
A.M. Best, S&P, Moody’s and Fitch as follows as
of September 30, 2009:
| Financial Strength Rating | ||||||||||||||||
|
Financial Strength Ratings
|
A.M. Best | S&P | Moody’s | Fitch | ||||||||||||
|
Symetra Life Insurance Company
|
A | A | A3 | A+ | ||||||||||||
|
First Symetra National Life Insurance Company of New York
|
A | A | NR* | A+ | ||||||||||||
|
Issuer Credit/Default Ratings
|
||||||||||||||||
|
Symetra Financial Corporation
|
bbb+ | BBB | Baa3 | ** | A- | |||||||||||
|
Symetra Life Insurance Company
|
a+ | A | NR* | NR* | ||||||||||||
|
First Symetra National Life Insurance Company of New York
|
a+ | A | NR* | NR* | ||||||||||||
| * | “NR” indicates not rated |
| ** | Represents the senior debt rating. |
A.M. Best states that its “A” (Excellent)
financial strength rating is assigned to those companies that
have, in its opinion, an excellent ability to meet their ongoing
obligations to policyholders. The “A” (Excellent) is
the third highest of 16 ratings assigned by A.M. Best,
which range from “A++” to “S.”
A.M. Best describes its “a” issuer credit rating
for insurers as “excellent,” assigned to those
companies that have, in its opinion, a strong ability to meet
the terms of their ongoing senior financial obligations. Its
“bbb” issuer credit rating is described as
“good,” assigned to those companies that have, in its
opinion, an adequate ability to meet the terms of their
obligations but are more susceptible to changes in economic or
other conditions. A.M. Best issuer credit ratings range
from “aaa” (exceptional) to “rs” (regulatory
supervision/liquidation) and may be enhanced with a
“+” (plus) or “−” (minus) to
indicate whether credit quality is near the top or bottom of a
category.
Symetra Life Insurance Company and First Symetra National Life
Insurance Company of New York’s Financial Size Category, or
FSC, rankings, as determined by A.M. Best, are both XIII,
the third highest of 15. A.M. Best indicates that the
FSC is designed to provide an indicator of the size of a company
in terms of its statutory surplus and related accounts.
Standard & Poor’s states that an insurer with a
financial strength rating of “A” (Strong) has strong
financial security characteristics that outweigh any
vulnerabilities, and is highly likely to have the ability to
meet financial commitments, but is somewhat more likely to be
affected by adverse business conditions than
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are insurers with higher ratings. The “A” range is
the third highest of the four ratings ranges that meet these
criteria, and also is the third highest of nine financial
strength ratings ranges assigned by S&P, which range from
“AAA” to “R.” A plus (+) or minus (-) shows
relative standing in a rating category. Accordingly, the
“A” rating is the sixth highest of S&P’s 21
ratings categories. S&P describes companies assigned an
“A” issuer credit rating as having a strong capacity
to meet financial commitments, but somewhat more susceptible to
the adverse effects of changes in circumstances and economic
conditions than higher-rated companies. Companies assigned a
“BBB” issuer credit rating have adequate capacity to
meet financial commitments, but adverse economic conditions are
more likely to lead to a weakened capacity to meet such
commitments. S&P issuer credit ratings range from
“AAA” to “D,” indicating default.
Moody’s Investors Service states that insurance companies
rated “A3” (Good) offer good financial security.
However, elements may be present that suggest a susceptibility
to impairment sometime in the future. The “A” range is
the third highest of nine financial strength rating ranges
assigned by Moody’s which range from “Aaa” to
“C.” Numeric modifiers are used to refer to the
ranking within the group, with “1” being the highest
and “3” being the lowest. Accordingly, the
“A3” rating is the seventh highest of Moody’s 21
ratings categories. Moody’s credit rating is assigned to
our senior debt. A rating of “Baa” is defined as
subject to moderate credit risk, considered medium-grade, and
may possess certain speculative characteristics.
Fitch states that insurance companies with a financial strength
rating of “A+” (Strong) are viewed as possessing
strong capacity to meet policyholder and contract obligations.
Risk factors are moderate, and the impact of any adverse
business and economic factors is expected to be small. The
“A” rating category is the third highest of eight
financial strength categories, which range from “AAA”
to “D.” The symbol (+) or (-) may be appended to a
rating to indicate the relative position of a credit within a
rating category. These suffixes are not added to ratings in the
“AAA” category or to ratings below the “CCC”
category. Accordingly, the “A+” rating is the fifth
highest of Fitch’s 24 financial strength ratings
categories. Fitch describes its “A-” issuer default
rating as “high credit quality,” which denotes an
expectation of low default risk, but may be more vulnerable to
adverse business or economic conditions than higher ratings.
Fitch issuer default ratings range from “AAA” (highest
credit quality) to “D” (default).
A.M. Best, S&P, Moody’s and Fitch review their
ratings periodically and we cannot assure you that we will
maintain our current ratings in the future. Other agencies may
rate Symetra or our insurance subsidiaries on a solicited or
unsolicited basis.
The A.M. Best, S&P, Moody’s and Fitch ratings
included are not designed to be, and do not serve as, measures
of protection or valuation offered to investors in this
offering. These financial strength ratings should not be relied
on with respect to making an investment in our securities.
Employees
As of September 30, 2009, we had approximately
1,100 full-time and part-time employees. We believe our
employee relations are satisfactory. To the best of our
knowledge, none of our employees is subject to a collective
bargaining agreement.
Facilities
We lease approximately 350,000 square feet of office space
in various locations throughout the United States, which
consists primarily of 292,000 square feet of office space
at our headquarters in Bellevue, Washington.
Most of our leases have lease terms ranging from one to ten
years. Our aggregate annual rental expense under these leases
was $8.0 million during 2008.
We believe our properties are adequate for our business as
presently conducted.
Legal
Proceedings
We are regularly a party to litigation, arbitration proceedings
and governmental examinations in the ordinary course of our
business. While we cannot predict the outcome of any pending or
future litigation or examination, we do not believe that any
pending matter, individually or in the aggregate, will have a
material adverse effect on our business.
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REGULATION
Our insurance operations are subject to a wide variety of laws
and regulations. State insurance laws regulate most aspects of
our insurance businesses, and our insurance subsidiaries are
regulated by the insurance departments of the states in which
they are domiciled and licensed. Our insurance products and thus
our businesses also are affected by U.S. federal, state and
local tax laws. Insurance products that constitute
“securities,” such as variable annuities and variable
life insurance, also are subject to federal and state securities
laws and regulations. The SEC, FINRA and state securities
authorities regulate these products.
Our broker-dealers are subject to federal and state securities
and related laws. The SEC, FINRA and state securities
authorities are the principal regulators of these operations.
The purpose of the laws and regulations affecting our insurance
and securities businesses is primarily to protect our customers
and not our noteholders or stockholders. Many of the laws and
regulations to which we are subject are regularly re-examined,
and existing or future laws and regulations may become more
restrictive or otherwise adversely affect our operations.
In addition, insurance and securities regulatory authorities
increasingly make inquiries regarding compliance by us and our
subsidiaries with insurance, securities and other laws and
regulations regarding the conduct of our insurance and
securities businesses. We cooperate with such inquiries and take
corrective action when warranted.
Many of our customers and agents also operate in regulated
environments. Changes in the regulations that affect their
operations also may affect our business relationships with them
and their ability to purchase or to distribute our products.
Insurance
Regulation
Our insurance subsidiaries are licensed and regulated in all
states in which they conduct insurance business. The extent of
this regulation varies, but most states have laws and
regulations governing the financial condition of insurers,
including standards of solvency, types and concentration of
investments, establishment and maintenance of reserves, credit
for reinsurance and requirements of capital adequacy, and the
business conduct of insurers, including marketing and sales
practices and claims handling. In addition, statutes and
regulations usually require the licensing of insurers and their
agents, the approval of policy forms and related materials and
the approval of rates for certain lines of insurance. The types
of insurance laws and regulations applicable to us or our
insurance subsidiaries are described below.
Insurance
Holding Company Regulation
All states in which our insurance subsidiaries conduct insurance
business have enacted legislation that requires each insurance
company in a holding company system, except captive insurance
companies, to register with the insurance regulatory authority
of its state of domicile and to furnish that regulatory
authority financial and other information concerning the
operations of, and the interrelationships and transactions
among, companies within its holding company system that may
materially affect the operations, management or financial
condition of the insurers within the system. These laws and
regulations also regulate transactions between insurance
companies and their parents and affiliates. Generally, these
laws and regulations require that all transactions within a
holding company system between an insurer and its affiliates be
fair and reasonable and that the insurer’s statutory
surplus following any transaction with an affiliate be both
reasonable in relation to its outstanding liabilities and
adequate to its financial needs. Statutory surplus is the excess
of admitted assets over statutory liabilities. For certain types
of agreements and transactions between an insurer and its
affiliates, these laws and regulations require prior
notification to, and non-disapproval or approval by, the
insurance regulatory authority of the insurer’s state of
domicile.
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Policy
Forms
Our insurance subsidiaries’ policy forms are subject to
regulation in every state in which such subsidiaries are
licensed to transact insurance business. In most states, policy
forms must be filed prior to their use.
Dividend
Limitations
As a holding company with no significant business operations of
its own, Symetra depends on dividends or other distributions
from its subsidiaries as the principal source of cash to meet
its obligations, including the payment of interest on and
repayment of principal of any debt obligations and payment of
dividends to stockholders and stock repurchases. The payment of
dividends or other distributions to Symetra by its insurance
subsidiaries is regulated by the insurance laws and regulations
of their respective states of domicile. In the state of
Washington, the state of domicile of Symetra’s principal
insurance subsidiary, Symetra Life Insurance Company, an
insurance company subsidiary may not pay an
“extraordinary” dividend or distribution until
30 days after the insurance commissioner has received
sufficient notice of the intended payment and has not objected
or has approved the payment within the
30-day
period. An “extraordinary” dividend or distribution is
defined under Washington law as a dividend or distribution that,
together with other dividends and distributions made within the
preceding twelve months, exceeds the greater of:
| • | 10% of the insurer’s statutory surplus as of the immediately prior year end; or | |
| • | the statutory net gain from the insurer’s operations for the prior year. |
State laws and regulations also prohibit an insurer from
declaring or paying a dividend except out of its statutory
surplus or require the insurer to obtain regulatory approval
before it may do so. In addition, insurance regulators may
prohibit the payment of ordinary dividends or other payments by
our insurance subsidiaries to Symetra (such as a payment under a
tax sharing agreement or for employee or other services) if they
determine that such payment could be adverse to our
policyholders or contractholders.
Market
Conduct Regulation
The laws and regulations of U.S. jurisdictions include
numerous provisions governing the marketplace activities of
insurers, including provisions governing the form and content of
disclosure to consumers, product illustrations, advertising,
product replacement, suitability, sales and underwriting
practices, complaint handling and claims handling. State
jurisdictions generally enforce these provisions through
periodic market conduct examinations.
Statutory
Examinations
As part of their regulatory oversight process, state insurance
departments conduct periodic detailed examinations of the books,
records, accounts and business practices of insurers domiciled
in their jurisdictions. These examinations generally are
conducted in cooperation with the insurance departments of
several other states under guidelines promulgated by the NAIC.
In the three-year period ended December 31, 2008 and
through September 30, 2009, we have not received any
material adverse findings resulting from any insurance
department examinations of our insurance subsidiaries.
Guaranty
Associations and Similar Arrangements
Most states require life insurers licensed to write insurance
within the state to participate in guaranty associations, which
are organized to pay contractual benefits owed pursuant to
insurance policies of insurers who become impaired or insolvent.
These associations levy assessments, up to prescribed limits, on
all member insurers in a particular state on the basis of the
proportionate share of the premiums written by member insurers
in the lines of business in which the impaired, insolvent or
failed insurer is engaged. Some states permit member insurers to
recover assessments paid through full or partial premium tax
offsets.
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We had net aggregate assessments (refunds) levied against or
received by our insurance subsidiaries totaling
$(1.6) million, $0.1 million, $0.2 million and
$0.2 million for the nine months ended September 30,
2009 and for the years ended December 31, 2008, 2007 and
2006, respectively. Included in the net amount above are refunds
totaling $2.2 million received during the nine months ended
September 30, 2009, primarily from two states related to
assessments we paid prior to 1998. Although the amount and
timing of future assessments are not predictable, we have
established reserves for guaranty fund assessments that we
consider adequate for assessments with respect to insurers that
currently are subject to insolvency proceedings.
Change
of Control
The laws and regulations of the states in which our insurance
subsidiaries are domiciled require that a person obtain the
approval of the insurance commissioner of the insurance
company’s jurisdiction of domicile prior to acquiring
control of the insurer. Generally, such laws provide that
control over an insurer is presumed to exist if any person,
directly or indirectly, owns, controls, holds with the power to
vote, or holds proxies representing 10% or more of the voting
securities of the insurer. In considering an application to
acquire control of an insurer, the insurance commissioner
generally will consider such factors as the experience,
competence and financial strength of the applicant, the
integrity of the applicant’s board of directors and
executive officers, the acquiror’s plans for the management
and operation of the insurer, and any anti-competitive results
that may arise from the acquisition. In addition, a person
seeking to acquire control of an insurance company is required
in some states to make filings prior to completing an
acquisition if the acquiror and the target insurance company and
their affiliates have sufficiently large market shares in
particular lines of insurance in those states. Approval of an
acquisition may not be required in these states, but the state
insurance departments could take action to impose conditions on
an acquisition that could delay or prevent its consummation.
These laws may discourage potential acquisition proposals and
may delay, deter or prevent a change of control involving us,
including through transactions, and in particular unsolicited
transactions, that some or all of our stockholders might
consider to be desirable.
Policy
and Contract Reserve Sufficiency Analysis
Under the laws and regulations of their states of domicile, our
life insurance subsidiaries are required to conduct annual
analyses of the sufficiency of their life and health insurance
and annuity statutory reserves. In addition, other jurisdictions
in which these subsidiaries are licensed may have certain
reserve requirements that differ from those of their domiciliary
jurisdictions. In each case, a qualified actuary must submit an
opinion that states that the aggregate statutory reserves, when
considered in light of the assets held with respect to such
reserves, make good and sufficient provision for the associated
contractual obligations and related expenses of the insurer. If
such an opinion cannot be provided, the affected insurer must
set up additional reserves by moving funds from surplus. Our
life insurance subsidiaries submit these opinions annually to
applicable insurance regulatory authorities.
Surplus
and Capital Requirements
Insurance regulators have the discretionary authority, in
connection with the ongoing licensing of our insurance
subsidiaries, to limit or prohibit the ability of an insurer to
issue new policies if, in the regulators’ judgment, the
insurer is not maintaining a minimum amount of surplus or is in
hazardous financial condition. Insurance regulators may also
limit the ability of an insurer to issue new life insurance
policies and annuity contracts above an amount based upon the
face amount and premiums of policies of a similar type issued in
the prior year. We do not believe that the current or
anticipated levels of statutory surplus of our insurance
subsidiaries present a material risk that any such regulator
would limit the amount of new policies that our insurance
subsidiaries may issue.
Risk-based
Capital
The NAIC has established risk-based capital standards for life
insurance companies as well as a model act with the intention
that these standards be applied at the state level. The model
act provides that life insurance companies must submit an annual
risk-based capital report to state regulators reporting their
risk-
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based capital based upon four categories of risk: asset risk,
insurance risk, interest rate risk and business risk. For each
category, the capital requirement is determined by applying
factors to various asset, premium and reserve items, with the
factor being higher for those items with greater underlying risk
and lower for less risky items. The formula is intended to be
used by insurance regulators as an early warning tool to
identify possible weakly capitalized companies for purposes of
initiating further regulatory action.
If an insurer’s risk-based capital falls below specified
levels, the insurer would be subject to different degrees of
regulatory action depending upon the level. These actions range
from requiring the insurer to propose actions to correct the
capital deficiency to placing the insurer under regulatory
control. As of September 30, 2009, the risk-based capital
of each of our life insurance subsidiaries exceeded the level of
risk-based capital that would require any of them to take or
become subject to any corrective action.
Statutory
Accounting Principles
Statutory accounting principles, or SAP, is a basis of
accounting developed by state insurance regulators to monitor
and regulate the solvency of insurance companies. In developing
SAP, insurance regulators were primarily concerned with assuring
an insurer’s ability to pay all its current and future
obligations to policyholders. As a result, statutory accounting
focuses on conservatively valuing the assets and liabilities of
insurers, generally in accordance with standards specified by
the insurer’s domiciliary state. Uniform statutory
accounting practices are established by the NAIC and generally
adopted by regulators in the various states. These accounting
principles and related regulations determine, among other
things, the amounts our insurance subsidiaries may pay to us as
dividends. The values for assets, liabilities and equity
reflected in financial statements prepared in accordance with
U.S. GAAP may be different from those reflected in
financial statements prepared under SAP.
Regulation
of Investments
Each of our insurance subsidiaries is subject to laws and
regulations that require diversification of its investment
portfolio and limit the amount of investments in certain asset
categories, such as below investment grade fixed maturities,
real estate, equity investments and derivatives. Failure to
comply with these laws and regulations would cause investments
exceeding regulatory limitations to be treated as non-admitted
assets for purposes of measuring surplus, and, in some
instances, would require divestiture of such non-complying
investments. We believe the investments held by our insurance
subsidiaries comply with these laws and regulations.
Federal
Regulation
Our variable life insurance and variable annuity products
generally are “securities” within the meaning of
federal and state securities laws. As a result, they are
registered under the Securities Act of 1933 (or are exempt from
registration) and are subject to regulation by the SEC, FINRA
and state securities authorities. Federal and state securities
regulation similar to that discussed below under
“— Other Laws and Regulations —
Securities Regulation” affect investment advice, sales and
related activities with respect to these products.
Although the federal government does not comprehensively
regulate the business of insurance, federal legislation and
administrative policies in several other areas, including
taxation, privacy regulation, financial services regulation and
pension and welfare benefits regulation, can also significantly
affect the insurance industry.
From time to time, federal measures are proposed that may
significantly affect the insurance business, including direct
federal regulation of insurance through an optional federal
charter, enhanced federal oversight of insurance through a
Federal Insurance Office, comprehensive health care reform,
limitations on antitrust immunity, tax incentives for lifetime
annuity payouts, simplification bills affecting tax-advantaged
or tax-exempt savings and retirement vehicles, and proposals to
modify or make permanent the estate tax repeal enacted in 2001.
We cannot predict whether these or other proposals will be
adopted, or what impact, if any, such proposals may have on our
business.
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Changes
in Tax Laws
Congress, from time to time, considers legislation that could
make our products less attractive to consumers, including
legislation that would reduce or eliminate the benefits derived
from the tax deferred nature of life insurance and annuity
products.
In addition, changes in tax laws could increase our tax
liability or increase our reporting obligations. For example, in
May 2009, President Obama released additional information about
the tax proposals contained in his Fiscal Year 2010 Budget (the
“Budget”). There are several proposals included in the
Budget that are significant for life insurance companies. Those
proposals include modifying the dividends-received deduction for
life insurance company separate accounts; requiring information
reporting for private separate accounts of life insurance
companies; imposing new reporting requirements and
transfer-for-value
rules on purchasers of certain life insurance contracts;
expanding the interest expense disallowance for corporate-owned
life insurance; requiring information reporting on payments to
corporations; and increasing information return penalties. In
addition, certain recent proposals for healthcare reform have
included potential tax ramifications, including, among other
things, a windfall profits tax on health insurers. These
proposals not only could increase our tax liabilities but also
could reduce the attractiveness of certain products we sell.
These proposals may not be enacted or may be modified by
Congress prior to enactment.
Furthermore, the federal estate tax, which has undergone a
gradual repeal since 2001 that will continue to be phased in
through 2010, is scheduled to revert to pre-2001 law as of
January 1, 2011. The repeal of and continuing uncertainty
regarding the federal estate tax may adversely affect sales and
surrenders of some of our estate planning products.
Other
Laws and Regulations
Securities
Regulation
Certain of our subsidiaries and certain policies and contracts
offered by them, are subject to various levels of regulation
under the federal securities laws administered by the SEC. One
of our subsidiaries is an investment advisor registered under
the Investment Advisers Act of 1940. Certain of its employees
are licensed as investment advisory representatives in the
states where those employees have clients. Some of our insurance
company separate accounts are registered under the Investment
Company Act of 1940. Some annuity contracts and insurance
policies issued by some of our subsidiaries are funded by
separate accounts, the interests in which are registered under
the Securities Act of 1933 and the Investment Company Act of
1940. Certain of our subsidiaries are registered and regulated
as broker-dealers under the Securities Exchange Act of 1934 and
are members of, and subject to regulation by, the FINRA, as well
as by various state and local regulators. The registered
representatives of our broker-dealers are also regulated by the
SEC and FINRA and are also subject to applicable state and local
laws.
These laws and regulations are primarily intended to protect
investors in the securities markets and generally grant
supervisory agencies broad administrative powers, including the
power to limit or restrict the conduct of business for failure
to comply with such laws and regulations. In such event, the
possible sanctions that may be imposed include suspension of
individual employees, suspension or limitation of sales of our
products, limitations on the activities in which the investment
adviser or broker-dealer may engage, suspension or revocation of
the investment adviser or broker-dealer registration, censure or
fines. We may also be subject to similar laws and regulations in
the states in which we provide investment advisory services,
offer the products described above, or conduct other
securities-related activities.
Certain of our subsidiaries also sponsor and manage investment
vehicles and issue annuities that rely on certain exemptions
from registration under the Investment Company Act of 1940 and
the Securities Act of 1933. Nevertheless, certain provisions of
the Investment Company Act of 1940 and the Securities Act of
1933 apply to these investment vehicles and the securities
issued by such vehicles. The Investment Company Act of 1940, the
Investment Advisers Act of 1940 and the Securities Act of 1933,
including the rules promulgated thereunder, are subject to
change which may affect our subsidiaries that sponsor and manage
such investment
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vehicles. Our costs may increase or we may exit markets to the
extent certain of our vehicles and annuities are required to
comply with increased regulation and liability under the
securities laws.
ERISA
and Internal Revenue Code Considerations
We provide certain products and services to certain employee
benefits plans that are subject to ERISA or the Internal Revenue
Code. As such, our activities are subject to the restrictions
imposed by ERISA and the Internal Revenue Code, including the
requirement under ERISA that fiduciaries must perform their
duties solely in the interests of ERISA plan participants and
beneficiaries and the requirement under ERISA and the Internal
Revenue Code that fiduciaries may not cause a covered plan to
engage in certain prohibited transactions with persons who have
certain relationships with respect to such plans. The applicable
provisions of ERISA and the Internal Revenue Code are subject to
enforcement by the U.S. Department of Labor, the IRS and
the Pension Benefit Guaranty Corporation.
USA
Patriot Act
The USA Patriot Act of 2001, or the Patriot Act, which was
renewed for an additional four years in 2006, contains
anti-money laundering and financial transparency laws and
mandates the implementation of various new regulations
applicable to broker-dealers and other financial services
companies including insurance companies. The Patriot Act seeks
to promote cooperation among financial institutions, regulators
and law enforcement entities in identifying parties that may be
involved in terrorism or money laundering. The increased
obligations of financial institutions to identify their
customers, watch for and report suspicious transactions, respond
to requests for information by regulatory authorities and law
enforcement agencies, and share information with other financial
institutions, require the implementation and maintenance of
internal practices, procedures and controls. We believe that we
have implemented, and that we maintain, appropriate internal
practices, procedures and controls to enable us to comply with
the provisions of the Patriot Act.
Privacy
of Consumer Information
U.S. federal and state laws and regulations require
financial institutions, including insurance companies, to
protect the security and confidentiality of consumer financial
information and to notify consumers about their policies and
practices relating to their collection and disclosure of
consumer information and their policies relating to protecting
the security and confidentiality of that information. Similarly,
federal and state laws and regulations also govern the
disclosure and security of consumer health information. In
particular, regulations promulgated by the U.S. Department
of Health and Human Services regulate the disclosure and use of
protected health information by health insurers and others, the
physical and procedural safeguards employed to protect the
security of that information and the electronic transmission of
such information. Congress and state legislatures are expected
to consider additional legislation relating to privacy and other
aspects of consumer information.
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MANAGEMENT
Directors
and Executive Officers
Set forth below is a list of the directors and principal
executive officers of Symetra as of September 30, 2009. The
positions listed are of Symetra unless otherwise indicated.
|
Name
|
Age
|
Positions
|
||||
|
Lowndes A. Smith
|
70 | Director, Chairman of the Board | ||||
|
Lois W. Grady
|
64 | Director, Vice Chairman of the Board | ||||
|
Randall H. Talbot
|
56 | Director, President and Chief Executive Officer | ||||
|
Margaret A. Meister
|
44 | Executive Vice President and Chief Financial Officer | ||||
|
Jennifer V. Davies
|
51 | Senior Vice President — Enterprise Development | ||||
|
Michael W. Fry
|
48 | Senior Vice President — Group Division, Symetra Life Insurance Company | ||||
|
Richard J. Lindsay
|
53 | Senior Vice President — Life & Annuities Division, Symetra Life Insurance Company | ||||
|
Patrick B. McCormick
|
52 | Senior Vice President — Distribution, Symetra Life Insurance Company | ||||
|
George C. Pagos
|
59 | Senior Vice President, General Counsel and Secretary | ||||
|
Tommie D. Brooks
|
39 | Vice President and Chief Actuary — Symetra Life Insurance Company | ||||
|
Christine A. Katzmar Holmes
|
50 | Vice President — Human Resources and Administration | ||||
|
Troy J. Olson-Blair
|
54 | Vice President — Information Technology | ||||
|
David T. Foy
|
43 | Director | ||||
|
Sander M. Levy
|
47 | Director | ||||
|
Robert R. Lusardi
|
52 | Director | ||||
|
David I. Schamis
|
35 | Director | ||||
Lowndes A. Smith has been a director of Symetra since
June 2007 and has served as Chairman of the Board since May
2009. Mr. Smith has served as Managing Partner of
Whittington Gray Associates since 2003. Mr. Smith formerly
served as Vice Chairman of The Hartford Financial Services
Group, Inc. (“The Hartford”) and President and CEO of
Hartford Life Insurance Company until his retirement in 2002. He
joined The Hartford in 1968. Mr. Smith also serves as
Chairman of OneBeacon Insurance Group, Ltd. and is a director of
White Mountains Insurance Group, Ltd. and 76 investment
companies in the mutual funds of The Hartford. He received his
B.S. degree from Babson College.
Lois W. Grady has been a director of Symetra since August
2004 and has served as Vice Chairman of the Board since May
2009. Ms. Grady served as Executive Vice President and
Director of Investment Products Services of Hartford Life, Inc.
from 2002 until her retirement in April 2004 and as Senior Vice
President and Director of Investment Products Services of
Hartford Life, Inc. from 1998 through 2002. She began her career
with Hartford Life in 1983. She is also a director of OneBeacon
Insurance Group, Ltd. Ms. Grady received her B.S. degree
from Southern Connecticut State University.
Randall H. Talbot has been a director, Chief Executive
Officer and President of Symetra since August 2004 and
director and President of Symetra Life Insurance Company since
joining in February 1998. He is also an officer and director of
various affiliates of Symetra. From 1988 to 1998, he was Chief
Executive Officer and President of Talbot Financial Corporation.
Mr. Talbot is also a director of Concur Technologies, Inc.
He received his B.S. degree from Arizona State University.
Margaret A. Meister has been Executive Vice President and
Chief Financial Officer of Symetra since February 2006 and
Executive Vice President and Chief Financial Officer of Symetra
Life Insurance Company since March 2006. She is also a director
of Symetra Life Insurance Company as well as an officer and
director of various affiliates of Symetra. Ms. Meister is a
fellow of the Society of Actuaries. She joined Symetra Life
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Insurance Company in 1988 and served in a variety of positions,
including Chief Actuary and Vice President, prior to being
promoted to her current position. Ms. Meister received her
B.A. degree from Whitman College.
Jennifer V. Davies has been Senior Vice President of
Symetra since June 2007 and of Symetra Life Insurance Company
since August 2004 and is responsible for Enterprise Development.
She is also a director of Symetra Life Insurance Company as well
as an officer and director of various affiliates of Symetra.
Ms. Davies joined Symetra Life Insurance Company in 1992,
and served in a variety of positions, including Vice President,
prior to being promoted to her current position. Ms. Davies
was employed by Sons of Norway from 1986 to 1992, and
ITT/Hartford Life Insurance Company from 1982 to 1986.
Ms. Davies received her B.A. degree from the University of
Minnesota and her M.A. degree from the University of Virginia.
Michael W. Fry has been Senior Vice President of Symetra
Life Insurance Company since May 2008 and is responsible for the
operations of its Group Division. He also serves as an officer
and director of various Symetra affiliates. Prior to his current
position, Mr. Fry served as Vice President of Symetra Life
Insurance Company from February 2003 until May 2008. Prior to
joining Symetra in August 2002, Mr. Fry was Vice President
of Swiss Re’s Group Division. Mr. Fry graduated from
Indiana University with a degree in Accounting.
Richard J. Lindsay has been Senior Vice President of
Symetra Life Insurance Company since August 2006 and is
responsible for the operations of its Life & Annuities
Division. He also serves as an officer and director of other
various Symetra affiliates. Prior to joining Symetra Life
Insurance Company, Mr. Lindsay had worked for AIG VALIC
since 1998, where his last position was as an Executive Vice
President of AIG VALIC and as President of VALIC Financial
Advisors, an affiliated broker-dealer. Prior to joining AIG
VALIC, Mr. Lindsay spent 11 years with CoreStates
Financial Corp. Mr. Lindsay received his B.A. degree from
Brown University, his M.B.A. degree from Wharton School of the
University of Pennsylvania, and his J.D. degree from Temple
University.
Patrick B. McCormick has been Senior Vice President of
Symetra Life Insurance Company since June 1999 and is
responsible for Distribution. Mr. McCormick joined Symetra
Life Insurance Company in 1995, and served in a variety of
positions, including Vice President, prior to being promoted to
his current position. He is also an officer and director of
other various affiliates of Symetra.
George C. Pagos has been Senior Vice President of Symetra
and Symetra Life Insurance Company since September 2007 and
General Counsel and Secretary of Symetra and Symetra Life
Insurance Company since August 2004. He is also a director of
Symetra Life Insurance Company as well as an officer and
director of various affiliates of Symetra. Mr. Pagos joined
Symetra Life Insurance Company in 1976 and served in a variety
of positions, including Vice President, prior to being promoted
to his current position. Mr. Pagos received his B.A. degree
from George Washington University and his J.D. degree from the
University of Maryland.
Tommie D. Brooks has been Vice President of Symetra since
March 2007 and Vice President and Chief Actuary of Symetra Life
Insurance Company since March 2007. Mr. Brooks joined
Symetra Life Insurance Company in 1992, and served in a variety
of managerial positions throughout the Company. Mr. Brooks
attained the Fellow of the Society of Actuaries in 1998 and
earned his B.S. in Math and Actuarial Sciences from Central
Washington University.
Christine A. Katzmar Holmes has been Vice President of
Symetra since August 2004 and is responsible for Human
Resources, Service Operations and Security. Ms. Katzmar
Holmes joined Symetra Life Insurance Company in 2001 as Vice
President. From 1991 to 2001, she was with Safeco Insurance
Company, where she held a variety of positions, including Human
Resources Director. She is also an officer of various affiliates
of Symetra. Ms. Katzmar Holmes received her B.S. degree
from Miami University, Ohio.
Troy J. Olson-Blair has been Vice President of Symetra
since June 2007 and is responsible for Information Technology.
She has been Vice President of Symetra Life Insurance Company
since 2000 and also served as Chief Information Officer since
2004. She has been responsible for Information Technology since
joining the Company. Prior to Symetra, Ms. Olson-Blair held
a variety of technical and managerial positions with Safeco
Insurance Company that spanned twenty years; her last position
was AVP and director for IT
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Operations. Ms. Olson-Blair’s background includes
application development, voice and data communications,
networking, web services and ITIL service level management.
David T. Foy has been a director of Symetra since March
2004 and served as Chairman of the Board from August 2004 until
May 2009. He has been Executive Vice President and Chief
Financial Officer of White Mountains Insurance Group, Ltd. since
2003. Previously, he was Senior Vice President and Chief
Financial Officer of Hartford Life, Inc., which he joined in
1993. From 1989 to 1993, Mr. Foy was with Milliman and
Robertson, an actuarial consulting firm. He is also a director
of OneBeacon Insurance Group, Ltd. He received his B.S. degree
from the Rochester Institute of Technology.
Sander M. Levy has been a director of Symetra since
August 2004. He has been Managing Director of Vestar Capital
Partners, a private equity firm, since 1988. He was previously a
member of the Management Buyout Group of The First Boston
Corporation. He received his B.S. degree from the Wharton School
of the University of Pennsylvania, and his M.B.A. degree from
Columbia Business School. He is also a director of Validus
Holdings, Ltd, Duff & Phelps Corporation and Wilton Re
Holdings Limited.
Robert R. Lusardi has been a director of Symetra since
August 2005. He has been President and Chief Executive Officer
of White Mountains Financial Services LLC since February 2005.
Prior to joining White Mountains, Mr. Lusardi was an
Executive Vice President of XL Capital Ltd. from 1998 to 2005
and was a Managing Director at Lehman Brothers, where he was
employed from 1980 to 1998. He is also a director of two NYSE
listed companies, OneBeacon Insurance Group, Ltd. and Primus
Guaranty, Ltd. He received his B.A. and M.A. degrees from Oxford
University, and his M.B.A. from Harvard University.
David I. Schamis has been a director of Symetra since
August 2004. He has been Managing Director of J.C.
Flowers & Co. LLC since 2000. Previously, he was with
Salomon Smith Barney from 1995 to 2000. He received his B.A.
degree from Yale University. Mr. Schamis also serves as the
Chairman of the Board of Crump Group, Inc., and is a director of
Fox-Pitt Kelton LLC, Affirmative Insurance Holdings, Inc. and MF
Global, Ltd.
Composition
of the Board of Directors
Our business and affairs are managed under the direction of our
board of directors. Our board of directors currently consists of
seven members, four of whom we believe are independent directors
under currently applicable listing standards of the NYSE. The
four independent directors are Messrs. Levy, Schamis and Smith
and Ms. Grady.
Our board of directors is divided into three classes of
directors who serve in staggered three-year terms, as follows:
| • | Class I directors are Messrs. Lusardi and Schamis, and their terms will expire at the annual meeting of stockholders to be held in 2011; | |
| • | Class II directors are Messrs. Levy and Smith, and their terms will expire at the annual meeting of stockholders to be held in 2012; and | |
| • | Class III directors are Messrs. Foy and Talbot and Ms. Grady, and their terms will expire at the annual meeting of stockholders to be held in 2010. |
At each annual meeting of our stockholders, the successors to
the directors whose terms expire at each such meeting will be
elected to serve until the third annual meeting after their
election or until their successor has been elected. As a result,
only one class of directors will be elected at each annual
meeting of our stockholders, with the other classes serving for
the remainder of their respective three-year terms.
Committees
of the Board of Directors
Upon completion of this offering, our board of directors will
conduct its business through four standing committees: the audit
committee, the compensation committee, the finance committee and
the nominating and corporate governance committee. In addition,
from time to time, special committees may be
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established under the direction of the board of directors when
necessary to address specific issues. Our audit committee, our
compensation committee and our nominating and corporate
governance committee will be required to be composed of a
majority of independent directors within 90 days following
the completion of this offering. Our audit committee, our
compensation committee and our nominating and corporate
governance committee will be required to be composed entirely of
independent directors within one year following the completion
of this offering.
Audit
Committee
Upon completion of this offering, we will have an audit
committee that will have responsibilities that meet all NYSE and
SEC requirements.
The audit committee will have the power to investigate any
matter brought to its attention within the scope of its duties
and to retain counsel for this purpose where appropriate.
Upon the completion of this offering, our audit committee will
consist of Mr. Foy, Mr. Levy, Mr. Schamis and
Mr. Smith. Within a year of the completion of this
offering, all members of the audit committee will be independent
directors according to the rules and regulations of the SEC and
the NYSE and at least one member will be an “audit
committee financial expert,” as such term is defined in
Item 407 of Regulation S-K.
Our board of directors has adopted a written charter for the
audit committee to be effective upon the completion of this
offering, which will be available on our website as of the date
of this offering.
Compensation
Committee
Upon completion of this offering, we will have a compensation
committee that will have responsibilities that meet all NYSE
requirements.
Upon the completion of this offering, our compensation committee
will consist of Mr. Foy, Ms. Grady and Mr. Smith.
Within a year of completion of this offering, all members of the
compensation committee will be independent directors according
to the rules and regulations of the NYSE.
Our board of directors has adopted a written charter for the
compensation committee to be effective upon the completion of
this offering, which will be available on our website as of the
date of this offering.
Nominating
and Corporate Governance Committee
Upon completion of this offering, we will have a nominating and
corporate governance committee that will have responsibilities
that meet all NYSE requirements.
Upon completion of this offering, our nominating and corporate
governance committee will consist of Mr. Foy, Mr. Levy
and Mr. Smith. Within a year of completion of this
offering, all members of the nominating and corporate governance
committee will be independent directors according to the rules
and regulations of the NYSE.
Our board of directors has adopted a written charter for the
corporate governance and nominating committee to be effective
upon the completion of this offering, which will be available on
our website as of the date of this offering.
Finance
Committee
Upon completion of this offering, we will have a finance
committee that will have responsibilities as outlined in its
charter.
Upon completion of the offering, our finance committee will
consist of Mr. Foy, Mr. Levy and Mr. Smith. The
majority of the members of the finance committee will be
independent directors according to the rules and regulations of
the NYSE.
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Our board of directors has adopted a written charter for the
finance committee, which will be available on our website as of
the date of this offering.
Compensation
Committee Interlocks and Insider Participation
Upon completion of this offering, our board of directors will
have a compensation committee as described above. None of our
executive officers will serve as a member of our compensation
committee, and none of them have served, or will be permitted to
serve, on the compensation committee (or any other committee
serving a similar function) of any entity of which an executive
officer is expected to serve as a member of our compensation
committee.
Code
of Business and Financial Conduct and Corporate Governance
Guidelines
Our board of directors has adopted a code of business and
financial conduct applicable to our directors, officers and
employees, to be effective upon the completion of this offering,
as well as corporate governance guidelines, each in accordance
with applicable rules and regulations of the SEC and the NYSE.
The code of business and financial conduct and the corporate
governance guidelines will be available on our website as of the
date of this offering.
Compensation
Discussion and Analysis
Named
Executive Officers
The following Compensation Discussion and Analysis describes the
compensation earned by, awarded to or paid to our Chief
Executive Officer, our Chief Financial Officer and our three
other most highly paid executive officers in 2008 as determined
under the rules of the SEC, collectively referred to as the
Named Executive Officers and listed below:
| • | Randall H. Talbot, President and Chief Executive Officer | |
| • | Margaret A. Meister, Executive Vice President and Chief Financial Officer | |
| • | Roger F. Harbin, Executive Vice President and former Chief Operating Officer (Mr. Harbin ceased providing services as an executive officer as of January 1, 2009) | |
| • | Richard J. Lindsay, Senior Vice President, Life & Annuities Division, Symetra Life Insurance Company | |
| • | Patrick B. McCormick, Senior Vice President, Distribution, Symetra Life Insurance Company |
Compensation
Philosophy
Our overall executive compensation program is designed to align
the financial interests of our executives with those of our
stockholders. We focus on
pay-for-performance
(both individual and company performance) by providing
incentives that emphasize long-term value creation, thereby
putting a large portion of our executives’ pay at risk.
Based on this philosophy, the compensation committee has
maintained base salaries that may be lower than those paid by
other financial services companies and life insurers and has
chosen not to provide pensions or other perquisites, choosing
instead to grant the largest portion of compensation as
long-term incentive compensation which is based on the growth of
intrinsic business value per share.
Pay-for-performance. A
majority of our executive officers’ compensation is
directly linked to our short- and long-term financial goals,
thereby providing incentives for both short- and long-term
results. Our Annual Incentive Bonus Plan rewards performance
relative to short-term results based on a combination of meeting
company performance goals and individual performance goals. The
Symetra Financial Corporation Performance Share Plan (the
“Performance Share Plan”) rewards long-term
performance relative to financial goals set on three-year cycles.
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Pay at risk. The pay at risk approach of our
incentive compensation is intended to align with the executive
officer’s impact on company performance over the short-and
long-term. All executive officers have a significant amount of
their total annual compensation at risk through company
performance-based incentives.
Competitive opportunities. As we grow and strive to
reach competitive financial goals, our need for experienced
executive talent will continue. Our compensation opportunities
must be competitive to allow us to attract and retain talented
executives in our field.
Compensation
Process
The compensation committee, according to its charter, is
responsible for approving all compensation for our Named
Executive Officers as well as our other executive officers and
for administering the Performance Share Plan with respect to all
participants.
The compensation committee relies on Randall H. Talbot, our
Chief Executive Officer, and Christine A. Katzmar Holmes, our
Vice President of Human Resources, to recommend compensation
programs and awards for executive officers, subject to
compensation committee approval, and to administer approved
programs for all employees. Mr. Talbot and Ms. Katzmar
Holmes attend compensation committee meetings and, at the
committee’s request, present management’s analysis and
recommendations regarding compensation actions including our
base salaries, Annual Incentive Bonus Plan, Performance Share
Plan and Equity Plan.
Compensation actions are typically considered at the first
meeting of the compensation committee of each year after
financial results for the prior year are available. In the
meeting, Mr. Talbot also presents a self-evaluation
outlining his performance to assist the compensation committee
in determining his total compensation for the year. The
compensation committee then holds a private session to discuss
and determine Mr. Talbot’s total compensation.
The compensation committee is composed of members with extensive
business experience who have, based on their experience, set
compensation levels and performance targets at what they believe
to be appropriate levels.
Elements
of Compensation
We currently compensate our executives through a combination of
base salary, annual incentive compensation or, in the case of
our sales executive, sales incentive compensation, and long-term
incentive compensation.
Base salary. Our philosophy is to make base salary a
relatively smaller portion of the overall compensation package
of our executive officers relative to what we believe to be
common in the industry. While executive performance is annually
reviewed, base salaries for executives are not regularly
adjusted. Our practice of not adjusting base salaries based on
performance is consistent with our philosophy that the majority
of compensation should be variable based on our actual long-term
and short-term performance and that of the executive.
Annual incentive compensation. We pay annual
incentive cash awards to our Named Executive Officers, other
than Mr. McCormick, through the Annual Incentive Bonus Plan
in March of each year for performance in the prior calendar
year. The Annual Incentive Bonus Plan awards are based on our
fulfillment of performance goals set at the beginning of the
year and the executive’s individual role in that goal
fulfillment.
The compensation committee determines the performance goals and
approves the target aggregate bonus pool for the Annual
Incentive Bonus Plan each year. The actual aggregate bonus pool
for the Annual Incentive Bonus Plan is determined by the sum of
all participants’ target awards and can range from 0% to
200% of this target, based on our fulfillment of performance
goals. The Annual Incentive Bonus Plan establishes the metric
used to determine the actual aggregate bonus pool as the growth
in our intrinsic business value per share, which is the average
of the growth of both our GAAP book value per share and
enterprise value per share during the plan year. For 2008, the
growth target was 13%. If the average growth was 10% or
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lower, the plan would not be funded. If the average growth fell
between 10% and 13%, the aggregate bonus pool would be less than
100% of the target. If the average growth met or exceeded 13%,
the aggregate bonus pool would grow proportionately up to a
maximum of 200% of the target if average growth met or exceeded
16%.
After the aggregate bonus pool for the Annual Incentive Bonus
Plan is established, each executive is allocated a portion of
the pool based on his or her individual target and individual
performance. The individual target bonus for the CEO and CFO is
equal to 50% of his or her base salary while the individual
target bonus for Mr. Lindsay is 35% of base salary. The
2008 individual target bonus for our former COO was 50% of his
base salary. After reviewing the performance of each executive,
Mr. Talbot recommends to the compensation committee a
percentage of that executive’s individual target to be paid
for the performance year based on such executive’s
individual performance compared to goals or expectations set by
such executive and Mr. Talbot. Mr. Talbot’s
recommended annual incentive bonus is subject to the total
funding level for the Annual Incentive Bonus Plan and the
average percentage of target bonuses paid to the executive team.
In 2008, the growth in our intrinsic business value per share
was 3.16%. However, to recognize our company’s solid
operating performance despite the significant downturn in the
financial markets, the board of directors, in its discretion
outside of the Annual Incentive Bonus Plan, approved an
aggregate bonus pool for bonuses paid in March 2009 that was
equal to 65% of the target bonus pool under the Annual Incentive
Bonus Plan. The board of directors reviewed several factors in
making the determination for this discretionary bonus pool,
including a review of the Company’s operating results in
relation to competitors, reducing the pool from the 2007 level
(which was funded at 85%) and taking into account that no merit
increases would be paid to employees in 2009. The board of
directors determined that this discretionary bonus pool would be
apportioned amongst the participants in the Annual Incentive
Bonus Plan in the same manner as it would have been pursuant to
the Annual Incentive Bonus Plan.
Since the discretionary aggregate bonus pool for 2008 was funded
at 65% of the target, the executives, based on their individual
performance, were eligible to receive 65% of the amount of
target bonuses for which they would have been eligible under the
Annual Incentive Bonus Plan. The compensation committee then
made the final determination of the amount to be received by
each executive. Mr. Talbot’s 2008 goals were a growth
in intrinsic business value of 13%, an increase in new business
production year over year, to control expenses to plan level and
to provide leadership. The growth in intrinsic business value
fell short, but new business grew over 2007 and expenses were at
plan level. The compensation committee determined that
Mr. Talbot should receive 100% of 65% of his individual
target based on his individual performance particularly in
leading the Company through the difficult economic time and
posting record sales. Ms. Meister’s 2008 goals
included a growth in intrinsic business value of 13%, to balance
pricing of our products, to control expenses to plan and to
provide financial leadership. Mr. Talbot recommended 115%
for her Annual Incentive Bonus due to her outstanding leadership
in navigating the Company through the financial downturn, and
she received 115% of 65% of her individual target.
Mr. Harbin’s 2008 goals were a growth in intrinsic
business value of 13%, to provide enterprise risk management and
to improve business efficiency. Mr. Talbot recommended 85%
for Mr. Harbin’s Annual Incentive Bonus because, by
the end of 2008, Mr. Harbin had transitioned his COO duties
to others. Mr. Harbin received 85% of 65% of his individual
target. Mr. Lindsay’s 2008 goals included to achieve
significant sales growth and to develop and implement product
management in the division. In order to recognize the breadth of
his responsibilities as head of the Life & Annuities
Division and the achievement of his goals, Mr. Talbot
recommended 100% for his Annual Incentive Bonus.
Mr. Lindsay received 100% of 65% of his individual target.
Combining our overall company performance and individual
performance in determining the amount to be received by each
executive ensures that the interests of each executive are
aligned with our goals for financial success and that each
executive is rewarded for individual performance. In 2008, the
Annual Incentive Bonus was designed to constitute 5%, 11%, 8%
and 11% of total target compensation for Mr. Talbot,
Ms. Meister, Mr. Harbin and Mr. Lindsay,
respectively. The Annual Incentive Bonus for 2008 actually
constituted 6%, 13%, 8% and 11% of total compensation earned in
2008 for Mr. Talbot, Ms. Meister, Mr. Harbin and
Mr. Lindsay, respectively.
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Sales incentive compensation. All sales employees,
including Mr. McCormick, participate in a sales incentive
program. The targets for Mr. McCormick’s Sales
Incentive Plan are based on Sales and Distribution’s
financial plan and are designed to motivate him to develop new
distribution relationships and expand existing relationships.
Mr. McCormick earns a percentage of sales for each product
line for new net sales volumes. The percentages decrease after a
prescribed sales-volume threshold is met. The percentages and
thresholds differ from product to product within each product
line. The range of percentages that applies before a sales
threshold is met is 0.00001%-0.005% and the range of sales
thresholds is $20,000,000-$1,000,000,000. The range of
percentages that applies after a sales threshold is met is
0.000005%-0.001%. The products to which this plan applies are
individual life products, fixed and variable annuities, income
annuities and bundled share products.
The CEO and the Vice President of Human Resources have
discretion to make modifications to the Sales Incentive Plan.
Mr. McCormick’s 2008 Sales Incentive Plan included a
minimum threshold regarding the Company’s pre-tax GAAP
profit that was not met in 2008. However, the CEO and Vice
President of Human Resources took into consideration that 2008
was a record sales year, even though profits of the Company as a
whole fell below the threshold for payment under
Mr. McCormick’s Sales Incentive Plan, and approved a
plan modification to pay the earned incentive compensation.
Mr. McCormick’s sales incentive target was 33% of his
total target compensation for 2008. His actual sales incentive
earned was 32% of his total compensation.
Long-Term
Incentive Compensation
The Performance Share Plan. We primarily provide
long-term incentives to our Named Executive Officers and other
executive officers through the Performance Share Plan. This
long-term incentive compensation is in the form of unit-based
performance awards. Awards are granted annually. Each award
period is typically three years, therefore overlapping other
award periods. At the time of grant, each target performance
unit has the financial value of $100.00. Thereafter, each target
performance unit has a notional value of $100.00 x (1 +
aggregate percentage growth per share). At the end of the award
period, the compensation committee determines the level of
attainment of the performance target and assigns a performance
percentage of 0% to 200% of target based on that determination.
The matured performance units are paid in cash in an amount
equal to the then notional value of the target shares multiplied
by the performance percentage.
For the
2007-2009
and
2008-2010
cycles under the Performance Share Plan, the performance target
is 13% compound annualized growth in our intrinsic business
value per share with a threshold performance target of 10% and a
maximum performance target of 16%. Growth in our intrinsic
business value per share equals the average of the compound
annualized growth rates during the award period of the GAAP book
value per share and the enterprise value per share, excluding
unrealized gains or losses other than unrealized gains or losses
on equities held as investments.
For the
2009-2011
cycle under the Performance Share Plan, the performance target
is 13% modified operating return on equity averaged over the
award period measured by modified operating income divided by
beginning of year GAAP book value with a threshold performance
target of 8% and a maximum performance target of 18%. Modified
operating income equals net income minus realized gains/(losses)
minus hedge funds investment income plus 30 year
‘‘A’’ Bond investment income substituted for
equities/hedge fund performance (valued quarterly). The metrics
used to calculate the performance target were changed for the
2009-2011
cycle under the Performance Share Plan in order to focus
management on achieving core earnings goals that are within
their control and to mitigate the volatile effects of upward and
downward movements on equities and hedge funds.
The performance percentage ranges from 0% to 200% for all
currently running performance cycles, although the board of
directors retains the discretion to make an award outside the
Performance Share Plan if the threshold is not met. For the
2007-2009
and the
2008-2010
cycles, if the compound annualized growth is 10% or lower, the
performance percentage will be 0%. If the compound annualized
growth is 16% or higher, the maximum performance percentage of
200% applies. For annualized percentage growth between 10% and
16%, the performance percentage will be determined on the basis
of straight line interpolation. It is anticipated
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that the threshold performance targets will not be met for the
2007-2009
and
2008-2010
cycles. The Compensation Committee has the discretion to modify
the terms of awards granted, and anticipates that after the end
of the award periods for these cycles, it will approve a
discretionary payout based on the growth in book value over each
cycle’s three-year period using a performance percentage in
the range of 60%-90% for the
2007-2009
cycle and 70%-110% for the
2008-2010
cycle, assuming the Company’s performance follows the
modified operating return on equity forecast.
For the
2009-2011
cycle, if the modified operating return on equity is 8% or
lower, the performance percentage will be 0%. If the modified
operating return on equity is 18% or higher, the maximum
performance percentage of 200% applies. For modified operating
return on equity between 8% and 18%, the performance percentage
will be determined on the basis of straight line interpolation.
For the
2006-2008
cycle under the Performance Share Plan, the performance targets
and threshold were not met. The actual compound annualized
growth over the three year cycle was 9.34%. However, the board
of directors used its discretion to make an award outside of the
Performance Share Plan and approved a 50% payout. In making the
determination to provide the discretionary payout, the
Compensation Committee looked at different methodologies to
modify the terms of the awards including a review of the
Company’s operating results in relation to competitors and
determined that changing the performance percentage to 50%
appropriately rewarded management for its success in increasing
revenue during a challenging economic year.
The “Grant of Plan-Based Awards in 2008” table on
page 144 sets forth the grants made under the Performance
Share Plan to each Named Executive Officer in 2008. For the
Performance Share Plan, our CEO’s recommendations and our
compensation committee’s determinations with respect to the
size of awards to participants are subjective, and no
proportional or other mathematical formula is applied, nor are
any specific factors considered. Our CEO receives the largest
grant because he is responsible for our company’s overall
business and financial performance. Our CFO’s awards have
increased each year to reflect her increased level of
responsibility. The former COO’s award is reflective of his
duties as COO at the time of his grant. The Senior Vice
President, Life & Annuities receives a significant
grant because Mr. Lindsay is accountable for several
product line results. Our Senior Vice President, Distribution,
receives a relatively smaller grant because his sales incentive
plan, which is also performance based, already constitutes a
significant component of his overall compensation.
The target grants for the
2008-2010
cycle under the Performance Share Plan constituted 85%, 76%,
80%, 57% and 45% of target total compensation for
Mr. Talbot, Ms. Meister, Mr. Harbin,
Mr. Lindsay and Mr. McCormick, respectively. Although
awards of performance shares were not specifically set at these
percentages, the Performance Share Plan is designed such that
our Named Executive Officers have a substantial proportion of
their target total compensation linked to the achievement of
company performance targets.
The Equity Plan. We maintain an Equity Plan to
provide long-term incentives to our Named Executive Officers and
other employees, our non-employee directors and any consultants.
Prior to 2009, we did not make grants under the Equity Plan. Our
compensation committee administers the Equity Plan and
determines which individuals are eligible to receive awards, the
number of shares or units to be granted, the exercise or
purchase price for awards, the vesting schedule for each award
and the maximum term of each award. Awards may consist of stock
options, stock appreciation rights, restricted stock, restricted
stock units, performance shares/units and other stock-based
awards. On August 24, 2009, pursuant to the Equity Plan,
our CEO and CFO received grants for 75,270 and 7,890 shares
of restricted stock, respectively, that are scheduled to vest
on December 31, 2011, subject to their continued employment
through such date. These grants of restricted stock to our CEO
and CFO were made to align the interests of these executives
directly with the interests of our stockholders.
Employment/severance/change-in-control
arrangements. We have no employment agreements with our
executive officers. All of our executive officers are “at
will” employees. In the event of a termination of an
executive officer’s employment by us without cause or by
the executive due to a constructive termination, in either case
within 12 months (in the case of the Equity Plan) or within
24 months (in the case of the Performance Share Plan) of a
change in control, executives receive certain payments and
accelerated vesting under our Performance Share Plan and our
Equity Plan as described in more detail beginning on
page 148. We
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provide for this change-in-control benefit as an incentive and
retention mechanism that provides security to our executives in
the event that we experience a change in ownership.
Retirement benefits. All of our employees, including
our Named Executive Officers, may participate in our qualified
401(k) plan, which includes a safe harbor employer match. The
safe harbor employer match is equal to 100% of the employee
contributions up to the first 6% of eligible compensation. We
have no defined benefit pension plans, non-qualified deferred
compensation plans or retiree medical plans.
Perquisites. Our executive officers receive the same
benefits that are available to all employees. Benefits such as
medical and dental insurance, life insurance, short- and
long-term disability, vacation and sick leave, tuition
reimbursement and professional education funding, charitable
gift matching, employee referral program and relocation
assistance are available to all employees. All employees are
also eligible for several discount programs including fitness
club memberships, computers/software, wireless programs, office
supplies, rental cars and hotels for personal use.
Tax
and Accounting Implications of Executive Compensation
Programs
After the consummation of this offering, Section 162(m) of
the Internal Revenue Code would limit the deductibility of the
compensation of our Named Executive Officers to $1,000,000 per
individual to the extent that such compensation is not
“performance-based” as defined in Section 162(m).
We intend to rely on an exemption from Internal Revenue Code
Section 162(m) for compensation plans adopted prior to a
company’s initial public offering. This transition
exemption for our compensation plans will no longer be available
to us after the date of our annual meeting that occurs after the
third calendar year following the year of our initial public
offering, or if we materially modify the plan earlier. We will
continue to consider the implications of Internal Revenue Code
Section 162(m) and the limits of deductibility of
compensation in excess of $1,000,000 as we design our
compensation programs going forward.
Summary
Compensation Table
The following table presents compensation earned during 2008 by
the Company’s CEO, CFO and its three most highly
compensated executive officers other than the CEO and CFO (the
“Named Executive Officers”).
|
Non-Equity |
||||||||||||||||||||||||
|
Incentive Plan |
All Other |
Total |
||||||||||||||||||||||
|
Salary |
Bonus |
Compensation |
Compensation |
Compensation |
||||||||||||||||||||
|
Name and Principal Position
|
Year | ($) | ($)(1) | ($) | ($)(2) | ($) | ||||||||||||||||||
|
Randall H. Talbot
|
||||||||||||||||||||||||
|
President and Chief Executive Officer
|
2008 | 525,000 | 2,131,403 | — | 14,461 | 2,670,864 | ||||||||||||||||||
|
Margaret A. Meister
|
||||||||||||||||||||||||
|
Executive Vice President and Chief Financial Officer
|
2008 | 295,962 | 535,451 | — | 14,173 | 845,586 | ||||||||||||||||||
|
Roger F. Harbin(3)
|
||||||||||||||||||||||||
|
Executive Vice President and former Chief Operating Officer
|
2008 | 400,000 | 927,491 | — | 14,304 | 1,341,795 | ||||||||||||||||||
|
Richard J. Lindsay
|
||||||||||||||||||||||||
|
Senior Vice President, Life & Annuities
|
2008 | 285,000 | 293,595 | — | 14,159 | 592,754 | ||||||||||||||||||
|
Patrick B. McCormick
|
||||||||||||||||||||||||
|
Senior Vice President, Sales and Distribution
|
2008 | 200,000 | 354,837 | — | 14,225 | 569,062 | ||||||||||||||||||
| (1) | Represents the discretionary amounts awarded for the 2008 Annual Incentive Bonuses and the 2006-2008 cycle under the Performance Share Plan paid in March 2009. Mr. Talbot received $170,625 for his Annual |
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| Incentive Bonus and $1,960,778 for his 2006-2008 Performance Share Plan. Ms. Meister received $110,616 for her Annual Incentive Bonus and $424,835 for the 2006-2008 cycle under the Performance Share Plan. Mr. Harbin received $110,500 for the Annual Incentive Bonus and $818,991 for the 2006-2008 cycle under the Performance Share Plan. Mr. Lindsay received $64,838 for his Annual Incentive Bonus and $228,757 for the 2006-2008 cycle under the Performance Share Plan. Mr. McCormick received $179,738 for the 2006-2008 cycle under the Performance Share Plan and $175,099 for his sales incentive compensation. |
| (2) | Represents (i) employer contributions to the Symetra Financial Retirement Savings Plan equal to $13,800 for each of our Named Executive Officers and (ii) employer-paid life insurance premiums with respect to each Named Executive Officer. |
| (3) | Mr. Harbin ceased providing services as an executive officer as of January 1, 2009. |
Grant of
Plan-Based Awards in 2008
The following table summarizes the estimated future payouts
under grants made by us to the Named Executive Officers in 2008
under our incentive plans:
|
Number of |
||||||||||||||||||||
|
Non-Equity |
Units |
Threshold |
Target |
Maximum |
||||||||||||||||
|
Name
|
Incentive Plan(1) | Cycle | Granted | ($) | ($) | ($) | ||||||||||||||
| Annual Incentive Plan | 2008 | n/a | 8,750 | 262,500 | 525,000 | |||||||||||||||
|
Randall H. Talbot
|
Performance Share Plan | 2008-2010 | 30,000 | 133,463 | 4,328,691 | 9,365,376 | ||||||||||||||
| Annual Incentive Plan | 2008 | n/a | 4,933 | 147,981 | 295,962 | |||||||||||||||
|
Margaret A. Meister
|
Performance Share Plan | 2008-2010 | 10,000 | 44,488 | 1,442,897 | 3,121,792 | ||||||||||||||
| Annual Incentive Plan | 2008 | n/a | 6,667 | 200,000 | 400,000 | |||||||||||||||
|
Roger F. Harbin
|
Performance Share Plan | 2008-2010 | 10,000 | 44,488 | 1,442,897 | 3,121,792 | ||||||||||||||
| Annual Incentive Plan | 2008 | n/a | 3,325 | 99,750 | 199,500 | |||||||||||||||
|
Richard J. Lindsay
|
Performance Share Plan | 2008-2010 | 3,500 | 15,571 | 505,014 | 1,092,627 | ||||||||||||||
| Sales Incentive Plan | 2008 | n/a | n/a | 284,890 | n/a | |||||||||||||||
|
Patrick B. McCormick
|
Performance Share Plan | 2008-2010 | 2,750 | 12,234 | 396,797 | 858,493 | ||||||||||||||
| (1) | On March 5, 2008, the 2008 targets of the Annual Incentive Plan were approved for Mr. Talbot, Ms. Meister, Mr. Harbin and Mr. Lindsay. Mr. McCormick’s 2008 Sales Incentive Plan was approved by Mr. Talbot on December 20, 2007. On March 5, 2008, all Named Executive Officers were granted shares in the 2008-2010 cycle under the Performance Share Plan. Each share is initially valued at $100.00. |
Employee
Benefit Plans
The following is a summary of our primary employee benefit plans:
Annual
Incentive Bonus Plan
Annual incentive cash awards are paid to our Named Executive
Officers, other than Mr. McCormick, pursuant to the Annual
Incentive Bonus Plan. A description of the material terms of the
Annual Incentive Bonus Plan, and the payouts received by our
Named Executive Officers with respect to 2008, is on
page 139 of “— Elements of
Compensation.”
Sales
Incentive Plan
Our sales employees, including Mr. McCormick, receive
short-term incentive compensation through the Sales Incentive
Plan. A description of the material terms of the Sales Incentive
Plan, and the payout received by Mr. McCormick with respect
to 2008, is on page 141 of “— Elements of
Compensation.”
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Performance
Share Plan
We provide our Named Executive Officers with long-term incentive
compensation primarily through grants pursuant to the
Performance Share Plan. A description of the material terms of
the Performance Share Plan, the payouts received by our Named
Executive Officers with respect to the
2006-2008
performance cycle, and the terms of the awards outstanding
pursuant to the
2007-2009,
2008-2010
and
2009-2011
performance cycles, are on page 141 of
“— Elements of Compensation.”
Equity
Plan
Background. The purpose of the Symetra Financial
Corporation Equity Plan (the “Equity Plan”) is to
advance the Company’s and our stockholders’ interests
by providing long-term incentives to our employees, directors
and consultants. The Equity Plan became effective in 2007 and
has a ten-year term. Prior to 2009, we did not make grants under
the Equity Plan, and long-term incentive compensation remains
primarily provided by the Performance Share Plan.
Administration. Our compensation committee
administers the Equity Plan, and determines which individuals
are eligible to receive awards, the type of awards and number of
shares or units to be granted, the exercise or purchase price
for awards, the vesting schedule for each award and the maximum
term of each award (subject to the limits set forth in the
Equity Plan). The compensation committee has authority to
interpret the Equity Plan, and any determination by the
compensation committee will be final.
Share Reserve. We have reserved
7,830,000 shares of our common stock for issuance under the
Equity Plan, of which 7,746,840 remain available for issuance.
This reserve, and all limits referenced below, is subject to
adjustment in the event of stock splits or similar
capitalization events.
Eligibility. The individuals eligible to participate
in the Equity Plan include our officers and other employees, our
non-employee directors and any consultants.
Limit on Awards. During any calendar year, the
maximum aggregate number of shares subject to awards granted to
any individual shall be 435,000.
Equity Awards. The Equity Plan permits us to grant
the following types of awards:
| • | Restricted Stock. A restricted stock award is a grant of shares or an offer by us to sell shares of our common stock subject to a risk of forfeiture and/or a right of repurchase by us upon the termination of employment of the participant on such terms (including price and timing) as may be determined by the compensation committee. This risk of forfeiture and/or right of repurchase may lapse according to vesting conditions, which may include performance conditions, a time-based schedule or a combination thereof, to be determined in each case by the compensation committee. In the event of death or disability of a holder of restricted stock subject to vesting other than monthly vesting, the risk of forfeiture and/or our right to repurchase such shares shall lapse with respect to a pro rata portion of the restricted shares equal to the percentage of the vesting period that has elapsed. The compensation committee also has the discretion to waive all or a portion of the risk of forfeiture and/or our right to repurchase shares of restricted stock in the event of a participant’s voluntary resignation or retirement. In the event of a change of control followed by termination without cause or constructive termination of the participant within twelve months, the restrictions on such participant’s restricted stock will lapse. | |
| • | Stock Options. The Equity Plan provides for the grant of incentive stock options (commonly referred to as ISOs) to employees and non-qualified stock options (commonly referred to as NSOs) to employees, directors and consultants. The compensation committee determines the terms of options, provided that ISOs are subject to statutory limitations. The compensation committee determines the exercise price for a stock option, within the terms and conditions of the Equity Plan and applicable law, provided that the exercise price of an ISO may not be less than 100% (or 110% in the case of a recipient who is a ten percent stockholder) of the fair |
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| market value of our common stock on the date of grant. ISOs exercisable for no more than 435,000 shares may be issued to a participant in any one year. |
Options granted under the Equity Plan will vest at the rate
specified by the compensation committee, with the vesting
schedule for each stock option to be set forth in the stock
option agreement for such option grant. Generally, the committee
determines the term of stock options granted under the Equity
Plan, up to a maximum term of ten years.
After termination of an optionee’s employment, the optionee
may exercise the vested portion of each option for the period of
time stated in the option agreement to which such option
relates. The compensation committee also has the discretion to
permit exercise of the unvested portion of an option in the
event of voluntary resignation or retirement. Generally, if
termination is due to disability, the vested portion of each
option will remain exercisable for three years following the
date of disability, and in the event of death of an optionee,
the vested portion of each option will remain exercisable by
such optionee’s estate for one year. In all other cases,
the vested portion of each option will generally remain
exercisable for three months following termination of
employment. However, an option may not be exercised later than
its expiration date.
Notwithstanding the above, in the event of a change of control
of Symetra, followed by termination without cause or
constructive termination (as such terms are defined in the
Equity Plan) of an optionee within twelve months of the change
of control, such optionee’s stock options will become 100%
vested and exercisable for up to 30 days following such
termination.
| • | Stock Appreciation Rights. Stock appreciation rights provide for a payment, or payments, in cash or shares of common stock, to the participant based upon the difference between the fair market value of our common stock on the date of exercise and the stated exercise price. The exercise price of a stock appreciation right may not be less than 100% of the fair market value of our common stock on the date of grant of the stock appreciation right. Stock appreciation rights are otherwise generally subject to the same terms and limitations as described above for stock options, including vesting acceleration upon termination following a change of control. | |
| • | Restricted Stock Units. Restricted stock units represent the right to receive, without payment to the Company, an amount of shares of our common stock equal to the number of shares underlying the restricted stock units multiplied by the fair market value of a share on the date of vesting of the restricted stock units. The compensation committee may, at its discretion, impose vesting conditions, which may include performance conditions, a time-based vesting schedule or a combination thereof, on the exercise of such units. A participant’s restricted stock units generally terminate in the event the participant’s employment terminates prior to payment with respect to the units. However, in the event of death or disability of a holder of restricted stock units that are subject to vesting other than monthly vesting, the holder will receive payment for a pro rata percentage of the unvested units equal to the percentage of the vesting period that has elapsed. The compensation committee also has the discretion to make payment with respect to all or a portion of the unvested restricted stock units held by a participant in the event of such participant’s voluntary resignation or retirement. In the event of a change of control followed by termination without cause or constructive termination of the participant within twelve months, such participant’s restricted stock units that were outstanding on the date of termination will be cancelled and such participant will receive a cash payment equal to the product of the number of restricted stock units and the fair market value of a share of our common stock on the date of termination. | |
| • | Performance Shares/Units. A performance share award entitles a participant to receive all or part of the value of a specified number of hypothetical shares if specified performance objectives, as determined by the compensation committee, are satisfied during a specified award period. The payout under a performance share award is the product of (1) the target number of performance shares subject to award, (2) the performance percentage and (3) the fair market value of a share on the date the award is paid or becomes payable to the participant. |
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Performance units are similar to performance shares, except that
the value is based on a fixed dollar value or formula specified
by the committee, rather than the fair market value of a share
on the date the award is paid or payable (as with performance
shares). The maximum value of performance units that may be
earned by a participant for any single award period of one year
or longer may not exceed $25 million.
At the end of the award period for performance shares or
performance units, the compensation committee assigns a
performance percentage that is between 0% and 200% depending on
the extent to which the applicable performance objectives were
met during the award period. Performance shares and units may be
settled in cash, shares of our common stock, other securities,
other awards, other property or any combination thereof, as
determined by the compensation committee.
A participant’s performance shares or units are cancelled
if the participant’s employment is terminated prior to end
of the award period. However, if a participant dies or becomes
disabled during the performance period, such award is paid to
such participant (or such participant’s estate) on a
pro-rata basis. In the event of a change of control followed by
termination without cause or constructive termination of the
participant within twelve months, the participant’s
performance share/unit award shall be paid out on a pro rata
basis according to the percentage of months during the award
period that have elapsed, with a performance percentage of 100%.
| • | Other Stock-Based Awards. The compensation committee also has the discretion to issue other equity-based awards under the Equity Plan, including fully-vested shares of common stock. |
Awards Not Transferable. Awards under the Equity
Plan are generally non-transferable, except to a
participant’s estate in the event of the participant’s
death.
Adjustments. The compensation committee is
authorized to make adjustments to the terms and conditions of
awards in recognition of certain unusual or nonrecurring events,
including but not limited to extraordinary dividends, stock
splits, mergers or a change in control of Symetra. In such
events, the committee has the discretion to do what it
determines is appropriate or desirable, including providing for
the substitution or assumption of awards, accelerating the
vesting of or the lapse of restrictions on awards, terminating
the awards or making a cash payment in consideration for the
cancellation of the awards.
Amendment and Termination. The Equity Plan may be
amended or terminated at any time upon approval of our board of
directors, provided that no amendment or termination will
adversely affect outstanding awards. The Equity Plan will
terminate on the earlier of the termination of the Equity Plan
by our board of directors or ten years from the effective date
of the Equity Plan.
Employee
Stock Purchase Plan
Background. Our employee stock purchase plan is
designed to enable eligible employees to periodically purchase
shares of our common stock at a discount. Purchases are
accomplished through participation during discrete offering
periods. Our employee stock purchase plan is intended to qualify
as an employee stock purchase plan under section 423 of the
Internal Revenue Code of 1986, as amended. Our board of
directors adopted our employee stock purchase plan in October
2007.
Share Reserve. We have initially reserved
870,000 shares of our common stock for issuance under our
employee stock purchase plan.
Administration. Our compensation committee
administers our employee stock purchase plan. Our employees
generally are eligible to participate in our employee stock
purchase plan if they are employed on a salaried basis by us, or
a subsidiary of ours that we designate, for 20 or more hours per
week and more than five months in a calendar year. Employees who
are 5% stockholders, or would become 5% stockholders as a result
of their participation in our employee stock purchase plan, are
ineligible to participate in our employee stock purchase plan.
We may impose additional restrictions on eligibility as well.
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Under our employee stock purchase plan, eligible employees may
acquire shares of our common stock by accumulating funds through
payroll deductions. Our eligible employees may select a rate of
payroll deduction up to 15% of their cash compensation (or such
lower limit as determined by the compensation committee). We
also have the right to amend or terminate our employee stock
purchase plan, except that, subject to certain exceptions, no
such action may adversely affect any outstanding rights to
purchase stock under the plan. Our employee stock purchase plan
will remain in effect until terminated by our compensation
committee.
Purchase Rights. When an offering period commences,
our employees who meet the eligibility requirements for
participation in that offering period and who elect to
participate are granted a non-transferable option to purchase
shares in that offering period. An employee’s participation
automatically ends upon termination of employment for any
reason. An employee may withdraw from the plan at any time at
least five business days prior to a purchase date, and in such
event shall receive a refund of all of such employee’s
payroll deductions deposited to date into the plan.
No offering period will commence until this offering is
complete. Each offering period will be for approximately six
months (commencing on the first trading day on or immediately
after February 15 and August 15 of each year and terminating on
the trading day on or immediately preceding the next August 14
or February 14, respectively). The duration and timing of
offering periods may be changed by the compensation committee
without stockholder approval if such change is announced prior
to the scheduled beginning of the offering period to be effected
thereafter.
No participant will have the right to purchase our shares at a
rate which, when aggregated with purchase rights under all our
employee stock purchase plans that are also outstanding in the
same calendar year(s), has a fair market value of more than
$25,000, determined as of the first trading day of the
applicable offering period, for each calendar year in which such
right is outstanding. The purchase price for shares of our
common stock purchased under our employee stock purchase plan
will be 85% of the closing trading price per share of our common
stock as reported by the NYSE on the last date of each purchase
period.
Change in Control. In the event of a change in
control of Symetra, the acquiring entity shall assume the
outstanding purchase rights. In the event the acquiring entity
refuses to do so, the purchase and offering periods then in
progress shall terminate prior to the date of closing of the
change of control transaction.
401(k)
Plan
We offer Section 401(k) plan to all employees who meet
specified eligibility requirements. Eligible employees may
contribute up to 100% of their eligible compensation, subject to
limitations established under Section 401(k). We match
participant contributions dollar-for-dollar, up to 6% of their
compensation. Participants are immediately vested in their
contributions.
Potential
Payments Upon Termination or Change in Control
We have no employment agreements with our Named Executive
Officers that would provide payments upon termination of
employment.
Annual
Incentive Bonus Plan
The Annual Incentive Bonus Plan requires that an executive be an
active employee on December 31 of the plan year, and remain
continuously employed by the Company through the award payout
date, in order to be eligible to receive a bonus award.
Exceptions to this include death, disability, retirement at
age 65 or older or position elimination. In these cases,
the bonus will be based on eligible earnings paid through the
executive’s last day of work within the plan year and is
modified by the funding level of the aggregate bonus pool.
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Sales
Incentive Plan
Mr. McCormick’s Sales Incentive Plan provides that if
he leaves his position for any reason, he will be paid for
production earned through the end of the last full month of
employment.
Performance
Share Plan
The Performance Share Plan provides that, except for the change
in control provision described below, the executive would
immediately forfeit all outstanding awards upon termination of
employment prior to the end of the applicable award period. The
board of directors, at its discretion, may provide that if an
executive dies, retires, is disabled or is granted a leave of
absence, or if the executive is otherwise terminated in a manner
reasonably judged to be not seriously detrimental to our
company, then all or a portion of the executive’s award, as
determined by the board, may be paid to the executive (or
beneficiary).
The Performance Share Plan includes a “double trigger”
change in control provision which provides that if a
participant’s employment is terminated without cause or
constructively terminated within 24 months after a change
in control of our company, each award held by the participant
prior to the change in control is cancelled and the participant
is entitled to receive an award payment equal to the product of
(a) the then financial value of 100% of the performance
shares and (b) the performance percentage, which is based
on the level of attainment of the performance goal as of the
last day of the calendar quarter ending prior to the date of the
termination event. Alternatively, following the change in
control, if the participant remains continuously employed
through the end of the award period, then the participant will
receive those awards for which the participant would have been
paid had the change in control not occurred. For purposes of the
Performance Share Plan, a change in control occurs when any
person or group, other than White Mountains or Berkshire
Hathaway, an underwriter or an employee benefit plan of the
Company, becomes the beneficial owner of 35% or more of the
Company’s outstanding common stock.
Under the Performance Share Plan, a “constructive
termination” is defined as a termination of the
participant’s employment at the initiative of the
participant following a material decrease in salary or a
material diminution in the participant’s authority, duties
or responsibilities.
Restricted
Stock Agreements
Restricted Stock Agreements with Mr. Talbot and
Ms. Meister provide that the restricted stock will vest on
December 31, 2011, subject to their continued employment
through such date. In the event of the executive’s
voluntary termination or termination with cause (as defined in
the Equity Plan), all of the unvested shares will be forfeited.
If the executive’s employment is terminated by us without
cause or due to the executive’s death or disability, the
following amounts of restricted stock will become vested: if
such termination is on or after December 31, 2009 but prior
to December 31, 2010, one-third of the restricted stock
will vest. If such termination is on or after December 31,
2010 but prior to December 31, 2011, two-thirds of the
restricted stock will vest.
In the event of a change in control followed by termination
without cause or constructive termination (as defined in the
Equity Plan) of the executive within twelve months, the
restrictions on all of the executive’s restricted stock
will lapse.
Potential
Payments Upon Termination
The following table shows the potential payments that would be
made by us to each of the Named Executive Officers assuming that
each executive’s employment was terminated due to death,
disability,
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retirement at age 65 or older or position elimination on
December 31, 2008 whether or not a change in control has
occurred.
|
2008 Annual |
2007-2009 |
2008-2010 |
||||||||||||||
|
Incentive Bonus |
Performance |
Performance |
||||||||||||||
|
Executive
|
Plan ($)(1) | Share Plan ($)(2) | Share Plan ($)(2) | Total ($) | ||||||||||||
|
Randall H. Talbot
|
170,625 | 0 | 0 | 170,625 | ||||||||||||
|
Margaret A. Meister
|
96,188 | 0 | 0 | 96,188 | ||||||||||||
|
Roger F. Harbin
|
130,000 | 0 | 0 | 130,000 | ||||||||||||
|
Richard J. Lindsay
|
64,838 | 0 | 0 | 64,838 | ||||||||||||
|
Patrick B. McCormick
|
175,099 | 0 | 0 | 175,099 | ||||||||||||
| (1) | Reflects the amount payable under the 2008 Annual Incentive Bonus Plan, except with respect to Mr. McCormick, who would instead receive payment under his Sales Incentive Plan. This amount is payable in the event of death, disability, retirement at age 65 or older or elimination of position, whether or not a change in control of the Company has occurred. This figure represents 100% of the executive’s individual target modified by the funding level of the aggregate bonus pool. In March 2009, the board of directors approved the funding of the aggregate bonus pool at 65% of the target level, even though the Company performance goal was not met. | |
| (2) | No payment would have been made in respect of performance units because performance goals were not met in 2008, which affected the 2007-2009 and 2008-2010 Performance Share Plans as of December 31, 2008. The board of directors, at its discretion, may elect to award all or a portion of the grant to an executive in the event of such executive’s death, retirement, disability or leave of absence, or in the event of termination in a manner not determined to be seriously detrimental to the Company. |
Compensation
of Directors
The following table presents compensation paid to our board of
directors for the year ended December 31, 2008:
|
Fees Earned |
||||||||
|
or Paid in |
||||||||
|
Name
|
Cash ($) | Total ($) | ||||||
|
David T. Foy(1)
|
64,000 | 64,000 | ||||||
|
Lois W. Grady(2)
|
41,750 | 41,750 | ||||||
|
Sander M. Levy(3)
|
51,900 | 51,900 | ||||||
|
Robert R. Lusardi(4)
|
28,000 | 28,000 | ||||||
|
David I. Schamis(5)
|
36,900 | 36,900 | ||||||
|
Lowndes A. Smith(6)
|
31,800 | 31,800 | ||||||
|
Randall H. Talbot(7)
|
— | — | ||||||
| (1) | Includes chairman of the board retainer, annual retainer, and board, audit committee and compensation committee meeting fees. Mr. Foy served as chairman of the board until May 2009. | |
| (2) | Includes chairman of the compensation committee retainer, annual retainer and board and compensation committee meeting fees. Ms. Grady also serves on the First Symetra National Life Insurance Company of New York board of directors and audit committee. | |
| (3) | Includes chairman of the audit committee retainer, annual retainer and board and audit committee meeting fees. Mr. Levy also serves on the First Symetra National Life Insurance Company of New York board of directors and audit committee. All compensation is paid to Vestar Capital Partners. |
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| (4) | Includes annual retainer and board meeting fees. | |
| (5) | Includes annual retainer, and board and audit committee meeting fees. Mr. Schamis also serves on the First Symetra National Life Insurance Company of New York board of directors and audit committee. All compensation is paid to J.C. Flowers & Co. LLC. | |
| (6) | Includes annual retainer and board and compensation committee meeting fees. Mr. Smith has served as chairman of the board since May 2009. Mr. Smith also serves on the First Symetra National Life Insurance Company of New York board of directors. | |
| (7) | Mr. Talbot is our employee and receives no additional retainer or fee for board participation. |
Upon completion of the offering, our directors who are not
employees of the Company will be entitled to the following
compensation for service on our board of directors and board
committees:
| • | Chairman of the board additional annual retainer: $270,000 |
| • | Vice chairman of the board additional annual retainer: $40,000 |
| • | Board member annual retainer: $75,000 |
| • | Audit committee chairman additional annual retainer: $40,000 |
| • | Audit committee member annual retainer: $10,000 |
| • | Compensation committee chairman annual retainer: $25,000 |
| • | Finance committee chairman annual retainer: $25,000 |
| • | Nominating and corporate governance committee chairman annual retainer: $15,000 | |
| • | Board meeting participation: $2,000 |
| • | Committee meeting participation: $2,000 |
In addition, members of the board of directors of First Symetra
National Life Insurance Co. of New York receive an annual
retainer of $500, and fees of $100 per board meeting and $50 per
committee meeting attended.
We reimburse our directors for first class travel, hotel
accommodations, meals, and other necessary expenses.
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CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
The following is a summary of each transaction or series of
similar transactions since January 1, 2006 to which we were
or are a party in which the amount involved exceeded or exceeds
$120,000 and in which any of our directors or executive
officers, any holder of 5% of our capital stock or any member of
the immediate family of any of the foregoing persons had or will
have a direct or indirect material interest.
Investment
Management Agreement with White Mountains Advisors LLC
A majority of our investments are managed by WM Advisors, a
wholly owned subsidiary of White Mountains Insurance Group, Ltd.
White Mountains Insurance Group, Ltd. beneficially owns
26,887,872 shares of our common stock, which includes
warrants exercisable for 9,487,872 shares. Mr. David T.
Foy, one of our directors, serves as Executive Vice President
and Chief Financial Officer of White Mountains Insurance Group,
Ltd. Mr. Lowndes A. Smith, chairman of our board of directors,
serves as a director of White Mountains Insurance Group, Ltd.
Mr. Robert R. Lusardi, one of our directors, serves as
President and Chief Executive Officer of White Mountains
Financial Services, LLC, an affiliate of White Mountains
Insurance Group, Ltd. The total fees incurred with respect to WM
Advisors under our existing investment management agreements, or
IMAs, with them for the nine months ended September 30,
2009 and for the years ended December 31, 2008, 2007 and
2006, respectively, were $10.4 million, $14.6 million,
$15.3 million and $20.2 million. Following
satisfaction of applicable prior notice/approval requirements of
insurance regulatory authorities, we and certain of our
subsidiaries intend to enter into an amended investment
management agreement, or the WMA Agreement, on substantially the
same terms as our existing IMAs with WM Advisors pursuant to
which WM Advisors will continue to supervise and direct the
fixed income and alternative investment portion of our
investment portfolio in accordance with our investment
philosophy described under “Business —
Investments.”
Under the WMA Agreement and consistent with the existing IMAs,
WM Advisors will have full discretion and authority to make all
investment decisions in respect of the fixed income and
alternative investment portion of our investment portfolio on
our behalf and at our sole risk, and to do anything which WM
Advisors deems is required, appropriate or advisable in
connection with the foregoing.
The assets of our portfolio will be held in one or more
separately identifiable accounts in the custody of a bank or
similar entity designated by us and acceptable to WM Advisors.
We will be responsible for custodial arrangements and the
payment of all custodial charges and fees.
We will agree to pay annual investment management fees generally
based on the month-end market/book values held under custody as
set forth in the table below (which are substantially the same
as the fees under our existing IMAs):
|
Value
|
Annual Fee
|
|||
|
Investment grade fixed maturities:
|
||||
|
Up to $1 billion
|
Book | 10.0 basis points | ||
| (0.1% or 0.001) | ||||
|
$1 billion — $2 billion
|
Book | 8.5 basis points | ||
|
$2 billion — $5 billion
|
Book | 7.5 basis points | ||
|
Greater than $5 billion
|
Book | 2.5 basis points | ||
|
High yield debt
|
Market | 25.0 basis points | ||
|
Equities
|
Market | 100.0 basis points | ||
|
Fully funded hedge funds, private equity funds and other
deferred fundings:
|
||||
|
First two years of fund’s life
|
Committed | 100.0 basis points | ||
|
Thereafter
|
Market | 100.0 basis points | ||
|
Affordable Housing Credit Funds:
|
||||
|
First year of fund’s life
|
Committed | 100.0 basis points | ||
|
Thereafter
|
Market | 10.0 basis points |
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We will pay WM Advisors a quarterly fee for portfolio management
services computed at the annual rate of one-half basis point
(0.005%) of the aggregate value of the net assets of the
aggregate investment account, which includes equities and
commercial mortgage loans in addition to the items managed by WM
Advisors.
WM Advisors will provide reports containing a detailed listing
of invested assets and transactions in our investment portfolio,
as well as various other analytical reports as outlined by
Symetra, at least quarterly. We will review periodically the
performance of and the fees paid to WM Advisors under the WMA
Agreement.
The WMA Agreement will provide for an initial fixed term of one
year, which will be extendible by us for an additional year (a
second year) and, if so extended, for a second additional year
(a third year). Following the end of the initial term and any
extensions, the WMA Agreement may be terminated by either party
upon 60 days’ written notice.
WM Advisors also provides investment advisory services to White
Mountains Insurance Group, Ltd., its subsidiaries and a number
of its affiliates.
Investment
Management Agreement with Prospector Partners, LLC
Prospector is a registered investment adviser managing assets
for corporations, foundations, endowments and high net worth
individuals. Mr. John D. Gillespie, the founder and
Managing Member of Prospector, is a director of White Mountains
Insurance Group, Ltd. As discussed above, White Mountains
Insurance Group, Ltd. beneficially owns shares of our common
stock and warrants and our chairman serves as a director and two
of our directors serve as officers of White Mountains entities.
Historically, Prospector managed most of the publicly traded
common equity and convertible securities in our portfolio
through a sub-advisory agreement with WM Advisors. As of
September 30, 2009, Prospector served as a discretionary
advisor to WM Advisors under the sub-advisory agreement with
respect to approximately $0.2 billion of specified assets
in our combined insurance and non-insurance portfolios. For the
nine months ended September 30, 2009 and during the years
ended December 31, 2008, 2007 and 2006, respectively, we
incurred $1.2 million, $1.9 million, $2.1 million
and $1.8 million in fees with respect to the Prospector
portfolio. These fees are included in the WM Advisor fees
mentioned above.
Following satisfaction of applicable prior notice/approval
requirements of insurance regulatory authorities, we intend to
enter into a separate investment management agreement with
Prospector, or the Prospector Agreement, pursuant to which
Prospector will agree to supervise and direct the publicly
traded common equity and convertible securities portion of our
investment portfolio in accordance with its investment strategy
described under “Business — Investments.”
Under the Prospector Agreement, Prospector will have discretion
and authority with respect to the portfolio it manages for us
that is substantially similar to WM Advisors’ discretion
and authority under the WMA Agreement. The assets of our
portfolio will be held in one or more separately identifiable
accounts in the custody of a bank or similar entity designated
by us and acceptable to Prospector. We will be responsible for
custodial arrangements and the payment of all custodial charges
and fees.
Under the Prospector Agreement, we will agree to pay annual
investment management fees based on aggregate net assets under
management according to the following schedule:
|
Assets Under Management
|
Annual Fee
|
|
|
Up to $200 million
|
100.0 basis points | |
|
$200 million to $400 million
|
50.0 basis points | |
|
Greater than $400 million
|
25.0 basis points |
The Prospector Agreement will have an initial fixed term of
three years, which will be extendible by us for an additional
year (a fourth year) at or prior to the end of the second year
of the term and, if so extended, for a second additional year (a
fifth year) at or prior to the end of the third year of the
term. The Prospector Agreement will be terminable by us only
(i) for cause (including material non-performance by
Prospector), (ii) if either John D. Gillespie or Richard P.
Howard are no longer affiliated with Prospector or (iii) if
there is a change in control of Prospector. Following the end of
the initial term and any extensions, the
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Prospector Agreement may be terminated by either party on
60 days’ written notice. We will review periodically
the performance of and the fees paid to Prospector under the
Prospector Agreement.
Relationships
and Transactions with White Mountains Insurance Group, Ltd. and
its Affiliates
We are party to certain shareholders agreements, dated as of
March 8, 2004, March 19, 2004 and April 16, 2004,
with our stockholders. The shareholders agreements will
terminate on the consummation of this offering other than
certain provisions, including provisions relating to tag-along
rights, transfer restrictions, registration rights,
confidentiality and competition. Regarding
tag-along
rights, for one year following this offering, if one or more
stockholders party to a shareholders agreement propose to
transfer 10% or more of our then outstanding common stock, they
must afford each other stockholder party to such shareholders
agreement the opportunity to participate proportionally in the
transfer. Regarding transfer restrictions, for one year
following this offering, warrant transfers are generally
restricted and for 18 months following this offering, any
stockholder party to a shareholders agreement wishing to
transfer shares of our common stock or warrants must generally
require the transferee to agree to be bound by the terms of the
shareholders agreement. Regarding registration rights, for
ten years following this offering, stockholders party to a
shareholders agreement holding in the aggregate 10% of all
registrable securities (as defined in the shareholders
agreements) then held by stockholders party to a shareholders
agreement may request that we effect the registration of such
securities through an underwritten public offering or the filing
of a shelf registration statement or permit the sale of such
securities already included in an effective shelf registration
statement pursuant to an underwritten public offering, subject
to certain limitations. During this
ten-year
period, if we register common shares in connection with an
offering, stockholders party to a shareholders agreement will be
given an opportunity to include their registrable securities,
subject to certain limitations. With respect to confidentiality
provisions, the shareholders agreements provide that, for an
indefinite period of time, the stockholders party to a
shareholders agreement will keep confidential any non-public
information made available to them during the due diligence
process of any prior offering of our common stock. The
shareholders agreements provide that, for an indefinite period
of time, we will indemnify the holders of registrable securities
and any underwriters for losses or damages arising out of
material misstatements or omissions in the relevant registration
statement or prospectus or violations of law in connection with
the registration of registrable securities, and further provide
that the holders of registrable securities and any underwriters
will indemnify us for losses or damages arising out of material
misstatements or omissions in the relevant registration
statement or prospectus that was made in reliance on written
information furnished by such holders or underwriters. The
shareholders agreements also provide that the stockholders may
freely engage in, or invest in, businesses that are competitive
with ours and that there are no obligations for any stockholder
to refer any business opportunities to us. In addition,
following this offering and so long as White Mountains Insurance
Group, Ltd. holds at least 20% of our outstanding common stock,
assuming exercise of any outstanding warrants, each stockholder
party to a shareholders agreement is required to vote its shares
for two board members designated by White Mountains Insurance
Group, Ltd., which will be reduced to one nominee so long as
White Mountains Insurance Group, Ltd. holds at least 10%, but
less than 20%, of our outstanding common stock.
Symetra Life Insurance Company entered into an accident and
health reinsurance agreement with a related party, White
Mountains Re America, a subsidiary of White Mountains Insurance
Group, Ltd. Berkshire Hathaway, Inc. and White Mountains Group,
Ltd. each beneficially own 26,887,872 shares of our common
stock, which includes warrants exercisable for 9,487,872 shares.
As discussed above, our chairman serves as a director and two of
our directors serve as officers of White Mountains entities. For
the nine months ended September 30, 2009 and the year ended
December 31, 2008, we recorded ceded premiums of
$1.1 million and $2.1 million, respectively, and
recovered ceded losses of $2.5 million and
$1.1 million, respectively.
Relationships
and Transactions with Others
The following transactions involve the operations of our
subsidiary, Symetra Life Insurance Company, and were entered
into in the ordinary course of business.
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Table of Contents
Symetra Life Insurance Company entered into a coinsurance
reinsurance agreement with Wilton Reassurance Company, or Wilton
Re. For the nine months ended September 30, 2009 and for
the years ended December 31, 2008, 2007 and 2006, we
recorded ceded premiums of $1.4 million, $1.8 million,
$1.7 million and $1.4 million, respectively, and
recovered ceded losses of $0.3 million, $0.9 million,
$0.3 million and $0.2 million, respectively. Vestar
Capital Partners, which holds 6,089,999 shares of our
common stock, has an investment interest in Wilton Re.
Mr. Sander M. Levy, one of our directors and our audit
committee chairman, serves on the board of directors of Wilton
Re. Mr. Levy is not directly involved in the business
dealings between the two companies but disclosed the
relationship to our audit committee, which ratified the
relationship.
Symetra Life Insurance Company is a party to several coinsurance
reinsurance agreements with General Re Life Corporation. General
Re Life Corporation is the North American life and health
reinsurance company of General Re Corporation, a subsidiary of
Berkshire Hathaway Inc. As discussed above, Berkshire Hathaway,
Inc. beneficially owns shares of our common stock and warrants.
For the nine months ended September 30, 2009 and the years
ended December 31, 2008, 2007 and 2006, we recorded ceded
premiums of $0.3 million, $0.5 million,
$0.4 million and $0.1 million, respectively. No ceded
losses have been recovered under these agreements.
Symetra Life Insurance Company issued an insurance policy for
both specific and aggregate excess loss coverage to Essent
Healthcare with an effective date of January 1, 2008 with
substantially the same terms as those provided to other third
parties. Vestar Capital Partners, which holds
6,089,999 shares of our common stock, has an investment in
Essent Healthcare. Premiums received for the nine months ended
September 30, 2009 and the year ended December 31,
2008 were $0.1 million and $0.1 million, respectively.
We recorded losses of $0.1 million and $0.6 million,
for the nine months ended September 30, 2009 and for the
year ended December 31, 2008, respectively.
Symetra Life Insurance Company issued an insurance policy for
specific excess loss coverage to Nebraska Furniture Mart with an
effective date of January 1, 2009 with substantially the
same terms as those provided to other third parties. Nebraska
Furniture Mart is a subsidiary of Berkshire Hathaway, Inc. As
discussed above, Berkshire Hathaway, Inc. beneficially owns
shares of our common stock and warrants. For the nine months
ended September 30, 2009 we received premiums of $0.5
million and recorded losses of $0.1 million.
Symetra Life Insurance Company issued an insurance policy for
specific excess loss coverage to Moody’s Corporation, with
an effective date of January 1, 2008 with substantially the
same terms as those provided to other third parties. The policy
was terminated as of December 31, 2008. Berkshire Hathaway
Inc., has an investment in Moody’s Corporation. As
discussed above, Berkshire Hathaway, Inc. beneficially owns
shares of our common stock and warrants. We recorded premiums of
$0.3 million for the year ended December 31, 2008.
Symetra Life Insurance Company issued medical stop-loss and
group life insurance policies with a related party, MidAmerican
Energy Holdings Company, an affiliate of Berkshire Hathaway
Inc., beginning January 1, 2006 with substantially the same
terms as those provided to other third parties. As discussed
above, Berkshire Hathaway, Inc. beneficially owns shares of our
common stock and warrants. The policy was terminated as of
December 31, 2006. Premiums received from MidAmerican
Energy Holdings Company for the year ended December 31,
2006 were $2.7 million and ceded losses for the years ended
December 31, 2007 and 2006 were $0.6 million and
$1.0 million, respectively.
Symetra Life Insurance Company held $3.6 million, $3.1 million,
$6.5 million, and $5.6 million in fair value of Class B common
stock in Berkshire Hathaway, Inc. as of September 30, 2009 and
December 31, 2008, 2007, and 2006, respectively. As
discussed above, Berkshire Hathaway, Inc. beneficially owns
shares of our common stock and warrants. For the nine months
ended September 30, 2009, we had purchases of $0.4 million and
no sales related to our holdings in Berkshire Hathaway, Inc. For
the years ending December 31, 2008, 2007, and 2006, we had
purchases of $2.1 million, $0.0 million, and
$2.2 million, respectively, and sales of $3.1 million,
$0.4 million, and $0.0 million, respectively, related
to our holdings in Berkshire Hathaway, Inc.
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Table of Contents
One of our subsidiaries, Symetra Assigned Benefits Service
Company (SABSCO), in the ordinary course of business, accepted
the assignment of periodic payment obligations from related
parties OneBeacon Insurance Group (OB) and United States
Liability Insurance Company (USLI). OB and USLI are affiliated
companies of White Mountains Insurance Group, Ltd. and Berkshire
Hathaway Inc., respectively. As discussed above, White Mountains
Group, Ltd. and Berkshire Hathaway, Inc. each beneficially own
shares of our common stock and warrants and our chairman serves
as a director and two of our directors serve as officers of
White Mountains entities. These assignments were on
substantially the same terms as those provided to other third
parties. For the nine months ended September 30, 2009 and
the years ended December 31, 2008, 2007 and 2006, SABSCO
purchased $1.1 million, $0.1 million,
$0.6 million and $0.4 million, respectively, in
structured settlement annuities from Symetra Life to fund these
obligations for OB and purchased $0.3 million in structured
settlement annuities from Symetra Life to fund these obligations
for USLI for the year ended December 31, 2007.
Procedures
for Approval of Related Party Transactions
Prior to this offering, we did not have a written policy
relating to the approval of related party transactions. Any such
transactions were approved by our board of directors or audit
committee in accordance with applicable law.
In connection with this offering, we will adopt a written policy
relating to the approval of related party transactions. We will
review all relationships and transactions in which we and our
directors and executive officers or their immediate family
members are participants to determine whether such persons have
a direct or indirect material interest. Our legal staff will be
primarily responsible for the development and implementation of
processes and controls to obtain information from our directors
and executive officers with respect to related party
transactions and for determining, based on the facts and
circumstances, whether we or a related person have a direct or
indirect material interest in the transaction.
In addition, our audit committee will review and approve or
ratify any related party transaction reaching a certain
threshold of significance. As set forth in the audit
committee’s charter to be effective upon completion of this
offering, in the course of its review and approval or
ratification of a related party transaction, the committee will
consider:
| • | the nature of the related person’s interest in the transaction; | |
| • | the material terms of the transaction, including, without limitation, the amount and type of transaction; | |
| • | the importance of the transaction to the related person; | |
| • | the importance of the transaction to us; | |
| • | whether the transaction would impair the judgment of a director or executive officer to act in the best interest of the Company; and | |
| • | any other matters the audit committee deems appropriate. |
Any member of the audit committee who is a related person with
respect to a transaction under review will not be permitted to
participate in the deliberations or vote respecting approval or
ratification of the transaction. However, such director may be
counted in determining the presence of a quorum at a meeting of
the committee that considers the transaction.
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PRINCIPAL
AND SELLING STOCKHOLDERS
The following table sets forth, as of September 30, 2009,
information regarding the beneficial ownership of our common
stock by:
| • | each person known by us to beneficially own more than 5% of the outstanding shares of our common stock; | |
| • | each Selling Stockholder; | |
| • | each of our current directors; | |
| • | each of our named executive officers; and | |
| • | our directors and named executive officers as a group. |
Beneficial ownership is determined in accordance with the SEC
rules and includes voting or investment power with respect to
the securities. Shares of common stock subject to options and
warrants that are currently exercisable or exercisable within
60 days are deemed to be outstanding and beneficially owned
by the person holding such options and warrants. Such shares,
however, are not deemed to be outstanding for the purposes of
computing the percentage ownership of any other person.
Percentage of beneficial ownership is based on
92,729,455 shares of our common stock outstanding as of
September 30, 2009. Unless otherwise indicated, the address
for all beneficial owners is
c/o Symetra
Financial Corporation, 777 108th Avenue NE,
Suite 1200, Bellevue, WA 98004.
| Shares Offered | ||||||||||||||||||||||||||||||||
|
Assuming |
Shares Beneficially Owned After Offering | |||||||||||||||||||||||||||||||
|
Shares of |
No |
Assuming Full |
Assuming No |
Assuming Full |
||||||||||||||||||||||||||||
|
Common Stock |
Exercise of |
Exercise of |
Exercise of |
Exercise of |
||||||||||||||||||||||||||||
|
Beneficially Owned |
Over-Allotment |
Over-Allotment |
Over-Allotment |
Over-Allotment |
||||||||||||||||||||||||||||
| Prior to the Offering | Options | Options | Options | Options | ||||||||||||||||||||||||||||
|
Beneficial Owner of 5% or More:
|
Number | % | Number | Number | Number | % | Number | % | ||||||||||||||||||||||||
|
Berkshire Hathaway Inc
|
26,887,872 | (1)(2) | 26.3 | % | ||||||||||||||||||||||||||||
|
White Mountains Insurance Group, Ltd
|
26,887,872 | (1)(3) | 26.3 | |||||||||||||||||||||||||||||
|
Franklin Mutual Advisers, LLC
|
10,875,000 | (4) | 11.7 | |||||||||||||||||||||||||||||
|
Caxton Associates, L.L.C.
|
6,090,000 | (5) | 6.6 | |||||||||||||||||||||||||||||
|
OZ Master Fund, Ltd.
|
6,090,000 | (6) | 6.6 | |||||||||||||||||||||||||||||
|
Vestar Capital Partners
|
6,089,999 | (7) | 6.6 | |||||||||||||||||||||||||||||
|
Highfields Capital Management LP
|
6,089,998 | (8) | 6.6 | |||||||||||||||||||||||||||||
|
Other Selling Stockholders:
|
||||||||||||||||||||||||||||||||
|
Directors and Executive Officers:
|
||||||||||||||||||||||||||||||||
|
David T. Foy
|
26,887,872 | (1)(9) | 26.3 | % | ||||||||||||||||||||||||||||
|
Randall H. Talbot
|
140,520 | (10) | * | |||||||||||||||||||||||||||||
|
Roger F. Harbin
|
21,750 | * | ||||||||||||||||||||||||||||||
|
Richard J. Lindsay
|
||||||||||||||||||||||||||||||||
|
Patrick B. McCormick
|
||||||||||||||||||||||||||||||||
|
Margaret A. Meister
|
7,890 | (11) | * | |||||||||||||||||||||||||||||
|
Lois W. Grady
|
||||||||||||||||||||||||||||||||
|
Sander M. Levy
|
6,089,999 | (12) | 6.6 | |||||||||||||||||||||||||||||
|
Robert R. Lusardi
|
26,887,872 | (1)(13) | 26.3 | |||||||||||||||||||||||||||||
|
David I. Schamis
|
2,175,000 | (14) | 2.3 | |||||||||||||||||||||||||||||
|
Lowndes A. Smith
|
||||||||||||||||||||||||||||||||
|
Directors and executive officers as a group (16 persons)
|
35,301,281 | 34.5 | ||||||||||||||||||||||||||||||
| * | Represents ownership of less than 1% |
footnotes continued on following page
157
Table of Contents
| (1) | Includes warrants exercisable for 9,487,872 shares. | |
| (2) | Represents shares held by General Reinsurance Corporation. | |
| (3) | Represents shares held by White Mountains Holdings (NL) B.V. | |
| (4) | Represents 1,183,200 shares held by Franklin Mutual Beacon Fund, 445,440 shares held by Franklin Mutual Recovery Fund, 255,780 shares held by Mutual Beacon Fund (Canada), 1,020,510 shares held by Mutual Financial Services Fund, 3,434,760 shares held by Mutual Qualified Fund, 84,390 shares held by Mutual Recovery Fund, Ltd. and 4,450,920 shares held by Mutual Beacon Fund. | |
| (5) | Represents shares held by CxLife, LLC. | |
| (6) | Represents shares held by OZ Management LP. | |
| (7) | Represents 128,424 shares held by Vestar Symetra LLC and 5,961,575 shares held by Vestar Capital Partners IV, LP, entities which are affiliated with or managed by Vestar Capital Partners. | |
| (8) | Represents 553,876 shares held by Highfields Capital I LP, 1,306,426 shares held by Highfields Capital II LP and 4,229,696 shares held by Highfields Capital III L.P. | |
| (9) | Represents shares owned by affiliates of White Mountains Insurance Group, Ltd., of which Mr. Foy is an executive officer. Mr. Foy disclaims beneficial ownership of all such shares. |
| (10) | Includes 75,270 shares of restricted stock. |
| (11) | Represents shares of restricted stock. |
| (12) | Represents shares owned by affiliates of Vestar Capital Partners, of which Mr. Levy is a Managing Director. Mr. Levy disclaims beneficial ownership of all such shares. |
| (13) | Represents shares owned by affiliates of White Mountains Insurance Group, Ltd., of which Mr. Lusardi is an executive officer. Mr. Lusardi disclaims beneficial ownership of all such shares. |
| (14) | Represents shares owned by affiliates of J.C. Flowers & Co. LLC, of which Mr. Schamis is a Managing Director. Mr. Schamis disclaims beneficial ownership of all such shares. |
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Table of Contents
DESCRIPTION
OF CAPITAL STOCK
The following information reflects our certificate of
incorporation and bylaws as these documents will be in effect
upon completion of this offering. Our certificate of
incorporation and bylaws will be filed as exhibits to the
registration statement of which this prospectus forms a part.
The summaries of these documents are qualified in their entirety
by reference to the full text of the documents.
General
Our authorized capital stock consists of 750,000,000 shares
of common stock, $0.01 par value per share and
10,000,000 shares of preferred stock, $0.01 par value
per share. As of September 30, 2009, there were
92,729,455 shares of our common stock issued and
outstanding held by 58 stockholders of record and no shares of
preferred stock outstanding.
Immediately prior to this offering, there has been no public
market for our common stock. Although we will apply to list our
common stock on the NYSE, we cannot assure you that a market for
our common stock will develop or if it develops that it will be
sustained.
Common
Stock
Voting
Rights
Each share of our common stock entitles the holder to one vote
with respect to each matter presented to our stockholders. Our
common stock votes as a single class. The approval of matters
brought before the stockholders requires the affirmative vote of
the holders of a majority of the shares of common stock
represented and voting, except where otherwise required by law
or by our certificate of incorporation or bylaws. Pursuant to
our certificate of incorporation, an increase or decrease in the
number of authorized shares of our common stock or preferred
stock requires the affirmative vote of the holders of a majority
in voting power of our stock entitled to vote thereon. Holders
of our common stock will not have cumulative voting rights.
Dividends
Holders of common stock and warrant holders will share equally
in any dividend declared by our board of directors, subject to
the rights of the holders of any outstanding preferred stock, on
a
one-for-one
basis.
Liquidation
Rights
In the event of any voluntary or involuntary liquidation,
dissolution or winding up of our affairs, holders of our common
stock would be entitled to share ratably in our assets that are
legally available for distribution to stockholders after payment
of liabilities. If we have any preferred stock outstanding at
such time, holders of the preferred stock may be entitled to
distributions
and/or
liquidation preferences. In either such case, we must pay the
applicable distribution to the holders of our preferred stock
before we may pay distributions to the holders of our common
stock.
Other
Rights
Our stockholders have no preemptive or other rights to subscribe
for additional shares. All holders of our common stock are
entitled to share equally on a
share-for-share
basis in any assets available for distribution to common
stockholders upon our liquidation, dissolution or winding up.
All outstanding shares are, and all shares offered by this
prospectus will be, when sold, validly issued, fully paid and
nonassessable.
Warrants
We currently have outstanding warrants to purchase
18,975,744 shares of our common stock at an exercise price
of $11.49 per share. If our warrants were exercised on a
cashless basis, we would have had 4,616,824, 0, 0 and 8,278,736
additional shares of common stock outstanding for the nine
months ended September 30, 2009 and 2008, and for the years
ended December 31, 2008 and 2007, respectively.
The exercise price and number of shares of common stock for each
warrant are subject to anti-dilution adjustments in respect of
certain events. If certain of these events occur, the warrant
holders will
159
Table of Contents
receive the right to receive the full intrinsic value of the
warrants instead of the stock acquirable and receivable upon
exercise. In the event we pay cash or stock dividends or other
distributions to our common stockholders, the warrant holders
will also receive such dividends or distributions on a
one-to-one
basis.
Preferred
Stock
Our board of directors is authorized, subject to the limits
imposed by the Delaware General Corporation Law, or DGCL, to
issue to up 10,000,000 shares of preferred stock in one or
more series, to establish from time to time the number of shares
to be included in each series, and to fix the rights,
preferences, privileges, qualifications, limitations and
restrictions of the shares of each wholly unissued series. Our
board of directors is also authorized to increase or decrease
the number of shares of any series, but not below the number of
shares of that series then outstanding, without any further vote
or action by our stockholders.
Our board of directors may authorize the issuance of preferred
stock with voting or conversion rights that affect adversely the
voting power or other rights of our common stockholders. The
issuance of preferred stock, while providing flexibility in
connection with possible acquisitions and other corporate
purposes, could have the effect of delaying, deferring or
preventing a change in control, causing the market price of our
common stock to decline, or impairing the voting and other
rights of the holders of our common stock. We have no current
plans to issue any shares of preferred stock.
Certain
Anti-Takeover Provisions of our Charter and Bylaws and the
Delaware Law
Upon completion of this offering, we will have the following
provisions in our certificate of incorporation and bylaws that
could deter, delay or prevent a third party from acquiring us,
even if doing so would benefit our stockholders.
Undesignated
Preferred Stock
The ability to authorize undesignated preferred stock makes it
possible for our board of directors to issue preferred stock
with super voting, special approval, dividend or other rights or
preferences on a discriminatory basis that could impede the
success of any attempt to acquire us. These and other provisions
may have the effect of deferring, delaying or discouraging
hostile takeovers or changes in control or management of our
Company.
Classified
Board of Directors
Our certificate of incorporation provides that our board of
directors is divided into three classes. Each class of directors
serves three-year terms.
Requirements
for Advance Notification of Stockholder Meetings, Nominations
and Proposals
Our bylaws provide that special meetings of the stockholders may
be called only upon the request of the majority of the board of
directors or upon request of the president. Our bylaws prohibit
the conduct of any business at a special meeting other than as
specified in the notice for such meeting.
Our bylaws establish advance notice procedures with respect to
stockholder proposals for annual meetings and the nomination of
candidates for election as directors, other than nominations
made by or at the direction of the board of directors or a
committee of the board of directors. In order for any matter to
be “properly brought” before a meeting, a stockholder
will have to comply with advance notice requirements and provide
us with certain information. Additionally, vacancies and newly
created directorships may be filled only by a vote of a majority
of the directors then in office, even though less than a quorum,
and not by the stockholders. Our bylaws allow the chairman of a
meeting of the stockholders to adopt rules and regulations for
the conduct of meetings that may have the effect of precluding
the conduct of certain business at a meeting if the rules and
regulations are not followed. These provisions may also defer,
delay or discourage a potential acquiror from conducting a
solicitation of proxies to elect the acquiror’s own slate
of directors or otherwise attempting to obtain control of us.
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No
Stockholder Action by Written Consent
Pursuant to Section 228 of the DGCL, any action required to
be taken at any annual or special meeting of the stockholders
may be taken without a meeting, without prior notice and without
a vote if a consent or consents in writing, setting forth the
action so taken, is signed by the holders of outstanding stock
having not less than the minimum number of votes that would be
necessary to authorize or take such action at a meeting at which
all shares of our stock entitled to vote thereon were present
and voted, unless our certificate of incorporation provides
otherwise. Our certificate of incorporation provides that any
action required or permitted to be taken by our stockholders may
be effected at a duly called annual or special meeting of our
stockholders and may not be effected by written consent.
Certain
Other Provisions of our Charter and Bylaws and the Delaware
Law
Board
of Directors
Our certificate of incorporation provides that the number of
directors will be fixed in the manner provided in our bylaws.
Our bylaws provide that the number of directors will be fixed
from time to time solely pursuant to a resolution adopted by the
board of directors. Our board of directors currently has seven
members who serve staggered terms as described above.
Limitations
of Liability and Indemnification of Officers and
Directors
The DGCL authorizes corporations to limit or eliminate the
personal liability of directors to corporations and their
stockholders for monetary damages for breaches of
directors’ fiduciary duties. Our certificate of
incorporation includes a provision that eliminates the personal
liability of directors for monetary damages for actions taken as
a director to the fullest extent authorized by the DGCL. The
DGCL does not permit exculpation for liability:
| • | for breach of duty of loyalty; | |
| • | for acts or omissions not in good faith or involving intentional misconduct or knowing violation of law; | |
| • | under Section 174 of the DGCL (unlawful dividends); or | |
| • | for transactions from which the director derived improper personal benefit. |
Our certificate of incorporation and bylaws provide that we
shall indemnify our directors and officers to the fullest extent
permitted by law. We are also expressly authorized to carry
directors’ and officers’ insurance providing
indemnification for our directors, officers and certain
employees and agents for some liabilities. We believe that these
indemnification provisions and insurance are useful to attract
and retain qualified directors and executive officers.
The limitation of liability and indemnification provisions in
our certificate of incorporation and bylaws may discourage
stockholders from bringing a lawsuit against directors for
breach of their fiduciary duty. These provisions may also have
the effect of reducing the likelihood of derivative litigation
against directors and officers, even though such an action, if
successful, might otherwise benefit us and our stockholders. In
addition, your investment may be adversely affected to the
extent we pay the costs of settlement and damage awards against
directors and officers pursuant to these indemnification
provisions.
There is currently no pending material litigation or proceeding
involving any of our directors, officers or employees for which
indemnification is sought.
Transfer
Agent and Registrar
The transfer agent and registrar of our common stock
is .
New York
Stock Exchange Listing
We intend to apply to have our common stock listed on the NYSE
under the symbol “SYA.”
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Table of Contents
DESCRIPTION
OF CERTAIN INDEBTEDNESS
6.125% Senior
Notes due 2016
In March 2006, we issued $300.0 million aggregate principal
amount of 6.125% senior notes due 2016, at a price of
$298.7 million in proceeds prior to commissions and
discounts for the initial purchasers and offering expenses.
Interest on the senior notes is payable semi-annually on April 1
and October 1 of each year.
The senior notes are unsecured senior obligations and are equal
in right of payment to all existing and future unsecured senior
indebtedness. The senior notes are redeemable at our option at
any time, in whole or in part, at a redemption price equal to
the greater of (i) 100% of the principal amount of the
senior notes or (ii) the sum of the present values of the
remaining scheduled payments of principal and interest on the
notes (exclusive of interest accrued to the date of redemption),
discounted to the redemption date on a semiannual basis
(assuming a
360-day year
consisting of twelve
30-day
months) at the U.S. Treasury rate plus 25 basis
points, plus, in each case accrued and unpaid interest thereon
to the date of redemption.
The indenture for the senior notes contains covenants that,
among other things, limit the ability of our subsidiaries to:
| • | create liens; | |
| • | enter into certain sale and leaseback transactions; and | |
| • | enter into certain mergers and acquisitions. |
The senior notes do not contain any financial covenants or any
provisions restricting us from purchasing or redeeming capital
stock, paying dividends or entering into a highly leveraged
transaction, reorganization, restructuring, merger or similar
transaction. In addition, we are not required to repurchase,
redeem or modify the terms of any of the notes upon a change of
control or other event involving us.
The indenture for the senior notes provides for events of
default that, if any of them occurs, would permit or require the
principal of, premium, if any, interest and any other monetary
obligations on the senior notes to become or to be declared to
be immediately due and payable. These events of default include
default in the payment of interest or principal, default in the
performance of covenants under the indenture and default under
the terms of any instrument evidencing or securing indebtedness
of us that results in the acceleration of the payment of such
indebtedness or constitutes the failure to pay the principal of
such indebtedness when due, in each case where the total amount
of such indebtedness has an outstanding aggregate principal
amount greater than $25.0 million.
Capital
Efficient Notes due 2067
On October 10, 2007, we issued $150.0 million
aggregate principal amount of CENts. The CENts were purchased by
a syndicate of initial purchasers, led by J.P. Morgan
Securities Inc. and Lehman Brothers Inc., and were eligible for
resale to qualified institutional buyers pursuant to
Rule 144A under the Securities Act or to
non-U.S. persons
pursuant to Regulation S under the Securities Act.
The CENts bear interest at a fixed annual rate of 8.300% to but
not including October 15, 2017, and at a floating annual
rate equal to three-month LIBOR plus 4.177% thereafter. We may
elect to defer the payment of interest for up to ten years. The
CENts have a scheduled maturity date of October 15, 2037,
provided that we raise sufficient funds from the sale of
qualifying capital securities. Qualifying capital securities
refers generally to securities or combinations of securities
issued by us or our subsidiaries (other than common stock,
warrants, mandatorily convertible preferred stock, debt
exchangeable for common equity and debt exchangeable for
preferred equity) that, in the determination of our board of
directors, meet certain criteria relating to, among other
things, ranking upon liquidation, dissolution or winding up, a
long dated maturity, being subject to a replacement capital
covenant similar to the covenant applicable to the CENts, having
a no-payment provision, having a mandatory trigger provision,
having an optional deferral provision and being non-cumulative.
For a complete definition of qualifying capital securities,
please see the indenture for the CENts. If we do not raise
sufficient funds, we are
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Table of Contents
obligated to use commercially reasonable efforts to sell enough
qualifying capital securities to permit repayment of the CENts
in full on each interest payment date thereafter. On
October 15, 2067, we must pay any remaining amounts due
under the CENts, whether or not we have sold sufficient
qualifying capital securities.
We may redeem the CENts, in whole or in part, at any time before
October 15, 2017, at a redemption price equal to the
greater of 100% of the principal amount or a make-whole price as
set forth in the CENts, in either case plus accrued and unpaid
interest, including deferred interest. However, if a special
event occurs, we may redeem the CENts, in whole but not in part,
at a redemption price equal to the greater of 100% of the
principal amount or a special event make-whole price as set
forth in the CENts, in either case plus accrued and unpaid
interest, including deferred interest. We may redeem the CENts
after October 15, 2017 on each interest payment date
thereafter, at a price equal to 100% of the principal amount of
the CENts plus accrued and unpaid interest, including deferred
interest.
In connection with the CENts offering, we entered into a
covenant in favor of the holders of our $300.0 million
principal amount senior notes, pursuant to which we may not
repay or redeem the CENts prior to October 15, 2047 unless
the repayment or redemption does not exceed a maximum amount
determined by reference to the proceeds received from the
offering of replacement capital securities. Replacement capital
securities means our common stock, warrants, mandatorily
convertible preferred stock, debt exchangeable for common
equity, debt exchangeable for preferred equity and qualifying
capital securities.
Revolving
Credit Facilities
Long-Term
Facility
On August 16, 2007, we entered into a $200.0 million
senior unsecured revolving credit agreement with a syndicate of
lending institutions led by Bank of America, N.A. The credit
facility matures on August 16, 2012. The revolving credit
facility is available to provide support for working capital,
capital expenditures and other general corporate purposes,
including permitted acquisitions, issuance of letters of
credits, refinancing and payment of fees in connection with this
facility. This new credit facility replaced our prior
$70.0 million revolving credit facility.
The facility enables us to obtain letters of credit of up to
$50.0 million and short-term loans of up to
$10.0 million, which would count against the
$200.0 million limit. We can increase the
$200.0 million limit by up to an additional
$100.0 million, upon the agreement of any lender to lend
such additional amount, without the consent of the other
lenders. On February 12, 2009, Bank of America, N.A. issued
a notice of default to Lehman Commercial Paper, Inc., one of the
lending institutions in the syndicate with a commitment of
$20 million, effectively limiting our ability to borrow
under the revolving credit facility to $180.0 million at
that time. On October 7, 2009, Lehman Commercial Paper,
Inc. assigned its interest in the revolving credit facility to
Barclays Bank PLC, effectively restoring capacity in the
facility to $200.0 million.
Loans under the credit facility bear interest, at our election,
at a spread above LIBOR, or at a base rate. The initial spread
above the LIBOR rate is 36 basis points, and may vary from
19 to 60 basis points depending on our credit rating. The
base rate is equal to the higher of 50 basis points above
the federal funds rate, and the Bank of America prime rate.
Interest under LIBOR-based loans is payable periodically, with
the period at the election of the Company (but at most
annually). Interest under base rate loans is payable quarterly.
In addition, we are obligated to pay a facility fee of between
six and 15 basis points, depending on our credit rating,
quarterly over the term of the facility, as well as letter of
credit and other fees as applicable.
Under the terms of the credit agreement, we are required to
maintain certain financial ratios. In particular, each of our
material insurance subsidiaries must maintain a risk-based
capital ratio of at least 200%, measured at the end of each
year, and our
debt-to-capitalization
ratio may not exceed 37.5%, measured at the end of each quarter.
In addition, we have agreed to other covenants restricting the
ability of our subsidiaries to incur additional indebtedness,
our ability to create liens and our ability to change our fiscal
year and to enter into new lines of business, as well as other
customary affirmative covenants.
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To be eligible for borrowing funds under this facility, the
representations and warranties that we make in the credit
agreement must continue to be true in all material respects, and
we must not be in default under the facility, including failure
to comply with the covenants described above.
As of September 30, 2009, we had no borrowings outstanding
under this facility.
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Table of Contents
SHARES ELIGIBLE
FOR FUTURE SALE
Before this offering, there has been no public market for our
common stock. We cannot predict the effect, if any, that market
sales of shares or the availability of shares will have on the
market price of our common stock. Sales of substantial amounts
of common stock in the public market, or the perception that
such sales could occur, could cause the prevailing market price
to decrease or to be lower than it might be in the absence of
those sales or perceptions.
Sales of
Restricted Securities
Upon the closing of this offering, we will have outstanding
approximately
shares of common stock. We have no shares of common stock held
in treasury. All of the shares of our common stock sold in this
offering will be freely tradeable without restriction under the
Securities Act of 1933, as amended (the “Securities
Act”), except for any shares that may be acquired by an
affiliate of us, as the term “affiliate” is defined in
Rule 144 under the Securities Act. Persons who may be
deemed to be affiliates generally include individuals or
entities that control, are controlled by, or are under common
control with, us and may include our directors and officers as
well as our significant stockholders. Following the expiration
of the
lock-up
agreements described below, the
remaining
shares outstanding held by current stockholders of the Company
will be available for sale pursuant to Rule 144, subject to
compliance with the requirements and limitations under
Rule 144, all as further described below.
Rule 144
Generally, under Rule 144 as currently in effect, beginning
90 days after the date of this prospectus, a person (or
persons whose shares are aggregated) who has beneficially owned
“restricted” shares for at least six months, will be
entitled to sell within any three-month period, a number of
shares that does not exceed the greater of:
| • | 1% of the then outstanding shares of common stock, which will equal approximately shares of common stock immediately after this offering; and | |
| • | the average weekly trading volume of the common stock on the open market during the four calendar weeks preceding the filing of notice with respect to such sale. |
Sales under Rule 144 are also subject to manner of sale
provisions and notice requirements and the availability of
current public information about our company.
In addition, under Rule 144, a person who is not currently
an affiliate of ours, and who is not deemed to have been one of
our affiliates for purposes of the Securities Act at any time
during the 90 days preceding a sale and who has
beneficially owned the shares proposed to be sold for at least
six months, including the holding period of any prior owner
other than our affiliates, is entitled to sell such shares
without restriction, provided that until the shares have been
held for at least one year, they may only be sold subject to the
availability of current public information about us.
Lock-Up
Arrangements
In connection with this offering, each of our executive
officers, directors and stockholders have agreed to enter into
lock-up
agreements described under “Underwriting” that
restrict the sale of shares of our common stock and securities
convertible into or exchangeable or exercisable for common stock
for up to 180 days after the date of this prospectus,
subject to an extension in certain circumstances. Following the
expiration of the
lock-up
period, our stockholders will have the right, subject to certain
conditions, to require us to register the sale of their
remaining shares of our common stock under federal securities
laws. By exercising their registration rights, and selling a
large number of shares, our stockholders could cause the
prevailing market price of our common stock to decline.
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Warrants
We currently have outstanding warrants to purchase
18,975,744 shares of our common stock at an exercise price
of $11.49 per share. The warrants permit the holders to exercise
either by paying the full exercise price in cash, or by means of
a cashless exercise, whereby the holders would surrender a right
to receive that number of shares having a value equal to the
exercise price of the warrants. In the event the holders pay the
exercise price in cash, the shares will be subject to the
holding period and other requirements of Rule 144. In the
event of a cashless exercise, the shares will be deemed to have
been acquired at the time of issuance of the warrants, in which
case the holding period will be met and the shares will be
eligible for resale subject to compliance with the other
requirements of Rule 144 and the
lock-up
agreements described above.
Registration
Statements
Following the completion of this offering, we intend to file one
or more registration statements on
Form S-8
under the Securities Act to register the shares of our common
stock that are issuable pursuant to the Equity Plan and the 2008
Employee Stock Purchase Plan. Such registration statements will
become effective immediately upon filing, and shares covered by
such registration statements will be eligible for sale in the
public market immediately after the effective date, upon
expiration of the
lock-up
agreements, and subject to vesting of such shares and to
Rule 144 volume limitations applicable to affiliates.
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MATERIAL
UNITED STATES FEDERAL TAX CONSEQUENCES
TO NON-U.S. STOCKHOLDERS
TO NON-U.S. STOCKHOLDERS
This is a general summary of material U.S. federal income
and estate tax considerations with respect to your acquisition,
ownership and disposition of common stock if you purchase your
common stock in this offering, you will hold the common stock as
a capital asset and you are a beneficial owner of shares other
than:
| • | an individual citizen or resident of the United States; | |
| • | a corporation or other entity taxable as a corporation created or organized in, or under the laws of, the United States or any political subdivision of the United States; | |
| • | a partnership or other entity taxable as a partnership for U.S. federal income tax purposes; | |
| • | an estate, the income of which is subject to U.S. federal income taxation regardless of its source; | |
| • | a trust, if a court within the United States is able to exercise primary supervision over the administration of the trust and one or more U.S. persons have the authority to control all substantial decisions of the trust; or | |
| • | a trust that has a valid election in place to be treated as a U.S. person. |
This summary does not address all of the U.S. federal
income and estate tax considerations that may be relevant to you
in light of your particular circumstances or if you are a
beneficial owner subject to special treatment under
U.S. income tax laws (such as a “controlled foreign
corporation,” “passive foreign investment
company,” company that accumulates earnings to avoid
U.S. federal income tax, foreign tax-exempt organization,
financial institution, broker or dealer in securities, insurance
company, regulated investment company, real estate investment
trust, financial asset securitization investment trust, person
who holds common stock as part of a hedging or conversion
transaction or as part of a short-sale or straddle, or former
U.S. citizen or resident). This summary does not discuss
any aspect of U.S. federal alternative minimum tax, state,
local or
non-U.S. taxation.
This summary is based on current provisions of the U.S. Internal
Revenue Code of 1986, as amended (“Code”), Treasury
regulations, judicial opinions, published positions of the
United States Internal Revenue Service (“IRS”) and all
other applicable authorities as of the date hereof, all of which
are subject to change, possibly with retroactive effect.
If a partnership holds our common stock, the tax treatment of a
partner will generally depend on the status of the partner and
the activities of the partnership. If you are a partner of a
partnership holding our common stock, you should consult your
tax advisor.
THIS DISCUSSION IS PROVIDED FOR GENERAL INFORMATION ONLY AND
DOES NOT CONSTITUTE LEGAL AND/OR TAX ADVICE TO ANY PROSPECTIVE
PURCHASER OF OUR COMMON STOCK. WE URGE PROSPECTIVE
NON-U.S. STOCKHOLDERS
TO CONSULT THEIR TAX ADVISORS REGARDING THE UNITED STATES
FEDERAL, STATE, LOCAL AND
NON-UNITED
STATES INCOME AND OTHER TAX CONSIDERATIONS OF ACQUIRING, HOLDING
AND DISPOSING OF SHARES OF COMMON STOCK.
Dividends
In general, any distributions we make to you with respect to
your shares of common stock that constitute dividends for
U.S. federal income tax purposes will be subject to
U.S. withholding tax at a rate of 30% of the gross amount,
unless you are eligible for a reduced rate of withholding tax
under an applicable income tax treaty and you provide proper
certification of your eligibility for such reduced rate
(generally, on an IRS
Form W-8BEN).
A distribution will constitute a dividend for U.S. federal
income tax purposes to the extent of our current or accumulated
earnings and profits as determined under the Code. Any
distribution not constituting a dividend will be treated first
as reducing your basis in your shares of common stock and, to
the extent it exceeds your basis, as capital gain.
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Dividends we pay to you that are effectively connected with your
conduct of a trade or business within the United States (and, if
certain income tax treaties apply, are attributable to a
U.S. permanent establishment maintained by you) generally
will not be subject to U.S. withholding tax if you comply
with applicable certification and disclosure requirements.
Instead, such dividends generally will be subject to
U.S. federal income tax, net of certain deductions, at the
same graduated individual or corporate rates applicable to
U.S. persons. If you are a corporation, effectively
connected income may also be subject to a “branch profits
tax” at a rate of 30% (or such lower rate as may be
specified by an applicable income tax treaty). Dividends that
are effectively connected with your conduct of a trade or
business but that under an applicable income tax treaty are not
attributable to a U.S. permanent establishment maintained
by you may be eligible for a reduced rate of
U.S. withholding tax under such treaty, provided you comply
with certification and disclosure requirements necessary to
obtain treaty benefits.
Sale or
Other Disposition of Common Stock
You generally will not be subject to U.S. federal income
tax on any gain realized upon the sale or other disposition of
your shares of common stock unless:
| • | the gain is effectively connected with your conduct of a trade or business within the United States (and, under certain income tax treaties, is attributable to a U.S. permanent establishment you maintain); | |
| • | you are an individual, you are present in the United States for 183 days or more in the taxable year of disposition and you meet other conditions, and you are not eligible for relief under an applicable income tax treaty; or | |
| • | we are or have been a “United States real property holding corporation” for U.S. federal income tax purposes (which we believe we are not and have never been, and do not anticipate we will become) and, in the event that our common stock is regularly traded on an established securities market, you hold or have held, directly or indirectly, at any time within the shorter of the five-year period preceding disposition or your holding period for your shares of common stock, more than 5% of our common stock. |
Gain that is effectively connected with your conduct of a trade
or business within the United States generally will be subject
to U.S. federal income tax, net of certain deductions, at
the same rates applicable to U.S. persons. If you are a
corporation, the branch profits tax (described above) also may
apply to such effectively connected gain. If the gain from the
sale or disposition of your shares is effectively connected with
your conduct of a trade or business in the United States but
under an applicable income tax treaty is not attributable to a
permanent establishment you maintain in the United States, your
gain may be exempt from U.S. tax under the treaty. If you
are described in the second bullet point above, you generally
will be subject to U.S. tax at a rate of 30% on the gain
realized, although the gain may be offset by some
U.S. source capital losses realized during the same taxable
year.
Information
Reporting and Backup Withholding
We must report annually to the IRS the amount of dividends or
other distributions we pay to you on your shares of common stock
and the amount of tax we withhold on these distributions
regardless of whether withholding is required. The IRS may make
copies of the information returns reporting those distributions
and amounts withheld available to the tax authorities in the
country in which you reside pursuant to the provisions of an
applicable income tax treaty or exchange of information treaty.
Under certain circumstances, the United States imposes backup
withholding on dividends and certain other types of payments to
U.S. persons. You will not be subject to backup withholding
on dividends you receive on your shares of common stock if you
provide proper certification of your status as a
non-U.S. person
or you are a corporation or one of several types of entities and
organizations that qualify for exemption (an “exempt
recipient”).
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Information reporting and backup withholding generally are not
required with respect to the amount of any proceeds from the
sale of your shares of common stock outside the United States
through a foreign office of a foreign broker that does not have
certain specified connections to the United States. However, if
you sell your shares of common stock through a U.S. broker
or the U.S. office of a foreign broker, the broker will be
required to report the amount of proceeds paid to you to the IRS
and also perform backup withholding on that amount unless you
provide appropriate certification to the broker of your status
as a
non-U.S. person
or you are an exempt recipient. Information reporting will also
apply if you sell your shares of common stock through a foreign
broker deriving more than a specified percentage of its income
from U.S. sources or having certain other connections to
the United States, unless such broker has documenting evidence
in its records that you are a
non-U.S. person
and certain other conditions are met or you are an exempt
recipient.
Any amounts withheld with respect to your shares of common stock
under the backup withholding rules will be refunded to you or
credited against your U.S. federal income tax liability, if
any, by the IRS if the required information is furnished in a
timely manner.
Estate
Tax
Common stock owned or treated as owned by an individual who is
not a citizen or resident (as defined for U.S. federal
estate tax purposes) of the United States at the time of his or
her death will be included in the individual’s gross estate
for U.S. federal estate tax purposes and therefore may be
subject to U.S. federal estate tax unless an applicable
treaty provides otherwise.
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UNDERWRITING
We and the Selling Stockholders intend to offer the shares in
the United States and Canada through the underwriters. Merrill
Lynch, Pierce, Fenner & Smith Incorporated,
J.P. Morgan Securities Inc., Goldman, Sachs & Co.
and Barclays Capital Inc. are acting as joint book-running
managers and as representatives of each of the underwriters
named below. Subject to the terms and conditions described in an
underwriting agreement among us, the Selling Stockholders and
the underwriters, we and the Selling Stockholders have agreed to
sell to the underwriters, and each of the underwriters has
agreed, severally and not jointly, to purchase from us and the
Selling Stockholders, the number of shares of common stock
listed opposite its name below.
|
Number of |
|||||
|
Underwriter
|
Shares | ||||
|
Merrill Lynch, Pierce, Fenner & Smith
Incorporated |
|||||
|
J.P. Morgan Securities Inc.
|
|||||
|
Goldman, Sachs & Co.
|
|||||
|
Barclays Capital Inc.
|
|||||
|
Total
|
|||||
Subject to the terms and conditions set forth in the
underwriting agreement, the underwriters have agreed, severally
and not jointly, to purchase all of the shares sold under the
underwriting agreement if any of these shares are purchased. If
an underwriter defaults, the underwriting agreement provides
that the purchase commitments of the nondefaulting underwriters
may be increased or the underwriting agreement may be terminated.
The underwriters are offering the shares, subject to prior sale,
when, as and if issued to and accepted by them, subject to
approval of legal matters by their counsel, including the
validity of the shares, and other conditions contained in the
underwriting agreement, such as the receipt by the underwriters
of officer’s certificates and legal opinions. The
underwriters reserve the right to withdraw, cancel or modify
offers to the public and to reject orders in whole or in part.
Commissions
and Discounts
The representatives have advised us and the Selling Stockholders
that the underwriters propose initially to offer the shares to
the public at the initial public offering price on the cover
page of this prospectus and to dealers at that price less a
concession not in excess of $ per
share. The underwriters may allow, and the dealers may reallow,
a discount not in excess of $ per
share to other dealers. After the initial public offering, the
public offering price, concession and discount may be changed.
The following table shows the public offering price,
underwriting discount and proceeds before expenses to us and the
Selling Stockholders. The information assumes either no exercise
or full exercise by the underwriters of their over-allotment
options.
| Per Share | Without Option | With Option | ||||||||||
|
Public offering price
|
$ | $ | $ | |||||||||
|
Underwriting discount
|
$ | $ | $ | |||||||||
|
Proceeds, before expenses, to the Company
|
$ | $ | $ | |||||||||
|
Proceeds, before expenses, to the Selling Stockholders
|
$ | $ | $ | |||||||||
The expenses of this offering, not including the underwriting
discount, are estimated at
$ million and are payable by
us.
Over-allotment
Options
The Company and the Selling Stockholders have granted options to
the underwriters to purchase a total of up
to additional shares at the
public offering price, less the underwriting discount. The
underwriters may exercise these options for 30 days from
the date of this prospectus solely to cover any over-
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allotments. If the underwriters exercise these options, each
will be obligated, subject to conditions contained in the
underwriting agreement, to purchase a number of additional
shares proportionate to that underwriter’s initial amount
reflected in the above table.
Indemnification
We and the Selling Stockholders have agreed to indemnify the
several underwriters against certain liabilities, including
certain liabilities under the Security Act, or to contribute to
payments that the underwriters may be required to make for these
liabilities.
No Sales
of Similar Securities
We and each of our executive officers, directors and
stockholders have agreed, with certain exceptions described
below, not to sell or transfer any common stock or securities
convertible into, exchangeable for, exercisable for or repayable
with common stock, for 180 days after the date of this
prospectus without first obtaining the written consent of the
representatives. Specifically, we and these other individuals
and entities have agreed not to directly or indirectly:
| • | offer, pledge, sell or contract to sell any common stock; | |
| • | sell any option or contract to purchase any common stock; | |
| • | purchase any option or contract to sell any common stock; | |
| • | grant any option, right or warrant for the sale of any common stock; | |
| • | lend or otherwise dispose of or transfer any common stock; | |
| • | request or demand that we file a registration statement related to the common stock; or | |
| • | enter into any swap or other agreement that transfers, in whole or in part, the economic consequence of ownership of any common stock whether any such swap or transaction is to be settled by delivery of shares or other securities, in cash or otherwise. |
This lock-up
provision also applies to common stock owned now or acquired
later by the person executing the agreement or for which the
person executing the agreement later acquires the power of
disposition.
This lock-up
provision is subject to certain exceptions. As applicable to us,
these exceptions, which are subject to certain limitations,
include: the issuance of any shares of common stock upon the
exercise of a warrant or the conversion of a security
outstanding on the date of the underwriting agreement; grants,
offers, sales or issuances of shares of common stock or
securities convertible into shares of common stock pursuant to
an employee benefit plan; and offers, sales and issuances of up
to 10% of the shares of common stock outstanding at the time of
the issuance as consideration for acquisitions of businesses,
provided that the recipient of such common stock agrees to be
bound by the lock-up provision. As applicable to our executive
officers, directors and stockholders, these exceptions, which
are subject to certain limitations, include: transfers of shares
of common stock by bona fide gift, will or intestacy; transfers
of shares of common stock by an individual to any trust for the
benefit of the individual or the individual’s immediate
family; distributions of shares of common stock by a trust to
its beneficiaries; distributions of shares of common stock by a
corporation, partnership or a limited liability company to its
shareholders, subsidiaries, partners, members or affiliates; the
establishment of a trading plan that complies with
Rule 10b5-1
under the Exchange Act, provided that the lock-up provision will
apply to any sales pursuant to such trading plan; and the
exercise of stock options granted pursuant to the Company’s
stock option or incentive plans disclosed in this prospectus,
provided that the lock-up provision will apply to any shares of
common stock issued upon such exercise.
Notwithstanding the foregoing, if: (1) during the last
17 days of the
180-day
lock-up
period, we issue an earnings release or material news or a
material event relating to us occurs; or (2) prior to the
expiration of the
180-day
lock-up
period, we announce that we will release earnings results or
become aware that material news or a material event will occur
during the
16-day
period beginning on the last day of the
180-day
lock-up
period, then the restrictions imposed by this
lock-up
provision shall continue to apply until the expiration of
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the 18-day
period beginning on the issuance of the earnings release or the
occurrence of the material news or material event, as
applicable, unless the representatives waive, in writing, such
extension.
New York
Stock Exchange Listing
We expect the shares to be approved for listing on the NYSE
under the symbol “SYA.” In order to meet the
requirements for listing on that exchange, the underwriters have
undertaken to sell a minimum number of shares to a minimum
number of beneficial owners as required by that exchange. Before
this offering, there has been no public market for our common
stock. The initial public offering price will be determined
through negotiations among us, the Selling Stockholders and the
representatives. In addition to prevailing market conditions,
the factors to be considered in determining the initial public
offering price are as follows:
| • | the valuation multiples of publicly traded companies that the representatives believe to be comparable to us; | |
| • | our financial information; | |
| • | the history of, and the prospects for, our company and the industry in which we compete; | |
| • | an assessment of our management, its past and present operations, and the prospects for, and timing of, our future revenues; | |
| • | the present state of our development; and | |
| • | the above factors in relation to market values and various valuation measures of other companies engaged in activities similar to ours. |
An active trading market for the shares may not develop. It is
also possible that after this offering the shares will not trade
in the public market at or above the initial public offering
price.
The underwriters do not expect to sell more than 5% of the
shares in the aggregate to accounts over which they exercise
discretionary authority.
Price
Stabilization, Short Positions and Penalty Bids
Until the distribution of the shares is completed, SEC rules may
limit underwriters and selling group members from bidding for
and purchasing our common stock. However, the representatives
may engage in transactions that stabilize the price of the
common stock, such as bids or purchases to peg, fix or maintain
that price. If the representatives elect to engage in such
transactions, they may discontinue them at any time without
notice.
In connection with this offering, the underwriters may purchase
and sell our common stock in the open market. These transactions
may include short sales, purchases on the open market to cover
positions created by short sales and stabilizing transactions.
Short sales involve the sale by the underwriters of a greater
number of shares than they are required to purchase in the
offering. “Covered” short sales are sales made in an
amount not greater than the underwriters’ over-allotment
options described above. The underwriters may close out any
covered short position by either exercising their over-allotment
options or purchasing shares in the open market. In determining
the source of shares to close out the covered short position,
the underwriters will consider, among other things, the price of
shares available for purchase in the open market as compared to
the price at which they may purchase shares through the
over-allotment options. “Naked” short sales are sales
in excess of the over-allotment options. The underwriters must
close out any naked short position by purchasing shares in the
open market. A naked short position is more likely to be created
if the underwriters are concerned that there may be downward
pressure on the price of our common stock in the open market
after pricing that could adversely affect investors who purchase
in the offering. Stabilizing transactions consist of various
bids for or purchases of shares of common stock made by the
underwriters in the open market prior to the completion of this
offering.
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The underwriters may also impose a penalty bid. This occurs when
a particular underwriter repays to the underwriters a portion of
the underwriting discount received by it because the
representatives have repurchased shares sold by or for the
account of such underwriter in stabilizing or short covering
transactions.
Similar to other purchase transactions, the underwriters’
purchases to cover the syndicate short sales may have the effect
of raising or maintaining the market price of our common stock
or preventing or retarding a decline in the market price of our
common stock. As a result, the price of our common stock may be
higher than the price that might otherwise exist in the open
market. The underwriters may conduct these transactions on the
NYSE, in the over-the-counter market or otherwise.
Neither we nor any of the underwriters make any representation
or prediction as to the direction or magnitude of any effect
that the transactions described above may have on the price of
the common stock. In addition, neither we nor any of the
underwriters make any representation that the representatives
will engage in these transactions or that these transactions,
once commenced, will not be discontinued without notice.
Electronic
Offer, Sale and Distribution of Shares
In connection with this offering, certain of the underwriters,
their affiliates or securities dealers may distribute
prospectuses by electronic means, such as
e-mail. In
addition, the underwriters or their affiliates may facilitate
Internet distribution for this offering to certain of their
Internet subscription customers. In those cases, prospective
investors may view offering terms online and, depending upon the
particular underwriter, prospective investors may be allowed to
place orders online. The underwriters may allocate a limited
number of shares for sale to their online brokerage customers.
An electronic prospectus is available on the Internet web sites
of certain of the underwriters and their affiliates. Other than
the prospectus in electronic format, the information on the web
sites of the underwriters and their affiliates is not part of
this prospectus and should not be relied upon by investors.
Other
Relationships
Some of the underwriters and their affiliates have engaged in,
and may in the future engage in, investment banking and other
commercial banking and other dealings in the ordinary course of
business with us, our affiliates, and White Mountains Insurance
Group, Ltd. They have received, or may in the future receive,
customary fees and commissions for these transactions.
For example, J.P. Morgan Securities Inc. and Banc of
America Securities LLC (an affiliate of Merrill Lynch, Pierce,
Fenner & Smith Incorporated) were initial purchasers
in connection with the offering of our 6.125% senior notes
due 2016 and were initial purchasers in connection with the
offering of our Capital Efficient Notes due 2067. JPMorgan Chase
Bank, N.A., an affiliate of J.P. Morgan Securities Inc.,
was involved in the financing of the Acquisition. JPMorgan Chase
Bank, N.A., Merrill Lynch Bank USA (an affiliate of Merrill
Lynch, Pierce, Fenner & Smith Incorporated), an
affiliate of Goldman, Sachs & Co. and Bank of America,
N.A., an affiliate of Merrill Lynch, Pierce, Fenner &
Smith Incorporated, are lenders under our revolving credit
facility. Under such facility, Bank of America, N.A. also serves
as administrative agent, swing line lender and issuing lender,
Banc of America Securities LLC serves as sole lead arranger and
sole book manager and JPMorgan Chase Bank, N.A. serves as
syndication agent. We are party to an arm’s length
distribution relationship with Chase Insurance Agency, Inc. (an
affiliate of J.P. Morgan Securities Inc.) in connection
with the sale of our immediate annuity products. Howard L.
Clark, Jr., Vice Chair of Barclays Capital Inc., is a
director of White Mountains Insurance Group, Ltd.
Notice to
Prospective Investors in the EEA
In relation to each Member State of the European Economic Area,
or EEA, which has implemented the Prospectus Directive (each, a
“Relevant Member State”), an offer to the public of
any shares which are the subject of the offering contemplated by
this prospectus may not be made in that Relevant Member State,
except that an offer to the public in that Relevant Member State
of any shares may be made at any time under
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the following exemptions under the Prospectus Directive, if they
have been implemented in that Relevant Member State:
| (a) | to legal entities which are authorized or regulated to operate in the financial markets or, if not so authorized or regulated, whose corporate purpose is solely to invest in securities; |
| (b) | to any legal entity which has two or more of (1) an average of at least 250 employees during the last financial year, (2) a total balance sheet of more than €43,000,000 and (3) an annual net turnover of more than €50,000,000, as shown in its last annual or consolidated accounts; |
| (c) | by the underwriters to fewer than 100 natural or legal persons (other than “qualified investors” as defined in the Prospectus Directive) subject to obtaining the prior consent of the representatives for any such offer; or |
| (d) | in any other circumstances falling within Article 3(2) of the Prospectus Directive; |
provided that no such offer of shares shall result in a
requirement for the publication by us or any representative of a
prospectus pursuant to Article 3 of the Prospectus
Directive.
Any person making or intending to make any offer of shares
within the EEA should only do so in circumstances in which no
obligation arises for us or any of the underwriters to produce a
prospectus for such offer. Neither we nor the underwriters have
authorized, nor do they authorize, the making of any offer of
shares through any financial intermediary, other than offers
made by the underwriters which constitute the final offering of
shares contemplated in this prospectus.
For the purposes of this provision, and the representation
below, the expression an “offer to the public” in
relation to any shares in any Relevant Member State means the
communication in any form and by any means of sufficient
information on the terms of the offer and any shares to be
offered so as to enable an investor to decide to purchase any
shares, as the same may be varied in that Relevant Member State
by any measure implementing the Prospectus Directive in that
Relevant Member State and the expression “Prospectus
Directive” means Directive 2003/71/EC and includes any
relevant implementing measure in each Relevant Member State.
Each person in a Relevant Member State who receives any
communication in respect of, or who acquires any shares under,
the offer of shares contemplated by this prospectus will be
deemed to have represented, warranted and agreed to and with us
and each underwriter that:
| (a) | it is a “qualified investor” within the meaning of the law in that Relevant Member State implementing Article 2(1)(e) of the Prospectus Directive; and |
| (b) | in the case of any shares acquired by it as a financial intermediary, as that term is used in Article 3(2) of the Prospectus Directive, (i) the shares acquired by it in the offering have not been acquired on behalf of, nor have they been acquired with a view to their offer or resale to, persons in any Relevant Member State other than “qualified investors” (as defined in the Prospectus Directive), or in circumstances in which the prior consent of the representatives has been given to the offer or resale or (ii) where shares have been acquired by it on behalf of persons in any Relevant Member State other than qualified investors, the offer of those shares to it is not treated under the Prospectus Directive as having been made to such persons. |
Notice to
Prospective Investors in Switzerland
This document, as well as any other material relating to the
shares which are the subject of the offering contemplated by
this prospectus, do not constitute an issue prospectus pursuant
to Article 652a of the Swiss Code of Obligations. The
shares will not be listed on the SWX Swiss Exchange and,
therefore, the documents relating to the shares, including, but
not limited to, this document, do not claim to comply with the
disclosure standards of the listing rules of SWX Swiss Exchange
and corresponding prospectus schemes annexed to the listing
rules of the SWX Swiss Exchange. The shares are being offered in
Switzerland by way of a private placement (i.e., to a small
number of selected investors only), without any public offer and
only to
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investors who do not purchase the shares with the intention to
distribute them to the public. The investors will be
individually approached by us from time to time. This document,
as well as any other material relating to the shares, is
personal and confidential and does not constitute an offer to
any other person. This document may only be used by those
investors to whom it has been handed out in connection with the
offering described herein and may neither directly nor
indirectly be distributed or made available to other persons
without our express consent. It may not be used in connection
with any other offer and shall in particular not be copied
and/or
distributed to the public in (or from) Switzerland.
Notice to
Prospective Investors in the Dubai International Financial
Centre
This document relates to an exempt offer in accordance with the
Offered Securities Rules of the Dubai Financial Services
Authority. This document is intended for distribution only to
persons of a type specified in those rules. It must not be
delivered to, or relied on by, any other person. The Dubai
Financial Services Authority has no responsibility for reviewing
or verifying any documents in connection with exempt offers. The
Dubai Financial Services Authority has not approved this
document nor taken steps to verify the information set out in
it, and has no responsibility for it. The shares which are the
subject of the offering contemplated by this prospectus may be
illiquid
and/or
subject to restrictions on their resale. Prospective purchasers
of the shares offered should conduct their own due diligence on
the shares. If you do not understand the contents of this
document you should consult an authorised financial adviser.
Notice to
Prospective Investors in Hong Kong
This prospectus has not been approved by or registered with the
Securities and Futures Commission of Hong Kong or the Registrar
of Companies of Hong Kong. The shares will not be offered or
sold in Hong Kong other than (a) to “professional
investors” as defined in the Securities and Futures
Ordinance (Cap. 571) of Hong Kong and any rules made under
that Ordinance or (b) in other circumstances which do not
result in the document being a “prospectus” as defined
in the Companies Ordinance (Cap. 32) of Hong Kong or which
do not constitute an offer to the public within the meaning of
that Ordinance. No advertisement, invitation or document
relating to the shares which is directed at, or the contents of
which are likely to be accessed or read by, the public of Hong
Kong (except if permitted to do so under the securities laws of
Hong Kong) has been issued or will be issued in Hong Kong or
elsewhere other than with respect to shares which are or are
intended to be disposed of only to persons outside Hong Kong or
only to “professional investors” as defined in the
Securities and Futures Ordinance of Hong Kong and any rules made
under that Ordinance.
Notice to
Prospective Investors in Singapore
This prospectus has not been registered as a prospectus with the
Monetary Authority of Singapore. Accordingly, this prospectus
and any other document or material in connection with the offer
or sale, or invitation for subscription or purchase, of the
shares may not be circulated or distributed, nor may the shares
be offered or sold, or be made the subject of an invitation for
subscription or purchase, whether directly or indirectly, to
persons in Singapore other than (i) to an institutional
investor under Section 274 of the Securities and Futures
Act (Chapter 289) (the “SFA”), (ii) to a
relevant person, or any person pursuant to Section 275(1A),
and in accordance with the conditions, specified in
Section 275 of the SFA or (iii) otherwise pursuant to,
and in accordance with the conditions of, any other applicable
provision of the SFA. Where the shares are subscribed or
purchased under Section 275 by a relevant person which is:
(a) a corporation (which is not an accredited investor) the
sole business of which is to hold investments and the entire
share capital of which is owned by one or more individuals, each
of whom is an accredited investor or (b) a trust (where the
trustee is not an accredited investor) whose sole purpose is to
hold investments and each beneficiary is an accredited investor,
then shares, debentures and units of shares and debentures of
that corporation or the beneficiaries’ rights and interest
in that trust shall not be transferable for six months
after that corporation or that trust has acquired the shares
under Section 275 except: (i) to an institutional
investor under Section 274 of the SFA or to a relevant
person, or any person pursuant to Section 275(1A), and in
accordance with the conditions specified in Section 275 of
the SFA, (ii) where no consideration is given for the
transfer or (iii) by operation of law.
175
Table of Contents
Notice to
Prospective Investors in Japan
The shares have not been and will not be registered under the
Financial Instruments and Exchange Law of Japan (Law No. 25
of 1948, as amended) and, accordingly, will not be offered or
sold, directly or indirectly, in Japan, or for the benefit of
any Japanese Person or to others for re-offering or resale,
directly or indirectly, in Japan or to any Japanese Person,
except in compliance with all applicable laws, regulations and
ministerial guidelines promulgated by relevant Japanese
governmental or regulatory authorities in effect at the relevant
time. For the purposes of this paragraph, “Japanese
Person” shall mean any person resident in Japan, including
any corporation or other entity organized under the laws of
Japan.
LEGAL
MATTERS
The validity of our common stock offered hereby will be passed
upon for us by Cravath, Swaine & Moore LLP, New York,
New York. The underwriters are being represented in connection
with this offering by Simpson Thacher & Bartlett LLP,
New York, New York. An investment vehicle comprised of several
partners of Simpson Thacher & Bartlett LLP, members of
their families, related persons and others owns interests
representing less than 1% of the capital commitments of funds
affiliated with Vestar that hold an interest in Symetra
Financial Corporation.
EXPERTS
The consolidated financial statements and schedules of Symetra
Financial Corporation at December 31, 2008 and 2007, and
for each of the three years in the three-year period ended
December 31, 2008, appearing in this prospectus and
registration statement have been audited by Ernst &
Young LLP, independent registered public accounting firm, as set
forth in their report thereon appearing elsewhere herein, and
are included in reliance upon such report given on the authority
of such firm as experts in accounting and auditing.
WHERE YOU
CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on
Form S-1
under the Securities Act of 1933, as amended, with respect to
the common stock we propose to sell in this offering. This
prospectus, which constitutes part of the registration
statement, does not contain all of the information set forth in
the registration statement. For further information about us and
the common stock we propose to sell in this offering, we refer
you to the registration statement and the exhibits and schedules
filed as a part of the registration statement. Statements
contained in this prospectus as to the contents of any contract
or other document filed as an exhibit to the registration
statement are not necessarily complete. If a contract or
document has been filed as an exhibit to the registration
statement, we refer you to the copy of the contract or document
that has been filed. The registration statement may be inspected
without charge at the principal office of the SEC in
Washington, D.C. and copies of all or any part of the
registration statement may be inspected and copied at the public
reference facilities maintained by the SEC at
100 F Street, N.E., Washington, D.C. 20549.
Copies of such material can also be obtained at prescribed rates
by mail from the Public Reference Section of the SEC at
100 F Street, N.E., Washington, D.C. 20549. The
SEC’s toll-free number is
1-800-SEC-0330.
In addition, the SEC maintains a website
(http://www.sec.gov)
that contains reports, proxy and information statements and
other information regarding registrants that file electronically
with the SEC. Prior to this offering, we were not required to
file reports with the SEC.
Upon completion of this offering, we will become subject to the
information and periodic reporting requirements of the Exchange
Act. The periodic reports and other information that we file
with the SEC will be available for inspection and copying at the
SEC’s public reference facilities and on the website of the
SEC referred to above.
176
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
| Page | ||||
|
Audited Consolidated Financial Statements of Symetra
Financial Corporation
|
||||
| F-2 | ||||
| F-3 | ||||
| F-4 | ||||
| F-5 | ||||
| F-6 | ||||
| F-7 | ||||
|
Unaudited Interim Consolidated Financial Statements of
Symetra Financial Corporation
|
||||
| F-45 | ||||
| F-46 | ||||
| F-47 | ||||
| F-48 | ||||
| F-49 | ||||
F-1
Table of Contents
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Symetra Financial Corporation
We have audited the accompanying consolidated balance sheets of
Symetra Financial Corporation (the Company) as of
December 31, 2008 and 2007, and the related consolidated
statements of income, changes in stockholders’ equity, and
cash flows for each of the three years in the period ended
December 31, 2008. The financial statements are the
responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. We were not engaged to perform an
audit of the Company’s internal control over financial
reporting. Our audits included consideration of internal control
over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of
the Company’s internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial presentation.
We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Symetra Financial Corporation at
December 31, 2008 and 2007, and the consolidated results of
its operations and its cash flows for each of the three years in
the period ended December 31, 2008, in conformity with U.S.
generally accepted accounting principles.
As discussed in Note 7 to the financial statements, in 2008
the Company changed its method of accounting for certain
marketable equity securities, hedge funds and private equity
funds.
/s/ Ernst & Young LLP
Seattle, Washington
March 6, 2009
F-2
Table of Contents
CONSOLIDATED
BALANCE SHEETS
| December 31, | ||||||||
| 2008 | 2007 | |||||||
| (In millions, except share and per share data) | ||||||||
|
ASSETS
|
||||||||
|
Investments:
|
||||||||
|
Available-for-sale
securities:
|
||||||||
|
Fixed maturities, at fair value (cost: $16,528.4 and
$15,644.2, respectively)
|
$ | 14,887.6 | $ | 15,599.9 | ||||
|
Marketable equity securities, at fair value (cost: $52.5
and $174.7, respectively)
|
38.1 | 200.8 | ||||||
|
Trading securities:
|
||||||||
|
Marketable equity securities, trading, at fair value (cost:
$152.1 and $0, respectively)
|
106.3 | — | ||||||
|
Mortgage loans, net
|
988.7 | 845.5 | ||||||
|
Policy loans
|
75.2 | 77.2 | ||||||
|
Short-term investments
|
9.4 | 10.9 | ||||||
|
Investments in limited partnerships (includes $56.3 and
$70.3 measured at fair value, respectively)
|
138.3 | 158.8 | ||||||
|
Other invested assets
|
8.9 | 11.9 | ||||||
|
Total investments
|
16,252.5 | 16,905.0 | ||||||
|
Cash and cash equivalents
|
468.0 | 253.9 | ||||||
|
Accrued investment income
|
206.3 | 194.5 | ||||||
|
Accounts receivable and other receivables
|
61.7 | 57.4 | ||||||
|
Reinsurance recoverables
|
264.2 | 253.9 | ||||||
|
Deferred policy acquisition costs
|
247.5 | 132.9 | ||||||
|
Goodwill
|
24.3 | 22.3 | ||||||
|
Current income tax recoverable
|
21.1 | 4.5 | ||||||
|
Deferred income tax assets, net
|
785.8 | 203.1 | ||||||
|
Property, equipment, and leasehold improvements, net
|
18.9 | 23.3 | ||||||
|
Other assets
|
57.4 | 44.2 | ||||||
|
Securities lending collateral
|
105.7 | 283.3 | ||||||
|
Separate account assets
|
716.2 | 1,181.9 | ||||||
|
Total assets
|
$ | 19,229.6 | $ | 19,560.2 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
|
Funds held under deposit contracts
|
$ | 16,810.4 | $ | 15,562.0 | ||||
|
Future policy benefits
|
392.1 | 384.9 | ||||||
|
Policy and contract claims
|
133.1 | 110.9 | ||||||
|
Unearned premiums
|
11.9 | 11.5 | ||||||
|
Other policyholders’ funds
|
117.3 | 56.8 | ||||||
|
Notes payable
|
448.8 | 448.6 | ||||||
|
Other liabilities
|
207.9 | 235.2 | ||||||
|
Securities lending payable
|
105.7 | 283.3 | ||||||
|
Separate account liabilities
|
716.2 | 1,181.9 | ||||||
|
Total liabilities
|
18,943.4 | 18,275.1 | ||||||
|
Commitments and contingencies (Note 17)
|
||||||||
|
Preferred stock, $0.01 par value; 10,000,000 shares
authorized; none issued
|
— | — | ||||||
|
Common stock, $0.01 par value; 750,000,000 shares
authorized; 92,646,295 shares issued and outstanding as of
December 31, 2008 and 2007
|
0.9 | 0.9 | ||||||
|
Additional paid-in capital
|
1,165.5 | 1,165.5 | ||||||
|
Retained earnings
|
172.4 | 131.2 | ||||||
|
Accumulated other comprehensive loss, net of taxes
|
(1,052.6 | ) | (12.5 | ) | ||||
|
Total stockholders’ equity
|
286.2 | 1,285.1 | ||||||
|
Total liabilities and stockholders’ equity
|
$ | 19,229.6 | $ | 19,560.2 | ||||
See accompanying notes.
F-3
Table of Contents
CONSOLIDATED
STATEMENTS OF INCOME
|
Year Ended |
Year Ended |
Year Ended |
||||||||||
|
December 31, |
December 31, |
December 31, |
||||||||||
| 2008 | 2007 | 2006 | ||||||||||
| (In millions, except per share data) | ||||||||||||
|
Revenues:
|
||||||||||||
|
Premiums
|
$ | 584.8 | $ | 530.5 | $ | 525.7 | ||||||
|
Net investment income
|
956.5 | 973.6 | 984.9 | |||||||||
|
Other revenues
|
67.8 | 68.7 | 56.1 | |||||||||
|
Net realized investment gains (losses):
|
||||||||||||
|
Total
other-than-temporary
impairment losses on securities
|
(86.4 | ) | (16.2 | ) | (25.7 | ) | ||||||
|
Less: portion of losses recognized in other comprehensive income
(loss)
|
— | — | — | |||||||||
|
Net impairment losses recognized in earnings
|
(86.4 | ) | (16.2 | ) | (25.7 | ) | ||||||
|
Other net realized investment gains (losses)
|
(71.6 | ) | 33.0 | 27.4 | ||||||||
|
Total net realized investment gains (losses)
|
(158.0 | ) | 16.8 | 1.7 | ||||||||
|
Total revenues
|
1,451.1 | 1,589.6 | 1,568.4 | |||||||||
|
Benefits and expenses:
|
||||||||||||
|
Policyholder benefits and claims
|
348.5 | 267.1 | 264.3 | |||||||||
|
Interest credited
|
766.1 | 752.3 | 765.9 | |||||||||
|
Other underwriting and operating expenses
|
265.8 | 281.9 | 260.5 | |||||||||
|
Interest expense
|
31.9 | 21.5 | 19.1 | |||||||||
|
Amortization of deferred policy acquisition costs
|
25.8 | 18.0 | 14.6 | |||||||||
|
Total benefits and expenses
|
1,438.1 | 1,340.8 | 1,324.4 | |||||||||
|
Income from operations before income taxes
|
13.0 | 248.8 | 244.0 | |||||||||
|
Provision (benefit) for income taxes:
|
||||||||||||
|
Current
|
23.8 | 62.8 | 92.4 | |||||||||
|
Deferred
|
(32.9 | ) | 18.7 | (7.9 | ) | |||||||
|
Total provision (benefit) for income taxes
|
(9.1 | ) | 81.5 | 84.5 | ||||||||
|
Net income
|
$ | 22.1 | $ | 167.3 | $ | 159.5 | ||||||
|
Net income per common share:
|
||||||||||||
|
Basic
|
$ | 0.20 | $ | 1.50 | $ | 1.43 | ||||||
|
Diluted
|
$ | 0.20 | $ | 1.50 | $ | 1.43 | ||||||
|
Weighted-average number of common shares outstanding:
|
||||||||||||
|
Basic
|
111.622 | 111.622 | 111.622 | |||||||||
|
Diluted
|
111.622 | 111.622 | 111.622 | |||||||||
|
Cash dividends declared per common share
|
$ | — | $ | 1.79 | $ | 0.90 | ||||||
See accompanying notes.
F-4
Table of Contents
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
|
Accumulated |
||||||||||||||||||||
|
Additional |
Other |
Total |
||||||||||||||||||
|
Common |
Paid-in |
Retained |
Comprehensive |
Stockholders’ |
||||||||||||||||
| Stock | Capital | Earnings | Income (Loss) | Equity | ||||||||||||||||
| (In millions) | ||||||||||||||||||||
|
Balances at January 1, 2006
|
$ | 0.9 | $ | 1,165.5 | $ | 101.9 | $ | 136.6 | $ | 1,404.9 | ||||||||||
|
Comprehensive income, net of taxes:
|
||||||||||||||||||||
|
Net income
|
— | — | 159.5 | — | 159.5 | |||||||||||||||
|
Other comprehensive income, net of taxes:
|
||||||||||||||||||||
|
Net unrealized losses on investment securities (net of taxes:
$(75.4))
|
— | — | — | (140.0 | ) | (140.0 | ) | |||||||||||||
|
Derivatives qualifying as cash flow hedges (net of taxes: $1.6)
|
— | — | — | 2.9 | 2.9 | |||||||||||||||
|
Total comprehensive income, net of taxes
|
22.4 | |||||||||||||||||||
|
Dividend distributions
|
— | — | (100.0 | ) | — | (100.0 | ) | |||||||||||||
|
Balances at December 31, 2006
|
$ | 0.9 | $ | 1,165.5 | $ | 161.4 | $ | (0.5 | ) | $ | 1,327.3 | |||||||||
|
Balances at January 1, 2007
|
$ | 0.9 | $ | 1,165.5 | $ | 161.4 | $ | (0.5 | ) | $ | 1,327.3 | |||||||||
|
Cumulative effect adjustment — new accounting guidance
(net of taxes: $(1.3))
|
— | — | 2.5 | (2.5 | ) | — | ||||||||||||||
|
Comprehensive income, net of taxes:
|
||||||||||||||||||||
|
Net income
|
— | — | 167.3 | — | 167.3 | |||||||||||||||
|
Other comprehensive income, net of taxes:
|
||||||||||||||||||||
|
Net unrealized losses on investment securities (net of taxes:
$(2.5))
|
— | — | — | (4.6 | ) | (4.6 | ) | |||||||||||||
|
Derivatives qualifying as cash flow hedges (net of taxes: $(2.6))
|
— | — | — | (4.9 | ) | (4.9 | ) | |||||||||||||
|
Total comprehensive income, net of taxes
|
157.8 | |||||||||||||||||||
|
Dividend distributions
|
— | — | (200.0 | ) | — | (200.0 | ) | |||||||||||||
|
Balances at December 31, 2007
|
$ | 0.9 | $ | 1,165.5 | $ | 131.2 | $ | (12.5 | ) | $ | 1,285.1 | |||||||||
|
Balances at January 1, 2008
|
$ | 0.9 | $ | 1,165.5 | $ | 131.2 | $ | (12.5 | ) | $ | 1,285.1 | |||||||||
|
Cumulative effect adjustment — new accounting guidance
(net of taxes: $(10.3))
|
— | — | 19.1 | (19.1 | ) | — | ||||||||||||||
|
Comprehensive income, net of taxes:
|
||||||||||||||||||||
|
Net income
|
— | — | 22.1 | — | 22.1 | |||||||||||||||
|
Other comprehensive income, net of taxes:
|
||||||||||||||||||||
|
Net unrealized losses on investment securities (net of taxes:
$(549.8))
|
— | — | — | (1,021.0 | ) | (1,021.0 | ) | |||||||||||||
|
Total comprehensive loss, net of taxes
|
(998.9 | ) | ||||||||||||||||||
|
Balances at December 31, 2008
|
$ | 0.9 | $ | 1,165.5 | $ | 172.4 | $ | (1,052.6 | ) | $ | 286.2 | |||||||||
See accompanying notes.
F-5
Table of Contents
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
Year Ended |
Year Ended |
Year Ended |
||||||||||
|
December 31, |
December 31, |
December 31, |
||||||||||
| 2008 | 2007 | 2006 | ||||||||||
| (In millions) | ||||||||||||
|
Cash flows from operating activities
|
||||||||||||
|
Net income
|
$ | 22.1 | $ | 167.3 | $ | 159.5 | ||||||
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
||||||||||||
|
Net realized investment (gains) and losses
|
158.0 | (16.8 | ) | (1.7 | ) | |||||||
|
Accretion of fixed maturity investments and mortgage loans
|
36.4 | 58.3 | 72.4 | |||||||||
|
Accrued interest on bonds
|
(33.4 | ) | (38.5 | ) | (43.4 | ) | ||||||
|
Amortization and depreciation
|
14.6 | 13.6 | 12.0 | |||||||||
|
Deferred income tax provision (benefit)
|
(32.9 | ) | 18.7 | (7.9 | ) | |||||||
|
Interest credited on deposit contracts
|
766.1 | 752.3 | 765.9 | |||||||||
|
Mortality and expense charges and administrative fees
|
(96.7 | ) | (94.1 | ) | (91.2 | ) | ||||||
|
Changes in:
|
||||||||||||
|
Accrued investment income
|
(11.8 | ) | 12.2 | 7.2 | ||||||||
|
Deferred policy acquisition costs
|
(89.6 | ) | (42.3 | ) | (39.1 | ) | ||||||
|
Other receivables
|
(13.7 | ) | 17.2 | (28.9 | ) | |||||||
|
Future policy benefits
|
7.2 | 8.5 | 4.9 | |||||||||
|
Policy and contract claims
|
22.2 | (8.6 | ) | (16.1 | ) | |||||||
|
Accrued income taxes
|
(16.6 | ) | (7.1 | ) | 28.8 | |||||||
|
Other assets and liabilities
|
1.2 | (24.1 | ) | (29.0 | ) | |||||||
|
Other, net
|
(0.1 | ) | (2.8 | ) | 1.2 | |||||||
|
Total adjustments
|
710.9 | 646.5 | 635.1 | |||||||||
|
Net cash provided by operating activities
|
733.0 | 813.8 | 794.6 | |||||||||
|
Cash flows from investing activities
|
||||||||||||
|
Purchases of:
|
||||||||||||
|
Fixed maturities and marketable equity securities
|
(2,286.7 | ) | (2,646.3 | ) | (1,759.2 | ) | ||||||
|
Other invested assets and investments in limited partnerships
|
(33.5 | ) | (62.6 | ) | (12.5 | ) | ||||||
|
Issuances of mortgage loans
|
(224.5 | ) | (150.0 | ) | (122.0 | ) | ||||||
|
Issuances of policy loans
|
(16.2 | ) | (17.8 | ) | (19.6 | ) | ||||||
|
Maturities, calls, paydowns, and other
|
922.0 | 974.8 | 912.8 | |||||||||
|
Securities lending collateral returned, net
|
174.4 | 159.9 | 151.0 | |||||||||
|
Acquisitions, net of cash received
|
(9.2 | ) | (22.0 | ) | — | |||||||
|
Sales of:
|
||||||||||||
|
Fixed maturities and marketable equity securities
|
371.8 | 2,123.8 | 1,676.6 | |||||||||
|
Other invested assets and investments in limited partnerships
|
29.6 | 13.2 | 6.8 | |||||||||
|
Repayments of mortgage loans
|
80.1 | 94.8 | 99.1 | |||||||||
|
Repayments of policy loans
|
17.0 | 18.7 | 20.7 | |||||||||
|
Net (increase) decrease in short-term investments
|
1.5 | 38.0 | (41.5 | ) | ||||||||
|
Purchases of property, equipment, and leasehold improvements
|
(2.0 | ) | (2.2 | ) | (3.2 | ) | ||||||
|
Other, net
|
(1.1 | ) | — | (0.1 | ) | |||||||
|
Net cash provided by (used in) investing activities
|
(976.8 | ) | 522.3 | 908.9 | ||||||||
|
Cash flows from financing activities
|
||||||||||||
|
Policyholder account balances:
|
||||||||||||
|
Deposits
|
$ | 1,970.8 | $ | 820.0 | $ | 660.5 | ||||||
|
Withdrawals
|
(1,322.0 | ) | (1,884.3 | ) | (2,016.0 | ) | ||||||
|
Securities lending collateral paid, net
|
(174.4 | ) | (159.9 | ) | (151.0 | ) | ||||||
|
Repayment of notes payable
|
— | — | (300.0 | ) | ||||||||
|
Proceeds from notes payable
|
— | 149.8 | 298.7 | |||||||||
|
Dividend distributions
|
— | (200.0 | ) | (100.0 | ) | |||||||
|
Other, net
|
(16.5 | ) | (61.0 | ) | 46.5 | |||||||
|
Net cash provided by (used in) financing activities
|
457.9 | (1,335.4 | ) | (1,561.3 | ) | |||||||
|
Net increase in cash and cash equivalents
|
214.1 | 0.7 | 142.2 | |||||||||
|
Cash and cash equivalents at beginning of period
|
253.9 | 253.2 | 111.0 | |||||||||
|
Cash and cash equivalents at end of period
|
$ | 468.0 | $ | 253.9 | $ | 253.2 | ||||||
|
Supplemental disclosures of cash flow information
|
||||||||||||
|
Net cash paid during the year for:
|
||||||||||||
|
Interest
|
$ | 31.3 | $ | 18.5 | $ | 17.8 | ||||||
|
Income taxes
|
40.4 | 69.6 | 62.8 | |||||||||
|
Non-cash transactions during the year:
|
||||||||||||
|
Investments in limited partnerships and capital obligations
incurred
|
4.2 | 20.0 | 19.9 | |||||||||
See accompanying notes.
F-6
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in millions, unless otherwise stated)
(All dollar amounts in millions, unless otherwise stated)
| 1. | Organization and Description of Business |
Symetra Financial Corporation is a Delaware corporation
privately owned by an investor group led by White Mountains
Insurance Group, Ltd. and Berkshire Hathaway Inc. The
accompanying financial statements include on a consolidated
basis the accounts of Symetra Financial Corporation and its
subsidiaries, which are collectively referred to as
“Symetra Financial” or “the Company.”
The Company’s subsidiaries offer group and individual
insurance products and retirement products, including annuities
marketed through professional agents and distributors in all
states and the District of Columbia. The Company’s
principal products include medical stop-loss insurance, fixed
and variable deferred annuities, single premium immediate
annuities and individual life insurance.
The Company’s primary operating subsidiaries and insurance
subsidiaries are as follows:
| • | Symetra Life Insurance Company | |
| • | First Symetra National Life Insurance Company of New York | |
| • | Symetra National Life Insurance Company | |
| • | Symetra Securities, Inc. | |
| • | Symetra Investment Services, Inc. | |
| • | Symetra Assigned Benefits Service Company | |
| • | Clearscape Funding Corporation | |
| • | Medical Risk Managers Holdings, Inc. (MRM) |
Common
and Preferred Stock (in millions, except par value and share
amounts)
The Company has 750,000,000 authorized shares of common stock,
$0.01 par value per share, and 10,000,000 authorized shares
of preferred stock, $0.01 par value per share. The
Company’s Board of Directors has the authority to designate
the preferred stock into series and to designate the voting
powers, preferences and other rights of the shares of each
series without further stockholder approval. In 2004, the
Company issued warrants to its two lead investors. The warrants
remained outstanding as of December 31, 2008, and are
exercisable at any time until August 2, 2014, for
18,975,744 shares of common stock in the aggregate at an
exercise price of $11.49 per share.
On October 26, 2007, the Company executed a 7.7-for-1 stock
dividend (substantially equivalent to an 8.7-for-1 stock split)
that increased the shares of common stock outstanding from
10,649,000 to 92,646,295, and the shares subject to outstanding
warrants from 2,181,120 to 18,975,744. The stock split, effected
in the form of a dividend, has been reflected retroactively in
these financial statements for all periods presented.
| 2. | Summary of Significant Accounting Policies |
Basis
of Presentation and Use of Estimates
The consolidated financial statements have been prepared in
conformity with U.S. generally accepted accounting
principles (GAAP). The preparation of financial statements in
conformity with GAAP requires the Company to make estimates and
assumptions that may affect the amounts reported in the
consolidated financial statements and accompanying notes.
The most significant estimates include those used to determine
the following: valuation of investments; the identification of
other-than-temporary
impairments of investments; the balance, recoverability and
amortization of deferred policy acquisition costs (DAC); the
liabilities for funds held under deposit contracts, future
policy benefits, and policy and contract claims; and income
taxes. The recorded amounts
F-7
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NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(All dollar amounts in millions, unless otherwise stated)
(All dollar amounts in millions, unless otherwise stated)
reflect management’s best estimates, though actual results
could differ from those estimates. Management believes the
amounts provided are appropriate.
The consolidated financial statements include the accounts of
Symetra Financial Corporation and its subsidiaries that are
wholly owned, directly or indirectly. All significant
intercompany transactions and balances have been eliminated.
Recognition
of Insurance Revenue and Related Benefits
Premiums from group life and health insurance products are
recognized as revenue when earned over the life of the policy.
The Company reports a liability for the portion of premiums
unearned on the consolidated balance sheets. Benefit claims are
charged to operations as incurred. These policies are
short-duration contracts.
Traditional individual life insurance products, primarily term
and whole life insurance products, are long-duration contracts
consisting principally of products with fixed and guaranteed
premiums and benefits. Premiums from these products are
recognized as revenue when due. Benefits and expenses are
associated with earned premiums to result in the recognition of
profits over the life of the policy. This association is
accomplished by the provision for future policy benefits and the
deferral and amortization of policy acquisition costs.
Deposits related to universal life-type, limited payment-type
and investment-type products are credited to policyholder
account balances and reflected as liabilities rather than as
premium income when received. Revenues from these contracts
consist of investment income on the policyholders’ fund
balances and amounts assessed during the period against
policyholders’ account balances for cost of insurance
charges, policy administration charges, and surrender charges.
The Company includes these cost of insurance charges in
premiums. Policy administration charges and surrender charges
are included in other revenues in the consolidated statements of
income. Amounts that are charged to operations include interest
credited and benefit claims incurred in excess of related
policyholder account balances.
Variable product fees are charged to variable annuity and
variable life policyholders’ accounts based upon the daily
net assets of the policyholders’ account values and are
recognized as other revenues when charged. Mortality and expense
charges, policy administration charges, and surrender charges
are included in other revenues in the consolidated statements of
income.
Investments
Available-for-Sale
Securities
The Company classifies its investments in fixed maturities and
certain marketable equity securities as
available-for-sale
securities and carries them at fair value. Fixed maturities
include bonds, mortgage-backed securities and redeemable
preferred stock. Marketable equity securities primarily include
nonredeemable preferred stock, which consist of investments in
publicly traded companies and certain mutual funds.
The Company reports net unrealized investment gains (losses)
related to its
available-for-sale
securities in accumulated other comprehensive income (loss) in
stockholders’ equity, net of related DAC and deferred
income taxes.
The Company reports interest and dividends earned in net
investment income. When the collectibility of interest income
for fixed maturities is considered doubtful, any accrued but
uncollectible interest is reversed against investment income in
the current period. The Company then places the securities on
nonaccrual status, and they are not restored to accrual status
until all delinquent interest and principal are paid. For
mortgage-backed securities, the Company recognizes income using
a constant effective yield based on anticipated prepayments and
the estimated economic life of the securities. Quarterly, the
Company compares actual prepayments to anticipated prepayments
and recalculates the effective yield to reflect actual payments
to date plus anticipated future payments. The Company includes
any resulting adjustment in net investment income.
F-8
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NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(All dollar amounts in millions, unless otherwise stated)
(All dollar amounts in millions, unless otherwise stated)
Trading
Securities
On January 1, 2008, the Company adopted new accounting
guidance that allowed the Company to elect fair value accounting
for its investments in common stock. Prior to January 1,
2008 these investments were accounted for as available-for-sale
securities. As a result, the impact of changes in the fair value
of the Company’s trading portfolio is recorded in net
realized investment gains (losses) in the consolidated
statements of income.
Investment
Valuation
The Company uses quoted market prices or public market
information to determine the fair value of its investments when
such information is available. When such information is not
available, as in the case of securities that are not publicly
traded, the Company uses other valuation techniques. These
techniques include evaluating discounted cash flows, identifying
comparable securities with quoted market prices, and using
internally prepared valuations based on certain modeling and
pricing methods. The Company’s investment portfolio at
December 31, 2008 and 2007 included $632.2 and $656.5,
respectively, of fixed maturities and $0 and $21.1,
respectively, of marketable equity securities that were not
publicly traded, and values for these securities were determined
using these other valuation techniques. See Note 7 for
additional disclosures about fair value measurements.
The cost of securities sold is determined by the
specific-identification method.
Other-Than-Temporary
Impairments
Investments are considered to be impaired when a decline in fair
value is judged to be
other-than-temporary.
The Company’s review of investment securities includes both
quantitative and qualitative criteria. Quantitative criteria
include the length of time and amount that each security is in
an unrealized loss position and, for fixed maturities, whether
the issuer is in compliance with the terms and covenants of the
security.
The Company’s review of its fixed maturities and marketable
equity securities (non-trading) for impairments includes an
analysis of the total gross unrealized losses by three
categories of securities: (i) securities where the
estimated fair value has declined and remained below cost or
amortized cost by less than 20%, (ii) securities where the
estimated fair value has declined and remained below cost or
amortized cost by 20% or more for less than six months and
(iii) securities where the estimated fair value has
declined and remained below cost or amortized cost by 20% or
more for six months or longer. While all securities are
monitored for impairment, the Company’s experience
indicates that the first category does not represent a
significant risk of impairment and, often, fair values recover
over time as the factors that caused the declines improve. The
Company performs a qualitative analysis by issuer to identify
securities in category (i) that should be further evaluated for
OTTI.
If the value of any of the Company’s investments falls into
the second or third category, the Company analyzes the decrease
to determine whether it is an
other-than-temporary
decline in value. To make this determination for each security,
the Company considers:
| • | How long and by how much the fair value has been below its cost or amortized cost. | |
| • | The financial condition and near-term prospects of the issuer of the security, including any specific events that may affect its operations or earnings potential. | |
| • | The Company’s intent and ability to hold the security long enough for it to recover its value, considering any long-range plans that may affect the Company’s ability to hold securities. |
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NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(All dollar amounts in millions, unless otherwise stated)
(All dollar amounts in millions, unless otherwise stated)
| • | Any downgrades of the security by a rating agency. | |
| • | Any reduction or elimination of dividends or nonpayment of scheduled interest payments. |
Based on the analysis, the Company makes a judgment as to
whether the loss is
other-than-temporary.
If the loss is
other-than-temporary,
the Company records an impairment charge within net realized
investment gains (losses) in its consolidated statements of
income in the period that the Company makes the determination.
In addition, any impaired investment where the Company does not
have the intent and ability to hold the security long enough for
it to recover its value is recorded as an
other-than-temporary
impairment.
Mortgage
Loans
The Company carries mortgage loans at outstanding principal
balances, less a valuation allowance. The allowance for losses
on mortgage loans provides for the risk of credit losses
inherent in the lending process. The allowance includes a
portfolio reserve for probable incurred but not specifically
identified losses and loan specific reserves for non-performing
loans. We define non-performing loans as a loan for which it is
probable that amounts due according to the terms of the loan
agreement will not be collected. As of December 31, 2008
and 2007 no loans were considered non-performing. The portfolio
reserve for probable incurred but not specifically identified
losses considers our past loan experience, the current credit
composition of the portfolio and takes into account market
considerations.
Policy
Loans
Policy loans are carried at unpaid principal balances. Policy
loans are secured and are not granted for amounts in excess of
the accumulated cash surrender value of the policy or contract.
Short-Term
Investments
Short-term investments consist of highly liquid debt instruments
with original maturities of greater than three months and less
than twelve months when purchased.
Investments
in Limited Partnerships
Investments in limited partnerships consist of $56.3 of
investments in hedge funds and private equity funds, recorded at
fair value under new fair value accounting guidance adopted
January 1, 2008, and $82.0 of investments in affordable
housing projects and state tax credit funds recorded at
amortized cost. The impact of changes in the fair value of hedge
funds and private equity funds is recorded in net investment
income in the consolidated statements of income. Prior to
adoption of the new accounting guidance on January 1, 2008,
hedge funds and private equity funds where the Company had a 3%
or greater interest were accounted for under the equity method.
Income (loss) from equity method investments is recorded in net
investment income. See Note 7 for discussion of fair value
and impact from the adoption of SFAS No. 159.
The Company has identified certain investments in limited
partnerships that meet the definition of a variable interest
entity (VIE). Based on the analysis of these interests, the
Company does not meet the definition of “primary
beneficiary” of any of these partnerships and therefore has
not consolidated these entities. The maximum exposure to loss as
a result of the Company’s involvement in its VIEs was
$181.4 and $204.7 as of December 31, 2008 and 2007,
respectively. The maximum exposure to loss includes commitments
to provide future capital contributions as described in
Note 17.
Cash
and Cash Equivalents
Cash and cash equivalents consist of demand bank deposits and
short-term highly liquid investments with original maturities of
three months or less at the time of purchase. Cash equivalents
are reported at cost, which approximates fair value, and were
$441.6 and $242.7 as of December 31, 2008 and 2007,
respectively.
F-10
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NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(All dollar amounts in millions, unless otherwise stated)
(All dollar amounts in millions, unless otherwise stated)
At December 31, 2008, $366.9 of total cash equivalents was
held at a single highly rated financial institution. At
December 31, 2007, $105.2 and $81.7 were held with two
highly rated financial institutions.
Derivative
Financial Instruments
Derivative financial instruments are included in other invested
assets at fair value on the Company’s consolidated balance
sheets. The Company’s financial statement recognition of
the change in fair value of a derivative depends on the intended
use of the derivative and the extent to which it is effective as
part of a hedging transaction. Derivatives that are highly
effective and designated as either fair value or cash flow
hedges receive hedge accounting treatment.
Derivatives that hedge variable rate assets or liabilities or
forecasted transactions are designated as cash flow hedges.
For such derivatives, the Company recognizes the changes in the
fair value of the derivative as a component of accumulated other
comprehensive loss, net of deferred income taxes, until the
hedged transaction affects current earnings. At the time current
earnings are affected by the variability of cash flows, the
related portion of deferred gains or losses on cash flow hedge
derivatives is reclassified from accumulated other comprehensive
loss and recorded in the consolidated statements of income.
When the changes in the fair value of such derivatives do not
perfectly offset the changes in the fair value of the hedged
transaction, the Company recognizes the ineffective portion in
the consolidated statements of income. For hedge ineffectiveness
and derivatives that do not qualify for hedge accounting
treatment, the Company records the changes in the fair value of
these derivatives in net realized investment gains (losses) in
the consolidated statements of income.
The Company formally documents all relationships between the
hedging instruments and hedged items, as well as risk-management
objectives and strategies for undertaking various hedge
transactions. The Company links all hedges that are designated
as cash flow hedges to specific variable rate assets or
liabilities or to forecasted transactions. The Company also
assesses, both at the inception of the hedge and on an ongoing
basis, whether the derivatives that are used in hedging
transactions are highly effective in offsetting the changes in
fair values or cash flows of hedged items. When it is determined
that a derivative is not highly effective as a hedge, the
Company discontinues hedge accounting on a prospective basis.
Reinsurance
The Company utilizes reinsurance agreements to manage its
exposure to potential losses. The Company reinsures all or a
portion of its risk to reinsurers for certain types of directly
written business. In addition, the Company reinsures through
pools to cover catastrophic losses. Reinsurance does not affect
the Company’s liability to its policyholders. Accordingly,
the future policy benefit reserves and policy and contract
claims liabilities are reported gross of any related reinsurance
recoverables. The Company reports premiums, benefits, and
settlement expenses net of reinsurance ceded on the consolidated
statements of income. The Company accounts for reinsurance
premiums, commissions, expense reimbursements, benefits and
reserves related to reinsured business on bases consistent with
those used in accounting for the original policies issued and
the terms of the reinsurance contracts. The Company remains
liable to its policyholders to the extent that counterparties to
ceded reinsurance contracts do not meet their contractual
obligations.
Deferred
Policy Acquisition Costs
The Company defers as assets certain costs, principally
commissions, distribution costs and other underwriting costs,
that vary with and are primarily related to the production of
business. The Company limits deferrals to the lesser of the
acquisition costs contained in the Company’s product
pricing assumptions or actual costs incurred.
F-11
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(All dollar amounts in millions, unless otherwise stated)
(All dollar amounts in millions, unless otherwise stated)
The Company amortizes acquisition costs for deferred and
immediate annuity contracts and universal life insurance
policies over the lives of the contracts or policies in
proportion to the estimated future gross profits of each of
these product lines. In this estimation process, the Company
makes assumptions as to surrender rates, mortality experience,
maintenance expenses, and investment performance. Actual profits
can vary from the estimates and can thereby result in increases
or decreases to DAC amortization rates. For interest-sensitive
life products, the Company regularly evaluates its assumptions
and, when necessary, revises the estimated gross profits of
these contracts, resulting in adjustments to DAC amortization.
When such estimates are revised, they are recorded in current
earnings. The Company adjusts the unamortized balance of DAC for
the impact on estimated future gross profits as if net
unrealized investment gains and losses on securities had been
realized as of the balance sheet date. The Company includes the
impact of this adjustment, net of tax, in accumulated other
comprehensive loss in Stockholders’ Equity.
The Company amortizes acquisition costs for traditional
individual life insurance policies over the premium paying
period of the related policies, using assumptions consistent
with those used in computing policy benefit liabilities. The
Company amortizes acquisition costs for group medical policies
over the policy period of one year.
The Company conducts regular recoverability analyses for
deferred and immediate annuity contract, universal life
contract, and traditional life contract DAC asset balances. The
Company compares the current DAC asset balance with the
estimated present value of future profitability of the
underlying business. The DAC asset balances are considered
recoverable if the present value of future profits is greater
than the current DAC asset balance. As of December 31, 2008
and 2007, all of the DAC asset balances were considered
recoverable.
For some products, policyholders can elect to modify product
benefits, features, rights or coverage by exchanging a contract
for a new contract or by amendment, endorsement or rider to a
contract or by election of a feature or coverage within a
contract. These transactions are known as internal replacements.
If the modification substantially changes the contract, the DAC
is immediately written off through income and any new deferrable
costs associated with the replacement contract are deferred. If
the modification does not substantially change the contract, the
DAC is retained and amortized over the life of the modified
contract and any acquisition costs associated with the related
modification are expensed.
Goodwill
Goodwill, which represents the excess of the cost of businesses
acquired over the fair value of the net assets, was primarily
attributable to MRM in the Company’s Group operating
segment. Goodwill is not amortized but is tested for impairment
at least annually using a fair value approach, which requires
the use of estimates and judgment. No impairment was recorded
for the years ended December 31, 2008, 2007 and 2006.
Property,
Equipment and Leasehold Improvements
Property, equipment and leasehold improvements are stated at
cost, less accumulated depreciation and amortization.
Depreciation is determined using the straight-line method over
the estimated useful lives of the assets. Estimated useful lives
generally range from one to ten years for leasehold improvements
and three to ten years for all other property and equipment.
Leasehold improvements are amortized over the shorter of their
economic useful lives or the term of the lease.
Leases
Certain operating leases of the Company provide for minimum
annual payments that change over the life of the lease. The
aggregate minimum annual payments are expensed on the
straight-line basis over the minimum lease term. The Company
recognizes a deferred rent liability for minimum step rents when
the amount of rent expense exceeds the actual lease payments,
and reduces the deferred rent liability when the
F-12
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(All dollar amounts in millions, unless otherwise stated)
(All dollar amounts in millions, unless otherwise stated)
actual lease payments exceed the amount of straight-line rent
expense. Rent holidays, rent incentives, and tenant improvement
allowances are amortized on the straight-line basis over the
initial term of the lease and any option period that is
reasonably assured.
Deferred
Sales Inducements
The Company defers sales inducements to contractholders for
bonus interest and sales inducement interest on deferred
annuities. The inducement interest entitles the contractholder
to an incremental amount of interest to be credited to the
account value over a 12- to
60-month
period following the initial deposit, depending on the product.
The incremental interest causes the initial credited rate to be
higher than the contract’s expected ongoing crediting rates
for periods after the inducement. Deferred sales inducements to
contractholders are reported as other assets and amortized into
interest credited to policyholder account values using the same
methodology and assumptions used to amortize DAC.
Separate
Accounts
Separate account assets and liabilities reported on the
accompanying consolidated balance sheets represent funds that
the Company administers and invests to meet the specific fund
allocations of the policyholders of variable annuity, life, and
universal life contracts. The assets of each separate account
are legally segregated and are not subject to claims that arise
out of the Company’s other business activities. Net
investment income and net realized and unrealized investment
gains and losses accrue directly to such policyholders who bear
the investment risk, subject to guaranteed minimum death
benefits (GMDB). For variable annuity contracts with GMDB, the
Company contractually guarantees total deposits made to the
contract, less any partial withdrawals, in the event of death.
The Company offers three types of GMDB contracts consisting of
return of premium and two versions of ratchet, which are
evaluated every fifth and eighth year, respectively. The ratchet
reset benefit is equal to the immediately preceding GMDB or is
“stepped up” to the account value on the evaluation
date, if higher.
The Company reinsures nearly all of the GMDB risk on its
individual variable annuity contracts. Therefore, the net GMDB
liability balance is not material. The Company does not include
investment results accruing directly to the policyholder in its
revenues. Fees charged to policyholders include mortality,
policy administration, and surrender charges and are included in
other revenues.
Funds
Held Under Deposit Contracts
Liabilities for fixed deferred annuity contracts, guaranteed
investment contracts, and universal life policies, including
bank-owned life insurance (BOLI), are computed as deposits net
of withdrawals made by the policyholder, plus amounts credited
based on contract specifications, less contract fees and charges
assessed, plus any additional interest. For single premium
immediate annuities (SPIAs), including structured settlements,
future benefits are either fully guaranteed or are contingent on
the survivorship of the annuitant. Liabilities are based on
discounted amounts of estimated future benefits. Contingent
future benefits are discounted with current pricing mortality
assumptions, which include provisions for longer life spans over
time. The interest rate pattern used to calculate the reserves
for SPIAs is set at issue. The interest rates within the pattern
vary over time and start with interest rates that prevailed at
the contract issue. The weighted-average implied interest rate
on the existing block is currently 5.9% and will grade to an
ultimate assumed level of 6.7% in about 17 years.
Future
Policy Benefits
The Company computes liabilities for future policy benefits
under traditional individual life and group life insurance
policies on the level premium method, which uses a level premium
assumption to fund reserves. The Company selects the level
premiums so that the actuarial present value of future benefits
equals the actuarial present value of future premiums. The
Company sets the interest, mortality, and persistency
F-13
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NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(All dollar amounts in millions, unless otherwise stated)
(All dollar amounts in millions, unless otherwise stated)
assumptions in the year of issue and includes a provision for
adverse deviation. These liabilities are contingent upon the
death of the insured while the policy is in force. The Company
derives mortality assumptions from both company-specific and
industry statistics. The Company discounts future benefits at
interest rates that vary by year of policy issue, are set
initially at a rate consistent with portfolio rates at the time
of issue, and graded to a lower rate, such as the statutory
valuation interest rate, over time. Assumptions are set at the
time each product is introduced and are not updated for actual
experience unless the total product liability amount is
determined to be inadequate to cover future policy benefits. The
provision for adverse deviation is intended to provide coverage
for the risk that actual experience may be worse than locked-in
best-estimate assumptions.
Policy
and Contract Claims
Liabilities for policy and contract claims primarily represent
liabilities for claims under group medical coverages and are
established on the basis of reported losses (case basis method).
The Company also provides for claims incurred but not reported
(IBNR), based on expected loss ratios, claims paying completion
patterns, and historical experience. The Company periodically
reviews estimates for reported but unpaid claims and IBNR. Any
necessary adjustments are reflected in current operating
results. If expected loss ratios increase or expected claims
paying completion patterns extend, the IBNR claim liability
increases.
Income
Taxes
Income taxes have been provided using the liability method. The
provision for income taxes has two components: amounts currently
payable or receivable and deferred income taxes. The deferred
income taxes are calculated as the difference between the book
and tax basis of the appropriate assets and liabilities and are
measured using enacted tax rates. Deferred tax assets are
recognized only to the extent that it is probable that future
tax profits will be available. A valuation allowance is
established where deferred tax assets cannot be recognized.
Adoption
of New Accounting Pronouncements
SFAS No. 157,
Fair Value Measurements
On January 1, 2008, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 157, Fair
Value Measurements. This statement defines fair value,
establishes a framework for measuring fair value, and expands
disclosures about fair value measurements. The adoption of
SFAS No. 157 did not have a material impact on the
Company’s consolidated financial statements. Additionally,
on January 1, 2008, the Company elected the partial
adoption of SFAS No. 157 under the provisions of FASB
Staff Position (FSP)
FAS 157-2,
which amends SFAS No. 157 to allow an entity to delay
the application of the Statement until January 1, 2009 for
certain non-financial assets and liabilities. Under the
provisions of the FSP, the Company delayed the application of
SFAS No. 157 for fair value measurements used in the
impairment testing of goodwill and eligible non-financial assets
and liabilities included within a business combination. In
October 2008, the FASB issued FSP
FAS 157-3,
Determining the Fair Value of a Financial Asset When the
Market for That Asset Is Not Active. The FSP provides
clarification and guidance on how management’s internal
assumptions, observable market information, and market quotes
are considered when applying SFAS No. 157 in inactive
markets. The adoption of FSP
FAS 157-3
did not have a material impact on the Company’s
consolidated financial statements. See Note 7 for
additional disclosures about fair value measurements.
SFAS No. 159,
Fair Value Options
On January 1, 2008, the Company adopted
SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities. The Statement allows
companies to make an election, on an individual instrument
basis, to report financial assets and liabilities at fair value.
The election must be made at the inception of a transaction and
may not be reversed. The election may also be made for existing
financial assets and liabilities
F-14
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NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(All dollar amounts in millions, unless otherwise stated)
(All dollar amounts in millions, unless otherwise stated)
at the time of adoption. The Company elected the fair value
option for certain of its investments in common stock, which are
presented as trading securities, and its investments in hedge
funds and private equity funds, regardless of ownership
percentage, which are presented as investments in limited
partnerships. See Note 7 for additional disclosure about
the effects of this adoption and fair value measurements.
FIN No. 48,
Accounting for Uncertainty in Income Taxes — An
Interpretation of FASB Statement No. 109
In June 2006, the FASB issued FIN No. 48,
Accounting for Uncertainty in Income Taxes, an Interpretation
of SFAS No. 109, Accounting for Income Taxes.
FIN No. 48 clarifies the accounting for uncertainty in
income taxes recognized in an enterprise’s financial
statements in accordance with SFAS No. 109.
FIN No. 48 prescribes a recognition threshold and
measurement attribute for the financial statement recognition
and measurement of a tax position taken or expected to be taken
in a tax return. FIN No. 48 also provides guidance on
de-recognition, classification, interest and penalties,
accounting in interim periods, disclosure, and transition. The
Company adopted the provisions of FIN No. 48 on
January 1, 2007. The Company did not recognize a change in
the liability for unrecognized tax benefits or an adjustment to
retained earnings upon adoption.
SFAS No. 155,
Accounting for Certain Hybrid Financial Instruments
On January 1, 2007, the Company adopted
SFAS No. 155, Accounting for Certain Hybrid
Financial Instruments. SFAS No. 155 amends certain
paragraphs of SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, and
SFAS No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of
Liabilities. SFAS No. 155 also resolves issues
addressed in SFAS No. 133 Implementation Issue
No. D1, Application of Statement 133 to Beneficial
Interests in Securitized Financial Assets. In summary,
SFAS No. 155 eliminates the requirement to bifurcate
financial instruments with embedded derivatives if the holder of
the instrument elects to account for the entire instrument on a
fair value basis. Changes in fair value are recorded as realized
gains (losses). The fair value election may be applied upon
adoption of the statement for hybrid instruments that had been
bifurcated under SFAS No. 133 prior to adoption.
Upon adoption of SFAS No. 155, the Company recorded an
adjustment of $2.5 in gross gains, net of tax, to reclassify net
unrealized gains on investments to beginning retained earnings
to reflect the cumulative effective of adoption. At
December 31, 2007 and 2008, the Company had $75.2 and
$50.5, respectively, of convertible securities recorded at fair
value in fixed maturities.
Accounting
Pronouncements Not Yet Adopted
SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements. SFAS No. 160 clarifies that a
noncontrolling interest in a subsidiary is an ownership interest
in the consolidated entity that should be reported as equity in
the consolidated financial statements. The Company adopted
SFAS No. 160 effective January 1, 2009. The
adoption did not have a material impact on the Company’s
consolidated financial statements.
SFAS No. 141(R),
Business Combinations
In December 2007, the FASB issued SFAS No. 141(R),
Business Combinations. SFAS No. 141(R)
establishes principles and requirements for how the acquirer of
a business would recognize and measure the identifiable assets
acquired, the liabilities assumed, and any noncontrolling
interest in the acquiree; the goodwill acquired in the business
combination or a gain from a bargain purchase; and the
appropriate disclosures. The Company adopted
SFAS No. 141(R) effective January 1, 2009. The
adoption of this Statement will impact future business
combinations.
F-15
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(All dollar amounts in millions, unless otherwise stated)
(All dollar amounts in millions, unless otherwise stated)
| 3. | Earnings Per Share |
Basic earnings per share represent the amount of earnings for
the period available to each share of common stock outstanding
during the reporting period. Diluted earnings per share
represent the amount of earnings for the period available to
each share of common stock outstanding during the reporting
period, adjusted for the potential issuance of common stock, if
dilutive. All outstanding warrants are considered participating
securities or potential common stock securities that are
included in weighted-average common shares outstanding for
purposes of computing basic earnings per share using the
two-class method. The warrants are considered participating
securities or potential common stock securities because the
terms of the warrants entitle the holders to receive any
dividends declared on the common stock concurrently with the
holders of outstanding shares of common stock, on a
one-to-one
basis, without regard to whether the warrants are exercised
prior to the record date for any such dividend.
The following table presents information relating to the
Company’s calculations of basic and diluted earnings per
share (EPS):
|
Year Ended |
Year Ended |
Year Ended |
||||||||||
|
December 31, |
December 31, |
December 31, |
||||||||||
| 2008 | 2007 | 2006 | ||||||||||
|
Numerator:
|
||||||||||||
|
Net income, as reported
|
$ | 22.1 | $ | 167.3 | $ | 159.5 | ||||||
|
Denominator:
|
||||||||||||
|
Common stock
|
92.646 | 92.646 | 92.646 | |||||||||
|
Warrants
|
18.976 | 18.976 | 18.976 | |||||||||
|
Weighted-average common shares outstanding — basic and
diluted
|
111.622 | 111.622 | 111.622 | |||||||||
|
Net income per common share:
|
||||||||||||
|
Basic
|
$ | 0.20 | $ | 1.50 | $ | 1.43 | ||||||
|
Diluted
|
$ | 0.20 | $ | 1.50 | $ | 1.43 | ||||||
| 4. | Investments |
The following tables summarize the Company’s fixed
maturities and marketable equity securities:
|
Cost or |
Gross |
Gross |
||||||||||||||
|
Amortized |
Unrealized |
Unrealized |
Fair |
|||||||||||||
| Cost | Gains | Losses | Value | |||||||||||||
|
December 31, 2008
|
||||||||||||||||
|
Fixed maturities:
|
||||||||||||||||
|
U.S. government and agencies
|
$ | 155.5 | $ | 5.2 | $ | (3.9 | ) | $ | 156.8 | |||||||
|
State and political subdivisions
|
488.8 | 0.9 | (64.8 | ) | 424.9 | |||||||||||
|
Foreign governments
|
31.4 | 3.2 | — | 34.6 | ||||||||||||
|
Corporate securities
|
10,584.2 | 105.1 | (1,376.5 | ) | 9,312.8 | |||||||||||
|
Mortgage-backed securities
|
5,268.5 | 102.1 | (412.1 | ) | 4,958.5 | |||||||||||
|
Total fixed maturities
|
16,528.4 | 216.5 | (1,857.3 | ) | 14,887.6 | |||||||||||
|
Marketable equity securities,
available-for-sale
|
52.5 | — | (14.4 | ) | 38.1 | |||||||||||
|
Total
|
$ | 16,580.9 | $ | 216.5 | $ | (1,871.7 | ) | $ | 14,925.7 | |||||||
F-16
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(All dollar amounts in millions, unless otherwise stated)
(All dollar amounts in millions, unless otherwise stated)
|
Cost or |
Gross |
Gross |
||||||||||||||
|
Amortized |
Unrealized |
Unrealized |
Fair |
|||||||||||||
| Cost | Gains | Losses | Value | |||||||||||||
|
December 31, 2007
|
||||||||||||||||
|
Fixed maturities:
|
||||||||||||||||
|
U.S. government and agencies
|
$ | 193.1 | $ | 3.7 | $ | (2.7 | ) | $ | 194.1 | |||||||
|
State and political subdivisions
|
490.1 | 13.0 | (4.1 | ) | 499.0 | |||||||||||
|
Foreign governments
|
122.1 | 4.3 | (0.1 | ) | 126.3 | |||||||||||
|
Corporate securities
|
10,184.8 | 151.2 | (218.9 | ) | 10,117.1 | |||||||||||
|
Mortgage-backed securities
|
4,654.1 | 47.5 | (38.2 | ) | 4,663.4 | |||||||||||
|
Total fixed maturities
|
15,644.2 | 219.7 | (264.0 | ) | 15,599.9 | |||||||||||
|
Marketable equity securities,
available-for-sale
|
174.7 | 36.4 | (10.3 | ) | 200.8 | |||||||||||
|
Total
|
$ | 15,818.9 | $ | 256.1 | $ | (274.3 | ) | $ | 15,800.7 | |||||||
Of the U.S. government and agencies securities, agencies
comprised $132.1 and $170.9 of the fair value, with $3.9 and
$0.1 of gross unrealized losses, at December 31, 2008 and
2007, respectively.
The following tables show gross unrealized losses and fair
values of the Company’s available-for-sale investments.
These are aggregated by investment category and the severity of
the unrealized loss, separated between securities that have been
in a continuous unrealized loss position for less than twelve
months and for twelve months or more.
| Less Than 12 Months | 12 Months or More | |||||||||||||||||||||||
|
Gross |
Gross |
|||||||||||||||||||||||
|
Fair |
Unrealized |
# of |
Fair |
Unrealized |
# of |
|||||||||||||||||||
| Value | Losses | Securities | Value | Losses | Securities | |||||||||||||||||||
|
December 31, 2008
|
||||||||||||||||||||||||
|
Fixed maturities:
|
||||||||||||||||||||||||
|
U.S. government and agencies
|
$ | 52.4 | $ | (3.9 | ) | 3 | $ | — | $ | — | — | |||||||||||||
|
State and political subdivisions
|
305.0 | (57.0 | ) | 61 | 73.1 | (7.8 | ) | 14 | ||||||||||||||||
|
Corporate securities
|
4,572.0 | (498.0 | ) | 696 | 2,789.7 | (878.5 | ) | 426 | ||||||||||||||||
|
Mortgage-backed securities
|
1,351.1 | (224.5 | ) | 183 | 762.4 | (187.6 | ) | 94 | ||||||||||||||||
|
Total fixed maturities
|
6,280.5 | (783.4 | ) | 943 | 3,625.2 | (1,073.9 | ) | 534 | ||||||||||||||||
|
Marketable equity securities, available-for-sale
|
14.8 | (11.2 | ) | 3 | 23.3 | (3.2 | ) | 2 | ||||||||||||||||
|
Total
|
$ | 6,295.3 | $ | (794.6 | ) | 946 | $ | 3,648.5 | $ | (1,077.1 | ) | 536 | ||||||||||||
|
% Below amortized cost — fixed maturities
|
||||||||||||||||||||||||
|
Less than 20%
|
$ | 5,427.3 | $ | (434.1 | ) | $ | 1,997.1 | $ | (257.9 | ) | ||||||||||||||
|
20% or more
|
853.2 | (349.3 | ) | 1,628.1 | (816.0 | ) | ||||||||||||||||||
|
Total fixed maturities
|
6,280.5 | (783.4 | ) | 3,625.2 | (1,073.9 | ) | ||||||||||||||||||
|
% Below cost — marketable equity securities,
available-for-sale
|
||||||||||||||||||||||||
|
Less than 20%
|
0.5 | (0.3 | ) | 23.3 | (3.2 | ) | ||||||||||||||||||
|
20% or more
|
14.3 | (10.9 | ) | — | — | |||||||||||||||||||
|
Total marketable equity securities, available-for-sale
|
14.8 | (11.2 | ) | 23.3 | (3.2 | ) | ||||||||||||||||||
|
Total
|
$ | 6,295.3 | $ | (794.6 | ) | $ | 3,648.5 | $ | (1,077.1 | ) | ||||||||||||||
F-17
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(All dollar amounts in millions, unless otherwise stated)
(All dollar amounts in millions, unless otherwise stated)
| Less Than 12 Months | 12 Months or More | |||||||||||||||||||||||
|
Gross |
Gross |
|||||||||||||||||||||||
|
Fair |
Unrealized |
# of |
Fair |
Unrealized |
# of |
|||||||||||||||||||
|
December 31, 2007
|
Value | Losses | Securities | Value | Losses | Securities | ||||||||||||||||||
|
Fixed maturities:
|
||||||||||||||||||||||||
|
U.S. government and agencies
|
$ | 33.7 | $ | (0.4 | ) | 3 | $ | 34.3 | $ | (2.3 | ) | 3 | ||||||||||||
|
State and political subdivisions
|
13.4 | (0.6 | ) | 6 | 82.7 | (3.5 | ) | 17 | ||||||||||||||||
|
Foreign governments
|
— | — | — | 10.6 | (0.1 | ) | 1 | |||||||||||||||||
|
Corporate securities
|
2,837.3 | (109.5 | ) | 437 | 2,520.4 | (109.4 | ) | 310 | ||||||||||||||||
|
Mortgage-backed securities
|
647.8 | (8.8 | ) | 86 | 1,553.3 | (29.4 | ) | 290 | ||||||||||||||||
|
Total fixed maturities
|
3,532.2 | (119.3 | ) | 532 | 4,201.3 | (144.7 | ) | 621 | ||||||||||||||||
|
Marketable equity securities,
available-for-sale
|
59.7 | (10.1 | ) | 45 | 0.9 | (0.2 | ) | 7 | ||||||||||||||||
|
Total
|
$ | 3,591.9 | $ | (129.4 | ) | 577 | $ | 4,202.2 | $ | (144.9 | ) | 628 | ||||||||||||
|
% Below amortized cost — fixed maturities:
|
||||||||||||||||||||||||
|
Less than 20%
|
$ | 3,505.6 | $ | (111.1 | ) | $ | 4,179.6 | $ | (133.0 | ) | ||||||||||||||
|
20% or more
|
26.6 | (8.2 | ) | 21.7 | (11.7 | ) | ||||||||||||||||||
|
Total fixed maturities
|
3,532.2 | (119.3 | ) | 4,201.3 | (144.7 | ) | ||||||||||||||||||
|
% Below cost — marketable equity securities,
available-for-sale:
|
||||||||||||||||||||||||
|
Less than 20%
|
34.7 | (2.4 | ) | 0.4 | (0.1 | ) | ||||||||||||||||||
|
20% or more
|
25.0 | (7.7 | ) | 0.5 | (0.1 | ) | ||||||||||||||||||
|
Total marketable equity securities,
available-for-sale
|
59.7 | (10.1 | ) | 0.9 | (0.2 | ) | ||||||||||||||||||
|
Total
|
$ | 3,591.9 | $ | (129.4 | ) | $ | 4,202.2 | $ | (144.9 | ) | ||||||||||||||
The Company reviewed all its investments with unrealized losses
at the end of 2008 and 2007 in accordance with the impairment
policy described in Note 2. The Company’s evaluation
determined, after the recognition of
other-than-temporary
impairment, the remaining declines in fair value were temporary,
and it had the intent and ability to hold them until recovery.
As of December 31, 2008 and 2007, $883.6 and $128.9,
respectively, of unrealized losses for a period of twelve months
or more related to investment-grade fixed maturity securities.
Unrealized losses on investment-grade securities are principally
related to changes in interest rates or changes in the issuer
and the sector-related credit spreads since the securities were
acquired. Sector-related credit spreads widened substantially in
the fourth quarter of 2008. As of December 31, 2008 and
2007, the Company had the intent and ability to hold these
investments for a period of time sufficient for them to recover
in value.
At December 31, 2008 and 2007, the Company held
below-investment-grade fixed maturities with fair values of
$458.8 and $586.6, respectively, and amortized costs of $680.1
and $599.4, respectively. These holdings amounted to 3.1% and
3.7% of the Company’s investments in fixed maturities at
fair value as of December 31, 2008 and 2007, respectively.
The fixed maturity portfolio also included not-rated securities
with fair values of $707.2 and $722.4, respectively, and
amortized costs of $802.7 and $720.5, respectively. These
holdings amounted to 4.8% and 4.6%, respectively, of the
Company’s investments in fixed maturities at fair value as
of December 31, 2008 and 2007.
F-18
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(All dollar amounts in millions, unless otherwise stated)
(All dollar amounts in millions, unless otherwise stated)
As of December 31, 2008 and 2007, the majority of the
Company’s mortgage-backed securities were classified as
prime. Approximately $0.8 and $1.8, representing 0.02% and 0.04%
of the fair value of total mortgage-backed securities, were
classified as subprime at December 31, 2008 and 2007,
respectively. The subprime mortgage-backed securities were
issued from a dedicated second-lien shelf, which the Company
considers to be a subprime risk regardless of credit score or
other metrics. The Company does not own any securities from
dedicated subprime shelves. The subprime securities had a
Standard & Poor’s (S&P) credit rating of B
and AAA as of December 31, 2008 and 2007, respectively.
In addition, based on a review of the characteristics of their
underlying mortgage loan pools, such as credit scores and
financial ratios, the Company classified certain securities as
Alt-A, as each has overall collateral credit quality between
prime and subprime. At December 31, 2008 and 2007, $155.5
and $209.7 were classified as Alt-A, representing 3.1% and 4.7%,
respectively, of the fair value of total mortgage-backed
securities. Of the securities classified as Alt-A, $155.5 and
$190.5, or 100% and 90.8%, had an S&P credit rating of AAA
as of December 31, 2008 and 2007.
The Company’s investments in asset-backed securities, which
are included in mortgage-backed securities, had fair values of
$157.2 and $160.2 as of December 31, 2008 and 2007,
respectively.
The following table summarizes the cost or amortized cost and
fair value of fixed maturities at December 31, 2008, by
contractual years to maturity. Expected maturities will differ
from contractual maturities because borrowers may have the right
to call or prepay obligations with or without prepayment
penalties.
|
Cost or |
||||||||
|
Amortized |
Fair |
|||||||
| Cost | Value | |||||||
|
One year or less
|
$ | 384.9 | $ | 379.4 | ||||
|
Over one year through five years
|
2,573.2 | 2,382.7 | ||||||
|
Over five years through ten years
|
2,967.4 | 2,609.9 | ||||||
|
Over ten years
|
5,334.4 | 4,557.1 | ||||||
|
Mortgage-backed securities
|
5,268.5 | 4,958.5 | ||||||
|
Total fixed maturities
|
$ | 16,528.4 | $ | 14,887.6 | ||||
The carrying value of certain securities and cash on deposit
with state regulatory authorities was $10.6 and $9.8 at
December 31, 2008 and 2007, respectively.
For the year ended December 31, 2008, financial
institutions, U.S. federal government and utilities
industries represented 24.8%, 20.6% and 11.1%, respectively, of
the Company’s investments in fixed maturity and marketable
equity securities at fair value.
For the year ended December 31, 2007, financial
institutions, U.S. federal government and utilities
industries represented 25.9%, 18.9% and 12.5%, respectively, of
the Company’s investments in fixed maturity and marketable
equity securities at fair value.
F-19
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(All dollar amounts in millions, unless otherwise stated)
(All dollar amounts in millions, unless otherwise stated)
The following table summarizes the Company’s net investment
income:
|
Year Ended |
Year Ended |
Year Ended |
||||||||||
|
December 31, |
December 31, |
December 31, |
||||||||||
| 2008 | 2007 | 2006 | ||||||||||
|
Fixed maturities
|
$ | 930.7 | $ | 911.4 | $ | 930.3 | ||||||
|
Marketable equity securities,
available-for-sale
|
3.4 | 5.8 | 6.8 | |||||||||
|
Marketable equity securities, trading
|
2.7 | — | — | |||||||||
|
Mortgage loans
|
59.4 | 50.0 | 48.8 | |||||||||
|
Policy loans
|
4.5 | 4.7 | 4.9 | |||||||||
|
Investments in limited partnerships
|
(36.4 | ) | — | 4.7 | ||||||||
|
Other
|
11.5 | 20.9 | 13.4 | |||||||||
|
Total investment income
|
975.8 | 992.8 | 1,008.9 | |||||||||
|
Investment expenses
|
(19.3 | ) | (19.2 | ) | (24.0 | ) | ||||||
|
Net investment income
|
$ | 956.5 | $ | 973.6 | $ | 984.9 | ||||||
The fair value of investments in fixed maturities that have not
produced income for the last twelve months was $6.5 and
$15.0 at December 31, 2008 and 2007, respectively. All of
the Company’s mortgage loans produced income during 2008
and 2007.
The following table summarizes the Company’s net realized
investment gains (losses):
|
Year Ended |
Year Ended |
Year Ended |
||||||||||
|
December 31, |
December 31, |
December 31, |
||||||||||
| 2008 | 2007 | 2006 | ||||||||||
|
Fixed maturities
|
$ | (94.2 | ) | $ | 7.9 | $ | (16.1 | ) | ||||
|
Marketable equity securities,
available-for-sale
|
— | 10.5 | 14.9 | |||||||||
|
Marketable equity securities, trading
|
(64.5 | ) | — | — | ||||||||
|
Other invested assets
|
(5.2 | ) | (2.4 | ) | 1.7 | |||||||
|
Deferred policy acquisition costs adjustment
|
5.9 | 0.8 | 1.2 | |||||||||
|
Net realized investment gains (losses)
|
$ | (158.0 | ) | $ | 16.8 | $ | 1.7 | |||||
During 2008, the Company recorded impairment charges on fixed
maturities totaling $86.4. The largest write-downs were from
investments in the paper-related industry, totaling $14.2, or
16.4%; in the diversified financial service industry, totaling
$8.4, or 9.7%; and in FNMA - U.S. federal government
securities, totaling $8.0, or 9.3%. During 2007, the Company
recorded write-downs of $16.2 primarily on investments in the
paper-related industry, totaling $7.6, or 46.9%, and in the
brewing industry, totaling $1.7, or 10.5%. During 2006, the
Company recorded impairments of $25.7, of which $15.7, or 60.9%,
were attributable to investments in the paper-related industry.
The additional write-downs in 2008, 2007 and 2006 generally
represent securities that the Company did not intend to hold
until recovery.
F-20
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(All dollar amounts in millions, unless otherwise stated)
(All dollar amounts in millions, unless otherwise stated)
The following tables provide additional detail of net realized
investment gains (losses).
|
Year Ended |
Year Ended |
Year Ended |
||||||||||
|
December 31, |
December 31, |
December 31, |
||||||||||
| 2008 | 2007 | 2006 | ||||||||||
|
Gross realized gains on sales:
|
||||||||||||
|
Fixed maturities
|
$ | 10.3 | $ | 37.1 | $ | 26.8 | ||||||
|
Marketable equity securities,
available-for-sale
|
— | 14.4 | 18.3 | |||||||||
|
Marketable equity securities, trading
|
14.8 | — | — | |||||||||
|
Total gross realized gains on sales
|
25.1 | 51.5 | 45.1 | |||||||||
|
Gross realized losses on sales:
|
||||||||||||
|
Fixed maturities
|
(7.0 | ) | (15.1 | ) | (18.4 | ) | ||||||
|
Marketable equity securities,
available-for-sale
|
— | (3.5 | ) | (1.4 | ) | |||||||
|
Marketable equity securities, trading
|
(8.5 | ) | — | — | ||||||||
|
Total gross realized losses on sales
|
(15.5 | ) | (18.6 | ) | (19.8 | ) | ||||||
|
Impairments:
|
||||||||||||
|
Fixed maturities
|
(86.4 | ) | (15.0 | ) | (24.6 | ) | ||||||
|
Marketable equity securities,
available-for-sale
|
— | (1.2 | ) | (1.1 | ) | |||||||
|
Total impairments
|
(86.4 | ) | (16.2 | ) | (25.7 | ) | ||||||
|
Gross gains on trading securities(1)
|
3.6 | — | — | |||||||||
|
Gross losses on trading securities(1)
|
(72.8 | ) | — | — | ||||||||
|
Other, including gains (losses) on calls and redemptions:
|
||||||||||||
|
Fixed maturities
|
(11.1 | ) | 0.9 | 0.1 | ||||||||
|
Marketable equity securities,
available-for-sale
|
— | 0.8 | (0.9 | ) | ||||||||
|
Marketable equity securities, trading
|
(1.6 | ) | — | — | ||||||||
|
Other
|
0.7 | (1.6 | ) | 2.9 | ||||||||
|
Total other
|
(12.0 | ) | 0.1 | 2.1 | ||||||||
|
Net realized investment gains (losses)
|
$ | (158.0 | ) | $ | 16.8 | $ | 1.7 | |||||
| (1) | As of January 1, 2008, changes in fair value related to certain marketable equity securities are recognized in net realized investment gains (losses) due to the Company’s election of the fair value option. Refer to Note 7. |
The following table summarizes the Company’s allowance for
mortgage loan losses:
|
Year Ended |
Year Ended |
Year Ended |
||||||||||
|
December 31, |
December 31, |
December 31, |
||||||||||
| 2008 | 2007 | 2006 | ||||||||||
|
Allowance at beginning of period
|
$ | 4.2 | $ | 4.0 | $ | 3.9 | ||||||
|
Provision
|
0.8 | 0.2 | 0.1 | |||||||||
|
Allowance at end of period
|
$ | 5.0 | $ | 4.2 | $ | 4.0 | ||||||
This allowance relates to mortgage loan investments of $993.7
and $849.7 at December 31, 2008 and 2007, respectively. All
of the Company’s mortgage loan investments were in good
standing at December 31, 2008 and 2007.
F-21
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(All dollar amounts in millions, unless otherwise stated)
(All dollar amounts in millions, unless otherwise stated)
At December 31, 2008, mortgage loans constituted
approximately 5.1% of total assets and are secured by
first-mortgage liens on income-producing commercial real estate,
primarily in the retail, industrial and office building sectors.
The average
loan-to-value
(LTV) ratio, which is a loan’s carrying amount divided by
its appraised value at loan inception, was 53.8% and 53.2% for
loans funded during 2008 and 2007, respectively. The average LTV
ratio for the Company’s entire mortgage portfolio was 50.7%
as of December 31, 2008. The majority of the properties are
located in the western United States, with 26.8% of the total in
California and 21.3% in Washington State. Individual loans
generally do not exceed $15.0.
The carrying value of other invested assets approximates fair
value. The following table summarizes the Company’s other
invested assets:
| December 31, | ||||||||
| 2008 | 2007 | |||||||
|
Note receivable — agency
|
$ | 6.5 | $ | 7.3 | ||||
|
Options
|
2.3 | 3.8 | ||||||
|
Other
|
0.1 | 0.8 | ||||||
|
Total other invested assets
|
$ | 8.9 | $ | 11.9 | ||||
The note receivable is a loan to a third party agency. The
agency’s equity at risk is not sufficient to finance its
activities and is therefore considered a VIE. The loan is
secured by the assets of the agency, and the majority of the
loan amount is personally guaranteed by the agency’s equity
holders. The Company is not the primary beneficiary. The
potential exposure to losses is limited to the senior debt
holding, which was $6.5 as of December 31, 2008, excluding
the value of rights to the assets of the agency and personal
guarantees provided by the equity holders.
| 5. | Derivative Financial Instruments |
Derivatives are instruments whose values are derived from
underlying instruments, indices or rates; have a notional
amount; and can be net settled. This may include derivatives
that are “embedded” in financial instruments or in
certain existing assets or liabilities. The Company uses
derivative financial instruments, including interest rate swaps
and options, as a means of hedging exposure to equity price
changes
and/or
interest rate risk on anticipated transactions related to the
Company’s notes payable.
Interest rate risk is the risk of economic loss due to changes
in the level of interest rates. The Company manages interest
rate risk through active portfolio management and selective use
of interest rate swaps as hedges to change the characteristics
of certain assets and liabilities. With interest rate swap
agreements, the Company exchanges with a counterparty, at
specified intervals, interest rate payments of differing
character (e.g., fixed-rate payments exchanged for variable-rate
payments), based on an underlying principal balance (notional
amount). No cash is exchanged at the outset of the contract, and
no principal payments are made by either party. Net interest
payments made at each interest payment due date are recorded to
interest expense.
Counterparty credit risk is the risk that a counterparty to a
derivative contract will be unable to perform its obligations.
The Company manages counterparty credit risk on an individual
counterparty basis, and gains and losses are netted by
counterparty. The Company mitigates counterparty credit risk
through credit reviews, approval controls and by only entering
into agreements with creditworthy counterparties. The Company
performs ongoing monitoring of counterparty credit exposure risk
against credit limits. The contract or notional amounts of these
instruments reflect the extent of involvement the Company has in
a particular class of derivative financial instruments. However,
the maximum loss of cash flow associated with these instruments
can be less than these amounts. For interest rate swaps, credit
risk is limited to the amount that it would cost the Company to
replace the contract.
F-22
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(All dollar amounts in millions, unless otherwise stated)
(All dollar amounts in millions, unless otherwise stated)
Cash
Flow Hedges
In 2007, the Company entered into interest rate swaps, which
qualified as cash flow hedges of the forecasted issuance of the
Capital Efficient Notes in 2007. In addition, in 2006, the
Company entered into interest rate swaps, which qualified as
cash flow hedges for the $300.0 fixed rate senior notes in 2006
(see Note 14). The unrealized gain or loss on the interest
rate swaps is being amortized into interest expense over the
life of the related debt issuance. As the critical terms of the
interest rate swaps were the same as the forecasted
transactions, the Company has not recorded any ineffectiveness.
For the years ended December 31, 2008, 2007 and 2006, the
Company amortized $(0.1), $0.3 and $0.2, respectively, from
accumulated other comprehensive loss to interest expense. The
Company estimates that $(0.1) will be reclassified from
accumulated other comprehensive loss to interest expense within
the next twelve months. For the years ended December 31,
2007 and 2006, the Company recorded unrealized gains (losses) of
$(7.2) and $4.8, respectively, in accumulated other
comprehensive loss.
Other
Derivatives
The Company has a closed block of fixed indexed annuity (FIA)
product that credits the policyholders’ accounts based on a
percentage of the gain in the S&P 500 Index. In connection
with this product, the Company has a hedging program with the
objective to hedge the exposure to changes in the S&P 500
Index. This program consists of buying S&P 500 Index
options. Although the Company uses index options to hedge the
equity return component of the FIA, the options do not qualify
as hedging instruments or for hedge accounting treatment.
Accordingly, the assets are recorded at fair value as
free-standing derivative assets or options in other invested
assets, with the impact of changes in the options’ fair
value recorded in net realized investment gains (losses). The
Company recognized pre-tax gains (losses) on these options of
$(2.9), $(2.3) and $2.2 for the years ended December 31,
2008, 2007 and 2006, respectively.
| 6. | Securities Lending Program |
The Company participates in a securities lending program whereby
blocks of securities included in investments are loaned to third
parties, primarily major brokerage firms. The Company requires a
minimum of 102% of the fair value of the loaned securities at
inception of the loan to be separately maintained as collateral
for the loans. The borrower deposits this collateral with a
lending agent, who invests the collateral to generate additional
income according to the Company’s guidelines. In the event
that the lending agent does not return the full amount of
collateral to the security lending counterparty, the Company is
obligated to make up any deficiency. The fair value of the
loaned securities is monitored on a daily basis, and additional
collateral is obtained if the collateral falls below 100% of the
fair value of the loaned securities.
The Company maintains full ownership rights to the securities on
loan, and accordingly the loaned securities are classified as
investments in the consolidated balance sheets. The securities
loaned under the program had an amortized cost of $117.1 and
$281.3 and a fair value of $102.8 and $271.3 at
December 31, 2008 and 2007, respectively. The Company
reports the securities lending collateral and the corresponding
securities lending payable on its consolidated balance sheets as
assets and liabilities.
At December 31, 2008 and 2007, the Company was liable for
securities lending collateral under its control of $105.7 and
$283.3, respectively. As of December 31, 2008 and 2007, the
fair value of invested collateral was less than the amounts
required to be returned to the counterparty by the lending agent
upon return of the loaned securities by $2.3 and $1.8,
respectively.
| 7. | Fair Value of Financial Instruments |
Effective January 1, 2008, the Company determined the fair
value of its financial instruments based on the fair value
hierarchy, which requires an entity to disclose the use of
observable inputs and minimize the use of unobservable inputs
when measuring fair value.
F-23
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(All dollar amounts in millions, unless otherwise stated)
(All dollar amounts in millions, unless otherwise stated)
The Company has categorized its financial instruments, based on
the priority of the inputs to the valuation technique, into the
three-level hierarchy. The fair value hierarchy gives the
highest priority to quoted prices in active markets for
identical assets or liabilities (Level 1) and the
lowest priority to unobservable inputs (Level 3). The level
in the fair value hierarchy within which the fair value
measurement falls is determined based on the lowest-level input
that is significant to the fair value measurement. The
Company’s financial assets recorded at fair value on the
consolidated balance sheets are categorized as follows:
| • | Level 1 — Unadjusted quoted prices in active markets for identical instruments. Primarily consists of financial instruments whose value is based on quoted market prices, such as exchange-traded marketable equity securities, and actively traded mutual fund investments. | |
| • | Level 2 — Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-derived valuations whose inputs are observable or whose significant value drivers are observable. |
This level includes those financial instruments that are valued
using industry-standard pricing methodologies, models or other
valuation methodologies. These models are primarily
industry-standard models that consider various inputs, such as
interest rate, credit spread and foreign exchange rates for the
underlying financial instruments. All significant inputs are
observable, or derived from observable, information in the
marketplace or are supported by observable levels at which
transactions are executed in the market place. Financial
instruments in this category primarily include certain public
and private corporate fixed maturity securities, government or
agency securities, and certain mortgage-backed and asset-backed
securities.
| • | Level 3 — Instruments whose significant value drivers are unobservable. This comprises financial instruments for which fair value is estimated based on industry-standard pricing methodologies and internally developed models utilizing significant inputs not based on or corroborated by readily available market information. In limited circumstances, this category may also utilize non-binding broker quotes. This category primarily consists of certain less liquid fixed maturities, investment in hedge funds and private equity funds, corporate private placement securities and trading securities where the Company cannot corroborate the significant valuation inputs with market observable data. |
The following table presents the financial instruments carried
at fair value by level (as described above):
| As of December 31, 2008 | ||||||||||||||||||||
|
Level 3 |
||||||||||||||||||||
| Fair Value | Level 1 | Level 2 | Level 3 | Percent | ||||||||||||||||
|
Assets
|
||||||||||||||||||||
|
Fixed maturities,
available-for-sale
|
$ | 14,887.6 | $ | — | $ | 14,213.3 | $ | 674.3 | 4.26 | % | ||||||||||
|
Marketable equity securities,
available-for-sale
|
38.1 | 38.1 | — | — | — | |||||||||||||||
|
Marketable equity securities, trading
|
106.3 | 106.1 | — | 0.2 | 0.00 | |||||||||||||||
|
Short-term investments
|
9.4 | 7.2 | 2.2 | — | — | |||||||||||||||
|
Investments in limited partnerships(1)
|
56.3 | — | — | 56.3 | 0.36 | |||||||||||||||
|
Other invested assets(2)
|
2.4 | — | 2.4 | 0.02 | ||||||||||||||||
|
Total investments
|
15,100.1 | 151.4 | 14,215.5 | 733.2 | 4.64 | |||||||||||||||
|
Separate account assets
|
716.2 | 716.2 | — | — | — | |||||||||||||||
|
Total assets
|
$ | 15,816.3 | $ | 867.6 | $ | 14,215.5 | $ | 733.2 | 4.64 | % | ||||||||||
| (1) | As of December 31, 2008, this amount included investments in hedge funds and private equity funds. | |
| (2) | As of December 31, 2008, this amount included investments, such as options and warrants. |
F-24
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(All dollar amounts in millions, unless otherwise stated)
(All dollar amounts in millions, unless otherwise stated)
Fixed
Maturities
The vast majority of the Company’s fixed maturities use
Level 2 inputs for the determination of fair value. The
Company predominantly utilizes third party independent pricing
services to assist management in determining the fair value of
its fixed maturity securities. The third party independent
pricing services provide prices where observable inputs are
available. The Company’s pricing services utilize evaluated
pricing models that vary by asset class and incorporate
available trade, bid and other market information. Because many
fixed maturities do not trade on a daily basis, evaluated
pricing applications apply available information through
processes, such as benchmark curves, benchmarking of like
securities, sector groupings and matrix pricing to prepare
evaluations. In addition, the pricing services use models and
processes to develop prepayment and interest rate scenarios.
These models and processes take into account market convention.
If sufficient objectively verifiable information about a
security’s valuation is not available, the pricing service
will discontinue evaluating the security until it is able to
obtain such information. The Company gains assurance on the
overall reasonableness and consistent application of input
assumptions, valuation methodologies and compliance with
accounting standards for fair value determination through
various processes including, but not limited to, evaluation of
pricing methodologies, analytical reviews of certain prices and
back-testing of selected sales activity to determine whether
there are any significant differences between the market price
used to value the security prior to sale and the actual sales
prices.
In situations where the Company is unable to obtain sufficient
market observable information upon which to estimate the fair
value of a particular security, fair values are obtained
primarily from industry-standard pricing methodologies based on
market observable information. Certain structured securities and
private equity funds valued using industry-standard pricing
methodologies utilize significant unobservable inputs to
estimate fair value, resulting in the fair value measurements
being classified as Level 3.
As of December 31, 2008, the Company has approximately
$632.2, or 4%, of its fixed maturities invested in corporate
private placement securities. The valuation of private placement
securities requires significant judgment by management due to
the absence of quoted market prices, the inherent lack of
liquidity and the long-term nature of such assets. Private
placement securities are valued initially based upon transaction
price. The carrying values or fair values of these investments
are adjusted to reflect expected exit values as evidence by
financing and sale transactions with third parties, or when
determination of a valuation adjustment is confirmed through
ongoing reviews by the Company’s investment advisors. A
variety of factors are reviewed and monitored to assess changes
in valuation, including, but not limited to, discounted cash
flows based on current performance and future expectations of
particular investments, industry valuation of comparable public
companies, changes in market outlook and the third party
financing environment over time. Private placement securities
are included in Level 3 of the valuation hierarchy.
Marketable
Equity Securities
Marketable equity securities consist primarily of investments in
common stock and certain nonredeemable preferred stocks and
mutual fund assets, which consist of investments in publicly
traded companies and actively traded mutual fund investments.
The fair values of the Company’s marketable equity
securities are based on quoted market prices in active markets
for identical assets and are primarily classified as
Level 1.
On January 1, 2008, the Company adopted
SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities. The Statement allows
companies to make an election, on an individual instrument
basis, to report financial assets and liabilities at fair value.
The Company made the fair value election for the majority of its
marketable equity securities comprised of investments in common
stock and investments in hedge funds and private equity funds
regardless of ownership percentage. Investments in hedge funds
and investments in private equity funds with less than
three percent ownership, were previously classified and
F-25
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(All dollar amounts in millions, unless otherwise stated)
(All dollar amounts in millions, unless otherwise stated)
accounted for as
available-for-sale
securities. Certain nonredeemable preferred stock continues to
be reported as
available-for-sale.
Upon the adoption of SFAS No. 159 on January 1,
2008, $130.6 in investments in common stock was classified as
trading, and $21.1 in investments in limited partnerships (with
less than three percent ownership) that was previously reported
as
available-for-sale
marketable equity securities was reclassified to investments in
limited partnerships. Realized and unrealized investment gains
and losses on trading securities are reported in the
consolidated statements of income as net realized investment
gains (losses). Prior to the adoption, unrealized investment
gains and losses on
available-for-sale
securities were reported net, after-tax, as a component of
stockholders’ equity. Changes in net unrealized investment
gains (losses) on
available-for-sale
securities, after-tax, were reported as a component of other
comprehensive loss. The Company recorded an adjustment to
increase retained earnings as of January 1, 2008 and
increase accumulated other comprehensive loss by $29.4, or
$19.1 net of taxes, to reclassify net unrealized gains as a
result of adoption.
The Company believes that making the election for investments in
common stock will result in reporting its investment results on
a basis that is more consistent with management’s operating
principles, as the Company considers changes in fair value of
its common stock when evaluating results. For the year ended
December 31, 2008, net changes in the fair value of trading
securities was a loss of $69.2 and was reported in net realized
investment gains (losses).
The election for investments in hedge funds and private equity
funds, regardless of the Company’s ownership percentage,
standardizes the accounting and reporting for these investments.
For the year ended December 31, 2008, changes in the fair
value of hedge funds and private equity funds was $30.1 and was
reported in net investment income.
Investments
in Limited Partnerships
The fair value for the Company’s investments in hedge funds
and private equity funds is based upon the Company’s
proportionate interest in the underlying partnership or
fund’s net asset value (NAV), which is deemed to
approximate fair value. In circumstances where the partnership
NAV is deemed to differ from fair value due to illiquidity or
other factors, the NAV is adjusted accordingly. At
December 31, 2008, there were no factors present that would
require an adjustment to the NAV. The Company classifies these
securities as Level 3.
Separate
Accounts
Separate account assets are primarily invested in mutual funds,
which are included in Level 1.
F-26
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(All dollar amounts in millions, unless otherwise stated)
(All dollar amounts in millions, unless otherwise stated)
The following table presents additional information about assets
measured at fair value on a recurring basis and for which we
have utilized significant unobservable
(Level 3) inputs to determine fair value between
January 1 and December 31, 2008:
|
Marketable |
||||||||||||||||||||
|
Equity |
Investments in |
Other |
||||||||||||||||||
|
Fixed |
Securities, |
Limited |
Invested |
Total |
||||||||||||||||
| Maturities | Trading | Partnerships | Assets | Level 3 | ||||||||||||||||
|
Balance as of January 1, 2008
|
$ | 690.3 | $ | 0.5 | $ | 91.3 | $ | 4.6 | $ | 786.7 | ||||||||||
|
Purchases
|
92.7 | 1.1 | 19.3 | — | 113.1 | |||||||||||||||
|
Sales
|
(4.2 | ) | (0.4 | ) | (29.9 | ) | 0.4 | (34.1 | ) | |||||||||||
|
Transfers in and/or (out) of Level 3(1)
|
50.3 | — | — | — | 50.3 | |||||||||||||||
|
Other(2)
|
(32.0 | ) | — | — | 1.8 | (30.2 | ) | |||||||||||||
|
Unrealized gains (losses) included in:
|
||||||||||||||||||||
|
Net income
|
— | (1.0 | ) | (30.1 | ) | 0.4 | (30.7 | ) | ||||||||||||
|
Other comprehensive income
|
(110.7 | ) | — | — | — | (110.7 | ) | |||||||||||||
|
Realized gains/(losses)
|
(12.1 | ) | — | 5.7 | (4.8 | ) | (11.2 | ) | ||||||||||||
|
Balance as of December 31, 2008
|
$ | 674.3 | $ | 0.2 | $ | 56.3 | $ | 2.4 | $ | 733.2 | ||||||||||
| (1) | Transfers into and/or out of Level 3 are generally reported at the value as of the beginning of the period in which the transfer occurs. Gross transfers into and (out of) Level 3 for the year ended December 31, 2008 were $64.4 and $(14.1), respectively. |
| (2) | Other is comprised of transactions such as pay downs, calls and amortization. |
The following table summarizes the carrying or reported values
and corresponding fair values of financial instruments subject
to disclosure requirements:
| December 31, 2008 | December 31, 2007 | |||||||||||||||
|
Carrying |
Carrying |
|||||||||||||||
| Amount | Fair Value | Amount | Fair Value | |||||||||||||
|
Financial assets:
|
||||||||||||||||
|
Fixed maturities
|
$ | 14,887.6 | $ | 14,887.6 | $ | 15,599.9 | $ | 15,599.9 | ||||||||
|
Marketable equity securities,
available-for-sale
|
38.1 | 38.1 | 200.8 | 200.8 | ||||||||||||
|
Marketable equity securities, trading
|
106.3 | 106.3 | — | — | ||||||||||||
|
Mortgage loans
|
988.7 | 907.6 | 845.5 | 857.4 | ||||||||||||
|
Short-term investments
|
9.4 | 9.4 | 10.9 | 10.9 | ||||||||||||
|
Investments in limited partnerships
|
138.3 | 140.2 | 158.8 | 158.8 | ||||||||||||
|
Cash and cash equivalents
|
468.0 | 468.0 | 253.9 | 253.9 | ||||||||||||
|
Securities lending collateral
|
105.7 | 105.7 | 283.3 | 283.3 | ||||||||||||
|
Separate account assets
|
716.2 | 716.2 | 1,181.9 | 1,181.9 | ||||||||||||
|
Financial liabilities:
|
||||||||||||||||
|
Funds held under deposit contracts
|
11,987.9 | 10,972.2 | 10,886.9 | 10,739.2 | ||||||||||||
|
Notes payable:
|
||||||||||||||||
|
Capital Efficient Notes (CENts)
|
149.8 | 64.0 | 149.8 | 150.1 | ||||||||||||
|
Senior notes
|
299.0 | 268.1 | 298.8 | 302.7 | ||||||||||||
|
Securities lending payable
|
105.7 | 105.7 | 283.3 | 283.3 | ||||||||||||
F-27
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(All dollar amounts in millions, unless otherwise stated)
(All dollar amounts in millions, unless otherwise stated)
Other
Financial Instruments
The fair values for mortgage loans are determined by discounting
the projected cash flows using the current rate at which the
loans would be made to borrowers with similar credit ratings and
for the same maturities.
Investments in limited partnerships are comprised of hedge
funds, private equity funds and affordable housing projects and
state tax credit funds. Investments in limited partnerships
associated with hedge funds and private equity funds are carried
at fair value based on the NAV. Investments in limited
partnerships associated with affordable housing projects and
state tax credit funds are carried at amortized cost. Fair value
is estimated based on the discounted cash flows over the
remaining life of the tax credits.
For cash and cash equivalents, the carrying value is a
reasonable estimate of fair value.
The Company reports funds held under deposit contracts related
to investment-type contracts at carrying value and estimates the
fair values of these contracts using an income approach based on
the present value of the discounted cash flows. Cash flows are
projected using best estimates for lapses, mortality and
expenses, and discounted at a risk-free rate plus a
nonperformance risk spread.
The fair values of the Company’s notes payable are based on
quoted prices for similar instruments. The fair value
measurement assumes that liabilities are transferred to a market
participant of equal credit standing and without consideration
for any optional redemption feature.
The fair value of securities lending collateral is the cash and
non-cash collateral received by the custodian and held on the
Company’s behalf, based on quoted prices for similar
instruments. The carrying amount of securities lending payable
approximates fair value.
| 8. | Reinsurance |
The Company evaluates the financial condition of its reinsurers
to minimize the exposure to losses from reinsurer insolvencies.
Management of the Company is not aware of any of the
Company’s major reinsurers currently experiencing material
financial difficulties. The Company analyzes reinsurance
recoverables according to the credit ratings of its reinsurers.
Of the total amount due from reinsurers at December 31,
2008, 99.7% was with reinsurers rated A- or higher by
A.M. Best. The Company had no reserve for uncollectible
reinsurance in 2008 or 2007. None of the Company’s
reinsurance contracts exclude certified terrorist acts.
For the individual life business, the Company has reinsurance
agreements that limit the maximum claim on a single individual
to $0.5. The reinsurance agreements vary by product and policy
issue year. Most of the reinsurance recoverable relates to
future policy benefits and is covered by coinsurance agreements
where the reinsurer reimburses the Company based on a
percentage, which ranges from 50% to 85%, as specified in the
reinsurance contracts.
The Company reinsures 100% of its group long-term and short-term
disability business, except for the short-term disability sold
within the limited medical benefit plans, which is not
reinsured. The reinsurer is responsible for paying all claims.
F-28
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(All dollar amounts in millions, unless otherwise stated)
(All dollar amounts in millions, unless otherwise stated)
Reinsurance recoverables are composed of the following amounts:
| December 31, | ||||||||
| 2008 | 2007 | |||||||
|
Life insurance and annuities
|
||||||||
|
Reinsurance recoverables on:
|
||||||||
|
Funds held under deposit contracts
|
$ | 75.1 | $ | 74.4 | ||||
|
Future policy benefits
|
121.4 | 106.8 | ||||||
|
Paid claims, expense allowance and premium tax recoverable
|
2.9 | 5.0 | ||||||
|
Policy and contract claims
|
2.7 | 5.2 | ||||||
|
Total life insurance and annuities
|
202.1 | 191.4 | ||||||
|
Accident and health insurance
|
||||||||
|
Reinsurance recoverables on:
|
||||||||
|
Future policy benefits
|
59.1 | 60.6 | ||||||
|
Paid claims, expense allowance and premium tax recoverable
|
0.6 | 1.2 | ||||||
|
Policy and contract claims
|
2.4 | 0.7 | ||||||
|
Total accident and health insurance
|
62.1 | 62.5 | ||||||
|
Total reinsurance recoverables
|
$ | 264.2 | $ | 253.9 | ||||
The following table sets forth net life insurance in force as of
December 31:
| 2008 | 2007 | 2006 | ||||||||||
|
Direct life insurance in force
|
$ | 55,577.1 | $ | 56,246.8 | $ | 55,656.3 | ||||||
|
Amounts assumed from other companies
|
223.1 | 215.3 | 211.7 | |||||||||
|
Amounts ceded to other companies
|
(24,190.0 | ) | (23,799.3 | ) | (21,944.9 | ) | ||||||
|
Net life insurance in force
|
$ | 31,610.2 | $ | 32,662.8 | $ | 33,923.1 | ||||||
|
Percentage of amount assumed to net
|
0.71 | % | 0.66 | % | 0.62 | % | ||||||
F-29
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(All dollar amounts in millions, unless otherwise stated)
(All dollar amounts in millions, unless otherwise stated)
The effects of reinsurance on earned premiums are as follows:
|
Year Ended |
Year Ended |
Year Ended |
||||||||||
|
December 31, |
December 31, |
December 31, |
||||||||||
| 2008 | 2007 | 2006 | ||||||||||
|
Direct:
|
||||||||||||
|
Accident and health premiums
|
$ | 456.3 | $ | 395.8 | $ | 390.9 | ||||||
|
Life insurance premiums
|
195.3 | 194.3 | 191.9 | |||||||||
|
Total
|
651.6 | 590.1 | 582.8 | |||||||||
|
Assumed:
|
||||||||||||
|
Accident and health premiums
|
0.6 | — | — | |||||||||
|
Life insurance premiums
|
0.2 | 0.2 | 0.2 | |||||||||
|
Total
|
0.8 | 0.2 | 0.2 | |||||||||
|
Ceded:
|
||||||||||||
|
Accident and health premiums
|
(13.6 | ) | (9.9 | ) | (10.2 | ) | ||||||
|
Life insurance premiums
|
(54.0 | ) | (49.9 | ) | (47.1 | ) | ||||||
|
Total
|
(67.6 | ) | (59.8 | ) | (57.3 | ) | ||||||
|
Total premiums
|
$ | 584.8 | $ | 530.5 | $ | 525.7 | ||||||
|
Percentage of amount assumed to total premiums
|
0.14 | % | 0.04 | % | 0.04 | % | ||||||
Ceded reinsurance reduced policy benefits by $54.3, $51.4 and
$45.5 for the years ended December 31, 2008, 2007 and 2006,
respectively.
| 9. | Deferred Policy Acquisition Costs |
The following table provides a reconciliation of the beginning
and ending balance for deferred policy acquisition costs:
| December 31, | ||||||||
| 2008 | 2007 | |||||||
|
Unamortized balance at beginning of period
|
$ | 129.9 | $ | 87.6 | ||||
|
Deferral of acquisition costs
|
110.6 | 59.6 | ||||||
|
Adjustments related to investment losses
|
4.8 | 0.7 | ||||||
|
Amortization related to other expenses
|
(25.8 | ) | (18.0 | ) | ||||
|
Unamortized balance at end of period
|
219.5 | 129.9 | ||||||
|
Accumulated effect of net unrealized investment losses
|
28.0 | 3.0 | ||||||
|
Balance at end of period
|
$ | 247.5 | $ | 132.9 | ||||
F-30
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(All dollar amounts in millions, unless otherwise stated)
(All dollar amounts in millions, unless otherwise stated)
| 10. | Deferred Sales Inducements |
The following table provides a reconciliation of the beginning
and ending balance for deferred sales inducements, which are
included in other assets:
| December 31, | ||||||||
| 2008 | 2007 | |||||||
|
Unamortized balance at beginning of period
|
$ | 17.2 | $ | 9.0 | ||||
|
Capitalizations
|
17.3 | 8.8 | ||||||
|
Adjustments related to investment losses
|
1.0 | 0.2 | ||||||
|
Amortization related to other expenses
|
(2.5 | ) | (0.8 | ) | ||||
|
Unamortized balance at end of period
|
33.0 | 17.2 | ||||||
|
Accumulated effect of net unrealized investment losses
|
4.5 | 0.8 | ||||||
|
Balance at end of period
|
$ | 37.5 | $ | 18.0 | ||||
| 11. | Acquisitions |
On May 1, 2007, the Company acquired 100% ownership of MRM,
a full-service managing general underwriter (or MGU) and health
care network consulting firm specializing in the stop-loss
market. This acquisition provides the Company with pricing and
underwriting competitive advantages and an additional source of
revenue. The aggregate purchase price was $32.2, of which $22.0
was paid in cash and the remaining $10.2 is payable over the
five-year period following the acquisition contingent upon the
achievement of certain annual profitability targets. At the date
of the acquisition, the fair value of the assets acquired was
$29.0 and liabilities assumed were $6.6.
The acquisition was accounted for using the purchase method of
accounting. The results of MRM’s operations are presented
in the Group segment and consolidated in the accompanying
financial statements from the date of acquisition. The purchase
price allocation resulted in $6.9 of identifiable intangible
assets, including customer relationships, employment contracts,
noncompete agreements and the MRM trade name with useful lives
ranging from 5 to 10 years. Goodwill of $18.6 was initially
recognized as of December 31, 2007 for the amount in excess
of the purchase price paid over the fair value of the net assets
acquired. As of December 31, 2008, goodwill totaled $20.6
as a result of satisfying certain contingent targets as
described above.
As part of the MRM acquisition, the Company placed funds into
escrow to be disbursed to the seller in the event that specified
contingencies are resolved. Escrow funds related to the
acquisition were $5.4 as of December 31, 2007. The
specified contingencies were resolved during 2008, and the
escrow funds were disbursed to the seller.
MRM maintains fiduciary cash accounts restricted for the
specific use of paying customer claims. These accounts are
funded by customers, and balances are generally offset by claims
liability accounts. Amounts maintained in these accounts totaled
$3.7 and $4.6 as of December 31, 2008 and 2007,
respectively.
F-31
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(All dollar amounts in millions, unless otherwise stated)
(All dollar amounts in millions, unless otherwise stated)
| 12. | Property, Equipment and Leasehold Improvements |
Property, equipment and leasehold improvements are composed of
the following amounts:
| December 31, | ||||||||
| 2008 | 2007 | |||||||
|
Computer equipment and software
|
$ | 9.4 | $ | 8.1 | ||||
|
Office equipment, furniture and fixtures
|
9.4 | 9.3 | ||||||
|
Equipment and software under capital leases
|
13.8 | 13.8 | ||||||
|
Leasehold improvements
|
13.7 | 13.7 | ||||||
| 46.3 | 44.9 | |||||||
|
Less: accumulated depreciation and amortization
|
27.4 | 21.6 | ||||||
|
Total property, equipment and leasehold improvements, net
|
$ | 18.9 | $ | 23.3 | ||||
Depreciation and amortization expenses associated with property,
equipment, and leasehold improvements, including equipment and
software under capital leases, amounted to $6.2, $7.2 and $5.6
for the years ended December 31, 2008, 2007 and 2006,
respectively.
| 13. | Policy and Contract Claims |
The following table provides a reconciliation of the beginning
and ending reserve balances for policy and contract claims:
| Year Ended December 31, | ||||||||||||
| 2008 | 2007 | 2006 | ||||||||||
|
Balance as of January 1
|
$ | 110.9 | $ | 119.5 | $ | 135.7 | ||||||
|
Less: reinsurance recoverable
|
5.9 | 5.3 | 3.3 | |||||||||
|
Net balance as of January 1
|
105.0 | 114.2 | 132.4 | |||||||||
|
Incurred related to insured events of:
|
||||||||||||
|
The current year
|
364.2 | 292.2 | 304.0 | |||||||||
|
Prior years
|
4.5 | (7.0 | ) | (7.6 | ) | |||||||
|
Total incurred
|
368.7 | 285.2 | 296.4 | |||||||||
|
Paid related to insured events of:
|
||||||||||||
|
The current year
|
271.7 | 226.6 | 234.3 | |||||||||
|
Prior years
|
74.0 | 67.8 | 80.3 | |||||||||
|
Total paid
|
345.7 | 294.4 | 314.6 | |||||||||
|
Net balance as of December 31
|
128.0 | 105.0 | 114.2 | |||||||||
|
Add: reinsurance recoverable
|
5.1 | 5.9 | 5.3 | |||||||||
|
Balance as of December 31
|
$ | 133.1 | $ | 110.9 | $ | 119.5 | ||||||
The Company uses estimates in determining its liability for
policy and contract claims. These estimates are based on
historical claim payment patterns and expected loss ratios to
provide for the inherent variability in claim patterns and
severity. For the year ended December 31, 2008, the change
in prior year incurred claims was primarily due to
higher-than-expected paid claims and unfavorable changes in
liability estimates in medical stop-loss claims. For the year
ended December 31, 2007, the change in prior year incurred
claims was primarily due to favorable changes in liability
estimates related to group medical stop-loss claims. This was
offset by
higher-than-expected
claims experience related to individual life insurance. For the
year ended December 31, 2006, the change in prior year
incurred claims was primarily due to favorable claims experience
and timing differences related to reinsurance recoveries in the
current year of claims incurred and paid in prior years, related
to individual life insurance.
F-32
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(All dollar amounts in millions, unless otherwise stated)
(All dollar amounts in millions, unless otherwise stated)
| 14. | Notes Payable and Credit Facilities |
Capital
Efficient Notes Due 2067
On October 10, 2007, the Company issued $150.0 aggregate
principal amount CENts with a scheduled maturity date of
October 15, 2037, and subject to certain limitations, with
a final maturity date of October 15, 2067. The Company
issued the CENts at a discount yielding $149.8. For the initial
10-year
period following the original issuance date, to but not
including October 15, 2017, the CENts carry a fixed
interest rate of 8.300% payable semi-annually. From
October 15, 2017, until the final maturity date of
October 15, 2067, interest on the CENts will accrue at a
variable annual rate equal to the three-month LIBOR plus 4.177%,
payable quarterly. The Company applied the net proceeds from the
issuance to pay a cash dividend of $200.0 to its stockholders on
October 19, 2007. Considering the impact of the cash flow
hedge, as well as the discount on the notes and the debt
issuance costs, the effective interest rate on the CENts is
9.39%.
The Company is required to use commercially reasonable efforts
to sell enough qualifying capital securities to permit repayment
of the CENts at the scheduled maturity date or on each interest
payment date thereafter. Any remaining outstanding principal
amount will be due on October 15, 2067.
Subject to certain conditions, the Company has the right, on one
or more occasions, to defer the payment of interest on the CENts
during any period up to ten years without giving rise to an
event of default. The Company will not be required to settle
deferred interest subject to certain conditions until it has
deferred interest for five consecutive years or, if earlier,
made a payment of current interest during a deferral period.
Deferred interest will accumulate additional interest at an
annual rate equal to the annual interest rate then applicable to
the CENts.
The CENts are unsecured junior subordinated obligations. The
Company can redeem the CENts at its option, in whole or in part,
on October 15, 2017, and on each interest payment date
thereafter at a redemption price of 100% of the principal amount
being redeemed plus accrued but unpaid interest. The Company can
redeem the CENts at its option, prior to October 15, 2017,
in whole or in part, at a redemption price of 100% of the
principal amount being redeemed or, if greater, a make-whole
price, plus accrued and unpaid interest.
In connection with the offering of the CENts, the Company
entered into a “replacement capital covenant” for the
benefit of the holders of the $300.0 senior notes due
April 1, 2016 (see below). Under the terms of the
replacement capital covenant, the Company may not redeem or
repay the CENts prior to October 15, 2047 unless the
redemption or repayment is financed from the offering of
replacement capital securities, as specified in the covenant.
Senior
Notes Due 2016
On March 30, 2006, the Company issued $300.0 of
6.125% senior notes due on April 1, 2016, which were
issued at a discount yielding $298.7. Proceeds from the senior
notes were used to pay down the outstanding principal on a
revolving line of credit. Interest on the senior notes is
payable semi-annually in arrears, beginning on October 2,
2006. Considering the impact of the cash flow hedge, as well as
the discount on the notes and the debt issuance costs, the
effective interest rate on the senior notes is 6.11%.
The senior notes are unsecured senior obligations and are equal
in right of payment to all existing and future unsecured senior
indebtedness. These notes are redeemable, in whole or in part,
at the option of the Company at any time or from time to time at
a redemption price equal to the greater of: (1) 100% of the
aggregate principal amount of the notes to be redeemed or
(2) the sum of the present value of the remaining scheduled
payments of principal and interest on the senior notes,
discounted to the redemption date on a semi-annual basis at a
prevailing U.S. Treasury rate plus 25 basis points,
together in each case with accrued interest payments to the
redemption date.
F-33
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(All dollar amounts in millions, unless otherwise stated)
(All dollar amounts in millions, unless otherwise stated)
Revolving
Credit Facilities
$200.0
Bank of America, N.A.
On August 16, 2007, the Company entered into a $200.0
senior unsecured revolving credit agreement with a syndicate of
lending institutions led by Bank of America, N.A. The credit
facility matures on August 16, 2012. The revolving credit
facility is available to provide support for working capital,
capital expenditures, and other general corporate purposes,
including permitted acquisitions, issuance of letters of
credits, refinancing and payment of fees in connection with this
facility.
Under the terms of the credit agreement, the Company is required
to maintain certain financial ratios. In particular, each of the
Company’s material insurance subsidiaries must maintain a
risk-based capital ratio of at least 200%, measured at the end
of each year, and the Company’s
debt-to-capitalization
ratio may not exceed 37.5%, measured at the end of each quarter.
In addition, the Company has agreed to other covenants
restricting the ability of its subsidiaries to incur additional
indebtedness, its ability to create liens, and its ability to
change its fiscal year and to enter into new lines of business,
as well as other customary affirmative covenants.
To be eligible for borrowing funds under this facility, the
representations and warranties that the Company made in the
credit agreement must continue to be true in all material
respects, and the Company must not be in default under the
facility, including failure to comply with the covenants
described above.
As of December 31, 2008 and 2007, the Company had no
borrowings outstanding under this facility and was in compliance
with all covenants.
On February 12, 2009, Bank of America, N.A. issued a notice
of default to one of the lending institutions in the syndicate
with a commitment of $20.0, effectively limiting the
Company’s ability to borrow under this facility to $180.0.
$50.0
Bank of New York
In 2005, the Company entered into two $25.0 revolving credit
facilities with The Bank of New York to support the
Company’s overnight repurchase agreement program, which
provides the Company liquidity to meet its general funding
requirements. These facilities were closed in March 2008. Prior
to closure, there was no borrowing activity on these facilities
in 2008 or 2007.
| 15. | Income Taxes |
The Company files income tax returns in the U.S. federal
and various state jurisdictions. The Company’s federal
income tax returns have been examined and closing agreements
have been executed with the Internal Revenue Service, or the
statute of limitations has expired for all tax periods through
December 31, 2003. The Internal Revenue Service is in the
process of auditing the Company’s life insurance and
non-life insurance company returns for the tax year ended
July 31, 2004, filed in consolidation with the
Company’s former parent, Safeco Corporation. To date, no
significant issues or proposed adjustments have been raised by
the examiners. The Internal Revenue Service has also completed
an audit of the Company’s life insurance company returns
for the years ended December 31, 2004 and 2005. As of
December 31, 2008, all issues were agreed upon and a
Form 4549-A
was prepared and sent to the Joint Committee on Taxation for
review pursuant to IRC § 6405(a) (refund in excess of
$2.0). The non-life insurance company tax returns are currently
not subject to an Internal Revenue Service audit for tax years
ended after July 31, 2004, and the statute of limitations
has expired for the tax year ended December 31, 2004. The
Company is not currently subject to any state income tax
examinations.
F-34
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(All dollar amounts in millions, unless otherwise stated)
(All dollar amounts in millions, unless otherwise stated)
Differences between income taxes computed by applying the
U.S. federal income tax rate of 35% to income before income
taxes and the provision for income taxes were as follows:
|
Year Ended December 31, |
Year Ended December 31, |
Year Ended December 31, |
||||||||||||||||||||||
| 2008 | 2007 | 2006 | ||||||||||||||||||||||
|
Income from operations before income taxes
|
$ | 13.0 | $ | 248.8 | $ | 244.0 | ||||||||||||||||||
|
Computed “expected” tax expense
|
4.5 | 35.00 | % | 87.1 | 35.00 | % | 85.4 | 35.00 | % | |||||||||||||||
|
Separate account dividend received deduction
|
(1.4 | ) | (10.77 | ) | (1.5 | ) | (0.60 | ) | (2.0 | ) | (0.82 | ) | ||||||||||||
|
Low income housing credits
|
(8.5 | ) | (65.38 | ) | (4.6 | ) | (1.85 | ) | (0.8 | ) | (0.33 | ) | ||||||||||||
|
Prior period adjustments
|
(2.9 | ) | (22.31 | ) | — | — | — | — | ||||||||||||||||
|
Other
|
(0.8 | ) | (6.54 | ) | 0.5 | 0.20 | 1.9 | 0.78 | ||||||||||||||||
|
Provision (benefit) for income taxes
|
$ | (9.1 | ) | (70.00 | )% | $ | 81.5 | 32.75 | % | $ | 84.5 | 34.63 | % | |||||||||||
The tax effects of temporary differences that gave rise to the
deferred income tax assets and deferred income tax liabilities
were as follows:
| December 31, | ||||||||
| 2008 | 2007 | |||||||
|
Deferred income tax assets:
|
||||||||
|
Adjustment to life policy liabilities
|
$ | 398.8 | $ | 365.4 | ||||
|
Capitalization of policy acquisition costs
|
45.1 | 44.8 | ||||||
|
Goodwill
|
1.3 | 1.8 | ||||||
|
Intangibles
|
11.6 | 13.8 | ||||||
|
Investment impairments
|
35.0 | 12.6 | ||||||
|
Performance share plan
|
3.9 | 3.7 | ||||||
|
Other liabilities accruals
|
1.7 | 1.8 | ||||||
|
Unrealized losses on investment securities (net of DAC
adjustment: $(9.8) and $(1.3), respectively)
|
566.8 | 6.8 | ||||||
|
Non-life net operating loss
|
1.0 | — | ||||||
|
Other
|
7.3 | 5.4 | ||||||
|
Total deferred income tax assets
|
1,072.5 | 456.1 | ||||||
|
Deferred income tax liabilities:
|
||||||||
|
Deferred policy acquisition costs
|
74.9 | 45.2 | ||||||
|
Securities — basis adjustment
|
211.1 | 206.9 | ||||||
|
Other
|
0.7 | 0.9 | ||||||
|
Total deferred income tax liabilities
|
286.7 | 253.0 | ||||||
|
Net deferred income tax asset
|
$ | 785.8 | $ | 203.1 | ||||
Due to the unprecedented volatility and disruption within the
capital markets over the past year the associated deferred tax
assets within our investment portfolio have also been subject to
this volatility. To assess the impact of this volatility, we
reviewed the liquidity requirements of our invested assets as
they relate to the liabilities associated with our insurance and
investment products to determine the future reversals and the
utilization of capital loss carry-backs and carry-forwards
related to our investment timing differences.
As the Company expects that it will fully realize the deferred
tax assets, no valuation allowance has been recorded as of
December 31, 2008 and 2007.
F-35
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(All dollar amounts in millions, unless otherwise stated)
(All dollar amounts in millions, unless otherwise stated)
As of December 31, 2008, the Company has $1.0 of non-life
federal net operating loss carry-forwards due to expire under
current law during 2028.
A reconciliation of the beginning and ending amount of
unrecognized tax benefits is as follows:
| 2008 | 2007 | |||||||
|
Balance at January 1
|
$ | 0.8 | $ | 0.6 | ||||
|
Additions based on tax positions related to the current year
|
0.1 | 0.2 | ||||||
|
Reductions for tax positions of prior years
|
(0.5 | ) | — | |||||
|
Balance at December 31
|
$ | 0.4 | $ | 0.8 | ||||
The total balance of the unrecognized tax benefits above would
affect the effective tax rate if recognized. The Company does
not expect the total amount of unrecognized tax benefits for any
tax position to change significantly within the next twelve
months.
The Company includes penalties and interest accrued related to
unrecognized tax benefits in the calculation of income tax
expense. For the years ended December 31, 2008, 2007 and
2006, amounts recognized for interest and penalties in the
consolidated statements of income were not material.
| 16. | Accumulated Other Comprehensive Loss |
The components of accumulated other comprehensive loss are as
follows:
| December 31, | ||||||||
| 2008 | 2007 | |||||||
|
Net unrealized losses on
available-for-sale
securities
|
$ | (1,649.0 | ) | $ | (20.2 | ) | ||
|
Net unrealized losses on derivative financial instruments
|
(2.9 | ) | (2.9 | ) | ||||
|
Adjustment for deferred policy acquisition costs
|
28.0 | 3.0 | ||||||
|
Adjustment for deferred sales inducements
|
4.5 | 0.8 | ||||||
|
Deferred income taxes
|
566.8 | 6.8 | ||||||
|
Accumulated other comprehensive loss
|
$ | (1,052.6 | ) | $ | (12.5 | ) | ||
For the years ended December 31, 2008, 2007 and 2006, the
amounts reclassified from other comprehensive loss to net
realized investment gains (losses) included in net income were
$(103.2), $(13.6), and $0.7, net of taxes of $(55.5), $(7.3) and
$0.4, respectively.
| 17. | Commitments and Contingencies |
Guaranty
Fund Assessments
Under state insolvency and guaranty laws, insurers licensed to
do business in a state can be assessed or required to contribute
to state guaranty funds to cover policyholder losses resulting
from insurer insolvencies. Liabilities for guaranty funds are
not discounted or recorded net of premium taxes and are included
in other liabilities in the consolidated balance sheets. At
December 31, 2008, the Company had liabilities of $7.3 for
estimated guaranty fund assessments. The Company has a related
asset for premium tax offsets of $5.8, reported in accounts
receivable and other receivables, which are available for a
period of five to 20 years.
Investments
in Limited Partnerships
At December 31, 2008, the Company was invested in 12
limited partnership interests related to affordable housing
projects and state tax credit funds, three of which were entered
into in 2008. The Company
F-36
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(All dollar amounts in millions, unless otherwise stated)
(All dollar amounts in millions, unless otherwise stated)
unconditionally committed to provide capital contributions
totaling approximately $106.9, of which the remaining $56.8 is
expected to be contributed over a period of four years. These
investments are accounted for under the equity method and are
recorded at amortized cost in investments in limited
partnerships, with the present value of unfunded contributions
recorded in other liabilities.
Capital contributions of $50.1 were paid as of December 31,
2008, with the remaining expected cash capital contributions as
follows:
|
Expected Capital |
||||
| Contributions | ||||
|
2009
|
$ | 23.8 | ||
|
2010
|
31.1 | |||
|
2011
|
0.1 | |||
|
2012
|
1.8 | |||
|
Total expected capital contributions
|
$ | 56.8 | ||
The Company has also committed to invest $52.5 in five private
equity funds. The Company will provide capital contributions to
the partnerships up to the committed amount at the discretion of
the general partners, subject to certain incremental
contribution limits. The remaining term of the capital
commitment ranges up to seven years, ending in 2015.
As of December 31, 2008, the Company has remaining
investment commitments totaling $37.0 related to these
partnerships.
Litigation
Because of the nature of the business, the Company is subject to
legal actions filed or threatened in the ordinary course of its
business operations. The Company does not expect that any such
litigation, pending or threatened, as of December 31, 2008,
will have a material adverse effect on its consolidated
financial condition, future operating results or liquidity.
Leases
The Company has office space, commercial real estate, and
certain equipment under leases that expire at various dates
through 2015. The Company accounts for these leases as operating
leases. Certain leases include renewal options.
Future minimum lease commitments, including cost escalation
clauses, for the next five years and thereafter are as follows:
|
Operating |
||||
| Leases | ||||
|
2009
|
$ | 7.9 | ||
|
2010
|
7.6 | |||
|
2011
|
7.0 | |||
|
2012
|
6.8 | |||
|
2013
|
6.7 | |||
|
Thereafter
|
10.8 | |||
|
Total
|
$ | 46.8 | ||
The amount of rent expense was $8.0, $8.1 and $7.8 for the years
ended December 31, 2008, 2007 and 2006, respectively.
F-37
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(All dollar amounts in millions, unless otherwise stated)
(All dollar amounts in millions, unless otherwise stated)
In October 2004, the Company entered into a service agreement
with a third party service provider to outsource the majority of
its information technology infrastructure. The initial term of
the service agreement expires in July 2010, subject to early
termination in certain cases, with two one-year extensions at
the Company’s election. Under the terms of the service
agreement, the Company agreed to pay an annual service fee
ranging from $13.2 to $14.7 for five years. The remaining annual
service fee is $11.6 for 2009 and $6.7 for 2010, subject to
certain annual service fee adjustments based on actual
benchmarks and production utilization. The Company incurred
service fee expenses of $11.8, $12.8 and $13.3 for the years
ended December 31, 2008, 2007 and 2006, respectively.
Other
Commitments
At December 31, 2008 and 2007, unfunded mortgage loan
commitments were $9.0 and $1.5, respectively.
The Company had no other material commitments or contingencies
at December 31, 2008 and 2007.
| 18. | Employee Benefit Plans |
Defined
Contribution Plan
The Company sponsors a defined contribution plan for all
eligible employees that includes a matching contribution of 100%
of a participant’s contributions up to 6% of eligible
compensation. Defined contribution plan expense was $4.5, $4.2
and $2.2 for the years ended December 31, 2008, 2007 and
2006, respectively.
Performance
Share Plan
In 2004, the Company adopted a performance share plan (the
“Performance Share Plan”) that provides incentives to
selected executives based on the long-term success of the
Company. Awards under the Performance Share Plan are typically
made in the form of performance shares with a three-year award
period. The value of each performance share is based on
achievement of a growth target in intrinsic business value per
share, which is based on book value per share and enterprise
value per share, and awards are paid in cash. The expense
recorded for grants related to the Performance Share Plan was
$6.0, $9.4 and $11.8 for the years ended December 31, 2008,
2007 and 2006, respectively.
Equity
Incentive Plan and Employee Stock Purchase Plan
In October 2007, the Company’s Board of Directors adopted,
and the Company’s stockholders approved, the Equity
Incentive Plan and employee stock purchase plan (or ESPP) and
reserved 7,830,000 and 870,000 shares of common stock,
respectively, for issuance under these plans. Also in October
2007, the Company’s Board of Directors adopted, and the
Company’s stockholders approved, an initial public offering
(IPO) grant program under which shares of common stock,
restricted stock units, and stock options would be granted to
certain management-level employees in connection with the
terminated 2007 initial public offering.
In October 2008, the Company withdrew its registration for an
IPO with the Securities and Exchange Commission as a result of
market conditions. As of December 31, 2008, the
Company’s Board of Directors had not approved any grants to
individuals under the Equity Incentive Plan, ESPP or IPO program.
| 19. | Dividends |
Intracompany
Dividends
The Company’s insurance subsidiaries are restricted by
state regulations as to the aggregate amount of dividends they
may pay in any consecutive
12-month
period without regulatory approval. Accordingly, based
F-38
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(All dollar amounts in millions, unless otherwise stated)
(All dollar amounts in millions, unless otherwise stated)
on statutory limits as of December 31, 2007, the Company
was eligible to receive dividends from its insurance
subsidiaries during 2008 without obtaining regulatory approval
as long as the aggregate dividends paid over the twelve months
preceding any dividend payment date in 2008 did not exceed
$135.2. The total amount of dividends received by the Company
from its insurance subsidiaries during 2008 was $100.0. Based on
state regulations as of December 31, 2008, the Company is
eligible to receive dividends from its insurance subsidiaries
during 2009 without obtaining regulatory approval as long as the
aggregate dividends paid over the twelve months preceding any
dividend payment date in 2009 do not exceed $117.9.
Dividends
to Stockholders
The Company paid no dividends to its stockholders and warrant
holders of record for the year ended December 31, 2008. On
October 19, 2007, the Company paid cash dividends totaling
$200.0, or $1.792 per share, to its stockholders and warrant
holders of record as of October 12, 2007. On
December 26, 2006, the Company paid a cash dividend
totaling $100.0, or $0.896 per share, to its stockholders and
warrant holders of record as of December 15, 2006.
| 20. | Statutory-Basis Information |
State insurance regulatory authorities require insurance
companies to file annual statements prepared on an accounting
basis prescribed or permitted by their respective states of
domicile. Prescribed statutory accounting practices include
state laws, regulations and general administrative rules, as
well as a variety of publications of the National Association of
Insurance Commissioners (NAIC), including the revised Accounting
Practices and Procedures Manual. Permitted statutory accounting
practices encompass all accounting practices not so prescribed.
The statutory net income (loss) for the Company’s insurance
subsidiaries is as follows:
| Year Ended December 31, | ||||||||||||
| 2008 | 2007 | 2006 | ||||||||||
|
Statutory net income (loss):
|
||||||||||||
|
Symetra Life Insurance Company
|
$ | 36.7 | $ | 134.1 | $ | 145.0 | ||||||
|
Symetra National Life Insurance Company
|
0.5 | 0.4 | 1.1 | |||||||||
|
First Symetra National Life Insurance Company of New York
|
(2.2 | ) | 2.4 | 0.1 | ||||||||
|
Total
|
$ | 35.0 | $ | 136.9 | $ | 146.2 | ||||||
Statutory net income differs from income reported in accordance
with GAAP primarily because policy acquisition costs are
expensed when incurred, reserves are based on different
assumptions, and income tax expense reflects only taxes paid or
currently payable.
Statutory capital and surplus for Symetra Life Insurance Company
was $1,179.0 and $1,225.0 for the years ended December 31,
2008 and 2007, respectively. These differ from amounts reported
in accordance with GAAP primarily because policy acquisition
costs are expensed when incurred, reserve calculations are based
on different assumptions and fixed maturities are carried at
amortized cost.
Life and health insurance companies are subject to certain
risk-based capital requirements as specified by the NAIC. Under
those requirements, the amount of capital and surplus maintained
by a life and health insurance company is to be determined based
on various risk factors related to it. At December 31, 2008
and 2007, Symetra Life Insurance Company and its subsidiaries
met the risk-based capital requirements.
F-39
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(All dollar amounts in millions, unless otherwise stated)
(All dollar amounts in millions, unless otherwise stated)
| 21. | Related Parties |
The Company entered into an Investment Management Agreement on
March 14, 2004, with White Mountains Advisors, LLC
(WMA), a subsidiary of White Mountains Investment Group, Ltd.
This agreement provides for investment advisory services related
to the Company’s invested assets and portfolio management
services. Expenses amounted to $14.6, $15.3, and $20.2 for the
years ended December 31, 2008, 2007 and 2006, respectively.
At December 31, 2008 and 2007, amounts due to WMA were $3.5
and $3.8, respectively.
| 22. | Segment Information |
The Company offers a broad range of products and services that
include group and individual insurance products, pension
products and annuities. These operations are managed separately
as five reportable segments based on product groupings: Group,
Retirement Services, Income Annuities, Individual and Other.
The primary segment profitability measure that management uses
is segment pre-tax operating income, which is calculated by
adjusting income from continuing operations before federal
income taxes to exclude net realized investment gains (losses),
and for the Retirement Services’ segment to include the net
realized investment gains (losses) on fixed index annuities
(FIA) options.
When evaluating segment pre-tax operating income in the
Retirement Services’ segment, management includes the
realized and unrealized investment gains (losses) from options
related to an FIA hedging program. This program consists of
buying S&P 500 Index call options. The Company uses index
options to hedge the equity return component of FIA products.
These options do not qualify as hedge instruments or for hedge
accounting treatment. The realized and unrealized gains (losses)
from the options are recorded in net realized investment gains
(losses). Since the interest incurred on the Company’s FIA
products is included as a component of interest credited, it is
more meaningful to evaluate results inclusive of the results of
the hedge program.
| • | Group. Group offers medical stop-loss insurance, limited medical benefit plans, group life insurance, accidental death and dismemberment insurance, and disability insurance mainly to employer groups of 50 to 5,000 individuals. The Company also offers MGU services. | |
| • | Retirement Services. Retirement Services offers fixed and variable deferred annuities, including tax-sheltered annuities, IRAs and group annuities, to qualified retirement plans, including Section 401(k) and 457 plans. It also provides record-keeping services for qualified retirement plans invested in mutual funds. | |
| • | Income Annuities. Income Annuities offers SPIAs for customers seeking a reliable source of retirement income and structured settlement annuities to fund third party personal injury settlements. | |
| • | Individual. Individual offers a wide array of term, universal and variable life insurance products, as well as BOLI. | |
| • | Other. This segment consists of unallocated corporate income, composed primarily of investment income on unallocated surplus, unallocated corporate expenses, interest expense on debt, the results of small, noninsurance businesses that are managed outside of the operating segments and intersegment elimination entries. |
The accounting policies of the reportable segments are the same
as those described in the summary of significant accounting
policies (see Note 2).
The Company allocates investment income on life insurance
company surplus assets to each segment using a risk-based
capital formula.
F-40
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(All dollar amounts in millions, unless otherwise stated)
(All dollar amounts in millions, unless otherwise stated)
The following tables present selected financial information by
segment and reconciles segment pre-tax operating income to
amounts reported in the consolidated statements of income.
| Year Ended December 31, 2008 | ||||||||||||||||||||||||
|
Retirement |
Income |
|||||||||||||||||||||||
| Group | Services | Annuities | Individual | Other | Total | |||||||||||||||||||
|
Revenues:
|
||||||||||||||||||||||||
|
Premiums
|
$ | 449.8 | $ | 0.1 | $ | — | $ | 134.9 | $ | — | $ | 584.8 | ||||||||||||
|
Net investment income (loss)
|
17.8 | 261.1 | 423.4 | 254.6 | (0.4 | ) | 956.5 | |||||||||||||||||
|
Other revenues
|
19.0 | 20.2 | 0.9 | 16.0 | 11.7 | 67.8 | ||||||||||||||||||
|
Net realized investment losses
|
(0.1 | ) | (20.8 | ) | (99.6 | ) | (16.8 | ) | (20.7 | ) | (158.0 | ) | ||||||||||||
|
Total revenues
|
486.5 | 260.6 | 324.7 | 388.7 | (9.4 | ) | 1,451.1 | |||||||||||||||||
|
Benefits and expenses:
|
||||||||||||||||||||||||
|
Policyholder benefits and claims
|
295.9 | (6.8 | ) | — | 59.4 | — | 348.5 | |||||||||||||||||
|
Interest credited
|
— | 176.4 | 364.5 | 227.7 | (2.5 | ) | 766.1 | |||||||||||||||||
|
Other underwriting and operating expenses
|
115.7 | 57.4 | 21.9 | 57.3 | 13.5 | 265.8 | ||||||||||||||||||
|
Interest expense
|
— | — | — | — | 31.9 | 31.9 | ||||||||||||||||||
|
Amortization of deferred policy acquisition costs
|
8.1 | 14.9 | 1.4 | 1.4 | — | 25.8 | ||||||||||||||||||
|
Total benefits and expenses
|
419.7 | 241.9 | 387.8 | 345.8 | 42.9 | 1,438.1 | ||||||||||||||||||
|
Segment pre-tax income (losses)
|
66.8 | 18.7 | (63.1 | ) | 42.9 | (52.3 | ) | 13.0 | ||||||||||||||||
|
Less: Net realized investment losses
|
(0.1 | ) | (20.8 | ) | (99.6 | ) | (16.8 | ) | (20.7 | ) | (158.0 | ) | ||||||||||||
|
Add: Net realized and unrealized losses on FIA options
|
— | (2.9 | ) | — | — | — | (2.9 | ) | ||||||||||||||||
|
Segment pre-tax operating income (losses)
|
$ | 66.9 | $ | 36.6 | $ | 36.5 | $ | 59.7 | $ | (31.6 | ) | $ | 168.1 | |||||||||||
|
As of December 31, 2008:
|
||||||||||||||||||||||||
|
Total investments
|
$ | 161.5 | $ | 4,636.6 | $ | 5,865.6 | $ | 4,129.2 | $ | 1,459.6 | $ | 16,252.5 | ||||||||||||
|
Deferred policy acquisition costs
|
3.3 | 183.0 | 14.5 | 46.7 | — | 247.5 | ||||||||||||||||||
|
Separate account assets
|
— | 645.7 | — | 70.5 | — | 716.2 | ||||||||||||||||||
|
Total assets
|
295.1 | 6,005.9 | 6,301.8 | 4,703.7 | 1,923.1 | 19,229.6 | ||||||||||||||||||
|
Future policy benefits, losses, claims and loss expenses(1)
|
192.1 | 5,661.0 | 6,756.4 | 4,737.5 | (11.4 | ) | 17,335.6 | |||||||||||||||||
|
Unearned premiums
|
1.4 | — | — | 10.5 | — | 11.9 | ||||||||||||||||||
|
Other policyholder funds
|
10.0 | 63.8 | 4.9 | 30.7 | 7.9 | 117.3 | ||||||||||||||||||
|
Notes payable
|
— | — | — | — | 448.8 | 448.8 | ||||||||||||||||||
| (1) | This includes funds held under deposit contracts, future policy benefits, and policy and contract claims. |
F-41
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(All dollar amounts in millions, unless otherwise stated)
(All dollar amounts in millions, unless otherwise stated)
| Year Ended December 31, 2007 | ||||||||||||||||||||||||
|
Retirement |
Income |
|||||||||||||||||||||||
| Group | Services | Annuities | Individual | Other | Total | |||||||||||||||||||
|
Revenues:
|
||||||||||||||||||||||||
|
Premiums
|
$ | 392.1 | $ | — | $ | — | $ | 138.4 | $ | — | $ | 530.5 | ||||||||||||
|
Net investment income
|
18.1 | 244.3 | 439.3 | 244.1 | 27.8 | 973.6 | ||||||||||||||||||
|
Other revenues
|
15.2 | 24.5 | 0.8 | 15.0 | 13.2 | 68.7 | ||||||||||||||||||
|
Net realized investment gains (losses)
|
(0.1 | ) | (9.8 | ) | 23.0 | (1.5 | ) | 5.2 | 16.8 | |||||||||||||||
|
Total revenues
|
425.3 | 259.0 | 463.1 | 396.0 | 46.2 | 1,589.6 | ||||||||||||||||||
|
Benefits and expenses:
|
||||||||||||||||||||||||
|
Policyholder benefits and claims
|
213.1 | (8.3 | ) | — | 62.3 | — | 267.1 | |||||||||||||||||
|
Interest credited
|
— | 165.5 | 371.5 | 216.3 | (1.0 | ) | 752.3 | |||||||||||||||||
|
Other underwriting and operating expenses
|
112.3 | 69.1 | 22.4 | 57.7 | 20.4 | 281.9 | ||||||||||||||||||
|
Interest expense
|
— | — | — | — | 21.5 | 21.5 | ||||||||||||||||||
|
Amortization of deferred policy acquisition costs
|
8.4 | 6.0 | 1.1 | 2.5 | — | 18.0 | ||||||||||||||||||
|
Total benefits and expenses
|
333.8 | 232.3 | 395.0 | 338.8 | 40.9 | 1,340.8 | ||||||||||||||||||
|
Segment pre-tax income
|
91.5 | 26.7 | 68.1 | 57.2 | 5.3 | 248.8 | ||||||||||||||||||
|
Less: Net realized investment gains (losses)
|
(0.1 | ) | (9.8 | ) | 23.0 | (1.5 | ) | 5.2 | 16.8 | |||||||||||||||
|
Add: Net realized and unrealized losses on FIA options
|
— | (2.3 | ) | — | — | — | (2.3 | ) | ||||||||||||||||
|
Segment pre-tax operating income
|
$ | 91.6 | $ | 34.2 | $ | 45.1 | $ | 58.7 | $ | 0.1 | $ | 229.7 | ||||||||||||
|
As of December 31, 2007:
|
||||||||||||||||||||||||
|
Total investments
|
$ | 255.9 | $ | 3,976.0 | $ | 6,830.3 | $ | 4,299.6 | $ | 1,543.2 | $ | 16,905.0 | ||||||||||||
|
Deferred policy acquisition costs
|
3.5 | 84.3 | 10.9 | 34.2 | — | 132.9 | ||||||||||||||||||
|
Separate account assets
|
— | 1,059.3 | — | 122.6 | — | 1,181.9 | ||||||||||||||||||
|
Total assets
|
385.3 | 5,337.0 | 7,132.5 | 4,818.9 | 1,886.5 | 19,560.2 | ||||||||||||||||||
|
Future policy benefits, losses, claims and loss expenses(1)
|
171.2 | 4,438.4 | 6,891.1 | 4,560.3 | (3.2 | ) | 16,057.8 | |||||||||||||||||
|
Unearned premiums
|
1.6 | — | — | 9.9 | — | 11.5 | ||||||||||||||||||
|
Other policyholder funds
|
11.2 | 7.0 | 4.3 | 26.6 | 7.7 | 56.8 | ||||||||||||||||||
|
Notes payable
|
— | — | — | — | 448.6 | 448.6 | ||||||||||||||||||
| (1) | This includes funds held under deposit contracts, future policy benefits, and policy and contract claims. |
F-42
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(All dollar amounts in millions, unless otherwise stated)
(All dollar amounts in millions, unless otherwise stated)
| Year Ended December 31, 2006 | ||||||||||||||||||||||||
|
Retirement |
Income |
|||||||||||||||||||||||
| Group | Services | Annuities | Individual | Other | Total | |||||||||||||||||||
|
Revenues:
|
||||||||||||||||||||||||
|
Premiums
|
$ | 387.3 | $ | 0.1 | $ | — | $ | 138.3 | $ | — | $ | 525.7 | ||||||||||||
|
Net investment income
|
18.0 | 269.8 | 439.0 | 232.8 | 25.3 | 984.9 | ||||||||||||||||||
|
Other revenues
|
10.2 | 22.8 | 0.8 | 12.9 | 9.4 | 56.1 | ||||||||||||||||||
|
Net realized investment gains (losses)
|
(0.1 | ) | (17.0 | ) | 16.8 | (3.8 | ) | 5.8 | 1.7 | |||||||||||||||
|
Total revenues
|
415.4 | 275.7 | 456.6 | 380.2 | 40.5 | 1,568.4 | ||||||||||||||||||
|
Benefits and expenses:
|
||||||||||||||||||||||||
|
Policyholder benefits and claims
|
230.8 | (16.5 | ) | — | 50.0 | — | 264.3 | |||||||||||||||||
|
Interest credited
|
— | 186.2 | 371.8 | 208.2 | (0.3 | ) | 765.9 | |||||||||||||||||
|
Other underwriting and operating expenses
|
105.7 | 61.7 | 21.6 | 57.4 | 14.1 | 260.5 | ||||||||||||||||||
|
Interest expense
|
— | — | — | — | 19.1 | 19.1 | ||||||||||||||||||
|
Amortization of deferred policy acquisition costs
|
10.9 | 1.1 | 0.6 | 2.0 | — | 14.6 | ||||||||||||||||||
|
Total benefits and expenses
|
347.4 | 232.5 | 394.0 | 317.6 | 32.9 | 1,324.4 | ||||||||||||||||||
|
Segment pre-tax income
|
68.0 | 43.2 | 62.6 | 62.6 | 7.6 | 244.0 | ||||||||||||||||||
|
Less: Net realized investment gains (losses)
|
(0.1 | ) | (17.0 | ) | 16.8 | (3.8 | ) | 5.8 | 1.7 | |||||||||||||||
|
Add: Net realized and unrealized gains on FIA options
|
— | 2.2 | — | — | — | 2.2 | ||||||||||||||||||
|
Segment pre-tax operating income
|
$ | 68.1 | $ | 62.4 | $ | 45.8 | 66.4 | $ | 1.8 | $ | 244.5 | |||||||||||||
|
As of December 31, 2006:
|
||||||||||||||||||||||||
|
Total investments
|
$ | 168.7 | $ | 4,443.3 | $ | 6,967.9 | $ | 4,074.9 | $ | 1,650.5 | $ | 17,305.3 | ||||||||||||
|
Deferred policy acquisition costs
|
4.0 | 54.5 | 6.8 | 22.9 | — | 88.2 | ||||||||||||||||||
|
Separate account assets
|
— | 1,115.5 | — | 118.4 | — | 1,233.9 | ||||||||||||||||||
|
Total assets
|
300.1 | 5,905.0 | 7,273.4 | 4,601.7 | 2,034.4 | 20,114.6 | ||||||||||||||||||
|
Future policy benefits, losses, claims and loss expenses(1)
|
185.2 | 4,914.7 | 7,010.6 | 4,370.1 | (0.7 | ) | 16,479.9 | |||||||||||||||||
|
Unearned premiums
|
2.5 | — | — | 9.2 | — | 11.7 | ||||||||||||||||||
|
Other policyholder funds
|
8.4 | 7.9 | 2.0 | 22.0 | 8.3 | 48.6 | ||||||||||||||||||
|
Notes payable
|
— | — | — | — | 298.7 | 298.7 | ||||||||||||||||||
| (1) | This includes funds held under deposit contracts, future policy benefits, and policy and contract claims. |
F-43
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(All dollar amounts in millions, unless otherwise stated)
(All dollar amounts in millions, unless otherwise stated)
| 23. | Quarterly Results of Operations (Unaudited) |
The unaudited quarterly results of operations for years ended
December 31, 2008 and 2007 are summarized in the table
below:
| Three Months Ended | ||||||||||||||||
| March 31 | June 30 | September 30 | December 31 | |||||||||||||
| (In millions, except for per share data) | ||||||||||||||||
|
2008
|
||||||||||||||||
|
Total revenues
|
$ | 365.0 | $ | 400.4 | $ | 341.7 | $ | 344.0 | ||||||||
|
Total benefits and expenses
|
360.3 | 360.2 | 352.3 | 365.3 | ||||||||||||
|
Income (loss) from operations before income taxes
|
4.7 | 40.2 | (10.6 | ) | (21.3 | ) | ||||||||||
|
Net income (loss)
|
3.3 | 28.5 | (4.8 | ) | (4.9 | ) | ||||||||||
|
Net income (loss) per common share:
|
||||||||||||||||
|
Basic net income (loss) per share(1)
|
$ | 0.03 | $ | 0.26 | $ | (0.05 | ) | $ | (0.05 | ) | ||||||
|
Diluted net income (loss) per share(1)
|
$ | 0.03 | $ | 0.26 | $ | (0.05 | ) | $ | (0.05 | ) | ||||||
|
2007
|
||||||||||||||||
|
Total revenues
|
$ | 407.3 | $ | 405.8 | $ | 391.3 | $ | 385.2 | ||||||||
|
Total benefits and expenses
|
331.5 | 338.6 | 329.7 | 341.0 | ||||||||||||
|
Income from operations before income taxes
|
75.8 | 67.2 | 61.6 | 44.2 | ||||||||||||
|
Net income
|
50.7 | 45.5 | 41.4 | 29.7 | ||||||||||||
|
Net income per common share:
|
||||||||||||||||
|
Basic net income per share(1)
|
$ | 0.45 | $ | 0.41 | $ | 0.37 | $ | 0.27 | ||||||||
|
Diluted net income per share(1)
|
$ | 0.45 | $ | 0.41 | $ | 0.37 | $ | 0.27 | ||||||||
| (1) | Quarterly earnings per share amounts may not add to the full year amounts as holders of outstanding warrants do not participate in losses. |
F-44
Table of Contents
CONSOLIDATED
BALANCE SHEETS
|
September 30, |
December 31, |
|||||||
| 2009 | 2008 | |||||||
| (Unaudited) | ||||||||
|
(In millions, except share and |
||||||||
| per share data) | ||||||||
|
ASSETS
|
||||||||
|
Investments:
|
||||||||
|
Available-for-sale
securities:
|
||||||||
|
Fixed maturities, at fair value (amortized cost: $18,381.2
and $16,528.4, respectively)
|
$ | 18,542.3 | $ | 14,887.6 | ||||
|
Marketable equity securities, at fair value (cost: $52.9
and $52.5, respectively)
|
35.4 | 38.1 | ||||||
|
Trading securities:
|
||||||||
|
Marketable equity securities, at fair value (cost: $157.9
and $152.1, respectively)
|
140.6 | 106.3 | ||||||
|
Mortgage loans, net
|
1,095.2 | 988.7 | ||||||
|
Policy loans
|
73.9 | 75.2 | ||||||
|
Short-term investments
|
2.5 | 9.4 | ||||||
|
Investments in limited partnerships (includes $46.6 and
$56.3 measured at fair value, respectively)
|
133.4 | 138.3 | ||||||
|
Other invested assets
|
11.9 | 8.9 | ||||||
|
Total investments
|
20,035.2 | 16,252.5 | ||||||
|
Cash and cash equivalents
|
241.7 | 468.0 | ||||||
|
Accrued investment income
|
243.0 | 206.3 | ||||||
|
Accounts receivable and other receivables
|
66.1 | 61.7 | ||||||
|
Reinsurance recoverables
|
269.9 | 264.2 | ||||||
|
Deferred policy acquisition costs
|
240.8 | 247.5 | ||||||
|
Goodwill
|
25.8 | 24.3 | ||||||
|
Current income tax recoverable
|
25.1 | 21.1 | ||||||
|
Deferred income tax assets, net
|
150.9 | 785.8 | ||||||
|
Property, equipment, and leasehold improvements, net
|
16.2 | 18.9 | ||||||
|
Other assets
|
61.3 | 57.4 | ||||||
|
Securities lending collateral
|
31.4 | 105.7 | ||||||
|
Separate account assets
|
818.6 | 716.2 | ||||||
|
Total assets
|
$ | 22,226.0 | $ | 19,229.6 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
|
Funds held under deposit contracts
|
$ | 18,586.1 | $ | 16,810.4 | ||||
|
Future policy benefits
|
394.7 | 392.1 | ||||||
|
Policy and contract claims
|
134.6 | 133.1 | ||||||
|
Unearned premiums
|
13.0 | 11.9 | ||||||
|
Other policyholders’ funds
|
90.8 | 117.3 | ||||||
|
Notes payable
|
448.9 | 448.8 | ||||||
|
Other liabilities
|
227.4 | 207.9 | ||||||
|
Securities lending payable
|
31.4 | 105.7 | ||||||
|
Separate account liabilities
|
818.6 | 716.2 | ||||||
|
Total liabilities
|
20,745.5 | 18,943.4 | ||||||
|
Commitments and contingencies (Note 9)
|
||||||||
|
Preferred stock, $0.01 par value; 10,000,000 shares
authorized; none issued
|
— | — | ||||||
|
Common stock, $0.01 par value; 750,000,000 shares
authorized;
92,729,455 and 92,646,295 shares issued and outstanding as of September 30, 2009 and December 31, 2008, respectively |
0.9 | 0.9 | ||||||
|
Additional paid-in capital
|
1,165.5 | 1,165.5 | ||||||
|
Retained earnings
|
284.3 | 172.4 | ||||||
|
Accumulated other comprehensive income (loss), net of taxes
|
29.8 | (1,052.6 | ) | |||||
|
Total stockholders’ equity
|
1,480.5 | 286.2 | ||||||
|
Total liabilities and stockholders’ equity
|
$ | 22,226.0 | $ | 19,229.6 | ||||
See accompanying notes.
F-45
Table of Contents
CONSOLIDATED
STATEMENTS OF INCOME (LOSS)
|
Three Months Ended |
Nine Months Ended |
|||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||
| (Unaudited) | (Unaudited) | (Unaudited) | ||||||||||||||
| (Unaudited) | ||||||||||||||||
| (In millions, except per share data) | ||||||||||||||||
|
Revenues:
|
||||||||||||||||
|
Premiums
|
$ | 142.1 | $ | 148.1 | $ | 430.2 | $ | 440.4 | ||||||||
|
Net investment income
|
283.6 | 241.6 | 829.4 | 718.0 | ||||||||||||
|
Other revenues
|
14.7 | 16.4 | 43.2 | 52.0 | ||||||||||||
|
Net realized investment gains (losses):
|
||||||||||||||||
|
Total
other-than-temporary
impairment losses on securities
|
(44.1 | ) | (23.3 | ) | (167.9 | ) | (61.7 | ) | ||||||||
|
Less: portion of losses recognized in other comprehensive income
|
26.7 | — | 94.2 | — | ||||||||||||
|
Net impairment losses recognized in earnings
|
(17.4 | ) | (23.3 | ) | (73.7 | ) | (61.7 | ) | ||||||||
|
Other net realized investment gains (losses)
|
28.7 | (41.1 | ) | 44.7 | (41.6 | ) | ||||||||||
|
Total net realized investment gains (losses)
|
11.3 | (64.4 | ) | (29.0 | ) | (103.3 | ) | |||||||||
|
Total revenues
|
451.7 | 341.7 | 1,273.8 | 1,107.1 | ||||||||||||
|
Benefits and expenses:
|
||||||||||||||||
|
Policyholder benefits and claims
|
85.6 | 79.7 | 262.1 | 260.1 | ||||||||||||
|
Interest credited
|
220.5 | 192.1 | 629.2 | 569.1 | ||||||||||||
|
Other underwriting and operating expenses
|
61.7 | 65.4 | 186.7 | 201.9 | ||||||||||||
|
Interest expense
|
7.9 | 8.0 | 23.8 | 24.0 | ||||||||||||
|
Amortization of deferred policy acquisition costs
|
13.8 | 7.1 | 36.4 | 17.7 | ||||||||||||
|
Total benefits and expenses
|
389.5 | 352.3 | 1,138.2 | 1,072.8 | ||||||||||||
|
Income (loss) from operations before income taxes
|
62.2 | (10.6 | ) | 135.6 | 34.3 | |||||||||||
|
Provision (benefit) for income taxes:
|
||||||||||||||||
|
Current
|
(15.7 | ) | 10.7 | (4.2 | ) | 34.2 | ||||||||||
|
Deferred
|
33.8 | (16.5 | ) | 43.6 | (26.9 | ) | ||||||||||
|
Total provision (benefit) for income taxes
|
18.1 | (5.8 | ) | 39.4 | 7.3 | |||||||||||
|
Net income (loss)
|
$ | 44.1 | $ | (4.8 | ) | $ | 96.2 | $ | 27.0 | |||||||
|
Net income (loss) per common share:
|
||||||||||||||||
|
Basic
|
$ | 0.40 | $ | (0.05 | ) | $ | 0.86 | $ | 0.24 | |||||||
|
Diluted
|
$ | 0.40 | $ | (0.05 | ) | $ | 0.86 | $ | 0.24 | |||||||
|
Weighted-average number of common shares outstanding:
|
||||||||||||||||
|
Basic
|
111.622 | 92.646 | 111.622 | 111.622 | ||||||||||||
|
Diluted
|
111.624 | 92.646 | 111.623 | 111.622 | ||||||||||||
|
Cash dividends declared per common share
|
$ | — | $ | — | $ | — | $ | — | ||||||||
See accompanying notes.
F-46
Table of Contents
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
|
Accumulated |
||||||||||||||||||||
|
Additional |
Other |
Total |
||||||||||||||||||
|
Common |
Paid-in |
Retained |
Comprehensive |
Stockholders’ |
||||||||||||||||
| Stock | Capital | Earnings | Income (Loss) | Equity | ||||||||||||||||
|
(Unaudited) |
||||||||||||||||||||
| (In millions) | ||||||||||||||||||||
|
Balances at January 1, 2008
|
$ | 0.9 | $ | 1,165.5 | $ | 131.2 | $ | (12.5 | ) | $ | 1,285.1 | |||||||||
|
Cumulative effect adjustment — new accounting guidance
(net of taxes: $(10.3))
|
— | — | 19.1 | (19.1 | ) | — | ||||||||||||||
|
Comprehensive income (loss), net of taxes:
|
||||||||||||||||||||
|
Net income
|
— | — | 27.0 | — | 27.0 | |||||||||||||||
|
Other comprehensive loss (net of taxes: $(404.5))
|
— | — | — | (751.2 | ) | (751.2 | ) | |||||||||||||
|
Total comprehensive loss, net of taxes
|
— | — | — | — | (724.2 | ) | ||||||||||||||
|
Balances at September 30, 2008
|
$ | 0.9 | $ | 1,165.5 | $ | 177.3 | $ | (782.8 | ) | $ | 560.9 | |||||||||
|
Balances at January 1, 2009
|
$ | 0.9 | $ | 1,165.5 | $ | 172.4 | $ | (1,052.6 | ) | $ | 286.2 | |||||||||
|
Cumulative effect adjustment — new accounting guidance
(net of taxes: $(8.4))
|
— | — | 15.7 | (15.7 | ) | — | ||||||||||||||
|
Comprehensive income, net of taxes:
|
||||||||||||||||||||
|
Net income
|
— | — | 96.2 | — | 96.2 | |||||||||||||||
|
Other comprehensive income (net of taxes: $(591.3))
|
— | — | — | 1,098.1 | 1,098.1 | |||||||||||||||
|
Total comprehensive income, net of taxes
|
— | — | — | — | 1,194.3 | |||||||||||||||
|
Balances at September 30, 2009
|
$ | 0.9 | $ | 1,165.5 | $ | 284.3 | $ | 29.8 | $ | 1,480.5 | ||||||||||
See accompanying notes.
F-47
Table of Contents
CONSOLIDATED
STATEMENTS OF CASH FLOWS
| Nine Months Ended September 30, | ||||||||
| 2009 | 2008 | |||||||
| (Unaudited) | (Unaudited) | |||||||
| (In millions) | ||||||||
|
Cash flows from operating activities
|
||||||||
|
Net income
|
$ | 96.2 | $ | 27.0 | ||||
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
||||||||
|
Net realized investment losses
|
29.0 | 103.3 | ||||||
|
Accretion of fixed maturities and mortgage loans
|
15.0 | 28.9 | ||||||
|
Accrued interest on bonds
|
(25.8 | ) | (25.4 | ) | ||||
|
Amortization and depreciation
|
10.9 | 11.1 | ||||||
|
Deferred income tax provision (benefit)
|
43.6 | (26.9 | ) | |||||
|
Interest credited on deposit contracts
|
629.2 | 569.1 | ||||||
|
Mortality and expense charges and administrative fees
|
(75.1 | ) | (72.3 | ) | ||||
|
Changes in:
|
||||||||
|
Deferred policy acquisition costs
|
(95.9 | ) | (56.9 | ) | ||||
|
Accrued income taxes
|
(4.0 | ) | (1.4 | ) | ||||
|
Accrued investment income
|
(36.7 | ) | (19.9 | ) | ||||
|
Policy and contract claims
|
1.5 | 24.4 | ||||||
|
Future policy benefits
|
2.6 | 8.1 | ||||||
|
Other assets
|
(27.8 | ) | (4.9 | ) | ||||
|
Other liabilities
|
34.1 | (6.6 | ) | |||||
|
Other, net
|
(0.2 | ) | — | |||||
|
Total adjustments
|
500.4 | 530.6 | ||||||
|
Net cash provided by operating activities
|
596.6 | 557.6 | ||||||
|
Cash flows from investing activities
|
||||||||
|
Purchases of:
|
||||||||
|
Fixed maturities and equity securities
|
(3,332.4 | ) | (1,675.2 | ) | ||||
|
Other invested assets and investments in limited partnerships
|
(30.3 | ) | (22.5 | ) | ||||
|
Issuances of mortgage loans
|
(162.3 | ) | (169.7 | ) | ||||
|
Issuances of policy loans
|
(13.6 | ) | (12.2 | ) | ||||
|
Maturities, calls, paydowns, and other
|
1,001.5 | 636.9 | ||||||
|
Securities lending collateral returned (invested), net
|
72.3 | (4.0 | ) | |||||
|
Sales of:
|
||||||||
|
Fixed maturities and equity securities
|
454.1 | 346.8 | ||||||
|
Other invested assets and investments in limited partnerships
|
23.0 | 2.4 | ||||||
|
Repayments of mortgage loans
|
53.9 | 62.7 | ||||||
|
Repayments of policy loans
|
14.1 | 13.1 | ||||||
|
Net decrease (increase) in short-term investments
|
6.9 | (5.3 | ) | |||||
|
Purchases of property, equipment, and leasehold improvements
|
(1.1 | ) | (1.5 | ) | ||||
|
Other, net
|
(2.8 | ) | (2.7 | ) | ||||
|
Net cash used in investing activities
|
(1,916.7 | ) | (831.2 | ) | ||||
|
Cash flows from financing activities
|
||||||||
|
Policyholder account balances:
|
||||||||
|
Deposits
|
$ | 2,187.7 | $ | 1,266.5 | ||||
|
Withdrawals
|
(1,010.1 | ) | (967.7 | ) | ||||
|
Securities lending collateral (paid) received, net
|
(72.3 | ) | 4.0 | |||||
|
Other, net
|
(11.5 | ) | (17.9 | ) | ||||
|
Net cash provided by financing activities
|
1,093.8 | 284.9 | ||||||
|
Net (decrease) increase in cash and cash equivalents
|
(226.3 | ) | 11.3 | |||||
|
Cash and cash equivalents at beginning of period
|
468.0 | 253.9 | ||||||
|
Cash and cash equivalents at end of period
|
$ | 241.7 | $ | 265.2 | ||||
|
Supplemental disclosures of cash flow information
|
||||||||
|
Net cash paid (received) during the year for:
|
||||||||
|
Interest
|
$ | 15.5 | $ | 15.8 | ||||
|
Income taxes
|
(0.4 | ) | 35.5 | |||||
|
Non-cash transactions during the period:
|
||||||||
|
Investments in limited partnerships and capital obligations
incurred
|
10.0 | 3.6 | ||||||
See accompanying notes.
F-48
Table of Contents
NOTES TO
UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in millions, unless otherwise stated)
(All dollar amounts in millions, unless otherwise stated)
| 1. | Nature of Operations, Basis of Presentation and Accounting Policies |
Organization
and Description of Business
The accompanying interim consolidated financial statements
include on a consolidated basis the accounts of Symetra
Financial Corporation and its subsidiaries which are referred to
as “Symetra Financial” or “the Company.”
Symetra Financial Corporation is a Delaware corporation
privately owned by an investor group led by White Mountains
Insurance Group, Ltd. and Berkshire Hathaway Inc.
Symetra Financial’s subsidiaries offer group and individual
insurance products and retirement products, including annuities
marketed through professional agents and distributors in all
states and the District of Columbia. The Company’s
principal products include medical stop-loss insurance, fixed
and variable deferred annuities, single premium immediate
annuities and individual life insurance.
Basis
of Presentation and Use of Estimates
The interim consolidated financial statements have been prepared
in conformity with U.S. generally accepted accounting
principles (GAAP) and the rules and regulations of the
Securities and Exchange Commission (SEC) for interim financial
reporting. These interim consolidated financial statements are
unaudited but in management’s opinion include all
adjustments, consisting of normal recurring adjustments and
accruals, necessary for a fair presentation. The consolidated
balance sheet as of December 31, 2008 is derived from
audited consolidated financial statements as of that date, but
certain information and footnotes required by GAAP for complete
financial statements have been excluded. These interim
consolidated financial statements should be read in conjunction
with the audited consolidated financial statements and
accompanying notes included elsewhere in this prospectus.
The most significant estimates include those used to determine
the following: the valuation of investments; the identification
of
other-than-temporary
impairments of investments; the balance, recoverability and
amortization of deferred policy acquisition costs (DAC); the
liabilities for funds held under deposit contracts, future
policy benefits, and policy and contract claims; and the
recoverability of deferred tax assets. The recorded amounts
reflect management’s best estimates, though actual results
could differ. Management believes the amounts provided are
appropriate.
The interim consolidated financial statements include the
accounts of Symetra Financial Corporation and its subsidiaries
that are wholly owned, directly or indirectly. All significant
intercompany transactions and balances have been eliminated.
| 2. | Accounting Policies |
For a description of significant accounting policies, see
Note 2 to the audited consolidated financial statements of
Symetra Financial Corporation included elsewhere in this
prospectus.
Adoption
of New Accounting Pronouncements
ASC
810-10
(formerly SFAS No. 160) Noncontrolling Interests
in Consolidated Financial Statements — an Amendment of
Accounting Research Bulletin No. 51
In December 2007, the Financial Accounting Standards Board
(FASB) issued SFAS No. 160
(ASC 810-10),
Noncontrolling Interests in Consolidated Financial
Statements, which clarifies that a noncontrolling interest
in a subsidiary is an ownership interest in the consolidated
entity that should be reported as equity in the consolidated
financial statements. The Company adopted this guidance
effective January 1, 2009. The adoption did not have a
material impact on the Company’s consolidated financial
statements.
F-49
Table of Contents
NOTES TO
UNAUDITED INTERIM CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(All dollar amounts in millions, unless otherwise stated)
(All dollar amounts in millions, unless otherwise stated)
ASC
320-10
(formerly FSP
SFAS 115-2
and
SFAS 124-2)
Other-than-Temporary
Impairments (OTTI)
In April 2009, the FASB issued FASB Staff Position (FSP)
SFAS 115-2
and
SFAS 124-2
(ASC 320-10),
Recognition and Presentation of
Other-than-Temporary
Impairments. This guidance amends OTTI guidance on fixed
maturities and modifies the OTTI presentation and disclosure
requirements for both fixed maturities and equity securities.
The FSP replaces the provision that management must positively
assert the intent and ability to hold a fixed maturity until
recovery to determine impairment, with the assertion that the
Company does not intend to sell or it is not
more-likely-than-not that the Company will be required to sell a
fixed maturity prior to recovery. In addition, if a credit loss
exists, the FSP requires that the credit loss is recognized in
earnings, whereas the portion due to other factors is recognized
in other comprehensive income (loss). As permitted by the
transition guidance, the Company elected to prospectively adopt
the guidance effective January 1, 2009, which resulted in
an increase of $15.7 (net of taxes of $8.4) to the opening
balance of retained earnings with a corresponding decrease to
accumulated other comprehensive income (loss) to reclassify the
noncredit portion of previously impaired fixed maturities held
as of January 1, 2009, for which the Company did not intend
to sell and it was not more likely than not that the Company
would be required to sell the security before recovery of its
amortized cost.
To determine the cumulative effect of adoption the Company
compared the present value of cash flows expected to be received
as of January 1, 2009, to the amortized cost basis of the
fixed maturities. The discount rate used to calculate the
present value was the rate for each respective fixed maturity in
effect before recognizing any OTTI. The cumulative effect
adjustment increased the amortized cost of our fixed maturity
securities, primarily corporate securities, by $24.1.
The Company enhanced its financial statement presentation, as
required, to separately present the OTTI recognized in
accumulated other comprehensive income (loss) on the face of the
consolidated statements of changes in stockholders’ equity
and present the total OTTI recognized as a realized loss in the
income statement, with an offset for the amount of noncredit
impairments recognized in accumulated other comprehensive income
(loss). The enhanced financial statement disclosures are
included in Note 4. For the nine months ended
September 30, 2009, gross impairments were $167.9, of which
$73.7 was included in earnings and $94.2 was recorded in other
comprehensive income (loss).
ASC
820-10
(formerly FSP
SFAS 157-2),
Effective Date of FASB Statement No. 157
On January 1, 2008, the Company elected the partial
adoption of SFAS No. 157 (ASC
820-10),
Fair Value Measurements under the provisions of FSP
SFAS 157-2,
which allowed an entity to delay application of the guidance for
fair value measurements until January 1, 2009, for certain
non-financial assets and liabilities, including fair value
measurements used in the impairment testing of goodwill and
eligible non-financial assets and liabilities included within a
business combination. The Company adopted the guidance for fair
value measurements for these non-financial assets and
liabilities on January 1, 2009. The adoption did not have a
material impact on the Company’s consolidated financial
statements.
ASC
820-10
(formerly FSP
SFAS 157-4),
Fair Value — Nonactive Markets
The Company prospectively adopted FSP
SFAS No. 157-4
(ASC
820-10),
Determining Fair Value When the Volume and Level of Activity
for the Asset or Liability Have Significantly Decreased and
Identifying Transactions That Are Not Orderly on
January 1, 2009, which provides guidance for determining
fair value when the volume or level of activity for an asset or
liability has significantly decreased and identifies
circumstances that indicate a transaction is not orderly. The
adoption of this guidance did not have a material impact on the
Company’s consolidated financial statements.
F-50
Table of Contents
NOTES TO
UNAUDITED INTERIM CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(All dollar amounts in millions, unless otherwise stated)
(All dollar amounts in millions, unless otherwise stated)
ASC
825-10
(formerly FSP
SFAS 107-1
and APB
28-1),
Interim Disclosures about Fair Value of Financial
Instruments
In April 2009, the FASB issued FSP
SFAS No. 107-1
and APB 28-1
(ASC
825-10),
Interim Disclosures about Fair Value of Financial Instruments
to require the fair value disclosures for certain financial
instruments be included in interim financial statements of
public companies. This guidance applies to all financial
instruments under ASC
825-10-50
(formerly SFAS No. 107, Disclosures about Fair
Value of Financial Instruments), whether recognized in the
financial statements or not. Additionally, companies must
disclose methods and significant assumptions used to estimate
fair value. The Company adopted this guidance on April 1,
2009. The adoption did not have a material impact on the
Company’s consolidated financial statements.
ASC
815-10
(formerly SFAS No. 161) Disclosures about
Derivative Instruments and Hedging Activities
In March 2008, the FASB issued SFAS No. 161 (ASC
815-10),
Disclosures about Derivative Instruments and Hedging
Activities, an amendment to SFAS No. 133. This
Statement amends and expands the disclosure requirements for
derivative instruments and hedging activities by requiring
companies to provide enhanced disclosures about how and why the
entity uses derivative instruments, how derivative instruments
and hedging activities are accounted for, and how derivative
instruments and related hedged items affect a company’s
financial position, financial performance and cash flows. The
Company adopted this guidance on January 1, 2009. The
adoption of this guidance did not impact the Company’s
consolidated financial statements, as the Company does not have
a material amount of derivative instruments.
ASC
855-10
(formerly SFAS No. 165) Subsequent
Events
In May 2009, the FASB issued SFAS No. 165 (ASC
855-10),
Subsequent Events. This guidance establishes the
standards of accounting for and disclosing events that occur
after the balance sheet date, but before financial statements
are issued and renames type I and type II subsequent events
to “recognized” subsequent events and
“non-recognized” subsequent events, respectively. The
guidance also clarifies that companies who widely distribute
financial statements should evaluate subsequent events through
the date of issuance, whereas all other companies should
evaluate subsequent events through the date financial statements
are available to be issued. The Company adopted this guidance
for its interim reporting period ending on June 30, 2009.
The adoption did not have a material impact on the
Company’s consolidated financial statements.
ASC
105-10
(formerly SFAS No. 168), FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting
Principles
In July 2009, the FASB issued SFAS No. 168 (ASC
105-10),
FASB Accounting Standards Codification and the Hierarchy of
Generally Accepted Accounting Principles, which establishes
the FASB Accounting Standards Codification (Codification or ASC)
as the single source of authoritative GAAP recognized by the
FASB to be applied by nongovernmental entities. Rules and
interpretive releases of the SEC under authority of federal
securities laws are also sources of authoritative GAAP for SEC
registrants. The Codification supersedes all existing non-SEC
accounting and reporting standards. All other non-grandfathered,
non-SEC accounting literature not included in the Codification
will become non-authoritative.
Following the Codification, the FASB will not issue new
standards in the form of Statements, FASB Staff Positions or
Emerging Issues Task Force Abstracts. Instead, it will issue
Accounting Standards Updates (ASUs), which will serve to update
the Codification, provide background information about the
guidance and provide the basis for conclusions on the changes to
the Codification.
GAAP is not intended to be changed as a result of the
FASB’s Codification project, but it will change the way the
guidance is organized and presented. As a result, these changes
have a significant impact on how
F-51
Table of Contents
NOTES TO
UNAUDITED INTERIM CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(All dollar amounts in millions, unless otherwise stated)
(All dollar amounts in millions, unless otherwise stated)
companies reference GAAP in their financial statements and in
their accounting policies for financial statements issued for
interim and annual periods ending after September 15, 2009.
The Company has implemented the Codification in this quarterly
report by referencing the Codification topics where appropriate.
References to the superseded standards have been included for
informational purposes.
Accounting
Pronouncements Not Yet Adopted
ASC
810-10
(formerly SFAS No. 167), Amendments to FASB
Interpretation No. 46(R)
In June 2009, the FASB issued SFAS No. 167 (ASC
810-10),
Amendments to FASB Interpretation No. 46(R), which
provides guidance for determining which enterprise, if any, has
a controlling financial interest in a variable interest entity
and requires additional disclosures about involvement in
variable interest entities. The Company will adopt this guidance
on January 1, 2010. The Company has not yet determined the
impact adoption of this guidance will have on its consolidated
financial statements.
ASU
2009-05,
Measuring Liabilities at Fair Value
In August 2009, the FASB issued ASU
2009-05,
Fair Value Measurements and Disclosures
(Topic 820) — Measuring Liabilities at Fair
Value. This update provides guidance on appropriate
measurement techniques for determining the fair value of
liabilities. The Company adopted this guidance on
October 1, 2009, and it will not have a material impact on
its consolidated financial statements.
ASU
2009-12,
Investments in Certain Entities That Calculate Net Asset Value
per Share (or It’s Equivalent)
In September 2009, the FASB issued ASU
2009-12,
Investments in Certain Entities That Calculate Net Asset
Value per Share (or It’s Equivalent). This update
amends ASC 820 to permit entities to estimate the fair value of
certain investments using the net asset value (NAV) per share as
of the measurement date, if the fair value of the investment is
not readily determinable. The guidance applies to investments in
entities that calculate NAV in accordance with ASC 946. The
Company adopted this guidance on October 1, 2009, and it
will not have a material impact on its consolidated financial
statements.
| 3. | Earnings Per Share |
Basic earnings per share represents the amount of earnings for
the period available to each share of common stock outstanding
during the reporting period. Diluted earnings per share
represents the amount of earnings for the period available to
each share of common stock outstanding during the reporting
period adjusted for the potential issuance of common stock, if
dilutive.
The outstanding warrants exercisable for 18,975,744 shares are
considered participating securities or potential common stock
securities that are included in weighted-average common shares
outstanding for purposes of computing basic earnings per share
using the two-class method. The warrants are considered
participating securities or potential common stock securities
because the terms of the agreements entitle the holders to
receive any dividends declared on the common stock concurrently
with the holders of outstanding shares of common stock, on a
one-to-one
basis. In periods of net loss, none of the loss is allocated to
the outstanding warrants; therefore, the warrants are not
included in the basic earnings per share calculation in such
periods.
The Company granted 83,160 shares of restricted stock to
certain members of senior management on August 24, 2009,
which were included in the computation of diluted earnings per
share, based on application of the treasury stock method,
weighted for the portion of the period they were outstanding.
The restricted stock shares are subject to certain service
vesting conditions, none of which were satisfied as of
September 30, 2009.
F-52
Table of Contents
NOTES TO
UNAUDITED INTERIM CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(All dollar amounts in millions, unless otherwise stated)
(All dollar amounts in millions, unless otherwise stated)
The following table presents information relating to the
Company’s calculations of basic and diluted earnings per
share (EPS) for the following periods:
|
For the Three Months |
For the Nine Months |
|||||||||||||||
| Ended September 30, | Ended September 30, | |||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||
| (in millions, except per share data) | ||||||||||||||||
|
Numerator:
|
||||||||||||||||
|
Net income (loss), as reported
|
$ | 44.1 | $ | (4.8 | ) | $ | 96.2 | $ | 27.0 | |||||||
|
Denominator:
|
||||||||||||||||
|
Weighted-average common shares outstanding — basic
|
111.622 | 92.646 | 111.622 | 111.622 | ||||||||||||
|
Add: Dilutive effect of restricted stock
|
0.002 | — | 0.001 | — | ||||||||||||
|
Weighted-average common shares outstanding — diluted
|
111.624 | 92.646 | 111.623 | 111.622 | ||||||||||||
|
Net income (loss) per common share:
|
||||||||||||||||
|
Basic
|
$ | 0.40 | $ | (0.05 | ) | $ | 0.86 | $ | 0.24 | |||||||
|
Diluted
|
$ | 0.40 | $ | (0.05 | ) | $ | 0.86 | $ | 0.24 | |||||||
|
Antidilutive shares not included in net income (loss) per
diluted common share
|
— | 18.976 | — | — | ||||||||||||
For periods with net losses, the warrants and restricted stock
are not included in the computation of diluted EPS as they are
anti-dilutive.
| 4. | Investments |
The following tables summarize the Company’s
available-for-sale
fixed maturities and marketable equity securities:
|
Other-Than- |
||||||||||||||||||||
|
Cost or |
Gross |
Gross |
Temporary |
|||||||||||||||||
|
Amortized |
Unrealized |
Unrealized |
Fair |
Impairments in |
||||||||||||||||
| Cost | Gains | Losses | Value | AOCI(1) | ||||||||||||||||
|
September 30, 2009
|
||||||||||||||||||||
|
Fixed maturities:
|
||||||||||||||||||||
|
U.S. government and agencies
|
$ | 42.4 | $ | 3.3 | $ | — | $ | 45.7 | $ | (0.1 | ) | |||||||||
|
State and political subdivisions
|
518.7 | 3.9 | (37.7 | ) | 484.9 | (1.8 | ) | |||||||||||||
|
Foreign governments
|
26.9 | 1.3 | — | 28.2 | — | |||||||||||||||
|
Corporate securities
|
12,231.6 | 597.0 | (414.6 | ) | 12,414.0 | (36.7 | ) | |||||||||||||
|
Residential mortgage-backed securities
|
3,506.3 | 132.0 | (101.7 | ) | 3,536.6 | (36.5 | ) | |||||||||||||
|
Commercial mortgage-backed securities
|
1,883.7 | 54.6 | (64.9 | ) | 1,873.4 | (0.1 | ) | |||||||||||||
|
Other debt obligations
|
171.6 | 9.2 | (21.3 | ) | 159.5 | (8.0 | ) | |||||||||||||
|
Total fixed maturities
|
18,381.2 | 801.3 | (640.2 | ) | 18,542.3 | (83.2 | ) | |||||||||||||
|
Marketable equity securities,
available-for-sale
|
52.9 | 0.6 | (18.1 | ) | 35.4 | — | ||||||||||||||
|
Total
|
$ | 18,434.1 | $ | 801.9 | $ | (658.3 | ) | $ | 18,577.7 | $ | (83.2 | ) | ||||||||
| (1) | Represents the amount of cumulative non-credit OTTI losses transferred to or recorded in other comprehensive income in accordance with ASC 820-10 (formerly FSP SFAS 115-2) for securities that also had a credit-related impairment. |
F-53
Table of Contents
NOTES TO
UNAUDITED INTERIM CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(All dollar amounts in millions, unless otherwise stated)
(All dollar amounts in millions, unless otherwise stated)
|
Cost or |
Gross |
Gross |
||||||||||||||
|
Amortized |
Unrealized |
Unrealized |
Fair |
|||||||||||||
| Cost | Gains | Losses | Value | |||||||||||||
|
December 31, 2008
|
||||||||||||||||
|
Fixed maturities:
|
||||||||||||||||
|
U.S. government and agencies
|
$ | 155.5 | $ | 5.2 | $ | (3.9 | ) | $ | 156.8 | |||||||
|
State and political subdivisions
|
488.8 | 0.9 | (64.8 | ) | 424.9 | |||||||||||
|
Foreign governments
|
31.4 | 3.2 | — | 34.6 | ||||||||||||
|
Corporate securities
|
10,564.1 | 105.1 | (1,362.7 | ) | 9,306.5 | |||||||||||
|
Residential mortgage-backed securities
|
3,176.1 | 84.6 | (134.4 | ) | 3,126.3 | |||||||||||
|
Commercial mortgage-backed securities
|
1,912.7 | 17.5 | (255.2 | ) | 1,675.0 | |||||||||||
|
Other debt obligations
|
199.8 | — | (36.3 | ) | 163.5 | |||||||||||
|
Total fixed maturities
|
16,528.4 | 216.5 | (1,857.3 | ) | 14,887.6 | |||||||||||
|
Marketable equity securities,
available-for-sale
|
52.5 | — | (14.4 | ) | 38.1 | |||||||||||
|
Total
|
$ | 16,580.9 | $ | 216.5 | $ | (1,871.7 | ) | $ | 14,925.7 | |||||||
Of the U.S. government and agencies securities, agencies
comprised $24.3 and $132.1 of the fair value as of
September 30, 2009 and December 31, 2008,
respectively. As of September 30, 2009, these securities
had gross unrealized gains of $1.6 and no unrealized losses. As
of December 31, 2008, these securities had gross unrealized
gains of $2.6 and gross unrealized losses of $(3.9).
F-54
Table of Contents
NOTES TO
UNAUDITED INTERIM CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(All dollar amounts in millions, unless otherwise stated)
(All dollar amounts in millions, unless otherwise stated)
The following tables show the gross unrealized losses including
the portion of OTTI recognized in other comprehensive income
(loss) for fixed maturities, and fair values of the
Company’s available-for-sale investments. These are
aggregated by investment category and the severity of the
unrealized loss, separated between securities that have been in
a continuous unrealized loss position for less than twelve
months and for twelve months or more.
| Less Than 12 Months | 12 Months or More | |||||||||||||||||||||||
|
Gross |
Gross |
|||||||||||||||||||||||
|
Fair |
Unrealized |
# of |
Fair |
Unrealized |
# of |
|||||||||||||||||||
|
September 30, 2009
|
Value | Losses | Securities | Value | Losses | Securities | ||||||||||||||||||
|
Fixed maturities:
|
||||||||||||||||||||||||
|
State and political subdivisions
|
$ | 35.1 | $ | (5.4 | ) | 6 | $ | 270.4 | $ | (32.3 | ) | 45 | ||||||||||||
|
Corporate securities
|
554.9 | (27.7 | ) | 55 | 2,711.6 | (386.9 | ) | 349 | ||||||||||||||||
|
Residential mortgage-backed securities
|
132.0 | (3.9 | ) | 10 | 468.4 | (97.8 | ) | 70 | ||||||||||||||||
|
Commercial mortgage-backed securities
|
55.6 | (0.9 | ) | 6 | 794.8 | (64.0 | ) | 50 | ||||||||||||||||
|
Other debt securities
|
— | — | — | 38.5 | (21.3 | ) | 10 | |||||||||||||||||
|
Total fixed maturities
|
777.6 | (37.9 | ) | 77 | 4,283.7 | (602.3 | ) | 524 | ||||||||||||||||
|
Marketable equity securities,
available-for-sale
|
— | — | — | 34.2 | (18.1 | ) | 5 | |||||||||||||||||
|
Total
|
$ | 777.6 | $ | (37.9 | ) | 77 | $ | 4,317.9 | $ | (620.4 | ) | 529 | ||||||||||||
|
% Below amortized cost — fixed maturities:
|
||||||||||||||||||||||||
|
Less than 20%
|
$ | 752.0 | $ | (26.3 | ) | $ | 3,638.7 | $ | (323.2 | ) | ||||||||||||||
|
20% or more
|
25.6 | (11.6 | ) | 645.0 | (279.1 | ) | ||||||||||||||||||
|
Total fixed maturities
|
777.6 | (37.9 | ) | 4,283.7 | (602.3 | ) | ||||||||||||||||||
|
% Below cost — marketable equity securities,
available-for-sale:
|
||||||||||||||||||||||||
|
Less than 20%
|
— | — | 0.2 | (0.1 | ) | |||||||||||||||||||
|
20% or more
|
— | — | 34.0 | (18.0 | ) | |||||||||||||||||||
|
Total marketable equity securities,
available-for-sale
|
— | — | 34.2 | (18.1 | ) | |||||||||||||||||||
|
Total
|
$ | 777.6 | $ | (37.9 | ) | $ | 4,317.9 | (620.4 | ) | |||||||||||||||
F-55
Table of Contents
NOTES TO
UNAUDITED INTERIM CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(All dollar amounts in millions, unless otherwise stated)
(All dollar amounts in millions, unless otherwise stated)
| Less Than 12 Months | 12 Months or More | |||||||||||||||||||||||
|
Gross |
Gross |
|||||||||||||||||||||||
|
Fair |
Unrealized |
# of |
Fair |
Unrealized |
# of |
|||||||||||||||||||
|
December 31, 2008
|
Value | Losses | securities | Value | Losses | securities | ||||||||||||||||||
|
Fixed maturities:
|
||||||||||||||||||||||||
|
U.S. government and agencies
|
$ | 52.4 | $ | (3.9 | ) | 3 | $ | — | $ | — | — | |||||||||||||
|
State and political subdivisions
|
305.0 | (57.0 | ) | 61 | 73.1 | (7.8 | ) | 14 | ||||||||||||||||
|
Foreign governments
|
||||||||||||||||||||||||
|
Corporate securities
|
4,565.7 | (484.2 | ) | 695 | 2,789.7 | (878.5 | ) | 426 | ||||||||||||||||
|
Residential mortgage-backed securities
|
536.0 | (74.4 | ) | 105 | 169.6 | (60.0 | ) | 41 | ||||||||||||||||
|
Commercial mortgage-backed securities
|
694.3 | (140.2 | ) | 60 | 566.2 | (115.0 | ) | 48 | ||||||||||||||||
|
Other debt securities
|
127.1 | (23.7 | ) | 19 | 26.6 | (12.6 | ) | 5 | ||||||||||||||||
|
Total fixed maturities
|
6,280.5 | (783.4 | ) | 943 | 3,625.2 | (1,073.9 | ) | 534 | ||||||||||||||||
|
Marketable equity securities,
available-for-sale
|
14.8 | (11.2 | ) | 3 | 23.3 | (3.2 | ) | 2 | ||||||||||||||||
|
Total
|
$ | 6,295.3 | $ | (794.6 | ) | 946 | $ | 3,648.5 | $ | (1,077.1 | ) | 536 | ||||||||||||
|
% Below amortized cost — fixed maturities:
|
||||||||||||||||||||||||
|
Less than 20%
|
$ | 5,427.3 | $ | (434.1 | ) | $ | 1,997.1 | $ | (257.9 | ) | ||||||||||||||
|
20% or more
|
853.2 | (349.3 | ) | 1,628.1 | (816.0 | ) | ||||||||||||||||||
|
Total fixed maturities
|
6,280.5 | (783.4 | ) | 3,625.2 | (1,073.9 | ) | ||||||||||||||||||
|
% Below cost — marketable equity securities,
available-for-sale:
|
||||||||||||||||||||||||
|
Less than 20%
|
0.5 | (0.3 | ) | 23.3 | (3.2 | ) | ||||||||||||||||||
|
20% or more
|
14.3 | (10.9 | ) | — | — | |||||||||||||||||||
|
Total marketable equity securities,
available-for-sale
|
14.8 | (11.2 | ) | 23.3 | (3.2 | ) | ||||||||||||||||||
|
Total
|
$ | 6,295.3 | $ | (794.6 | ) | 3,648.5 | (1,077.1 | ) | ||||||||||||||||
After the recognition of OTTI, the Company believes that the
remaining securities in an unrealized loss position as of
September 30, 2009 were not
other-than-temporarily
impaired as it did not intend to sell these fixed maturity
securities or it was not more likely than not that it will be
required to sell the fixed maturity securities before recovery
of their amortized cost basis. Furthermore, based upon the
Company’s cash flow modeling and the expected continuation
of contractually required principal and interest payments, the
Company considered these securities to be temporarily impaired
as of September 30, 2009.
The Company does not intend to sell its
available-for-sale
marketable equity securities, primarily consisting of
non-redeemable preferred stock, or it is not more likely than
not it will be required to sell these securities before recovery
of their cost basis, and the Company expects to recover the cost
basis of these securities.
The following table summarizes the amortized cost and fair value
of fixed maturities as September 30, 2009, by contractual
years to maturity. Expected maturities will differ from
contractual maturities because borrowers may have the right to
call or prepay obligations with or without prepayment
F-56
Table of Contents
NOTES TO
UNAUDITED INTERIM CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(All dollar amounts in millions, unless otherwise stated)
(All dollar amounts in millions, unless otherwise stated)
penalties. Residential and commercial mortgage-backed securities
and other debt obligations, which are mainly asset-backed
securities, are shown separately as they are not due at a single
maturity date.
|
Cost or |
||||||||
| Amortized Cost | Fair Value | |||||||
|
One year or less
|
$ | 430.2 | $ | 435.2 | ||||
|
Over one year through five years
|
2,941.9 | 3,046.0 | ||||||
|
Over five years through ten years
|
4,259.7 | 4,445.9 | ||||||
|
Over ten years
|
5,187.8 | 5,045.7 | ||||||
|
Residential mortgage-backed securities
|
3,506.3 | 3,536.6 | ||||||
|
Commercial mortgage-backed securities
|
1,883.7 | 1,873.4 | ||||||
|
Other debt obligations
|
171.6 | 159.5 | ||||||
|
Total fixed maturities
|
$ | 18,381.2 | $ | 18,542.3 | ||||
The following table summarizes the Company’s net investment
income:
|
For the Three Months |
For the Nine Months |
|||||||||||||||
| Ended September 30, | Ended September 30, | |||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||
|
Fixed maturities
|
$ | 267.0 | $ | 235.7 | $ | 781.4 | $ | 691.2 | ||||||||
|
Marketable equity securities,
available-for-sale
|
0.6 | 0.4 | 2.3 | 2.0 | ||||||||||||
|
Marketable equity securities, trading
|
0.7 | 0.7 | 1.9 | 2.1 | ||||||||||||
|
Mortgage loans
|
17.2 | 15.1 | 49.3 | 43.4 | ||||||||||||
|
Policy loans
|
1.1 | 1.1 | 3.3 | 3.4 | ||||||||||||
|
Investments in limited partnerships
|
(0.9 | ) | (9.7 | ) | 1.7 | (19.9 | ) | |||||||||
|
Other(1)
|
2.8 | 3.2 | 4.0 | 10.5 | ||||||||||||
|
Total investment income
|
288.5 | 246.5 | 843.9 | 732.7 | ||||||||||||
|
Investment expenses(2)
|
(4.9 | ) | (4.9 | ) | (14.5 | ) | (14.7 | ) | ||||||||
|
Net investment income
|
$ | 283.6 | $ | 241.6 | $ | 829.4 | $ | 718.0 | ||||||||
| (1) | Includes income from other invested assets, short-term investments and cash and cash equivalents. |
| (2) | Investment expenses are primarily composed of fees paid to the Company’s investment advisor, an affiliate of White Mountains Insurance Group, Ltd. |
F-57
Table of Contents
NOTES TO
UNAUDITED INTERIM CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(All dollar amounts in millions, unless otherwise stated)
(All dollar amounts in millions, unless otherwise stated)
The following table provides additional detail of net realized
investment gains (losses). The cost of securities sold is
determined using the specific identification method.
|
For the Three Months |
For the Nine Months |
|||||||||||||||
| Ended September 30, | Ended September 30, | |||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||
|
Gross realized gains on sales:
|
||||||||||||||||
|
Fixed maturities
|
$ | 10.7 | $ | 0.7 | $ | 17.0 | $ | 10.2 | ||||||||
|
Marketable equity securities, trading
|
1.3 | 8.5 | 2.3 | 14.6 | ||||||||||||
|
Total gross realized gains on sales
|
12.0 | 9.2 | 19.3 | 24.8 | ||||||||||||
|
Gross realized losses on sales:
|
||||||||||||||||
|
Fixed maturities
|
(12.7 | ) | (3.1 | ) | (14.9 | ) | (6.1 | ) | ||||||||
|
Marketable equity securities, trading
|
(1.0 | ) | (5.3 | ) | (5.3 | ) | (5.6 | ) | ||||||||
|
Total gross realized losses on sales
|
(13.7 | ) | (8.4 | ) | (20.2 | ) | (11.7 | ) | ||||||||
|
Impairments:
|
||||||||||||||||
|
Fixed maturities
|
(17.4 | ) | (23.3 | ) | (73.7 | ) | (61.7 | ) | ||||||||
|
Gains (losses) on trading securities:
|
||||||||||||||||
|
Gross gains
|
22.6 | 14.9 | 36.5 | 12.2 | ||||||||||||
|
Gross losses
|
(0.5 | ) | (50.5 | ) | (7.9 | ) | (52.4 | ) | ||||||||
|
Total net gains (losses) on trading securities
|
22.1 | (35.6 | ) | 28.6 | (40.2 | ) | ||||||||||
|
Other, including gains (losses) on calls and redemptions:
|
||||||||||||||||
|
Fixed maturities(1)
|
7.6 | (3.6 | ) | 6.9 | (8.5 | ) | ||||||||||
|
Marketable equity securities, trading
|
(0.8 | ) | (2.4 | ) | 0.3 | (2.4 | ) | |||||||||
|
Other
|
1.5 | (0.3 | ) | 9.8 | (3.6 | ) | ||||||||||
|
Total other
|
8.3 | (6.3 | ) | 17.0 | (14.5 | ) | ||||||||||
|
Net realized investment gains (losses)
|
$ | 11.3 | $ | (64.4 | ) | $ | (29.0 | ) | $ | (103.3 | ) | |||||
| (1) | The Company uses the fair value option for its investments in convertible fixed maturities. The fair value of these securities was $55.3 and $50.5 as of September 30, 2009 and December 31, 2008, respectively. The Company recorded gains (losses) in net realized investment gains (losses) related to changes in fair value of these securities of $6.3 and $(2.1) for the three months ended September 30, 2009 and 2008, respectively, and $10.0 and $(6.8) for the nine months ended September 30, 2009 and 2008, respectively. These realized gains (losses) are included in Other-fixed maturities. |
Other-Than-Temporary
Impairments
Investments are considered to be impaired when a decline in fair
value is judged to be
other-than-temporary.
The Company’s review of investment securities includes both
quantitative and qualitative criteria. Quantitative criteria
include the length of time and amount that each security is in
an unrealized loss position and, for fixed maturities, whether
expected future cash flows indicate a credit loss exists.
The Company’s review of its fixed maturity and
available-for-sale
marketable equity securities for impairments includes an
analysis of the gross unrealized losses by three categories of
securities: (i) securities where the estimated fair value
has declined and remained below cost or amortized cost by less
than 20%, (ii) securities where the estimated fair value
has declined and remained below cost or amortized cost by 20% or
more for less than six months and (iii) securities where
the estimated fair value has declined and remained
F-58
Table of Contents
NOTES TO
UNAUDITED INTERIM CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(All dollar amounts in millions, unless otherwise stated)
(All dollar amounts in millions, unless otherwise stated)
below cost or amortized cost by 20% or more for six months or
longer. While all securities are monitored for impairment, the
Company’s experience indicates that the first category does
not represent a significant risk of impairment and, often, fair
values recover over time as the factors that caused the declines
improve. In times of economic turbulence, such as those of 2008
and 2009, securities in category (ii) represent a
significant risk. Securities in category (iii) are always
considered to represent a significant risk. The Company performs
a qualitative analysis by issuer to identify securities in
category (i) that should be further evaluated for OTTI.
If the value of a security falls into category (ii) or
(iii), the Company analyzes the decrease in fair value to
determine whether it is an
other-than-temporary
decline in value. To make this determination for each security,
the Company considers, among other factors:
| • | Extent and duration of the decline in fair value below cost or amortized cost; |
| • | The financial condition and near-term prospects of the issuer of the security, including any specific events that may affect its operations or earnings potential; |
| • | Any downgrades of the security by a rating agency; |
| • | Any reduction or elimination of dividends or nonpayment of scheduled interest payments; |
| • | Other indications that a credit loss has occurred; and |
| • | For fixed maturities, the Company’s intent to sell the security or whether it is more likely than not the Company will be required to sell the security prior to recovery of its amortized cost, considering any regulatory developments and the Company’s liquidity needs. |
Based on the analysis, the Company makes a judgment as to
whether the loss is
other-than-temporary.
The Company’s
available-for-sale
marketable equity securities consist primarily of non-redeemable
preferred stock, which are evaluated similarly to fixed
maturities.
For fixed maturities, the Company implemented new accounting
guidance effective January 1, 2009. If the Company intends
to sell a security or it is more-likely-than-not it will be
required to sell a security before recovery of its amortized
cost basis and the fair value of the security is below amortized
cost, an OTTI has occurred and the amortized cost is written
down to current fair value, with a corresponding charge to net
realized investment gains (losses) in the consolidated
statements of income. If the Company does not intend to sell a
security or believes it is not more likely than not it will be
required to sell a security before recovery of its amortized
cost basis, but the present value of the cash flows expected to
be collected is less than the amortized cost of the security
(that is, a credit loss exists), the Company concludes that an
OTTI has occurred and the amortized cost is written down to the
discounted estimated recovery value with a corresponding charge
to net realized investment gains (losses) in the consolidated
statements of income, as this is deemed the credit portion of
the OTTI. The remainder of the decline in fair value is recorded
in other comprehensive income (loss) in the consolidated
statements of stockholders’ equity, as this is considered
the portion of the impairment due to other, non-credit factors.
When assessing the Company’s intent to sell a fixed
maturity or if it is more likely than not it will be required to
sell a fixed maturity before recovery of its cost basis, the
Company evaluates facts and circumstances including, but not
limited to, decisions to reposition its security portfolio,
sales of securities to meet cash flow needs and sales of
securities to capitalize on favorable pricing. In order to
determine the amount of the credit loss for a fixed maturity,
the Company calculates the recovery value by performing a
discounted cash flow analysis based on the current expectations
of future cash flows it expects to recover. The discount rate is
the effective interest rate implicit in the underlying fixed
maturity. The effective interest rate is the original yield, or
the coupon if the security was previously impaired. See the
discussion below for additional information on the methodology
and significant inputs, by security type, used to determine the
amount of a credit loss.
F-59
Table of Contents
NOTES TO
UNAUDITED INTERIM CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(All dollar amounts in millions, unless otherwise stated)
(All dollar amounts in millions, unless otherwise stated)
In periods subsequent to the recognition of an OTTI, the
security is accounted for as if it had been purchased on the
measurement date of the OTTI, with a par value equal to the
expected principal to be recovered. Therefore, for fixed
maturity securities, the revised discount or reduced premium is
reflected in net investment income over the contractual term of
the investment in a manner that produces a constant effective
yield.
Determination
of Credit Losses on Corporate Securities
To determine recovery value of a corporate security, the Company
performs an analysis related to the underlying issuer including,
but not limited to, the following:
| • | Fundamentals of the issuer to determine what the Company would recover if the issuer were to file bankruptcy versus the price at which the market is trading; |
| • | Fundamentals of the industry in which the issuer operates; |
| • | Earnings multiples for the given industry or sector of the industry that the underlying issuer operates within, divided by the outstanding debt to determine an expected recovery value of the security in the case of a liquidation; |
| • | Expected cash flows of the issuer; |
| • | Expectations regarding defaults and recovery rates; |
| • | Changes to the rating of the security by a rating agency; and |
| • | Additional market information. |
Determination
of Credit Losses on Mortgage-backed Securities
To determine recovery value of a mortgage-backed security,
including residential, commercial and other asset-backed
securities, the Company performs an analysis related to the
underlying issuer including, but not limited to, the following:
| • | Discounted cash flow analysis based on the current and future cash flows the Company expects to recover; |
| • | Level of creditworthiness; |
| • | Delinquency ratios and loan-to-value ratios; |
| • | Average cumulative collateral loss, vintage year and level of subordination; |
| • | Susceptibility to fair value fluctuations due to changes in the interest rate environment; |
| • | Susceptibility to reinvestment risk in cases where market yields are lower than the book yield earned; |
| • | Susceptibility to reinvestment risk in cases where market yields are higher than the book yields earned and the Company’s expectation of the sale of such security; and |
| • | Susceptibility to variability of prepayments. |
F-60
Table of Contents
NOTES TO
UNAUDITED INTERIM CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(All dollar amounts in millions, unless otherwise stated)
(All dollar amounts in millions, unless otherwise stated)
Changes in the amount of credit-related OTTI recognized in net
income where the portion related to other factors was recognized
in other comprehensive income (loss) were as follows:
|
For the Three |
For the Nine |
|||||||
|
Months Ended |
Months Ended |
|||||||
| September 30, 2009 | September 30, 2009 | |||||||
|
Balance, beginning of the period
|
$ | 74.4 | $ | 73.0 | ||||
|
Increases recognized in the current period:
|
||||||||
|
For which an OTTI was not previously recognized
|
14.1 | 35.4 | ||||||
|
Recognized in the current period for which an OTTI was
previously recognized
|
1.5 | 12.1 | ||||||
|
Decreases attributable to:
|
||||||||
|
Securities sold or paid down during the period
|
(18.7 | ) | (26.4 | ) | ||||
|
Previously recognized credit losses on securities impaired
during the period due to a change in intent to sell(1)
|
(0.3 | ) | (23.1 | ) | ||||
|
Balance, end of the period
|
$ | 71.0 | $ | 71.0 | ||||
| (1) | Represents circumstances where the Company determined in the current period that it intends to sell the security or it is more likely than not that it will be required to sell the security prior to recovery of its amortized cost. |
| 5. | Fair Value of Financial Instruments |
The Company has categorized its financial instruments, based on
the priority of the inputs to the valuation technique, into the
three-level fair value hierarchy. The fair value hierarchy gives
the highest priority to quoted prices in active markets for
identical assets or liabilities (Level 1) and the
lowest priority to unobservable inputs (Level 3). The level
in the fair value hierarchy within which the fair value
measurement falls is determined based on the lowest-level input
that is significant to the fair value measurement. The
Company’s financial assets recorded at fair value on the
consolidated balance sheets are categorized as follows:
| • | Level 1 — Unadjusted quoted prices in active markets for identical instruments. Primarily consists of financial instruments whose value is based on quoted market prices, such as exchange-traded marketable equity securities and actively traded mutual fund investments. |
| • | Level 2 — Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable. |
This level includes those financial instruments that are valued
using industry-standard pricing methodologies, models, or other
valuation methodologies. These models are primarily
industry-standard models that consider various inputs, such as
interest rate and credit spread for the underlying financial
instruments. All significant inputs are observable, or derived
from observable, information in the marketplace or are supported
by observable levels at which transactions are executed in the
market place. Financial instruments in this category primarily
include certain public and private corporate fixed maturity
securities, government or agency securities, and certain
mortgage-backed and asset-backed securities.
| • | Level 3 — Instruments whose significant value drivers are unobservable. This comprises financial instruments for which fair value is estimated based on industry-standard pricing |
F-61
Table of Contents
NOTES TO
UNAUDITED INTERIM CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(All dollar amounts in millions, unless otherwise stated)
(All dollar amounts in millions, unless otherwise stated)
| methodologies and internally developed models utilizing significant inputs not based on or corroborated by readily available market information. In limited circumstances, this category may also utilize nonbinding broker quotes. This category primarily consists of certain less liquid fixed maturities, investments in hedge funds and private equity funds, corporate private placement securities, and trading securities where the Company cannot corroborate the significant valuation inputs with market observable data. |
The following table presents the financial instruments carried
at fair value under the valuation hierarchy, as described above,
for assets accounted for at fair value on a recurring basis. The
Company has no financial liabilities accounted for at fair value
on a recurring basis:
| As of September 30, 2009 | ||||||||||||||||||||
| Fair Value | Level 1 | Level 2 | Level 3 | Level 3 Percent | ||||||||||||||||
|
Types of Investments
|
||||||||||||||||||||
|
Fixed maturities,
available-for-sale:
|
||||||||||||||||||||
|
U.S. government and agencies
|
$ | 45.7 | $ | — | $ | 45.7 | $ | — | — | |||||||||||
|
State and political subdivisions
|
484.9 | — | 477.7 | 7.2 | 0.0 | % | ||||||||||||||
|
Foreign governments
|
28.2 | — | 28.2 | — | — | |||||||||||||||
|
Corporate securities
|
12,414.0 | — | 11,508.9 | 905.1 | 4.6 | |||||||||||||||
|
Residential mortgage-backed securities
|
3,536.6 | — | 3,270.5 | 266.1 | 1.4 | |||||||||||||||
|
Commercial mortgage-backed securities
|
1,873.4 | — | 1,850.1 | 23.3 | 0.1 | |||||||||||||||
|
Other debt obligations
|
159.5 | — | 146.3 | 13.2 | 0.1 | |||||||||||||||
|
Total fixed maturities,
available-for-sale
|
18,542.3 | — | 17,327.4 | 1,214.9 | 6.2 | |||||||||||||||
|
Marketable equity securities,
available-for-sale
|
35.4 | 32.9 | — | 2.5 | 0.0 | |||||||||||||||
|
Marketable equity securities, trading
|
140.6 | 140.3 | — | 0.3 | 0.0 | |||||||||||||||
|
Short-term investments
|
2.5 | 2.5 | — | — | — | |||||||||||||||
|
Investments in limited partnerships(1)
|
46.6 | — | — | 46.6 | 0.2 | |||||||||||||||
|
Other invested assets
|
6.1 | — | — | 6.1 | 0.0 | |||||||||||||||
|
Total investments
|
$ | 18,773.5 | $ | 175.7 | $ | 17,327.4 | $ | 1,270.4 | 6.4 | |||||||||||
|
Separate account assets
|
818.6 | 818.6 | — | — | — | |||||||||||||||
|
Total assets
|
$ | 19,592.1 | $ | 994.3 | $ | 17,327.4 | $ | 1,270.4 | 6.4 | % | ||||||||||
| (1) | As of September 30, 2009, this amount included investments in hedge funds and private equity funds. |
F-62
Table of Contents
NOTES TO
UNAUDITED INTERIM CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(All dollar amounts in millions, unless otherwise stated)
(All dollar amounts in millions, unless otherwise stated)
| As of December 31, 2008 | ||||||||||||||||||||
| Fair Value | Level 1 | Level 2 | Level 3 | Level 3 Percent | ||||||||||||||||
|
Types of Investments
|
||||||||||||||||||||
|
Fixed maturities,
available-for-sale:
|
||||||||||||||||||||
|
U.S. government and agencies
|
$ | 156.8 | $ | — | $ | 156.8 | $ | — | — | |||||||||||
|
State and political subdivisions
|
424.9 | — | 418.6 | 6.3 | 0.0 | % | ||||||||||||||
|
Foreign governments
|
34.6 | — | 34.6 | — | — | |||||||||||||||
|
Corporate securities
|
9,306.5 | — | 8,674.9 | 631.6 | 4.0 | |||||||||||||||
|
Residential mortgage-backed securities
|
3,126.3 | — | 3,126.3 | — | — | |||||||||||||||
|
Commercial mortgage-backed securities
|
1,675.0 | — | 1,650.6 | 24.4 | 0.2 | |||||||||||||||
|
Other debt obligations
|
163.5 | — | 151.5 | 12.0 | 0.1 | |||||||||||||||
|
Total fixed maturities,
available-for-sale
|
14,887.6 | — | 14,213.3 | 674.3 | 4.3 | |||||||||||||||
|
Marketable equity securities,
available-for-sale
|
38.1 | 38.1 | — | — | — | |||||||||||||||
|
Marketable equity securities, trading
|
106.3 | 106.1 | — | 0.2 | 0.0 | |||||||||||||||
|
Short-term investments
|
9.4 | 7.2 | 2.2 | — | — | |||||||||||||||
|
Investments in limited partnerships(1)
|
56.3 | — | — | 56.3 | 0.4 | |||||||||||||||
|
Other invested assets
|
2.4 | — | — | 2.4 | 0.0 | |||||||||||||||
|
Total investments
|
$ | 15,100.1 | $ | 151.4 | $ | 14,215.5 | $ | 733.2 | 4.7 | |||||||||||
|
Separate account assets
|
716.2 | 716.2 | — | — | — | |||||||||||||||
|
Total assets
|
$ | 15,816.3 | $ | 867.6 | $ | 14,215.5 | $ | 733.2 | 4.7 | % | ||||||||||
| (1) | As of December 31, 2008, this amount included investments in hedge funds and private equity funds. |
Fixed
Maturities
The vast majority of the Company’s fixed maturities have
been classified as Level 2 measurements. To make this
assessment, the Company determines whether the market for a
security is active and if significant pricing inputs are
observable. The Company predominantly utilizes third party
independent pricing services to assist management in determining
the fair value of its fixed maturity securities. As of
September 30, 2009 and December 31, 2008, pricing services
provided prices for 93.5% and 95.1%, respectively, of the
Company’s fixed maturities. Prices received from the
pricing services are not adjusted and multiple prices for these
securities are not obtained. The pricing services provide prices
where observable inputs are available. The Company’s
pricing services utilize evaluated pricing models that vary by
asset class. The standard inputs for security evaluations
include benchmark yields, reported trades, broker/dealer quotes,
issuer spreads, two-sided markets, benchmark securities, bids,
offers and other reference data, including market research
publications. Because many fixed maturities do not trade on a
daily basis, evaluated pricing applications apply available
information through processes, such as benchmark curves,
benchmarking of like securities, sector groupings and matrix
pricing, to prepare evaluations. In addition, the pricing
services use models and processes to develop prepayment and
interest rate scenarios. These models take into account market
convention. If sufficient objectively verifiable information
about a security’s valuation is not available, the pricing
services will not provide a valuation for the security until it
is able to obtain such information.
The Company performs analysis on the prices received from the
pricing services to ensure that the prices represent a
reasonable estimate of fair value and gains assurance on the
overall reasonableness and consistent application of input
assumptions, valuation methodologies and compliance with
accounting standards for fair value determination. This analysis
is performed through various processes including
F-63
Table of Contents
NOTES TO
UNAUDITED INTERIM CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(All dollar amounts in millions, unless otherwise stated)
(All dollar amounts in millions, unless otherwise stated)
evaluation of pricing methodologies and inputs, analytical
reviews of certain prices between reporting periods, and
back-testing of selected sales activity to determine whether
there are any significant differences between the market price
used to value the security prior to sale and the actual sales
prices.
In situations where the Company is unable to obtain sufficient
market-observable information upon which to estimate the fair
value of a particular security, fair values are determined using
internal pricing models that typically utilize significant,
unobservable market inputs or inputs that are difficult to
corroborate with observable market data. When there is not
sufficient observable market information and the security is
priced using internal pricing models, which is generally the
case for private placement securities and other securities the
pricing services are unable to price, it is considered a Level 3
measurement.
As of September 30, 2009 and December 31, 2008, the Company had
$875.9, or 4.7%, and $632.2, or 4.0%, respectively, of its fixed
maturities invested in private placement securities. The
valuation of certain private placement securities requires
significant judgment by management due to the absence of quoted
market prices, the inherent lack of liquidity and the long-term
nature of such assets. The fair values of these assets are
determined using a discounted cash flow approach. The valuation
model requires the use of inputs that are not market-observable
and involve significant judgment. The discount rate is based on
the current Treasury curve adjusted for credit and liquidity
factors. The appropriate illiquidity adjustment is estimated
based on illiquidity spreads observed in transactions involving
other similar securities. The use of significant unobservable
inputs in determining the fair value of the Company’s
investments in private placement securities resulted in the
classification of $783.9, or 89.5%, and $583.2, or 92.2%, as
Level 3 measurements, as of September 30, 2009 and December 31,
2008, respectively.
Marketable
Equity Securities
Marketable equity securities consist primarily of investments in
common stock and certain nonredeemable preferred stock and
mutual fund assets, which consist of investments in publicly
traded companies and actively traded mutual fund investments.
The fair values of the Company’s marketable equity
securities are based on quoted market prices in active markets
for identical assets and the vast majority are classified as
Level 1.
Investments
in Limited Partnerships
The fair value of the Company’s investments in hedge funds
and private equity funds is based upon the Company’s
proportionate interest in the underlying partnership or
fund’s net asset value (NAV), which is deemed to
approximate fair value. In circumstances where the partnership
NAV is deemed to differ from fair value due to illiquidity or
other factors, the NAV is adjusted accordingly. As of
September 30, 2009 and December 31, 2008, there were
no factors present that would require an adjustment to the NAV.
The Company classifies these securities as Level 3.
Separate
Account Assets
Separate account assets are primarily invested in mutual funds,
which are included in Level 1.
F-64
Table of Contents
NOTES TO
UNAUDITED INTERIM CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(All dollar amounts in millions, unless otherwise stated)
(All dollar amounts in millions, unless otherwise stated)
Rollforward
of Financial Instruments Measured at Fair Value on a Recurring
Basis Using Significant Unobservable Inputs
(Level 3)
The following tables present additional information about assets
measured at fair value on a recurring basis and for which the
Company utilized significant unobservable
(Level 3) inputs to determine fair value for the three
and nine months ended September 30, 2009 and 2008,
respectively.
|
Unrealized Gain |
||||||||||||||||||||||||||||||||||||
|
Transfers in |
Included in: | |||||||||||||||||||||||||||||||||||
|
Balance as |
and/or |
Other |
Balance as of |
|||||||||||||||||||||||||||||||||
|
of July 1, |
(Out) of |
Net |
Comprehensive |
Realized |
September 30, |
|||||||||||||||||||||||||||||||
| 2009 | Purchases | Sales | Level 3(1) | Other | Income(2) | Income | Gains(2) | 2009 | ||||||||||||||||||||||||||||
|
Types of Investments:
|
||||||||||||||||||||||||||||||||||||
|
State and political subdivisions
|
$ | 7.1 | $ | — | $ | — | $ | — | $ | (0.6 | ) | $ | — | $ | 0.7 | $ | — | $ | 7.2 | |||||||||||||||||
|
Corporate securities(3)
|
747.1 | 34.4 | (4.0 | ) | 7.8 | 37.9 | — | 81.9 | — | 905.1 | ||||||||||||||||||||||||||
|
Residential mortgage-backed securities
|
61.1 | 206.6 | — | (4.3 | ) | 0.2 | — | 2.5 | — | 266.1 | ||||||||||||||||||||||||||
|
Commercial mortgage-backed securities
|
23.1 | — | — | — | (0.6 | ) | — | 0.8 | — | 23.3 | ||||||||||||||||||||||||||
|
Other debt obligations
|
12.7 | — | — | — | (0.2 | ) | — | 0.7 | — | 13.2 | ||||||||||||||||||||||||||
|
Total fixed maturities,
available-for-sale
|
851.1 | 241.0 | (4.0 | ) | 3.5 | 36.7 | — | 86.6 | — | 1,214.9 | ||||||||||||||||||||||||||
|
Marketable equity securities,
available-for-sale
|
1.8 | — | — | — | 0.3 | — | 0.4 | — | 2.5 | |||||||||||||||||||||||||||
|
Marketable equity securities, trading
|
0.2 | — | — | — | — | 0.1 | — | — | 0.3 | |||||||||||||||||||||||||||
|
Investments in limited partnerships
|
63.2 | 2.2 | (20.1 | ) | — | — | 0.3 | — | 1.0 | 46.6 | ||||||||||||||||||||||||||
|
Other invested assets
|
1.2 | 3.0 | — | — | 0.2 | 1.7 | — | — | 6.1 | |||||||||||||||||||||||||||
|
Total Level 3
|
$ | 917.5 | $ | 246.2 | $ | (24.1 | ) | $ | 3.5 | $ | 37.2 | $ | 2.1 | $ | 87.0 | $ | 1.0 | $ | 1,270.4 | |||||||||||||||||
|
Unrealized Gain (Loss) |
||||||||||||||||||||||||||||||||||||
|
Transfers in |
Included in: | |||||||||||||||||||||||||||||||||||
|
Balance as |
and/or |
Other |
Balance as of |
|||||||||||||||||||||||||||||||||
|
of January 1, |
(Out) of |
Net |
Comprehensive |
Realized |
September 30, |
|||||||||||||||||||||||||||||||
| 2009 | Purchases | Sales | Level 3(1) | Other | Income(2) | Income | Losses(2) | 2009 | ||||||||||||||||||||||||||||
|
Types of Investments:
|
||||||||||||||||||||||||||||||||||||
|
State and political subdivisions
|
$ | 6.3 | $ | — | $ | — | $ | (0.7 | ) | $ | — | $ | — | $ | 1.6 | $ | — | $ | 7.2 | |||||||||||||||||
|
Corporate securities(3)
|
631.6 | 147.7 | (4.0 | ) | (14.3 | ) | 12.0 | — | 136.1 | (4.0 | ) | 905.1 | ||||||||||||||||||||||||
|
Residential mortgage-backed securities
|
— | 263.5 | — | — | 0.2 | — | 2.4 | — | 266.1 | |||||||||||||||||||||||||||
|
Commercial mortgage-backed securities
|
24.4 | — | — | (0.7 | ) | (2.2 | ) | — | 1.8 | — | 23.3 | |||||||||||||||||||||||||
|
Other debt obligations
|
12.0 | — | — | 0.7 | (1.5 | ) | — | 2.0 | — | 13.2 | ||||||||||||||||||||||||||
|
Total fixed maturities,
available-for-sale
|
674.3 | 411.2 | (4.0 | ) | (15.0 | ) | 8.5 | — | 143.9 | (4.0 | ) | 1,214.9 | ||||||||||||||||||||||||
|
Marketable equity securities,
available-for-sale
|
— | — | — | 5.2 | 0.3 | — | (3.0 | ) | — | 2.5 | ||||||||||||||||||||||||||
|
Marketable equity securities, trading
|
0.2 | — | — | — | — | 0.1 | — | — | 0.3 | |||||||||||||||||||||||||||
|
Investments in limited partnerships
|
56.3 | 4.6 | (23.0 | ) | — | — | 9.5 | — | (0.8 | ) | 46.6 | |||||||||||||||||||||||||
|
Other invested assets
|
2.4 | 3.0 | — | — | 0.3 | 0.4 | — | — | 6.1 | |||||||||||||||||||||||||||
|
Total Level 3
|
$ | 733.2 | $ | 418.8 | $ | (27.0 | ) | $ | (9.8 | ) | $ | 9.1 | $ | 10.0 | $ | 140.9 | $ | (4.8 | ) | $ | 1,270.4 | |||||||||||||||
| (1) | Transfers into and/or out of Level 3 are reported at the value as of the beginning of the period in which the transfer occurs. Gross transfers into Level 3 were $8.2 and $14.7 for the three and nine months ended |
F-65
Table of Contents
NOTES TO
UNAUDITED INTERIM CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(All dollar amounts in millions, unless otherwise stated)
(All dollar amounts in millions, unless otherwise stated)
| September 30, 2009, respectively. Gross transfers out of Level 3 were $4.7 and $24.5 for the three and nine months ended September 30, 2009, respectively. |
| (2) | Realized and unrealized gains and losses for investments in limited partnerships are included in net investment income. All other realized and unrealized gains and losses are included in realized gains (losses) on the income statement. |
| (3) | Other transactions for corporate securities include a tax free exchange of $40.0, where a Level 2 bond, purchased in 2009, was exchanged for a Level 3 bond from the same issuer during the third quarter of 2009. |
|
Unrealized Gain (Loss) |
||||||||||||||||||||||||||||||||||||
|
Transfers in |
Included in: | |||||||||||||||||||||||||||||||||||
|
Balance as |
and/or |
Other |
Realized |
Balance as of |
||||||||||||||||||||||||||||||||
|
of July 1, |
(Out) of |
Net |
Comprehensive |
Gains |
September 30, |
|||||||||||||||||||||||||||||||
| 2008 | Purchases | Sales | Level 3(1) | Other | Income(2) | Income | (Losses)(2) | 2008 | ||||||||||||||||||||||||||||
|
Types of Investments:
|
||||||||||||||||||||||||||||||||||||
|
State and political subdivisions
|
$ | 7.5 | $ | 22.0 | $ | — | $ | — | $ | — | $ | — | $ | (1.8 | ) | $ | — | $ | 27.7 | |||||||||||||||||
|
Corporate securities
|
649.2 | 14.6 | (4.0 | ) | 22.4 | (5.5 | ) | — | (29.8 | ) | (3.3 | ) | 643.6 | |||||||||||||||||||||||
|
Residential mortgage-backed securities
|
80.6 | 3.9 | — | (40.5 | ) | 0.2 | — | (1.7 | ) | — | 42.5 | |||||||||||||||||||||||||
|
Commercial mortgage-backed securities
|
36.9 | — | — | 5.3 | (8.0 | ) | — | 2.3 | — | 36.5 | ||||||||||||||||||||||||||
|
Other debt obligations
|
16.1 | — | — | (1.7 | ) | (0.2 | ) | — | (1.4 | ) | — | 12.8 | ||||||||||||||||||||||||
|
Total fixed maturities,
available-for-sale
|
790.3 | 40.5 | (4.0 | ) | (14.5 | ) | (13.5 | ) | — | (32.4 | ) | (3.3 | ) | 763.1 | ||||||||||||||||||||||
|
Marketable equity securities, trading
|
1.3 | — | — | — | 1.8 | (1.7 | ) | — | — | 1.4 | ||||||||||||||||||||||||||
|
Investments in limited partnerships
|
100.5 | 0.4 | (2.8 | ) | — | — | (8.5 | ) | — | 2.0 | 91.6 | |||||||||||||||||||||||||
|
Other invested assets
|
0.9 | — | — | — | 1.4 | (0.2 | ) | — | (0.4 | ) | 1.7 | |||||||||||||||||||||||||
|
Total Level 3
|
$ | 893.0 | $ | 40.9 | $ | (6.8 | ) | $ | (14.5 | ) | $ | (10.3 | ) | $ | (10.4 | ) | $ | (32.4 | ) | $ | (1.7 | ) | $ | 857.8 | ||||||||||||
|
Unrealized Gain (Loss) |
||||||||||||||||||||||||||||||||||||
|
Transfers in |
Included in: | |||||||||||||||||||||||||||||||||||
|
Balance as |
and/or |
Other |
Realized |
Balance as |
||||||||||||||||||||||||||||||||
|
of January 1, |
(Out) of |
Net |
Comprehensive |
Gains |
of September 30, |
|||||||||||||||||||||||||||||||
| 2008 | Purchases | Sales | Level 3(1) | Other | Income(2) | Income | (Losses)(2) | 2008 | ||||||||||||||||||||||||||||
|
Types of Investments:
|
||||||||||||||||||||||||||||||||||||
|
State and political subdivisions
|
$ | 0.8 | $ | 28.7 | $ | — | $ | — | $ | — | $ | — | $ | (1.8 | ) | $ | — | $ | 27.7 | |||||||||||||||||
|
Corporate securities
|
632.4 | 61.7 | (7.1 | ) | 29.3 | (14.5 | ) | — | (47.2 | ) | (11.0 | ) | 643.6 | |||||||||||||||||||||||
|
Residential mortgage-backed securities
|
— | 3.9 | — | 50.4 | 0.5 | — | (12.3 | ) | — | 42.5 | ||||||||||||||||||||||||||
|
Commercial mortgage-backed securities
|
49.6 | — | — | 0.6 | (11.9 | ) | — | (1.2 | ) | (0.6 | ) | 36.5 | ||||||||||||||||||||||||
|
Other debt obligations
|
7.4 | — | — | 17.1 | (0.6 | ) | — | (11.1 | ) | — | 12.8 | |||||||||||||||||||||||||
|
Total fixed maturities,
available-for-sale
|
690.2 | 94.3 | (7.1 | ) | 97.4 | (26.5 | ) | — | (73.6 | ) | (11.6 | ) | 763.1 | |||||||||||||||||||||||
|
Marketable equity securities, trading
|
0.5 | 1.1 | (0.5 | ) | 0.2 | 1.8 | (1.7 | ) | — | — | 1.4 | |||||||||||||||||||||||||
|
Investments in limited partnerships
|
91.4 | 13.9 | (2.9 | ) | — | — | (12.9 | ) | — | 2.1 | 91.6 | |||||||||||||||||||||||||
|
Other invested assets
|
4.6 | — | — | — | 1.8 | (4.0 | ) | — | (0.7 | ) | 1.7 | |||||||||||||||||||||||||
|
Total Level 3
|
$ | 786.7 | $ | 109.3 | $ | (10.5 | ) | $ | 97.6 | $ | (22.9 | ) | $ | (18.6 | ) | $ | (73.6 | ) | $ | (10.2 | ) | $ | 857.8 | |||||||||||||
F-66
Table of Contents
NOTES TO
UNAUDITED INTERIM CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(All dollar amounts in millions, unless otherwise stated)
(All dollar amounts in millions, unless otherwise stated)
| (1) | Transfers into and/or out of Level 3 are reported as the value as of the beginning of the period in which the transfer occurs. Gross transfers into Level 3 were $34.2 and $111.8 for the three and nine months ended September 30, 2008, respectively. Gross transfers out of Level 3 were $48.7 and $14.2 for the three and nine months ended September 30, 2008, respectively. |
| (2) | Realized and unrealized gains and losses for investments in limited partnerships are included in net investment income. All other realized and unrealized gains and losses are included in realized gains (losses) on the income statement. |
The following table summarizes the carrying or reported values
and corresponding fair values of financial instruments subject
to disclosure requirements:
| September 30, 2009 | December 31, 2008 | |||||||||||||||
|
Carrying |
Fair |
Carrying |
Fair |
|||||||||||||
| Amount | Value | Amount | Value | |||||||||||||
|
Financial assets:
|
||||||||||||||||
|
Fixed maturities
|
$ | 18,542.3 | $ | 18,542.3 | $ | 14,887.6 | $ | 14,887.6 | ||||||||
|
Marketable equity securities,
available-for-sale
|
35.4 | 35.4 | 38.1 | 38.1 | ||||||||||||
|
Marketable equity securities, trading
|
140.6 | 140.6 | 106.3 | 106.3 | ||||||||||||
|
Mortgage loans
|
1,095.2 | 1,076.5 | 988.7 | 907.6 | ||||||||||||
|
Short-term investments
|
2.5 | 2.5 | 9.4 | 9.4 | ||||||||||||
|
Investments in limited partnerships
|
133.4 | 134.8 | 138.3 | 140.2 | ||||||||||||
|
Cash and cash equivalents
|
241.7 | 241.7 | 468.0 | 468.0 | ||||||||||||
|
Securities lending collateral
|
31.4 | 31.4 | 105.7 | 105.7 | ||||||||||||
|
Separate account assets
|
818.6 | 818.6 | 716.2 | 716.2 | ||||||||||||
|
Financial liabilities:
|
||||||||||||||||
|
Funds held under deposit contracts
|
13,735.7 | 14,148.9 | 11,987.9 | 10,972.2 | ||||||||||||
|
Notes payable:
|
||||||||||||||||
|
Capital Efficient Notes (CENts)
|
149.8 | 93.8 | 149.8 | 64.0 | ||||||||||||
|
Senior notes
|
299.1 | 277.5 | 299.0 | 268.1 | ||||||||||||
|
Securities lending payable
|
31.4 | 31.4 | 105.7 | 105.7 | ||||||||||||
The fair values of mortgage loans are determined by discounting
the projected cash flows using the current rate at which the
loans would be made to borrowers with similar credit ratings and
for the same maturities.
Investments in limited partnerships are comprised of hedge
funds, private equity funds, and affordable housing projects and
state tax credit funds. Investments in limited partnerships
associated with hedge funds and private equity funds are carried
at fair value based on the NAV, as described previously.
Investments in limited partnerships associated with affordable
housing projects and state tax credit funds are carried at
amortized cost. Fair value is estimated based on the discounted
cash flows over the remaining life of the tax credits.
For cash and cash equivalents, the carrying value is a
reasonable estimate of fair value.
The Company reports funds held under deposit contracts related
to investment-type contracts at carrying value and estimates the
fair values of these contracts using an income approach based on
the present value of the discounted cash flows. Cash flows are
projected using prudent best estimates for lapses, mortality,
and expenses and discounted at a risk-free rate plus a
nonperformance risk spread.
F-67
Table of Contents
NOTES TO
UNAUDITED INTERIM CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(All dollar amounts in millions, unless otherwise stated)
(All dollar amounts in millions, unless otherwise stated)
The fair values of the Company’s notes payable are based on
quoted market prices for similar instruments. The fair value
measurement assumes that liabilities are transferred to a market
participant of equal credit standing, without consideration for
any optional redemption feature.
The fair value of securities lending collateral is the cash and
non-cash collateral received by the custodian and held on the
Company’s behalf, based on quoted market prices for similar
instruments. The carrying amount of securities lending payable
approximates fair value.
| 6. | Comprehensive Income (Loss) |
The components of comprehensive income (loss) are as follows:
|
Three Months Ended |
Nine Months Ended |
|||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||
|
Net income (loss)
|
$ | 44.1 | $ | (4.8 | ) | $ | 96.2 | $ | 27.0 | |||||||
|
Other comprehensive income (loss), net of taxes:
|
||||||||||||||||
|
Changes in unrealized gains and losses on
available-for-sale
securities(1)
|
743.0 | (487.5 | ) | 1,191.7 | (834.7 | ) | ||||||||||
|
Reclassification adjustment for net realized investment (gains)
losses included in net income(2)
|
(6.4 | ) | 41.7 | 25.2 | 64.9 | |||||||||||
|
Adjustment for deferred policy acquisition costs and deferred
sales inducements valuation allowance(3)
|
(68.5 | ) | 12.7 | (80.4 | ) | 18.6 | ||||||||||
|
Other than temporary impairments on fixed maturities not related
to credit losses(4)
|
4.6 | — | (38.4 | ) | — | |||||||||||
|
Other comprehensive income (loss)
|
672.7 | (433.1 | ) | 1,098.1 | (751.2 | ) | ||||||||||
|
Total comprehensive income (loss)
|
$ | 716.8 | $ | (437.9 | ) | $ | 1,194.3 | $ | (724.2 | ) | ||||||
| (1) | Net of taxes of $400.1, $(262.5), $641.7 and $(449.4) for the three months ended September 30, 2009 and 2008 and the nine months ended September 30, 2009 and 2008, respectively. |
| (2) | Net of taxes of $(3.4), $22.4, $13.6 and $34.9 for the three months ended September 30, 2009 and 2008 and the nine months ended September 30, 2009 and 2008, respectively. For the three and nine months ended September 30, 2009, $22.0 (net of taxes of $11.8) and $22.9 (net of taxes of $12.2), respectively, of the reclassification adjustment is related to losses previously classified as other-than-temporary impairments not related to credit losses. |
| (3) | Net of taxes of $(37.0), $6.9, $(43.3) and $10.0 for the three months ended September 30, 2009 and 2008 and the nine months ended September 30, 2009 and 2008, respectively. |
| (4) | Net of taxes of $2.5, $0, $(20.7) and $0 for the three months ended September 30, 2009 and 2008 and the nine months ended September 30, 2009 and 2008, respectively. |
F-68
Table of Contents
NOTES TO
UNAUDITED INTERIM CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(All dollar amounts in millions, unless otherwise stated)
(All dollar amounts in millions, unless otherwise stated)
| 7. | Deferred Policy Acquisition Costs |
The following table provides a reconciliation of the beginning
and ending balance for deferred policy acquisition costs:
|
September 30, |
December 31, |
|||||||
| 2009 | 2008 | |||||||
|
Unamortized balance at beginning of period
|
$ | 219.5 | $ | 129.9 | ||||
|
Deferral of acquisition costs
|
123.2 | 110.6 | ||||||
|
Adjustments related to investment losses
|
9.1 | 4.8 | ||||||
|
Amortization related to other expenses
|
(36.4 | ) | (25.8 | ) | ||||
|
Unamortized balance at end of period
|
315.4 | 219.5 | ||||||
|
Accumulated effect of net unrealized investment (gains) losses
|
(74.6 | ) | 28.0 | |||||
|
Balance at end of period
|
$ | 240.8 | $ | 247.5 | ||||
| 8. | Deferred Sales Inducements |
The following table provides a reconciliation of the beginning
and ending balance for deferred sales inducements, which are
included in other assets:
|
September 30, |
December 31, |
|||||||
| 2009 | 2008 | |||||||
|
Unamortized balance at beginning of period
|
$ | 33.0 | $ | 17.2 | ||||
|
Capitalizations
|
30.4 | 17.3 | ||||||
|
Adjustments related to investment losses
|
2.0 | 1.0 | ||||||
|
Amortization related to other expenses
|
(6.8 | ) | (2.5 | ) | ||||
|
Unamortized balance at end of period
|
58.6 | 33.0 | ||||||
|
Accumulated effect of net unrealized investment (gains) losses
|
(16.6 | ) | 4.5 | |||||
|
Balance at end of period
|
$ | 42.0 | $ | 37.5 | ||||
| 9. | Commitments and Contingencies |
Litigation
Because of the nature of the business, the Company is subject to
legal actions filed or threatened in the ordinary course of its
business operations. The Company does not expect that any such
litigation, pending or threatened, as of September 30,
2009, will have a material adverse effect on its consolidated
financial condition, future operating results or liquidity.
Leases
On August 1, 2009, the Company entered into a new service
agreement with a third party service provider to outsource the
majority of its information technology infrastructure,
effectively terminating the previous agreement with this vendor
which was scheduled to expire in July 2010. The initial term of
the new agreement expires in July 2014, subject to early
termination in certain cases, with two one-year extensions at
the Company’s election. Under the terms of the service
agreement, the Company agreed to pay an annual service fee
ranging from $10.6 to $11.4 for five contract years beginning
August 1, 2009.
F-69
Table of Contents
NOTES TO
UNAUDITED INTERIM CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(All dollar amounts in millions, unless otherwise stated)
(All dollar amounts in millions, unless otherwise stated)
Investments
in Limited Partnerships
On June 24, 2009, the Company invested in a new limited
partnership interest related to affordable housing projects. The
Company unconditionally committed to provide capital
contributions totaling $10.0. As of September 30, 2009 the
Company contributed $1.4 and is expected to contribute $8.6 over
the next four years. The present value of these unfunded
contributions is recorded in other liabilities.
Other
Commitments
At September 30, 2009 and December 31, 2008, unfunded
mortgage loan commitments were $17.4 and $9.0, respectively. The
Company had no other material commitments or contingencies at
September 30, 2009 and December 31, 2008.
| 10. | Segment Information |
The Company offers a broad range of products and services that
include group and individual insurance products, retirement
products and annuities. These operations are managed separately
as five reportable segments based on product groupings: Group,
Retirement Services, Income Annuities, Individual and Other.
The primary segment profitability measure that management uses
is segment pre-tax operating income, which is calculated by
adjusting income from continuing operations before federal
income taxes to exclude net realized investment gains (losses),
and for the Retirement Services’ segment to include the net
realized investment gains (losses) on fixed index annuities
(FIA) options.
When evaluating segment pre-tax operating income in the
Retirement Services’ segment, management includes the
realized and unrealized investment gains (losses) from options
related to a FIA hedging program. This program consists of
buying S&P 500 Index call options. The Company uses index
options to hedge the equity return component of FIA products.
These options do not qualify as hedge instruments or for hedge
accounting treatment. The realized and unrealized gain (losses)
from the options is recorded in net realized investment gains
(losses). Since the interest incurred on the Company’s FIA
products is included as a component of interest credited, it is
more meaningful to evaluate results inclusive of the results of
the hedge program.
| • | Group. Group offers medical stop-loss insurance, limited medical benefit plans, group life insurance, accidental death and dismemberment insurance, and disability insurance mainly to employer groups of 50 to 5,000 individuals. Group also offers managing general underwriter services through Medical Risk Managers Holdings, Inc. |
| • | Retirement Services. Retirement Services offers fixed and variable deferred annuities, including tax-sheltered annuities, IRAs and group annuities, to qualified retirement plans, including Section 401(k) and 457 plans. |
| • | Income Annuities. Income Annuities offers single premium immediate annuities, or SPIAs, for customers seeking a reliable source of retirement income and structured settlement annuities to fund third party personal injury settlements. |
| • | Individual. Individual offers a wide array of term, universal and variable life insurance products, as well as bank-owned life insurance, or BOLI. |
| • | Other. This segment consists of unallocated corporate income, composed primarily of investment income on unallocated surplus, unallocated corporate expenses, interest expense on debt, the results of small, non-insurance businesses that are managed outside of the operating segments, and intersegment elimination entries. |
F-70
Table of Contents
NOTES TO
UNAUDITED INTERIM CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(All dollar amounts in millions, unless otherwise stated)
(All dollar amounts in millions, unless otherwise stated)
The Company allocates capital and related investment income to
each segment using a risk-based capital formula.
The following tables present selected financial information by
segment and reconcile segment pre-tax operating income to
amounts reported in the consolidated statements of income.
| Three Months Ended September 30, 2009 | ||||||||||||||||||||||||
|
Retirement |
Income |
|||||||||||||||||||||||
| Group | Services | Annuities | Individual | Other | Total | |||||||||||||||||||
|
Revenues:
|
||||||||||||||||||||||||
|
Premiums
|
$ | 106.5 | $ | 0.1 | $ | — | $ | 35.5 | $ | — | $ | 142.1 | ||||||||||||
|
Net investment income
|
4.5 | 103.5 | 104.7 | 66.9 | 4.0 | 283.6 | ||||||||||||||||||
|
Other revenues
|
4.2 | 4.5 | 0.1 | 3.1 | 2.8 | 14.7 | ||||||||||||||||||
|
Net realized investment gains (losses):
|
||||||||||||||||||||||||
|
Total
other-than-temporary
impairment losses on securities
|
(3.4 | ) | (6.3 | ) | (24.4 | ) | (3.9 | ) | (6.1 | ) | (44.1 | ) | ||||||||||||
|
Less: portion of losses recognized in other comprehensive income
|
2.7 | 1.9 | 14.9 | 2.5 | 4.7 | 26.7 | ||||||||||||||||||
|
Net impairment losses recognized in earnings
|
(0.7 | ) | (4.4 | ) | (9.5 | ) | (1.4 | ) | (1.4 | ) | (17.4 | ) | ||||||||||||
|
Other net realized investment gains (losses)
|
(0.8 | ) | 5.3 | 28.4 | (2.1 | ) | (2.1 | ) | 28.7 | |||||||||||||||
|
Total net realized investment gains (losses)
|
(1.5 | ) | 0.9 | 18.9 | (3.5 | ) | (3.5 | ) | 11.3 | |||||||||||||||
|
Total revenues
|
113.7 | 109.0 | 123.7 | 102.0 | 3.3 | 451.7 | ||||||||||||||||||
|
Benefits and expenses:
|
||||||||||||||||||||||||
|
Policyholder benefits and claims
|
71.7 | (1.3 | ) | — | 15.2 | — | 85.6 | |||||||||||||||||
|
Interest credited
|
— | 70.5 | 90.7 | 60.0 | (0.7 | ) | 220.5 | |||||||||||||||||
|
Other underwriting and operating expenses
|
25.6 | 13.6 | 5.4 | 13.4 | 3.7 | 61.7 | ||||||||||||||||||
|
Interest expense
|
— | — | — | — | 7.9 | 7.9 | ||||||||||||||||||
|
Amortization of deferred policy acquisition costs
|
1.9 | 10.5 | 0.4 | 1.0 | — | 13.8 | ||||||||||||||||||
|
Total benefits and expenses
|
99.2 | 93.3 | 96.5 | 89.6 | 10.9 | 389.5 | ||||||||||||||||||
|
Segment pre-tax income (loss)
|
14.5 | 15.7 | 27.2 | 12.4 | (7.6 | ) | 62.2 | |||||||||||||||||
|
Less: Net realized investment gains (losses)
|
(1.5 | ) | 0.9 | 18.9 | (3.5 | ) | (3.5 | ) | 11.3 | |||||||||||||||
|
Add: Net realized and unrealized gains (losses) on FIA options
|
— | 1.4 | — | — | — | 1.4 | ||||||||||||||||||
|
Segment pre-tax operating income (loss)
|
$ | 16.0 | $ | 16.2 | $ | 8.3 | $ | 15.9 | $ | (4.1 | ) | $ | 52.3 | |||||||||||
F-71
Table of Contents
NOTES TO
UNAUDITED INTERIM CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(All dollar amounts in millions, unless otherwise stated)
(All dollar amounts in millions, unless otherwise stated)
| Three Months Ended September 30, 2008 | ||||||||||||||||||||||||
|
Retirement |
Income |
|||||||||||||||||||||||
| Group | Services | Annuities | Individual | Other | Total | |||||||||||||||||||
|
Revenues:
|
||||||||||||||||||||||||
|
Premiums
|
$ | 113.2 | $ | 0.1 | $ | — | $ | 34.8 | $ | — | $ | 148.1 | ||||||||||||
|
Net investment income
|
4.2 | 67.9 | 108.4 | 64.3 | (3.2 | ) | 241.6 | |||||||||||||||||
|
Other revenues
|
4.7 | 5.1 | 0.2 | 3.4 | 3.0 | 16.4 | ||||||||||||||||||
|
Net realized investment gains (losses):
|
||||||||||||||||||||||||
|
Total
other-than-temporary
impairment losses on securities
|
(0.1 | ) | (2.0 | ) | (3.3 | ) | (9.8 | ) | (8.1 | ) | (23.3 | ) | ||||||||||||
|
Less: portion of losses recognized in other comprehensive income
|
— | — | — | — | — | — | ||||||||||||||||||
|
Net impairment losses recognized in earnings
|
(0.1 | ) | (2.0 | ) | (3.3 | ) | (9.8 | ) | (8.1 | ) | (23.3 | ) | ||||||||||||
|
Other net realized investment gains (losses)
|
— | (1.6 | ) | (33.8 | ) | (1.0 | ) | (4.7 | ) | (41.1 | ) | |||||||||||||
|
Net realized investment gains (losses)
|
(0.1 | ) | (3.6 | ) | (37.1 | ) | (10.8 | ) | (12.8 | ) | (64.4 | ) | ||||||||||||
|
Total revenues
|
122.0 | 69.5 | 71.5 | 91.7 | (13.0 | ) | 341.7 | |||||||||||||||||
|
Benefits and expenses:
|
||||||||||||||||||||||||
|
Policyholder benefits and claims
|
67.3 | (2.4 | ) | — | 14.8 | — | 79.7 | |||||||||||||||||
|
Interest credited
|
— | 44.5 | 90.5 | 57.8 | (0.7 | ) | 192.1 | |||||||||||||||||
|
Other underwriting and operating expenses
|
27.5 | 14.2 | 5.3 | 14.7 | 3.7 | 65.4 | ||||||||||||||||||
|
Interest expense
|
— | — | — | — | 8.0 | 8.0 | ||||||||||||||||||
|
Amortization of deferred policy acquisition costs
|
2.0 | 4.0 | 0.4 | 0.7 | — | 7.1 | ||||||||||||||||||
|
Total benefits and expenses
|
96.8 | 60.3 | 96.2 | 88.0 | 11.0 | 352.3 | ||||||||||||||||||
|
Segment pre-tax income (loss)
|
25.2 | 9.2 | (24.7 | ) | 3.7 | (24.0 | ) | (10.6 | ) | |||||||||||||||
|
Less: Net realized investment gains (losses)
|
(0.1 | ) | (3.6 | ) | (37.1 | ) | (10.8 | ) | (12.8 | ) | (64.4 | ) | ||||||||||||
|
Segment pre-tax operating income (loss)
|
$ | 25.3 | $ | 12.8 | $ | 12.4 | $ | 14.5 | $ | (11.2 | ) | $ | 53.8 | |||||||||||
F-72
Table of Contents
NOTES TO
UNAUDITED INTERIM CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(All dollar amounts in millions, unless otherwise stated)
(All dollar amounts in millions, unless otherwise stated)
| Nine Months Ended September 30, 2009 | ||||||||||||||||||||||||
|
Retirement |
Income |
|||||||||||||||||||||||
| Group | Services | Annuities | Individual | Other | Total | |||||||||||||||||||
|
Revenues:
|
||||||||||||||||||||||||
|
Premiums
|
$ | 324.1 | $ | 0.1 | $ | — | $ | 106.0 | $ | — | $ | 430.2 | ||||||||||||
|
Net investment income
|
13.3 | 281.8 | 318.1 | 198.0 | 18.2 | 829.4 | ||||||||||||||||||
|
Other revenues
|
12.7 | 12.3 | 0.4 | 9.9 | 7.9 | 43.2 | ||||||||||||||||||
|
Net realized investment gains (losses):
|
||||||||||||||||||||||||
|
Total
other-than-temporary
impairment losses on securities
|
(8.5 | ) | (53.1 | ) | (76.6 | ) | (17.7 | ) | (12.0 | ) | (167.9 | ) | ||||||||||||
|
Less: portion of losses recognized in other comprehensive income
|
6.3 | 23.4 | 49.5 | 9.1 | 5.9 | 94.2 | ||||||||||||||||||
|
Net impairment losses recognized in earnings
|
(2.2 | ) | (29.7 | ) | (27.1 | ) | (8.6 | ) | (6.1 | ) | (73.7 | ) | ||||||||||||
|
Other net realized investment gains (losses)
|
(0.7 | ) | 12.2 | 34.8 | 0.7 | (2.3 | ) | 44.7 | ||||||||||||||||
|
Total net realized investment gains (losses)
|
(2.9 | ) | (17.5 | ) | 7.7 | (7.9 | ) | (8.4 | ) | (29.0 | ) | |||||||||||||
|
Total revenues
|
347.2 | 276.7 | 326.2 | 306.0 | 17.7 | 1,273.8 | ||||||||||||||||||
|
Benefits and expenses:
|
||||||||||||||||||||||||
|
Policyholder benefits and claims
|
219.9 | (2.2 | ) | — | 44.4 | — | 262.1 | |||||||||||||||||
|
Interest credited
|
— | 187.2 | 268.7 | 175.7 | (2.4 | ) | 629.2 | |||||||||||||||||
|
Other underwriting and operating expenses
|
79.7 | 41.3 | 15.6 | 39.6 | 10.5 | 186.7 | ||||||||||||||||||
|
Interest expense
|
— | — | — | — | 23.8 | 23.8 | ||||||||||||||||||
|
Amortization of deferred policy acquisition costs
|
5.8 | 26.8 | 1.2 | 2.6 | — | 36.4 | ||||||||||||||||||
|
Total benefits and expenses
|
305.4 | 253.1 | 285.5 | 262.3 | 31.9 | 1,138.2 | ||||||||||||||||||
|
Segment pre-tax income (loss)
|
41.8 | 23.6 | 40.7 | 43.7 | (14.2 | ) | 135.6 | |||||||||||||||||
|
Less: Net realized investment gains (losses)
|
(2.9 | ) | (17.5 | ) | 7.7 | (7.9 | ) | (8.4 | ) | (29.0 | ) | |||||||||||||
|
Add: Net realized and unrealized gains (losses) on FIA options
|
— | 0.2 | — | — | — | 0.2 | ||||||||||||||||||
|
Segment pre-tax operating income (loss)
|
$ | 44.7 | $ | 41.3 | $ | 33.0 | $ | 51.6 | $ | (5.8 | ) | $ | 164.8 | |||||||||||
|
As of September 30, 2009:
|
||||||||||||||||||||||||
|
Total investments
|
$ | 157.8 | $ | 6,979.3 | $ | 6,481.9 | $ | 4,710.3 | $ | 1,705.9 | $ | 20,035.2 | ||||||||||||
|
Deferred policy acquisition costs
|
3.5 | 166.3 | 19.7 | 51.3 | — | 240.8 | ||||||||||||||||||
|
Separate account assets
|
— | 736.9 | — | 81.7 | — | 818.6 | ||||||||||||||||||
|
Total assets
|
285.5 | 8,158.5 | 6,664.6 | 5,076.5 | 2,040.9 | 22,226.0 | ||||||||||||||||||
|
Future policy benefits, losses, claims, and loss expenses(1)
|
190.5 | 7,448.0 | 6,703.4 | 4,792.8 | (19.3 | ) | 19,115.4 | |||||||||||||||||
|
Unearned premiums
|
2.2 | — | — | 10.8 | — | 13.0 | ||||||||||||||||||
|
Other policyholder funds
|
8.6 | 16.1 | 19.4 | 40.3 | 6.4 | 90.8 | ||||||||||||||||||
|
Notes payable
|
— | — | — | — | 448.9 | 448.9 | ||||||||||||||||||
| (1) | This includes funds held under deposit contracts, future policy benefits, and policy and contract claims. |
F-73
Table of Contents
NOTES TO
UNAUDITED INTERIM CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(All dollar amounts in millions, unless otherwise stated)
(All dollar amounts in millions, unless otherwise stated)
| Nine Months Ended September 30, 2008 | ||||||||||||||||||||||||
|
Retirement |
Income |
|||||||||||||||||||||||
| Group | Services | Annuities | Individual | Other | Total | |||||||||||||||||||
|
Revenues:
|
||||||||||||||||||||||||
|
Premiums
|
$ | 338.8 | $ | 0.1 | $ | — | $ | 101.5 | $ | — | $ | 440.4 | ||||||||||||
|
Net investment income
|
13.4 | 188.4 | 316.9 | 190.6 | 8.7 | 718.0 | ||||||||||||||||||
|
Other revenues
|
14.3 | 15.9 | 0.6 | 12.2 | 9.0 | 52.0 | ||||||||||||||||||
|
Net realized investment gains (losses):
|
||||||||||||||||||||||||
|
Total
other-than-temporary
impairment losses on securities
|
(0.1 | ) | (12.9 | ) | (22.6 | ) | (12.7 | ) | (13.4 | ) | (61.7 | ) | ||||||||||||
|
Less: portion of losses recognized in other comprehensive income
|
— | — | — | — | — | — | ||||||||||||||||||
|
Net impairment losses recognized in earnings
|
(0.1 | ) | (12.9 | ) | (22.6 | ) | (12.7 | ) | (13.4 | ) | (61.7 | ) | ||||||||||||
|
Other net realized investment losses
|
— | (4.1 | ) | (31.4 | ) | (0.5 | ) | (5.6 | ) | (41.6 | ) | |||||||||||||
|
Net realized investment losses
|
(0.1 | ) | (17.0 | ) | (54.0 | ) | (13.2 | ) | (19.0 | ) | (103.3 | ) | ||||||||||||
|
Total revenues
|
366.4 | 187.4 | 263.5 | 291.1 | (1.3 | ) | 1,107.1 | |||||||||||||||||
|
Benefits and expenses:
|
||||||||||||||||||||||||
|
Policyholder benefits and claims
|
222.0 | (6.7 | ) | — | 44.8 | — | 260.1 | |||||||||||||||||
|
Interest credited
|
— | 127.2 | 272.4 | 171.3 | (1.8 | ) | 569.1 | |||||||||||||||||
|
Other underwriting and operating expenses
|
86.7 | 44.5 | 16.1 | 43.0 | 11.6 | 201.9 | ||||||||||||||||||
|
Interest expense
|
— | — | — | — | 24.0 | 24.0 | ||||||||||||||||||
|
Amortization of deferred policy acquisition costs
|
6.1 | 8.4 | 1.0 | 2.2 | — | 17.7 | ||||||||||||||||||
|
Total benefits and expenses
|
314.8 | 173.4 | 289.5 | 261.3 | 33.8 | 1,072.8 | ||||||||||||||||||
|
Segment pre-tax income (loss)
|
51.6 | 14.0 | (26.0 | ) | 29.8 | (35.1 | ) | 34.3 | ||||||||||||||||
|
Less: Net realized investment gains (losses)
|
(0.1 | ) | (17.0 | ) | (54.0 | ) | (13.2 | ) | (19.0 | ) | (103.3 | ) | ||||||||||||
|
Add: Net realized and unrealized gains (losses) on FIA options
|
— | (3.6 | ) | — | — | — | (3.6 | ) | ||||||||||||||||
|
Segment pre-tax operating income (loss)
|
$ | 51.7 | $ | 27.4 | $ | 28.0 | $ | 43.0 | $ | (16.1 | ) | $ | 134.0 | |||||||||||
|
As of September 30, 2008:
|
||||||||||||||||||||||||
|
Total investments
|
$ | 157.4 | $ | 4,508.5 | $ | 6,069.1 | $ | 4,186.2 | $ | 1,527.3 | $ | 16,448.5 | ||||||||||||
|
Deferred policy acquisition costs
|
3.2 | 151.9 | 13.8 | 42.9 | — | 211.8 | ||||||||||||||||||
|
Separate account assets
|
— | 821.1 | — | 91.3 | — | 912.4 | ||||||||||||||||||
|
Total assets
|
293.7 | 5,856.8 | 6,491.0 | 4,768.3 | 1,981.2 | 19,391.0 | ||||||||||||||||||
|
Future policy benefits, losses, claims, and loss expenses(1)
|
198.2 | 5,173.8 | 6,794.1 | 4,698.8 | (9.4 | ) | 16,855.5 | |||||||||||||||||
|
Unearned premiums
|
2.2 | — | — | 10.3 | — | 12.5 | ||||||||||||||||||
|
Other policyholder funds
|
9.2 | 29.1 | 2.1 | 28.8 | 7.9 | 77.1 | ||||||||||||||||||
|
Notes payable
|
— | — | — | — | 448.7 | 448.7 | ||||||||||||||||||
| (1) | This includes funds held under deposit contracts, future policy benefits, and policy and contract claims. |
F-74
Table of Contents
NOTES TO
UNAUDITED INTERIM CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(All dollar amounts in millions, unless otherwise stated)
(All dollar amounts in millions, unless otherwise stated)
| 11. | Quarterly Results of Operations |
The unaudited quarterly results of operations for the nine
months ended September 30, 2009 and the year ended
December 31, 2008 are summarized in the table below:
| Three Months Ended | ||||||||||||||||
| March 31 | June 30 | September 30 | December 31 | |||||||||||||
| (In millions, except for per share data) | ||||||||||||||||
|
2009
|
||||||||||||||||
|
Total revenues
|
$ | 378.8 | $ | 443.3 | $ | 451.7 | ||||||||||
|
Total benefits and expenses
|
371.6 | 377.1 | 389.5 | |||||||||||||
|
Income from operations before income taxes
|
7.2 | 66.2 | 62.2 | |||||||||||||
|
Net income
|
5.1 | 47.0 | 44.1 | |||||||||||||
|
Net income per common share:
|
||||||||||||||||
|
Basic net income per share(1)
|
$ | 0.05 | $ | 0.42 | $ | 0.40 | ||||||||||
|
Diluted net income per share(1)
|
$ | 0.05 | $ | 0.42 | $ | 0.40 | ||||||||||
|
2008
|
||||||||||||||||
|
Total revenues
|
$ | 365.0 | $ | 400.4 | $ | 341.7 | $ | 344.0 | ||||||||
|
Total benefits and expenses
|
360.3 | 360.2 | 352.3 | 365.3 | ||||||||||||
|
Income (loss) from operations before income taxes
|
4.7 | 40.2 | (10.6 | ) | (21.3 | ) | ||||||||||
|
Net income (loss)
|
3.3 | 28.5 | (4.8 | ) | (4.9 | ) | ||||||||||
|
Net income (loss) per common share:
|
||||||||||||||||
|
Basic net income (loss) per share(1)
|
$ | 0.03 | $ | 0.26 | $ | (0.05 | ) | $ | (0.05 | ) | ||||||
|
Diluted net income (loss) per share(1)
|
$ | 0.03 | $ | 0.26 | $ | (0.05 | ) | $ | (0.05 | ) | ||||||
| (1) | Quarterly earnings per share amounts may not add to the full year amounts due to share weighting, rounding and, in the periods of quarterly net losses, the antidilutive effect of the outstanding warrants and restricted shares. |
| 12. | Subsequent Events |
On November 9, 2009, the date the September 30, 2009
unaudited interim consolidated financial statements of Symetra
Financial were issued, the Company evaluated the recognition and
disclosure of subsequent events.
On October 5, 2009, the Company’s IPO committee
approved the filing of a registration statement with the
Securities and Exchange Commission for an initial public
offering of the Company’s common stock.
On October 7, 2009, a member in default in the syndicate of
lending institutions on the Company’s revolving credit
facility assigned its interest in the facility to a new member.
This assignment effectively restored the Company’s ability
to borrow under the facility from $180.0 to the original amount
of $200.0.
F-75
Table of Contents
GLOSSARY
OF SELECTED INSURANCE AND DEFINED TERMS
| Accumulation period | The period during which a deferred annuity accumulates interest or investment gains (losses). The period ends when the income payments begin. | |
| Annualized first-year premiums (AFYP) | This term applies to our Group and Individual segments. For recurring premium products it represents the total expected premium payments over the first twelve months on new sales. The entire twelve months of expected premium is reported as AFYP in the period during which the policy is issued. For single-premium products, the AFYP is 10% of the single premium. | |
| Annuity | A contract sold by insurance companies that offers tax-deferred savings and a choice of payout options to meet the owner’s income needs in retirement. | |
| Bank-owned life insurance (BOLI) | A life insurance policy purchased to insure the life of certain bank employees, usually officers and other highly compensated employees. The policies are commonly used to fund employee pension and benefit plans. | |
| Brokerage general agent | An independent contractor of the insurance company who has the authority to appoint brokers on behalf of the insurance company. | |
| Cash value | The amount of cash available to a policyholder on the surrender of or withdrawal from a life insurance policy or annuity contract. | |
| Cede | Reinsuring with another insurance company all or a portion of the risk we insure. | |
| Contract values | The amounts held for the benefit of policyholders or contractholders within investment products. For variable products, account value is equal to fair value. | |
| Deferred annuities | Annuity contracts that delay income payments until the holder chooses to receive them. These contracts might also be surrendered for cash, exchanged for another contract or rolled over to another contract. | |
| Defined benefit plan | A pension plan that promises to pay a specified amount to each eligible plan member who retires. | |
| Defined contribution plan | A plan established under Section 401(a), 401(k), 403(b) or 457(b) of the Internal Revenue Code, under which the benefits to a participant depend on contributions made to, and the investment return on, the participant’s account. | |
| Earned premiums | The portion of a premium, net of any amount ceded, that represents coverage already provided or that belongs to the insurer based on the part of the policy period that has passed. | |
| Expense risk | The measure of the sensitivity of the insurance company’s liability for the resultant higher expense rates than charged for in the premium, expense charge or margin. | |
| Fixed annuity | An annuity that guarantees that a specific sum of money will be paid in the future, usually as monthly income, to an annuitant. The dollar amount will not fluctuate regardless of adverse changes in |
G-1
Table of Contents
| the insurance company’s mortality experience, investment return and expenses. | ||
| Fixed indexed annuity (FIA) | Modifications of the single premium deferred annuity, which usually guarantees at a minimum a return of the premium. Additional interest can be earned that is linked to a specified stock index. Thus, this insurance product usually guarantees the principal of the investment, while at the same time providing the opportunity for increasing values tied to the equities market. | |
| General account | All of the assets of our insurance companies recognized for statutory accounting purposes other than those specifically allocated to separate accounts. We bear the risk of our investments held in our general account. | |
| Group insurance | A single contract or policy under which individuals in a natural group (such as employees of a business firm) and potentially their dependants are covered. | |
| Group medical stop-loss insurance | Coverage purchased by employers in order to limit their exposure under self-insured medical plans. | |
| Guaranteed investment contract | A contract, usually purchased by ERISA qualified plans, that guarantees a minimum rate of return on the amount invested. | |
| Guaranteed living benefits (GLBs) | An industry term associated with optional benefit riders on variable annuity contracts, such as guaranteed minimum withdrawal benefits (GMWBs), guaranteed minimum income benefits (GMIBs) and guaranteed minimum accumulation benefits (GMABs). For a separate charge assessed against the variable annuity contract value, GLBs generally provide for some guaranteed level of withdrawal, annuity or accumulation benefit regardless of declines in the variable annuity contract value. Some variable annuity contracts may allow for increases or “step-ups” in guaranteed benefit amounts. GLBs are typically subject to various contractual conditions, including minimum waiting periods, required participation in asset allocation programs and limitations on withdrawal amounts. GLBs typically require insurers to maintain complex hedging programs to manage the risks associated with these guaranties. | |
| Guaranteed minimum income benefit (GMIB) | A benefit that guarantees a specified minimum appreciation rate for a defined period of time, after which annuity payments commence. | |
| Guaranteed minimum withdrawal benefit (GMWB) | A benefit that guarantees a customer’s minimum stream of income, equal to the return of the contract’s principal, provided it is withdrawn within specified limits over time. | |
| In force | Policies and contracts reflected on our applicable records that have not expired or been terminated as of a given date. | |
| Interest spread | Yield on investments less the interest rate credited on liabilities. | |
| Managing general underwriter (MGU) | An MGU is a business that acts as a sales intermediary between an insurance company and medical stop-loss policyholder. MGU’s can |
G-2
Table of Contents
| provide marketing, premium administration, claims administration, claims adjudication and pricing. The MGU is generally paid a percentage of premium and does not share in any of the risk. | ||
| Market value adjustment (MVA) | A market value adjustment is a feature that adjusts the surrender value of a contract in the event of surrender prior to the end of the contract period to protect an insurer against losses due to higher interest rates at the time of the surrender. | |
| Morbidity | The incidence of disease or disability in a specific population over a specific period of time. | |
| Mortality | The number of deaths in a specific population over a specific period of time. | |
| Mortality gains | Mortality gains may arise if mortality rates are higher or lower than expected. For structured settlements and SPIAs mortality gains occur if policyholders die sooner than expected. For life insurance, mortality gains occur if policyholders die later than expected. | |
| Multiple premium immediate annuity (MPIA) | An annuity that is funded with multiple premiums and guarantees a series of payments continuing over a fixed number of years or for the life of the annuitant. The payments typically begin more than one year after the initial premium payment. | |
| Non-admitted assets | Certain assets or portions thereof that are not permitted to be reported as admitted assets in an insurer’s annual statement prepared in accordance with statutory accounting principles. As a result, certain assets that normally would be accorded value in the financial statements of non-insurance corporations are accorded no value and thus reduce the reported statutory surplus of the insurer. | |
| Non-qualified plan | An employee benefits plan that does not have the federal tax advantages of a qualified pension plan, in which employers receive a federal tax deduction for contributions paid into the plan on behalf of their employees. For an employer, not having a tax deduction can be a serious disadvantage, but a non-qualified plan has these advantages: | |
|
1) otherwise discriminatory coverage for some employees is
allowed; and
|
||
|
2) benefits can be allocated to certain employees whom the
employer wishes to reward. The result could be that the total
cost of the benefits for a particular group of employees may be
less under a non-qualified plan than for all employees under a
qualified plan.
|
||
| Persistency | Measurement of the percentage of insurance policies or annuity contracts remaining in force between specified measurement dates. | |
| Premiums | Payments and other consideration received on insurance policies issued or reinsurance assumed by an insurance company. Under generally accepted accounting principles, premiums on variable life and other investment-type contracts are not accounted for as revenues. |
G-3
Table of Contents
| Regulatory capital | Regulatory capital is the sum of statutory capital and surplus and asset valuation reserve (AVR). | |
| Reinsurance | A form of insurance that insurance companies buy for their own protection “a sharing of insurance.” An insurer (the reinsured) reduces its possible maximum loss on either an individual risk or a large number of risks by giving a portion of its liability to another insurance company (the reinsurer). Reinsurance enables an insurance company to (1) expand its capacity; (2) stabilize its underwriting results; (3) finance its expanding volume; (4) secure catastrophe protection against shock losses; (5) withdraw from a class or line of business, or a geographical area, within a relatively short time period and (6) share large risks with other companies. | |
| Reserves | Liabilities established by insurers and reinsurers to reflect the estimated costs of claim payments and benefits and the related expenses that the insurer or reinsurer will ultimately be required to pay in respect of insurance or reinsurance it has written. | |
| Section 403(b) plan | A retirement plan which is available primarily to public school employees and non-profit organizations that allows individuals to defer compensation on a pre-tax basis through payroll deductions and to defer federal and sometimes state taxes until the assets are withdrawn. | |
| Section 457 plan | A retirement plan available to government employees that allows an individual to defer compensation on a pre-tax basis through payroll deductions and to defer federal and sometimes state taxes until the assets are withdrawn. | |
| Shadow account | A shadow account is a proxy for the account value of a UL policy. The shadow account accumulates based on more favorable cost of insurance charges, loads and interest crediting rates than the policy’s actual account value. The policy will not lapse as long as the value of the shadow account remains positive. The shadow account is not accessible by the policyholder. | |
| Single premium immediate annuities (SPIAs) | An annuity that is purchased for a single premium at the time of issue and guarantees a series of payments continuing over a fixed number of years or for the life of the annuitant. | |
| Statutory reserves | Liabilities established by state insurance law that an insurer must have available to provide for future obligations with respect to all policies. Statutory reserves are liabilities on the balance sheet of financial statements prepared in conformity with statutory accounting principles. | |
| Statutory surplus | The excess of admitted assets over statutory liabilities as shown on an insurer’s statutory financial statements. | |
| Structured settlement | A customized annuity used to provide a claimant ongoing periodic payments instead of a lump sum payment. A structured settlement provides an alternative to a lump sum settlement generally in a personal injury lawsuit and typically is purchased by a property and casualty insurance company for the benefit of an injured |
G-4
Table of Contents
| claimant with benefits scheduled to be paid throughout a fixed period or for the life of the claimant. | ||
| Surrender charge | An amount specified in an insurance policy or annuity contract that is charged to a policyholder or contractholder for early cancellation of, or withdrawal under, that policy or contract. | |
| Surrenders and withdrawals | Amounts taken from life insurance policies and annuity contracts representing the full or partial values of these policies or contracts. | |
| Tax sheltered annuity | An annuity issued as part of a Section 403(b) plan. Tax-sheltered annuities are also referred to as “Section 403(b) annuities.” | |
| Term life insurance | Life insurance that stays in effect for only a specified, limited period. If an insured dies within that period, the beneficiary receives the death payments. If the insured survives, the policy ends and the beneficiary receives nothing. | |
| Third party administrator (TPA) | A person or entity that, pursuant to a service contract, processes claims or provides administrative services for an employee benefits plan. | |
| Underwriting | The insurer’s process of reviewing applications submitted for insurance coverage, deciding whether to accept all or part of the coverage requested and determining the applicable premiums. | |
| Universal life (UL) insurance | Adjustable life insurance under which (1) premiums are flexible, not fixed, (2) protection is adjustable, not fixed, and (3) insurance company expenses and other charges are specifically disclosed to a purchaser. This policy is referred to as unbundled life insurance because its three basic elements (investment earnings, pure cost of protection and company expenses) are separately identified both in the policy and in an annual report to the policyowner. After the first premium, additional premiums can be paid at any time. A specified percentage expense charge is deducted from each premium before the balance is credited to the cash value, along with interest. The pure cost of protection is subtracted from the cash value monthly. As selected by the insured, the death benefit can be a specified amount plus the cash value or the specified amount that includes the cash value. After payment of the minimal initial premium required, there are no contractually scheduled premium payments (provided the cash value account balance is sufficient to pay the pure cost of protection each month and any other expenses and charges). Expenses and charges may take the form of a flat dollar amount for the first policy year, a sales charge for each premium received and a monthly expense charge for each policy year. An annual report is provided the policy owner that shows the status of the policy. | |
| Variable annuity | An annuity in which premium payments are used to purchase accumulation units, their number depending on the value of each unit. The value of a unit is determined by the value of the portfolio of stocks in which the insurance company invests the premiums. | |
| Variable life (VL) insurance | An investment-oriented life insurance policy that provides a return linked to an underlying portfolio of securities. The investment offered through the policy is typically established as a separate |
G-5
Table of Contents
| account, which is divided into subaccounts that invest in underlying mutual funds. The policyholder has discretion in choosing among the available subaccounts, such as a common stock fund, bond fund, or money market fund. The life insurance policy benefits payable to the beneficiary upon the death of the insured or the surrender of the policy will vary to reflect the investment performance of the subaccounts chosen by the policy owner. | ||
| Waiver of premium | A provision of a life insurance policy pursuant to which an insured with total disability that lasts for a specified period no longer has to pay premiums for the duration of the disability or for a stated period, during which time the life insurance policy provides continued coverage. | |
| Whole life insurance | Level premium life insurance that covers the lifetime of the individual instead of a fixed term. |
G-6
Table of Contents
Shares
Common Stock
PRELIMINARY
PROSPECTUS
BofA Merrill Lynch
J.P. Morgan
Goldman, Sachs &
Co.
Barclays Capital
,
2009
Table of Contents
PART II
INFORMATION
NOT REQUIRED IN PROSPECTUS
| Item 16. | Exhibits and Financial Statement Schedules. |
(a) Exhibits
|
Exhibit |
||||
|
Number
|
Description | |||
| 1 | .1 | Underwriting Agreement* | ||
| 3 | .1 | Amended and Restated Certificate of Incorporation of Symetra Financial Corporation** | ||
| 3 | .2 | Form of Bylaws of Symetra Financial Corporation** | ||
| 4 | .1 | Specimen Common Stock Certificate* | ||
| 4 | .2 | Fiscal Agency Agreement between Symetra Financial Corporation and U.S. Bank dated March 30, 2006 | ||
| 4 | .3 | Warrant Certificate — General Reinsurance Corporation, dated October 26, 2007** | ||
| 4 | .4 | Warrant Certificate — White Mountains Re (NL) B.V., dated July 24, 2008** | ||
| 4 | .5 | Credit Agreement among Symetra Financial Corporation, the lenders party thereto and Bank of America, N.A., as administrative agent, dated as of August 16, 2007 (including Assignment and Assumption by and between Lehman Commercial Paper, Inc. and Barclays Bank PLC dated as of October 7, 2009) | ||
| 4 | .6 | Purchase Agreement between Symetra Financial Corporation and the purchasers listed therein, dated October 4, 2007** | ||
| 4 | .7 | Indenture between Symetra Financial Corporation and U.S. Bank National Association, as trustee, dated as of October 10, 2007** | ||
| 5 | .1 | Opinion of Cravath, Swaine & Moore LLP* | ||
| 9 | .1 | Shareholders’ Agreement among Occum Acquisition Corp. and the persons listed on the signature pages thereto, dated as of March 8, 2004 | ||
| 9 | .2 | Shareholders’ Agreement among Occum Acquisition Corp. and the persons listed on the signature pages thereto, dated as of March 19, 2004 | ||
| 9 | .3 | Shareholders’ Agreement among Occum Acquisition Corp. and the persons listed on the signature pages thereto, dated as of April 16, 2004 | ||
| 10 | .1 | Master Services Agreement between Affiliated Computer Services, Inc. and Symetra Life Insurance Company, dated August 1, 2009**† | ||
| 10 | .2 | Coinsurance Reinsurance Agreement dated as of January 1, 1998 (the “RGA Agreement”) between Safeco Life Insurance Company and RGA Reinsurance Company (including the two Amendments to the RGA Agreement dated as of June 19, 2002, Amendment to the RGA Agreement dated as of September 23, 2002 and Addendum to the RGA Agreement dated as of August 12, 2003)**† | ||
| 10 | .3 | Group Short Term Disability Reinsurance Agreement dated as of January 1, 1999 (the “Short Term Agreement”) between Safeco Life Insurance Company and Reliance Standard Life Insurance Company, doing business as Custom Disability Solutions, successor to Duncanson & Holt Services, Inc. (including Amendment No. 1 to the Short Term Agreement dated as of July 1, 2006 and Amendment No. 2 to the Short Term Agreement Dated as of December 8, 2006) | ||
| 10 | .4 | Group Long Term Disability Reinsurance Agreement dated as of January 1, 1999 (the “Long Term Agreement”) between Safeco Life Insurance Company and Reliance Standard Life Insurance Company, doing business as Custom Disability Solutions, successor to Duncanson & Holt Services, Inc. (including Amendment No. 1 to the Long Term Agreement dated as of January 1, 2000, Amendment to the Long Term Agreement dated as of January 1, 2006, Amendment No. 3 to the Long Term Agreement dated as of July 1, 2006, Amendment No. 4 to the Long Term Agreement dated as of December 8, 2006 and Amendment No. 5 to the Long Term Agreement dated as of September 1, 2008) | ||
Table of Contents
|
Exhibit |
||||
|
Number
|
Description | |||
| 10 | .5 | Coinsurance Agreement dated as of August 24, 2001 between Safeco Life Insurance Company and The Lincoln National Life Insurance Company**† | ||
| 10 | .6 | Coinsurance Funds Withheld Reinsurance Agreement dated as of December 1, 2001 between Safeco Life Insurance Company and Transamerica Insurance Company**† | ||
| 10 | .7 | Investment Management Agreement between White Mountains Advisors LLC and Occum Acquisition Corp., dated as of March 14, 2004 (including Amendment to Investment Management Agreement dated as of September 30, 2004, Amendment No. 2 to the Investment Management Agreement dated as of August 1, 2005, Amendment No. 3 to the Investment Management Agreement dated as of October 1, 2005 and Amendment No. 4 to the Investment Management Agreement dated as of March 9, 2007)** | ||
| 10 | .8 | Agency Agreement dated as of March 10, 2006 among Symetra Life Insurance Company, WM Financial Services, Inc. and WMFS Insurance Services, Inc. (including Addendum to the Agency Agreement dated as of February 22, 2007, Amendment to the Agency Agreement dated as of March 26, 2007, Amendment to the Agency Agreement dated as of July 17, 2007, Amendment to the Agency Agreement dated as of December 18, 2007, Amendment to the Agency Agreement dated as of September 15, 2008, Amendment to the Agency Agreement dated as of September 23, 2008, Addendum to the Agency Agreement dated as of September 23, 2008, Assignment of Agency Agreement between Symetra Life Insurance Company and WaMu Investments, Inc. (formerly WM Financial Services, Inc.) dated as of May 2, 2009 among Symetra Life Insurance Company, WaMu Investments, Inc. (formerly WM Financial Services, Inc.), WMFS Insurance Services, Inc. and Chase Insurance Agency, Inc. and Amendment to the Agency Agreement dated as of May 2, 2009)**† | ||
| 10 | .9 | Agency Agreement dated as of September 26, 2006 among Symetra Life Insurance Company and Chase Insurance Agency, Inc. (including Addendum to the Agency Agreement dated as of May 15, 2007 and Addendum to the Agency Agreement dated as of March 21, 2008)**† | ||
| 10 | .10 | Symetra Financial Corporation Performance Share Plan 2006-2008** | ||
| 10 | .11 | Symetra Financial Corporation Performance Share Plan 2007-2009** | ||
| 10 | .12 | Symetra Financial Corporation Performance Share Plan 2008-2010** | ||
| 10 | .13 | Symetra Financial Corporation Performance Share Plan 2009-2011 | ||
| 10 | .14 | Annual Incentive Bonus Plan** | ||
| 10 | .15 | 2008 Sales Incentive Plan for Pat McCormick**† | ||
| 10 | .16 | Symetra Financial Corporation Equity Plan** | ||
| 10 | .17 | Symetra Financial Corporation Employee Stock Purchase Plan** | ||
| 10 | .18 | 2009 Sales Incentive Plan for Pat McCormick**† | ||
| 10 | .19 | Form of Restricted Stock Agreement | ||
| 21 | .1 | Subsidiaries of Symetra Financial Corporation* | ||
| 23 | .1 | Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm | ||
| 23 | .2 | Consent of Cravath, Swaine & Moore LLP (included in the opinion filed as Exhibit 5.1)* | ||
| 24 | .1 | Power of Attorney (included in signature page to the Registration Statement filed October 5, 2009)** | ||
| * | To be filed by amendment. | |
| ** | Previously filed. | |
| † | An application for confidential treatment of selected portions of this agreement has been filed with the Commission. |
Table of Contents
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this Registration Statement to be
signed on its behalf by the undersigned, thereunto duly
authorized, in the city of Bellevue, State of Washington, on
November 9, 2009.
SYMETRA FINANCIAL CORPORATION
| By: |
/s/ George
C. Pagos
|
Name: George C. Pagos
| Title: | Senior Vice President, General Counsel and Secretary |
Pursuant to the requirements of the Securities Act of 1933, this
Amendment No. 2 to the Registration Statement has been
signed by the following persons in the capacities indicated as
of November 9, 2009.
|
Signature
|
Title
|
|||
|
* |
Randall H. Talbot President, Chief Executive Officer and Director (Principal Executive Officer) |
|||
|
* |
Margaret A. Meister Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) |
|||
|
* |
David T. Foy (Director) |
|||
|
* |
Lois W. Grady (Director) |
|||
|
* |
Sander M. Levy (Director) |
|||
|
* |
Robert R. Lusardi (Director) |
|||
|
* |
David I. Schamis (Director) |
|||
|
* |
Lowndes A. Smith (Director) |
|||
|
*By:
/s/ George
C. Pagos |
George C. Pagos (Attorney-in-Fact) |
|||
Table of Contents
EXHIBIT INDEX
|
Exhibit |
||||
|
Number
|
Description | |||
| 1 | .1 | Underwriting Agreement* | ||
| 3 | .1 | Amended and Restated Certificate of Incorporation of Symetra Financial Corporation** | ||
| 3 | .2 | Form of Bylaws of Symetra Financial Corporation** | ||
| 4 | .1 | Specimen Common Stock Certificate* | ||
| 4 | .2 | Fiscal Agency Agreement between Symetra Financial Corporation and U.S. Bank dated March 30, 2006 | ||
| 4 | .3 | Warrant Certificate — General Reinsurance Corporation, dated October 26, 2007** | ||
| 4 | .4 | Warrant Certificate — White Mountains Re (NL) B.V., dated July 24, 2008** | ||
| 4 | .5 | Credit Agreement among Symetra Financial Corporation, the lenders party thereto and Bank of America, N.A., as administrative agent, dated as of August 16, 2007 (including Assignment and Assumption by and between Lehman Commercial Paper, Inc. and Barclays Bank PLC dated as of October 7, 2009) | ||
| 4 | .6 | Purchase Agreement between Symetra Financial Corporation and the purchasers listed therein, dated October 4, 2007** | ||
| 4 | .7 | Indenture between Symetra Financial Corporation and U.S. Bank National Association, as trustee, dated as of October 10, 2007** | ||
| 5 | .1 | Opinion of Cravath, Swaine & Moore LLP* | ||
| 9 | .1 | Shareholders’ Agreement among Occum Acquisition Corp. and the persons listed on the signature pages thereto, dated as of March 8, 2004 | ||
| 9 | .2 | Shareholders’ Agreement among Occum Acquisition Corp. and the persons listed on the signature pages thereto, dated as of March 19, 2004 | ||
| 9 | .3 | Shareholders’ Agreement among Occum Acquisition Corp. and the persons listed on the signature pages thereto, dated as of April 16, 2004 | ||
| 10 | .1 | Master Services Agreement between Affiliated Computer Services, Inc. and Symetra Life Insurance Company, dated August 1, 2009**† | ||
| 10 | .2 | Coinsurance Reinsurance Agreement dated as of January 1, 1998 (the “RGA Agreement”) between Safeco Life Insurance Company and RGA Reinsurance Company (including the two Amendments to the RGA Agreement dated as of June 19, 2002, Amendment to the RGA Agreement dated as of September 23, 2002 and Addendum to the RGA Agreement dated as of August 12, 2003)**† | ||
| 10 | .3 | Group Short Term Disability Reinsurance Agreement dated as of January 1, 1999 (the “Short Term Agreement”) between Safeco Life Insurance Company and Reliance Standard Life Insurance Company, doing business as Custom Disability Solutions, successor to Duncanson & Holt Services, Inc. (including Amendment No. 1 to the Short Term Agreement dated as of July 1, 2006 and Amendment No. 2 to the Short Term Agreement dated as of December 8, 2006) | ||
| 10 | .4 | Group Long Term Disability Reinsurance Agreement dated as of January 1, 1999 (the “Long Term Agreement”) between Safeco Life Insurance Company and Reliance Standard Life Insurance Company, doing business as Custom Disability Solutions, successor to Duncanson & Holt Services, Inc. (including Amendment No. 1 to the Long Term Agreement dated as of January 1, 2000, Amendment to the Long Term Agreement dated as of January 1, 2006, Amendment No. 3 to the Long Term Agreement dated as of July 1, 2006, Amendment No. 4 to the Long Term Agreement dated as of December 8, 2006 and Amendment No. 5 to the Long Term Agreement dated as of September 1, 2008) | ||
| 10 | .5 | Coinsurance Agreement dated as of August 24, 2001 between Safeco Life Insurance Company and The Lincoln National Life Insurance Company**† | ||
| 10 | .6 | Coinsurance Funds Withheld Reinsurance Agreement dated as of December 1, 2001 between Safeco Life Insurance Company and Transamerica Insurance Company**† | ||
Table of Contents
|
Exhibit |
||||
|
Number
|
Description | |||
| 10 | .7 | Investment Management Agreement between White Mountains Advisors LLC and Occum Acquisition Corp., dated as of March 14, 2004 (including Amendment to Investment Management Agreement dated as of September 30, 2004, Amendment No. 2 to the Investment Management Agreement dated as of August 1, 2005, Amendment No. 3 to the Investment Management Agreement dated as of October 1, 2005 and Amendment No. 4 to the Investment Management Agreement dated as of March 9, 2007)** | ||
| 10 | .8 | Agency Agreement dated as of March 10, 2006 among Symetra Life Insurance Company, WM Financial Services, Inc. and WMFS Insurance Services, Inc. (including Addendum to the Agency Agreement dated as of February 22, 2007, Amendment to the Agency Agreement dated as of March 26, 2007, Amendment to the Agency Agreement dated as of July 17, 2007, Amendment to the Agency Agreement dated as of December 18, 2007, Amendment to the Agency Agreement dated as of September 15, 2008, Amendment to the Agency Agreement dated as of September 23, 2008, Addendum to the Agency Agreement dated as of September 23, 2008, Assignment of Agency Agreement between Symetra Life Insurance Company and WaMu Investments, Inc. (formerly WM Financial Services, Inc.) dated as of May 2, 2009 among Symetra Life Insurance Company, WaMu Investments, Inc. (formerly WM Financial Services, Inc.), WMFS Insurance Services, Inc. and Chase Insurance Agency, Inc. and Amendment to the Agency Agreement dated as of May 2, 2009)**† | ||
| 10 | .9 | Agency Agreement dated as of September 26, 2006 among Symetra Life Insurance Company and Chase Insurance Agency, Inc. (including Addendum to the Agency Agreement dated as of May 15, 2007 and Addendum to the Agency Agreement dated as of March 21, 2008)**† | ||
| 10 | .10 | Symetra Financial Corporation Performance Share Plan 2006-2008** | ||
| 10 | .11 | Symetra Financial Corporation Performance Share Plan 2007-2009** | ||
| 10 | .12 | Symetra Financial Corporation Performance Share Plan 2008-2010** | ||
| 10 | .13 | Symetra Financial Corporation Performance Share Plan 2009-2011 | ||
| 10 | .14 | Annual Incentive Bonus Plan** | ||
| 10 | .15 | 2008 Sales Incentive Plan for Pat McCormick**† | ||
| 10 | .16 | Symetra Financial Corporation Equity Plan** | ||
| 10 | .17 | Symetra Financial Corporation Employee Stock Purchase Plan** | ||
| 10 | .18 | 2009 Sales Incentive Plan for Pat McCormick**† | ||
| 10 | .19 | Form of Restricted Stock Agreement | ||
| 21 | .1 | Subsidiaries of Symetra Financial Corporation* | ||
| 23 | .1 | Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm | ||
| 23 | .2 | Consent of Cravath, Swaine & Moore LLP (included in the opinion filed as Exhibit 5.1)* | ||
| 24 | .1 | Power of Attorney (included in signature page to the Registration Statement filed October 5, 2009)** | ||
| * | To be filed by amendment. | |
| ** | Previously filed. | |
| † | An application for confidential treatment of selected portions of this agreement has been filed with the Commission. |
Table of Contents
Report of
Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Symetra Financial Corporation
We have audited the consolidated financial statements of Symetra
Financial Corporation (the Company) as of December 31, 2008
and 2007, and for each of the three years in the period ended
December 31, 2008, and have issued our report thereon dated
March 6, 2009 (included elsewhere in this Registration
Statement). Our audits also included the financial statement
schedules listed in Item 16(b) of
Form S-1
of this Registration Statement. These schedules are the
responsibility of the Company’s management. Our
responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedules referred to
above, when considered in relation to the basic financial
statements taken as a whole, present fairly, in all material
respects the information set forth therein.
/s/ Ernst
& Young LLP
Seattle, Washington
March 6, 2009
S-1
Table of Contents
Schedule I
Summary
of Investments — Other Than Investments in Related
Parties
Year
Ended December 31, 2008
|
Cost or |
Amount as |
|||||||||||
|
Amortized |
Fair |
Shown in the |
||||||||||
| Type of Investment | Cost | Value | Balance Sheet | |||||||||
| (In millions) | ||||||||||||
|
Fixed maturities
|
||||||||||||
|
Bonds:
|
||||||||||||
|
United States government and government agencies and authorities
|
$ | 155.5 | $ | 156.8 | $ | 156.8 | ||||||
|
States, municipalities, and political subdivisions
|
488.8 | 424.9 | 424.9 | |||||||||
|
Foreign governments
|
31.4 | 34.6 | 34.6 | |||||||||
|
Public utilities(1)
|
1,744.4 | 1,568.4 | 1,568.4 | |||||||||
|
Convertible bonds and bonds with warrants attached
|
56.7 | 50.5 | 50.5 | |||||||||
|
All other corporate bonds
|
8,687.6 | 7,606.3 | 7,606.3 | |||||||||
|
Mortgage-backed securities
|
5,268.5 | 4,958.5 | 4,958.5 | |||||||||
|
Redeemable preferred stock
|
16.6 | 11.3 | 11.3 | |||||||||
|
Total fixed maturities
|
16,449.5 | 14,811.3 | 14,811.3 | |||||||||
|
Marketable equity securities
|
||||||||||||
|
Common stock:
|
||||||||||||
|
Public utilities
|
17.1 | 12.0 | 12.0 | |||||||||
|
Banks, trusts, and insurance companies(2)
|
8.3 | 7.0 | 7.0 | |||||||||
|
Industrial, miscellaneous, and all other
|
124.7 | 84.7 | 84.7 | |||||||||
|
Nonredeemable preferred stock
|
51.7 | 37.6 | 37.6 | |||||||||
|
Total marketable equity securities
|
201.8 | 141.3 | 141.3 | |||||||||
|
Mortgage loans(3)
|
993.7 | 907.6 | 988.7 | |||||||||
|
Policy loans
|
75.2 | 75.2 | 75.2 | |||||||||
|
Other long-term investments
|
178.8 | 147.2 | 147.2 | |||||||||
|
Short-term investments
|
9.4 | 9.4 | 9.4 | |||||||||
|
Total investments
|
$ | 17,908.4 | $ | 16,092.0 | $ | 16,173.1 | ||||||
| (1) | The amount shown in the consolidated balance sheet for total fixed maturities differs from cost and fair value, as these investments include affiliated fixed maturities with a cost and fair value of $78.9 and $76.3, respectively. | |
| (2) | The amount shown in the consolidated balance sheet for total marketable equity securities differs from cost and fair value, as these investments include affiliated marketable equity securities with a cost and fair value of $2.8 and $3.1, respectively. | |
| (3) | The amount shown in the consolidated balance sheet for mortgage loans differs from cost, as these investments are presented net of a $5.0 allowance. |
S-2
Table of Contents
Schedule II
Condensed
Statements of Financial Position
(Parent
Company Only)
| December 31, | ||||||||
| 2008 | 2007 | |||||||
| (In millions, except share and per share data) | ||||||||
|
Assets
|
||||||||
|
Cash and investments:
|
||||||||
|
Investments
|
$ | 110.8 | $ | 149.1 | ||||
|
Investments in subsidiaries
|
533.0 | 1,542.1 | ||||||
|
Cash and cash equivalents
|
60.8 | 38.4 | ||||||
|
Restricted funds
|
— | 5.4 | ||||||
|
Total cash and investments
|
704.6 | 1,735.0 | ||||||
|
Current and deferred tax receivables
|
20.4 | 4.9 | ||||||
|
Receivables due from affiliates
|
24.8 | 24.0 | ||||||
|
Other assets
|
21.1 | 17.4 | ||||||
|
Total assets
|
$ | 770.9 | $ | 1,781.3 | ||||
|
Liabilities and stockholders’ equity
|
||||||||
|
Notes payable
|
$ | 448.8 | $ | 448.6 | ||||
|
Other liabilities
|
35.9 | 47.6 | ||||||
|
Total liabilities
|
484.7 | 496.2 | ||||||
|
Common stock, par value $0.01 per share, 750,000,000 shares
authorized and 92,646,295 shares issued and outstanding
|
0.9 | 0.9 | ||||||
|
Additional paid-in capital
|
1,165.5 | 1,165.5 | ||||||
|
Retained earnings
|
172.4 | 131.2 | ||||||
|
Accumulated other comprehensive loss, net of taxes
|
(1,052.6 | ) | (12.5 | ) | ||||
|
Total stockholders’ equity
|
286.2 | 1,285.1 | ||||||
|
Total liabilities and stockholders’ equity
|
$ | 770.9 | $ | 1,781.3 | ||||
See accompanying notes.
S-3
Table of Contents
Schedule II
(continued)
Condensed
Statements of Income
(Parent
Company Only)
|
Year Ended |
Year Ended |
Year Ended |
||||||||||
|
December 31, |
December 31, |
December 31, |
||||||||||
| 2008 | 2007 | 2006 | ||||||||||
| (In millions) | ||||||||||||
|
Revenues:
|
||||||||||||
|
Dividends from subsidiaries:
|
||||||||||||
|
Symetra Life Insurance Company
|
$ | 100.0 | $ | 166.4 | $ | 122.5 | ||||||
|
Other subsidiaries
|
15.7 | 5.7 | — | |||||||||
|
Net investment income (loss)
|
(14.8 | ) | 3.3 | 2.2 | ||||||||
|
Net realized investment gains (losses)
|
(12.3 | ) | 6.8 | 7.4 | ||||||||
|
Total revenues
|
88.6 | 182.2 | 132.1 | |||||||||
|
Expenses:
|
||||||||||||
|
Interest expense on debt
|
31.9 | 21.5 | 19.2 | |||||||||
|
Operating expenses
|
0.8 | 3.7 | 0.6 | |||||||||
|
Total expenses
|
32.7 | 25.2 | 19.8 | |||||||||
|
Income from continuing operations before income taxes
|
55.9 | 157.0 | 112.3 | |||||||||
|
Income tax benefits
|
(22.6 | ) | (5.0 | ) | (3.8 | ) | ||||||
|
Income before equity in undistributed net income of subsidiaries
|
78.5 | 162.0 | 116.1 | |||||||||
|
Equity in undistributed net income (loss) of subsidiaries:
|
||||||||||||
|
Symetra Life Insurance Company
|
(52.3 | ) | 1.1 | 38.6 | ||||||||
|
Other subsidiaries
|
(4.1 | ) | 4.2 | 4.8 | ||||||||
|
Total equity in undistributed net income (loss) of subsidiaries
|
(56.4 | ) | 5.3 | 43.4 | ||||||||
|
Net income
|
$ | 22.1 | $ | 167.3 | $ | 159.5 | ||||||
See accompanying notes.
S-4
Table of Contents
Schedule II
(continued)
Condensed
Statements of Cash Flows
(Parent
Company Only)
|
Year Ended |
Year Ended |
Year Ended |
||||||||||
|
December 31, |
December 31, |
December 31, |
||||||||||
| 2008 | 2007 | 2006 | ||||||||||
| (In millions) | ||||||||||||
|
Cash flows from operating activities
|
||||||||||||
|
Net income
|
$ | 22.1 | $ | 167.3 | $ | 159.5 | ||||||
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
||||||||||||
|
Equity in undistributed net income (loss) of subsidiaries
|
56.4 | (5.3 | ) | (43.4 | ) | |||||||
|
Net realized investment (gains) losses
|
12.3 | (6.8 | ) | (7.4 | ) | |||||||
|
Changes in accrued items and other adjustments, net
|
2.5 | (4.1 | ) | 7.2 | ||||||||
|
Total adjustments
|
71.2 | (16.2 | ) | (43.6 | ) | |||||||
|
Net cash provided by operating activities
|
93.3 | 151.1 | 115.9 | |||||||||
|
Cash flows from investing activities
|
||||||||||||
|
Purchases of investments
|
(94.6 | ) | (91.9 | ) | (46.7 | ) | ||||||
|
Sales of investments
|
71.7 | 33.3 | 44.5 | |||||||||
|
Maturities, calls, paydowns and other
|
18.9 | 6.0 | 8.5 | |||||||||
|
Acquisitions, net of cash received
|
(2.0 | ) | (22.4 | ) | — | |||||||
|
Other, net
|
0.2 | 10.1 | (11.1 | ) | ||||||||
|
Net cash used in investing activities
|
(5.8 | ) | (64.9 | ) | (4.8 | ) | ||||||
|
Cash flows from financing activities
|
||||||||||||
|
Capital contributions
|
(65.1 | ) | — | (0.7 | ) | |||||||
|
Dividend distributions
|
— | (200.0 | ) | (100.0 | ) | |||||||
|
Proceeds from note payable
|
— | 149.8 | 298.7 | |||||||||
|
Repayment of note payable
|
— | — | (300.0 | ) | ||||||||
|
Other, net
|
— | (10.4 | ) | 1.8 | ||||||||
|
Net cash used in financing activities
|
(65.1 | ) | (60.6 | ) | (100.2 | ) | ||||||
|
Net increase in cash and cash equivalents
|
22.4 | 25.6 | 10.9 | |||||||||
|
Cash and cash equivalents at beginning of period
|
38.4 | 12.8 | 1.9 | |||||||||
|
Cash and cash equivalents at end of period
|
$ | 60.8 | $ | 38.4 | $ | 12.8 | ||||||
|
Supplemental disclosures of cash flow information
|
||||||||||||
|
Non-cash transactions during the year:
|
||||||||||||
|
Exchange of securities from insurance subsidiary to parent
company
|
$ | (79.0 | ) | $ | — | $ | — | |||||
|
Exchange of securities from parent company to insurance
subsidiary
|
79.0 | — | — | |||||||||
See accompanying notes.
S-5
Table of Contents
Schedule II
(continued)
Notes to
Condensed Financial Statements
(Parent Company Only)
(In millions)
(In millions)
| 1. | Organization and Presentation |
The accompanying financial statements comprise a condensed
presentation of financial position, results of operations and
cash flows of Symetra Financial Corporation (the Company) on a
separate-company basis. These condensed financial statements do
not include the accounts of the Company’s wholly-owned
subsidiaries, but instead include the Company’s investment
in those subsidiaries, stated at amounts that are substantially
equal to the Company’s equity in the subsidiaries’ net
assets. Therefore, the accompanying financial statements are not
those of the primary reporting entity.
Additional information about accounting policies pertaining to
investments and other significant areas, the Company’s
notes payable, and commitments and contingencies are as set
forth in Notes 2, 14 and 17, respectively, to the audited
consolidated financial statements of the Company.
| 2. | Related Parties |
The Company received cash dividends of $115.7, $172.1 and
$122.5, respectively, from its subsidiaries for the years ended
December 31, 2008, 2007 and 2006.
See Note 21 to the audited consolidated financial
statements of the Company for a description of other
related-party transactions.
S-6
Exhibit 4.2
EXECUTION COPY
FISCAL AGENCY AGREEMENT
between
SYMETRA FINANCIAL CORPORATION
as Issuer
as Issuer
AND
U.S. BANK NATIONAL ASSOCIATION
as Fiscal Agent
as Fiscal Agent
6.125% Notes Due 2016
Dated as of March 30, 2006
| TABLE OF CONTENTS | ||||
| Page | ||||
ARTICLE ONE |
||||
DEFINITIONS |
||||
Section 1.01. Definitions |
1 | |||
Section 1.02. Other Definitions |
3 | |||
Section 1.03. Rules of Construction |
4 | |||
ARTICLE TWO |
||||
THE SECURITIES |
||||
Section 2.01. Form and Dating |
5 | |||
Section 2.02. Execution and Authentication |
7 | |||
Section 2.03. Fiscal Agent, Registrar and Paying Agent |
7 | |||
Section 2.04. Paying Agent to Hold Money in Trust |
8 | |||
Section 2.05. Holder Lists |
8 | |||
Section 2.06. Transfer and Exchange |
9 | |||
Section 2.07. Replacement Securities |
14 | |||
Section 2.08. Outstanding Securities |
14 | |||
Section 2.09. Treasury Securities |
15 | |||
Section 2.10. Temporary Securities |
15 | |||
Section 2.11. Cancellation |
15 | |||
Section 2.12. Defaulted Interest |
16 | |||
Section 2.13. Persons Deemed Owners |
16 | |||
Section 2.14. CUSIP Numbers |
16 | |||
Section 2.15. Issuance of Additional Securities |
16 | |||
Section 2.16. Legal Holidays |
17 | |||
ARTICLE THREE |
||||
REDEMPTION |
||||
Section 3.01. Notice to Fiscal Agent of Election to Redeem |
17 | |||
Section 3.02. Selection of Securities to be Redeemed |
17 | |||
Section 3.03. Notice of Redemption |
18 | |||
Section 3.04. Payment of Securities Called for Redemption |
19 | |||
Section 3.05. Exclusion of Certain Securities from Eligibility for Selection for Redemption |
19 | |||
Section 3.06. Optional Redemption |
19 | |||
i
| Page | ||||
ARTICLE FOUR |
||||
COVENANTS |
||||
Section 4.01. Certain Definitions |
21 | |||
Section 4.02. Payment of Securities |
22 | |||
Section 4.03. Limitation on Liens of Capital Stock |
22 | |||
Section 4.04. Limitation on Disposition of Stock |
22 | |||
Section 4.05. Compliance Certificate |
23 | |||
Section 4.06. Certain Financial Information of the Company |
23 | |||
ARTICLE FIVE |
||||
SUCCESSOR COMPANY |
||||
Section 5.01. When the Company May Merge, etc. |
23 | |||
ARTICLE SIX |
||||
DEFAULTS AND REMEDIES |
||||
Section 6.01. Events of Default |
24 | |||
Section 6.02. Acceleration |
25 | |||
Section 6.03. Other Remedies |
26 | |||
Section 6.04. Waiver of Past Defaults |
26 | |||
Section 6.05. Control by Majority |
26 | |||
Section 6.06. Limitation on Suits |
26 | |||
Section 6.07. Rights of Holders to Receive Payment |
27 | |||
Section 6.08. Collection Suit by Fiscal Agent |
27 | |||
Section 6.09. Fiscal Agent May File Proofs of Claim |
27 | |||
Section 6.10. Priorities |
27 | |||
Section 6.11. Undertaking for Costs |
28 | |||
Section 6.12. Notice to Holders by Fiscal Agent |
28 | |||
ARTICLE SEVEN |
||||
FISCAL AGENT |
||||
Section 7.01. Duties of Fiscal Agent |
28 | |||
Section 7.02. Rights of Fiscal Agent |
29 | |||
Section 7.03. Individual Rights of Fiscal Agent |
30 | |||
Section 7.04. Fiscal Agent’s Disclaimer |
30 | |||
Section 7.05. Compensation and Indemnity |
30 | |||
Section 7.06. Replacement of Fiscal Agent |
31 | |||
Section 7.07. Successor Fiscal Agent by Merger, etc. |
32 | |||
ii
| Page | ||||
ARTICLE EIGHT |
||||
DEFEASANCE AND DISCHARGE |
||||
Section 8.01. Option to Effect Covenant Defeasance |
32 | |||
Section 8.02. Covenant Defeasance |
32 | |||
Section 8.03. Conditions to Covenant Defeasance |
32 | |||
Section 8.04. Discharge |
33 | |||
Section 8.05. Deposited Money and Government Securities to be Held in Trust; Other Miscellaneous Provisions |
34 | |||
Section 8.06. Repayment to Company |
34 | |||
Section 8.07. Reinstatement |
35 | |||
ARTICLE NINE |
||||
AMENDMENTS, SUPPLEMENTS AND WAIVERS |
||||
Section 9.01. Without Consent of Holders |
35 | |||
Section 9.02. With Consent of Holders |
36 | |||
Section 9.03. Revocation and Effect of Consents |
36 | |||
Section 9.04. Notation on or Exchange of Securities |
37 | |||
Section 9.05. Fiscal Agent to Sign Amendments, etc. |
37 | |||
ARTICLE TEN |
||||
MISCELLANEOUS |
||||
Section 10.01. Notices |
37 | |||
Section 10.02. Certificate and Opinion as to Conditions Precedent |
38 | |||
Section 10.03. Statements Required in Certificate or Opinion |
38 | |||
Section 10.04. Rules by Fiscal Agent, Paying Agent, Registrar |
39 | |||
Section 10.05. Governing Law |
39 | |||
Section 10.06. No Recourse Against Others |
39 | |||
Section 10.07. Successors |
39 | |||
Section 10.08. Execution in Counterparts |
39 | |||
SIGNATURES |
53 | |||
EXHIBIT A — FORM OF SECURITY |
||||
EXHIBIT B — FORM OF CERTIFICATE OF TRANSFER |
||||
EXHIBIT C — FORM OF CERTIFICATE TO BE DELIVERED UPON TERMINATION OF RESTRICTED PERIOD |
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FISCAL AGENCY AGREEMENT dated as of March 30, 2006 (the “Agreement”), between SYMETRA
FINANCIAL CORPORATION, a Delaware corporation (the “Company”) and U.S. BANK NATIONAL
ASSOCIATION, as fiscal agent (the “Fiscal Agent”).
Each party agrees as follows for the benefit of the other party and for the equal and
ratable benefit of the Holders of the Company’s Securities:
ARTICLE ONE
DEFINITIONS
Section 1.01. Definitions.
“Additional Securities” means 6.125% Senior Notes due 2016 of the Company issued under this
Agreement after the Issuance Date in accordance with Sections 2.02 and 2.15 hereof, and having
identical terms and conditions to the Securities.
“Affiliate ” means any person directly or indirectly controlling or controlled by or under
direct or indirect common control with the Company.
“Agent” means any Registrar or Paying Agent. See Section 2.03.
“Agreement” means this Fiscal Agency Agreement as amended or supplemented from time to
time.
“Applicable Procedures” means, with respect to any transfer or exchange of or for beneficial
interests in any Global Security, the rules and procedures of the Depositary, Euroclear and
Clearstream that apply to such transfer or exchange.
“Board of Directors” means the Board of Directors of the Company or any committee of the
Board of Directors duly authorized to act for it hereunder.
“Board Resolution” means a resolution of the Board of Directors, which may be evidenced by a
certificate of the Secretary or an Assistant Secretary of the Company stating that such
resolution has been duly adopted by the Board of Directors and is in full force and effect.
“Capital Stock” shall mean (i) in the case of a corporation, corporate stock; (ii) in the
case of an association or business entity that is not a corporation, any and all shares,
interests, participations, rights or other equivalents (however designated) of corporate stock;
(iii) in the case of a limited partnership or limited liability company, partnership interests
(whether general or limited) or membership interests; and (iv) any other interest of
participation that confers on a person the right to receive a share of the profits and losses of,
or distributions of assets of, the issuing person, but excluding from the foregoing any debt
securities convertible into Capital Stock, whether or not such debt securities include any right
of participation in Capital Stock.
“Company” means the party named as such in this Agreement until a successor replaces it
pursuant to this Agreement and thereafter means the successor.
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“Default” means any event which is, or after notice or passage of time or both would be, an
Event of Default.
“Depositary” shall mean, with respect to the Securities issuable or issued in whole or in
part in the form of one or more Global Securities, the person designated as Depositary by the
Company, which Depositary shall be a clearing agency registered under the Exchange Act.
“Distribution Compliance Period” shall mean the period that begins on the closing of any
offering of Securities (including any Additional Securities) and ends 40 days later.
“Exchange Act” means the Securities Exchange Act of 1934, as amended.
“Fiscal Agent” means the party named as such in this Agreement until a successor replaces it
pursuant to this Agreement and thereafter means the successor.
“Global Security” or “Global Securities’” means a Security or Securities, as the case may
be, in the form prescribed in Section 2.01 of this Agreement evidencing all or part of the
Securities, issued to the Depositary or its nominee and registered in the name of such Depositary
or nominee.
“guarantee” means any obligation, contingent or otherwise, of any Person directly or
indirectly guaranteeing any indebtedness of any other Person and any obligation, direct or
indirect, contingent or otherwise, of such Person (i) to purchase or pay (or advance or supply
funds for the purchase or payment of) such indebtedness of such other Person (whether arising by
virtue of partnership arrangements, or by agreement to keep-well, to purchase assets, goods,
securities or services, to take-or-pay, or to maintain financial statement conditions or
otherwise) or (ii) entered into for purposes of assuring in any other manner the obligee of such
indebtedness of the payment thereof or to protect such obligee against loss in respect thereof (in
whole or in part); provided, however, that the term “guarantee” will not include endorsements for
collection or deposit in the ordinary course of business. The term “guarantee” used as a verb has
a corresponding meaning.
“Holder” or “Securityholder” or “Holder of Securities” or “Noteholder” means a person in
whose name a Security is registered on the Registrar’s books.
“Indirect Participant” means a Person who holds a beneficial interest in a Global Security
through a Participant.
“Issuance Date” means March 30, 2006.
“Officer” means the Chairman of the Board of Directors, the President, any Vice President,
the Treasurer, the Secretary or the Controller of the Company.
“Officers’ Certificate” means a certificate signed by two Officers or by an Officer and an
Assistant Treasurer, Assistant Secretary or Assistant Controller of the Company.
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“Opinion of Counsel” means a written opinion from legal counsel who may be an employee
of or counsel to the Company, or who may be other counsel reasonably satisfactory to the Fiscal
Agent.
“Participant” means, with respect to the Depositary, Euroclear or Clearstream, a Person who
has an account with the Depositary, Euroclear or Clearstream, respectively (and, with respect to
DTC, shall include Euroclear and Clearstream).
“Person” means any individual, corporation, partnership, joint venture, association,
joint-stock company, trust, unincorporated organization, government or any agency or political
subdivision thereof or any other entity.
“Place of Payment” means, when used with respect to Securities, the place or places where the
principal of, premium, if any, and interest, if any, on the Securities are payable.
“Qualified Institutional Buyer” means a “qualifed institutional buyer” as defined in Rule
144A.
“Responsible Officer” means any officer in the Corporate Trust Division of the Fiscal Agent
or any other officer of the Fiscal Agent assigned by the Fiscal Agent to administer its corporate
trust matters.
“Rule 144” means Rule 144 promulgated under the Securities Act.
“Rule 144A” means Rule 144A promulgated under the Securities Act.
“Rule 903” means Rule 903 promulgated under the Securities Act.
“Rule 904” means Rule 904 promulgated the Securities Act.
“SEC” means the Securities and Exchange Commission.
“Securities” means the 6.125% Senior Notes due 2016 of the Company (including, without
limitation, any Additional Securities) issued under this Agreement.
“Securities Act” means the Securities Act of 1933, as amended from time to time.
“Securities Custodian” means the Fiscal Agent, as custodian with respect to the Securities
in global form, or any successor entity thereto.
“U.S. Government Obligations” means direct obligations of the United States for the payment
of which the full faith and credit of the United States is pledged.
Section 1.02. Other Definitions.
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| Term | Defined in Section | |||
“Bankruptcy Law” |
6.01 | |||
“Cash Equivalents” |
8.03 | |||
“Comparable Treasury Issue” |
3.06 | |||
“Comparable Treasury Price” |
3.06 | |||
“Covenant Defeasance” |
8.03 | |||
“Custodian” |
6.01 | |||
“Definitive Securities” |
2.01 | |||
“Discharge” |
8.05 | |||
“DTC” |
2.01 | |||
“DTC Participants” |
2.01 | |||
“Event of Default” |
6.01 | |||
“Fair Value” |
4.04 | |||
“Indebtedness” |
4.01 | |||
“Insurance Subsidiaries” |
4.01 | |||
“Legal Holiday” |
2.16 | |||
“Lien” |
4.01 | |||
“Make Whole Amount” |
3.06 | |||
“Notice of Default” |
6.01 | |||
“Obligations” |
11.01 | |||
“Outstanding Securities |
2.08 | |||
“144A Global Security” |
2.01 | |||
“Paying Agent” |
2.03 | |||
“Payor” |
4.02 | |||
“Private Placement Legend” |
2.06 | |||
“Quotation Agent” |
3.06 | |||
“Redemption Date” |
3.06 | |||
“Reference Treasury Dealer” |
3.06 | |||
“Reference Treasury Dealer Quotations” |
3.06 | |||
“Register” |
2.03 | |||
“Registrar” |
2.03 | |||
“Regulation S Global Security” |
2.01 | |||
“Subsidiary” |
4.01 | |||
“Successor Company” |
5.01 | |||
“Symetra Life” |
4.01 | |||
“Taxes” |
4.02 | |||
“Temporary Regulation S Global Security” |
2.01 | |||
“Treasury Rate” |
3.06 | |||
“United States” |
4.01 | |||
All other terms used in this Agreement that are defined by SEC rule have the meanings
assigned to them.
Section 1.03. Rules of Construction.
Unless the context otherwise requires:
(1) a term has the meaning assigned to it;
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(2) an accounting term, not otherwise defined, has the meaning assigned to it in
accordance with generally accepted accounting principles;
(3) “or” is not exclusive; and
(4) words in the singular include the plural, and in the plural include the singular.
ARTICLE TWO
The Securities
Section 2.01. Form and Dating.
(a) General Form of Securities. The Securities and the Fiscal Agent’s certificate of
authentication shall be substantially in the form of Exhibit A hereto, which Exhibit is part of
this Agreement. The Securities may have notations, legends or endorsements required by law, stock
exchange rule or usage. Each Security shall be dated the date of its authentication. The
Securities shall be in minimum denominations of $2,000 and integral multiples of $1,000. The terms
and provisions contained in the Securities shall constitute, and are hereby expressly made, a part
of this Agreement and the Company and the Fiscal Agent, by their execution and delivery of this
Agreement, expressly agree to such terms and provisions and to be bound thereby.
Securities offered and sold to Qualified Institutional Buyers in reliance on Rule 144A under
the Securities Act will initially be issued only in the form of one or more global Securities in
definitive, fully registered form without interest coupons (each a “144A Global Security”). The
144A Global Securities shall be substantially in the form of Exhibit A attached hereto, with such
applicable legends as are provided for herein.
Securities offered and sold outside the United States in reliance on Regulation S under the
Securities Act will initially be issued in the form of one or more temporary global Securities (the
“Temporary Regulation S Global Security”), without interest coupons. Temporary Regulation S Global
Securities shall be substantially in the form of Exhibit A attached hereto, with such applicable
legends as are provided for herein. The Temporary Regulation S Global Securities, which will be
deposited on behalf of the purchasers of the Securities represented thereby with the Fiscal Agent,
as custodian for DTC, and registered in the name of DTC or a nominee of DTC for the accounts of
Euroclear and Clearstream, shall be duly executed by the Company and authenticated by the Fiscal
Agent as hereinafter provided. Beneficial interests in the Temporary Regulation S Global Security
will be exchanged for beneficial interests in one or more corresponding permanent global
Securities, in definitive, fully registered form without interest coupons (each a “Regulation S
Global Security”; collectively with 144A Global Securities, the “Global Securities”), substantially
in the form of Exhibit A attached hereto, with such applicable legends as are provided for herein
within a reasonable period after the expiration of the Distribution Compliance Period (as defined
below) upon delivery of a certificate in the form of Exhibit C hereto. Prior to the expiration of
the Distribution Compliance Period, interests in the Temporary Regulation S Global Security may
only be
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transferred to non-U.S. persons pursuant to Regulation S, unless exchanged for interests in a
Global Security in accordance with the transfer and certification requirements described herein.
| (b) | Form of Global Securities. | ||
| (i) | Each Global Security (A) shall represent such portion of the outstanding Securities as shall be specified therein, (B) shall provide that it shall represent the aggregate amount of outstanding Securities from time to time endorsed thereon and that the aggregate amount of outstanding Securities represented thereby may from time to time be reduced or increased, as appropriate, to reflect exchanges and redemptions, (C) shall be registered in the name of the Depositary or its nominee, duly executed by the Company and authenticated by the Fiscal Agent as provided herein, for credit to the respective accounts of the Holders (or such accounts as they may direct) at the Depositary, (D) shall be delivered by the Fiscal Agent or its Agent to the Depositary or a Securities Custodian pursuant to the Depositary’s instructions and (E) shall bear the applicable legends required by Section 2.06(d) hereof. | ||
| (ii) | Members of, or participants in, the Depositary (“DTC Participants”) shall have no rights under this Agreement with respect to any Global Security held on their behalf by the Depositary, and the Depositary may be treated by the Company, the Fiscal Agent, and any agent of the Company or the Fiscal Agent as the absolute owner of such Global Security for all purposes whatsoever. Notwithstanding the foregoing, nothing herein shall prevent the Company, the Fiscal Agent, or any agent of the Company or the Fiscal Agent from giving effect to any written certification, proxy or other authorization furnished to the Depositary or impair, as between the Depositary and its agent members, the operation of customary practices governing the exercise of the rights of a Holder of any Security. |
Any endorsement of a Global Security to reflect the amount of any increase or decrease in the
amount of outstanding Securities represented thereby shall be made by the Fiscal Agent or the
Securities Custodian, at the direction of the Fiscal Agent, in accordance with instructions given
by the Holder thereof as required by Section 2.06 hereof.
(c) Form of Definitive Securities. Subject to the provisions of Section 2.06 hereof,
Definitive Securities may be produced in any manner determined by the Officers of the Company
executing such Securities, as evidenced by their execution of such Securities. The Fiscal Agent
must register Definitive Securities so issued in the name of, and cause the same to be delivered
to, such Person (or its nominee).
(d) Provisions Applicable to Forms of Securities. The Securities may also have such
additional provisions, omissions, variations or substitutions as are not inconsistent with the
provisions of this Agreement, and may have such letters, numbers or other marks of identification
and such legends or endorsements placed thereon as may be required to comply with this Agreement,
any applicable law or with any rules made pursuant there to or with the
6
rules of any securities exchange or governmental agency or as may be determined consistently
herewith by the Officer of the Company executing such Securities, as conclusively evidenced by
their execution of such Securities. All Securities shall be otherwise substantially identical
except as provided herein.
Subject to the provisions of this Article 2, a registered Holder in a Global Security may
grant proxies and otherwise authorize any Person to take any action that a Holder is entitled to
take under this Agreement or the Securities.
Section 2.02. Execution and Authentication.
An Officer shall sign the Securities for the Company by manual or facsimile signature. The
Company’s seal may be reproduced on the Securities and may be in facsimile form.
If an Officer whose signature is on a Security no longer holds that office at the time a
Security is authenticated, the Security shall nevertheless be valid.
A Security shall not be valid or obligatory for any purpose or entitled to the benefits of
this Agreement until authenticated by the manual signature of the Fiscal Agent or its
authenticating agent. The signature shall be conclusive evidence that the Security has been
authenticated under this Agreement.
The Fiscal Agent shall authenticate Securities for original issue up to an initial maximum
aggregate principal amount of $300,000,000 on the Issuance Date. Any Additional Securities issued
by the Company in accordance with Section 2.15 hereof shall be authenticated by the Fiscal Agent
on the date of their issuance in an aggregate principal amount specified in a Board Resolution
and an Officers’ Certificate provided pursuant to Section 2.15.
The Fiscal Agent may appoint an authenticating agent reasonably acceptable to the Company to
authenticate Securities. An authenticating agent may authenticate Securities whenever the Fiscal
Agent may do so. Each reference in this Agreement to authentication by the Fiscal Agent includes
authentication by such agent. An authenticating agent has the same rights as an Agent to deal with
the Company or an Affiliate of the Company.
Section 2.03. Fiscal Agent, Registrar and Paying Agent.
The Company hereby appoints U.S. Bank National Association, at its principal office in
Cincinnati, Ohio, as the Fiscal Agent hereunder and U.S. Bank National Association hereby accepts
such appointment. The Fiscal Agent shall have the powers and authority granted to and conferred
upon it in the Securities and hereby and such further powers and authority to act on behalf of
the Company as may be mutually agreed upon by the Company and the Fiscal Agent, and the Fiscal
Agent shall keep a copy of this Agreement available for inspection during normal business hours
at its principal office in Cincinnati, Ohio.
The Company shall maintain an office or agency where Securities may be presented for
registration of transfer or for exchange (“Registrar”) and an office or agency where Securities
may be presented for payment (“Paying Agent”). The Registrar shall keep a register
7
(“Register”) of the Securities and of their transfer and exchange. The Company may also from time
to time appoint one or more co-registrars and one or more additional paying agents. The term
“Registrar” includes any co-registrar and the term “Paying Agent” includes any additional paying
agent. The Company may change any Paying Agent or Registrar upon notice to the Holders. The
Company shall notify the Fiscal Agent in writing of the name and address of any Agent not a party
to this Agreement. If the Company fails to appoint or maintain another entity as Registrar or
Paying Agent, the Fiscal Agent shall act, subject to the penultimate paragraph of this Section
2.03, as such. The Company or any of its Subsidiaries may act as Paying Agent or Registrar;
provided, however, that none of the Company, its Subsidiaries or the Affiliates of the foregoing
shall act as Paying Agent or Registrar if a Default or Event of Default has occurred and is
continuing.
The Company initially appoints the Fiscal Agent to act as the Registrar and Paying Agent and
to act as Securities Custodian with respect to the Global Securities.
All of the terms and provisions with respect to such powers and authority contained in the
Securities are subject to and governed by the terms and provisions hereof.
The Fiscal Agent may resign as Registrar or Paying Agent upon 30 days prior written notice
to the Company.
The Company initially appoints DTC to act as Depositary with respect to the Global
Securities.
Section 2.04. Paying Agent to Hold Money in Trust.
The Company shall require each Paying Agent other than the Fiscal Agent to agree in writing
that the Paying Agent will hold in trust for the benefit of Holders or the Fiscal Agent all money
and Cash Equivalents held by the Paying Agent for the payment of principal of, or premium, if any,
or interest on, the Securities, and shall notify the Fiscal Agent of any default by the Company in
making any such payment. While any such default continues, the Fiscal Agent may require a Paying
Agent to pay all money and Cash Equivalents held by it to the Fiscal Agent. The Company at any
time may require a Paying Agent to pay all money and Cash Equivalents held by it to the Fiscal
Agent. Upon payment of all such money and Cash Equivalents over to the Fiscal Agent, the Paying
Agent (if other than the Company or a Subsidiary) shall have no further liability for the money
and Cash Equivalents. If the Company or a Subsidiary acts as Paying Agent, it shall segregate and
hold in a separate trust fund for the benefit of the Holders, all money and Cash Equivalents held
by it as Paying Agent. Upon any bankruptcy or reorganization proceedings relating to the Company,
the Fiscal Agent shall serve as Paying Agent for the Securities.
Section 2.05. Holder Lists.
The Fiscal Agent shall preserve in as current a form as is reasonably practicable the most
recent list available to it of the names and addresses of all Holders. If the Fiscal Agent is not
the Registrar, the Company shall furnish to the Fiscal Agent at least seven business days before
each interest payment date, and at such other times as the Fiscal Agent may request in
8
writing, a list in such form and as of such date as the Fiscal Agent may reasonably require of the
names and addresses of the Holders of Securities.
Section 2.06. Transfer and Exchange.
(a) Transfer and Exchange of Global Securities. A Global Security may not be transferred as
a whole except by the Depositary to a nominee of the Depositary, by a nominee of the Depositary
to the Depositary or to another nominee of the Depositary, or by the Depositary or any such
nominee to a successor Depositary or a nominee of such successor Depositary. Global Securities
may be exchanged or replaced, in whole or in part, as provided in this Section 2.06 and Section
2.07 hereof. Every Security authenticated and delivered in exchange for, or in lieu of, a Global
Security or any portion thereof, pursuant to this Section 2.06 or Section 2.07 or 2.10 hereof,
shall be authenticated and delivered in the form of, and shall be, a Global Security. A Global
Security may not be exchanged for another Security other than as provided in this Section 2.06(a)
and Section 2.06(c) hereof; however, beneficial interests in a Global Security may be transferred
and exchanged as provided in Section 2.06(b) hereof.
(b) Transfer and Exchange of Beneficial Interests in the Global Securities. The transfer and
exchange of beneficial interests in the Global Securities shall be effected through the
Depositary, in accordance with the provisions of this Agreement and the Applicable Procedures.
Beneficial interests in the Global Securities shall be subject to restrictions on transfer
comparable to those set forth herein to the extent required by the Securities Act. Transfers of
beneficial interests in the Global Securities also shall require compliance with either
subparagraph (i) or (ii) below, as applicable, as well as one or more of the other following
subparagraphs, as applicable:
| (i) | Transfer of Beneficial Interests in the Same Global Security. Beneficial interests in any Global Security may be transferred to Persons who take delivery thereof in the form of a beneficial interest in the same Global Security in accordance with the transfer restrictions set forth in the Private Placement Legend. No written orders or instructions shall be required to be delivered to the Registrar to effect the transfers described in this Section 2.06(b). | ||
| (ii) | All Other Transfers and Exchanges of Beneficial Interests in Global Securities. In connection with all transfers and exchanges of beneficial interests that are not subject to Section 2.06(b)(i), the transferer of such beneficial interest must deliver to the Registrar (A) a written order from a Participant or an Indirect Participant given to the Depositary in accordance with the Applicable Procedures directing the Depositary to credit or cause to be credited a beneficial interest in another Global Security in an amount equal to the beneficial interest to be transferred or exchanged and (B) instructions given in accordance with the Applicable Procedures containing information regarding the Participant account to be credited with such increase. In addition, the Registrar must receive the following: |
| (A) | if the transferee will take delivery in the form of a beneficial interest in the 144A Global Security, then the transferer must |
9
| deliver a certificate in the forai of Exhibit B hereto, including the certifications in item (1) thereof; and |
| (B) | if the transferee will take delivery in the form of a beneficial interest in the Regulation S Global Security, then the transferor must deliver a certificate in the form of Exhibit B hereto, including the certifications in item (2) thereof; |
| provided that, after any Distribution Compliance Period, the Registrar need not receive such certificate in respect of a transfer of a beneficial interest in the Regulation S Global Security. Upon satisfaction of all of the requirements for transfer or exchange of beneficial interests in Global Securities contained in this Agreement and the Securities or otherwise applicable under the Securities Act, the Fiscal Agent shall adjust the principal amount of the relevant Global Security(s) pursuant to Section 2.06(e) hereof. |
| (c) | Exchange for Definitive Securities. | ||
| (i) | Except as provided below, owners of beneficial interests in Global Securities will not be entitled to receive Definitive Securities. Definitive Securities shall be transferred to all beneficial owners in exchange for their beneficial interests in a Global Security if (A) DTC notifies the Company that it is unwilling or unable to continue as depositary for such Global Security or DTC ceases to be a clearing agency registered under the Exchange Act, at a time when DTC is required to be so registered in order to act as depositary, and in each case a successor depositary is not appointed by the Company within 90 days of such notice, (B) the Company executes and delivers to the Fiscal Agent and Registrar an Officers’ Certificate stating that such Global Security shall be so exchangeable; provided that in no event shall the Temporary Regulation S Global Security be exchanged by the Company for Definitive Securities prior to the expiration of the Distribution Compliance Period or (C) an Event of Default has occurred and is continuing and the Registrar has received a request from DTC. | ||
| (ii) | In connection with the transfer of an entire Global Security to beneficial owners pursuant to this Section 2.06(c), such Global Security shall be deemed to be surrendered to the Fiscal Agent for cancellation, and the Company shall execute, and the Fiscal Agent shall authenticate and deliver, to each beneficial owner identified by DTC in exchange for its beneficial interest in such Global Security, an equal aggregate principal amount of Definitive Securities of authorized denominations. Any Definitive Security delivered in exchange for an interest in a Global Security pursuant to this Section 2.06(c) shall bear the Private Placement Legend. |
10
(d) Legends. The following legends shall appear on the face of all Securities issued
under this Agreement unless specifically stated otherwise in the applicable provisions of this
Agreement.
| (i) | Private Placement Legend. Each Security (and all Securities issued in exchange therefor or substitution thereof) shall bear the legend in substantially the following form (the “Private Placement Legend”). |
“THE NOTES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE “SECURITIES ACT”), OR OTHER SECURITIES LAWS. NEITHER THIS NOTE NOR ANY INTEREST OR
PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED
OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION UNLESS THE TRANSACTION
IS EXEMPT FROM, OR NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. THE HOLDER
OF THIS SECURITY BY ITS ACCEPTANCE HEREOF (1) AGREES THAT IT WILL NOT PRIOR TO (X) THE DATE WHICH
IS TWO YEARS (OR SUCH SHORTER PERIOD OF TIME AS PERMITTED BY RULE 144(k) UNDER THE SECURITIES ACT
OR ANY SUCCESSOR PROVISION THEREUNDER) AFTER THE LATER OF THE ORIGINAL ISSUE DATE HEREOF (OR OF ANY
PREDECESSOR OF THIS NOTE) OR THE LAST DAY ON WHICH THE ISSUER OR ANY AFFILIATE OF THE ISSUER WAS
THE OWNER OF THIS NOTE (OR ANY PREDECESSOR OF THIS NOTE) AND (Y) SUCH LATER DATE, IF ANY, AS MAY BE
REQUIRED BY APPLICABLE LAW (THE “RESALE RESTRICTION TERMINATION DATE”), OFFER, SELL OR OTHERWISE
TRANSFER THIS NOTE EXCEPT (A) TO THE ISSUER OR ONE OF ITS AFFILIATES, (B) PURSUANT TO A
REGISTRATION STATEMENT WHICH HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C) FOR SO LONG
AS THE NOTES ARE ELIGIBLE FOR RESALE PURSUANT TO RULE 144A, TO A PERSON IT REASONABLY BELIEVES IS A
“QUALIFIED INSTITUTIONAL BUYER” AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT THAT PURCHASES
FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN
THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (D) PURSUANT TO OFFERS AND SALES TO NON
U.S. PERSONS THAT OCCUR OUTSIDE THE UNITED STATES WITHIN THE MEANING OF REGULATION S UNDER THE
SECURITIES ACT OR (E) PURSUANT TO ANY OTHER AVAILABLE EXEMPTION FROM THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND (2) AGREES THAT IT WILL GIVE TO EACH PERSON TO
WHOM THIS NOTE IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND; PROVIDED THAT
THE ISSUER, THE FISCAL AGENT AND THE REGISTRAR SHALL HAVE THE RIGHT PRIOR TO ANY SUCH OFFER, SALE
OR TRANSFER (I) PURSUANT TO CLAUSE (D) OR (E) TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL,
CERTIFICATION AND/OR OTHER INFORMATION SATISFACTORY TO EACH OF THEM, AND (II) IN EACH OF THE
FOREGOING CASES, TO REQUIRE THAT A CERTIFICATION OF TRANSFER IN THE FORM APPEARING ON THE OTHER
SIDE OF THIS NOTE IS COMPLETED AND DELIVERED BY THE TRANSFEROR TO THE FISCAL AGENT. THIS LEGEND
WILL BE REMOVED UPON THE REQUEST OF THE HOLDER AFTER THE RESALE RESTRICTION
TERMINATION DATE. AS USED HEREIN, THE TERMS “UNITED
11
STATES” AND “U.S. PERSON” HAVE THE MEANINGS GIVEN TO THEM BY REGULATION S UNDER THE
SECURITIES ACT.”
| (ii) | Global Security Legend. Each Global Security shall bear legends in substantially the following form: |
“UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST
COMPANY, A NEW YORK CORPORATION (“DTC”), TO THE COMPANY OR ITS AGENT FOR REGISTRATION OF
TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO.
OR IN SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS
MADE TO CEDE & CO OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF
DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS
WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.”
“THIS GLOBAL NOTE IS HELD BY THE DEPOSITARY (AS DEFINED IN THE FISCAL AGENCY AGREEMENT GOVERNING
THIS NOTE) OR ITS NOMINEE IN CUSTODY FOR THE BENEFIT OF THE BENEFICIAL OWNERS HEREOF, AND IS NOT
TRANSFERABLE TO ANY PERSON UNDER ANY CIRCUMSTANCES EXCEPT THAT (I) THE FISCAL AGENT MAY MAKE SUCH
NOTATIONS HEREON AS MAY BE REQUIRED PURSUANT TO SECTION 2.06(b)(ii) AND SECTION 2.06(e) OF THE
FISCAL AGENCY AGREEMENT, (II) THIS GLOBAL NOTE MAY BE EXCHANGED IN WHOLE BUT NOT IN PART
PURSUANT TO SECTION 2.06(a) OF THE FISCAL AGENCY AGREEMENT, (III) THIS GLOBAL NOTE MAY BE
DELIVERED TO THE FISCAL AGENT FOR CANCELLATION PURSUANT TO SECTION 2.11 OF THE FISCAL AGENCY
AGREEMENT AND (IV) THIS GLOBAL NOTE MAY BE TRANSFERRED TO A SUCCESSOR DEPOSITARY WITH THE PRIOR
WRITTEN CONSENT OF THE COMPANY.”
(e)
Cancellation and/or Adjustment of Global Securities. At such time as all beneficial
interests in a particular Global Security have been exchanged for Definitive Securities or a
particular Global Security has been redeemed, repurchased or canceled in whole and not in part,
each such Global Security shall be returned to or retained and canceled by the Fiscal Agent in
accordance with Section 2.11 hereof. At any time prior to such cancellation, if any beneficial
interest in a Global Security is exchanged for or transferred to a Person who will take delivery
thereof in the form of a beneficial interest in another Global Security or exchanged for Definitive
Securities pursuant to Section 2.06(c) hereof, the principal amount of Securities represented by
such Global Security shall be reduced accordingly and an endorsement shall be made on such Global
Security by the Fiscal Agent or by the Depositary at the direction of the Fiscal Agent to reflect
such reduction; and if the beneficial interest is being exchanged for or transferred to a Person
who will take delivery thereof in the form of a beneficial interest in another Global Security,
such other Global Security shall be increased accordingly and an endorsement shall be made on such
other Global Security by the Fiscal Agent or by the Depositary at the direction of the Fiscal Agent
to reflect such increase.
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| (f) | General Provisions Relating to Transfers and Exchanges. | ||
| (i) | To permit registrations of transfers and exchanges, the Company shall execute and the Fiscal Agent shall authenticate Global Securities and Definitive Securities upon the Company’s order or at the Registrar’s request. | ||
| (ii) | No service charge shall be made to a Holder for any registration of transfer or exchange, but the Company may require payment of a sum sufficient to cover any transfer tax or similar governmental charge payable in connection therewith (other than any such transfer taxes or similar governmental charge payable upon exchange by or transfer to the same Holder pursuant to Sections 2.06 or 9.04 hereof). | ||
| (iii) | The Registrar shall not be required to register the transfer of or exchange any Security selected for redemption in whole or in part, except the unredeemed portion of any Security being redeemed in part. | ||
| (iv) | All Securities issued upon any registration of transfer or exchange pursuant to the terms of this Agreement shall be the valid obligations of the Company, evidencing the same debt, and entitled to the same benefits under this Agreement, as the Securities surrendered upon such registration of transfer or exchange. | ||
| (v) | The Company shall not be required (A) to issue, to register the transfer of or to exchange any Securities during a period beginning at the opening of business 15 days before the day of any selection of Securities for redemption under Section 3.02 hereof and ending at the close of business on the day of selection or (B) to register the transfer of or to exchange any Security so selected for redemption in whole or in part, except the unredeemed portion of any Security being redeemed in part. | ||
| (vi) | Prior to due presentment for the registration of a transfer of any Security, the Fiscal Agent, any Agent and the Company may deem and treat the Person in whose name any Security is registered as the absolute owner of such Security for the purpose of receiving payment of principal of, premium, if any, and interest on such Securities and for ail other purposes, and none of the Fiscal Agent, any Agent or the Company shall be affected by notice to the contrary. | ||
| (vii) | The Fiscal Agent shall authenticate Securities in accordance with the provisions of Section 2.02 hereof. | ||
| (viii) | All certifications, certifîcates and Opinions of Counsel required to be submitted to the Registrar pursuant to this Section 2.06 to effect a registration of transfer or exchange may be submitted by facsimile. |
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| (ix) | The Fiscal Agent shall have no obligation or duty to monitor, determine or inquire as to compliance with any restrictions on transfer imposed under this Agreement or under applicable law with respect to any transfer of any interest in any Security (including any transfers between or among Participants or beneficial owners of interests in any Global Security) other than to require delivery of such certificates and other documentation or evidence as are expressly required by, and to do so if and when expressly required by the terms of, this Agreement, and to examine the same to determine substantial compliance as to form with the express requirements hereof. |
Section 2.07. Replacement Securities.
If any mutilated Security is surrendered to the Fiscal Agent, or the Company and the Fiscal
Agent receive evidence to their satisfaction of the destruction, loss or theft of any Security,
the Company shall, upon the written request of the Holder thereof, issue and the Fiscal Agent,
upon the written order of the Company signed by two Officers of the Company, shall authenticate a
replacement Security if the Fiscal Agent’s requirements are met. If required by the Fiscal Agent
or the Company, an indemnity bond must be supplied by such Holder that is sufficient in the
judgment of the Fiscal Agent and the Company to protect the Company, the Fiscal Agent, any Agent
and any authenticating agent from any loss that any of them may suffer if a Security is replaced.
The Company may charge such Holder for its expenses in replacing a Security.
Every replacement Security is an additional obligation of the Company and shall be entitled
to all of the benefits of this Agreement equally and proportionately with all other Securities duly
issued hereunder.
The provisions of this Section 2.07 are exclusive and shall preclude (to the extent lawful)
all other rights and remedies with respect to the replacement or payment of mutilated, destroyed,
lost or stolen Securities.
Section 2.08. Outstanding Securities.
The Securities outstanding at any time (the “Outstanding Securities”) are all the Securities
authenticated by the Fiscal Agent except for those cancelled by it (or its agent), those delivered
to it (or its agent) for cancellation, those reductions in the beneficial interest in a Global
Security effected by the Fiscal Agent in accordance with the provisions hereof, and those
described in this Section 2.08 as not outstanding. Except as set forth in Section 2.09 hereof, a
Security does not cease to be outstanding because the Company or an Affiliate of the Company holds
the Security.
If a Security is replaced pursuant to Section 2.07 hereof, it ceases to be outstanding unless
the Fiscal Agent receives proof satisfactory to it that the replaced Security is held by a
“protected purchaser” (as such term is defined in Section 8-303 of the Uniform Commercial Code as
in effect in the State of New York).
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If the principal amount of any Security is considered paid under Section 4.02 hereof, it
ceases to be outstanding and interest on it ceases to accrue.
If the Paying Agent (other than the Company, a Subsidiary or an Affiliate of any thereof)
holds, on a redemption date or maturity date, money or Cash Equivalents sufficient to pay all of
the principal of, premium (if any) and interest on Securities payable on that date, then on and
after that date such Securities shall be deemed to be no longer outstanding and shall cease to
accrue interest.
Section 2.09. Treasury Securities.
In determining whether the Holders of the required principal amount of Securities have
concurred in any direction, waiver or consent, Securities owned by the Company, or by any Person
directly or indirectly controlling or controlled by or under direct or indirect common control
with the Company, shall be considered as though not outstanding and shall be disregarded, except
that for the purposes of determining whether the Fiscal Agent shall be protected in relying on
any such direction, waiver or consent, only Securities that a Responsible Officer of the Fiscal
Agent has actual knowledge are so owned shall be so disregarded.
Section 2.10. Temporary Securities.
In lieu of formal printed Definitive Securities, or until such Definitive Securities are
ready for delivery, the Company may prepare and the Fiscal Agent shall authenticate temporary
Securities upon a written order of the Company signed by two Ofïicers of the Company. Temporary
Securities shall be substantially in the form of Definitive Securities but may have variations
that the Company considers appropriate for temporary Securities and as shall be reasonably
acceptable to the Fiscal Agent. At the Company’s election, the Company may prepare and the Fiscal
Agent shall authenticate Definitive Securities in exchange for temporary Securities.
Unless and until any such exchange, Holders of temporary Securities shall be entitled to all
of the benefits of this Agreement.
Section 2.11. Cancellation.
The Company at any time may deliver Securities to the Fiscal Agent or its agent for
cancellation. The Registrar and Paying Agent shall forward to the Fiscal Agent any Securities
surrendered to them for registration of transfer, exchange or payment. The Fiscal Agent (or its
agent) and no one else shall cancel all Securities surrendered for registration of transfer,
exchange, payment, replacement or cancellation and shall destroy cancelled Securities (subject to
the record retention requirement of the Exchange Act). Certification of the destruction of all
cancelled Securities shall be delivered to the Company, upon written request, from time to time.
The Company may not issue new Securities to replace Securities that it has paid or that have been
delivered to the Fiscal Agent (or its agent) for cancellation. If the Company acquires any of the
Securities, such acquisition shall not operate as a redemption or satisfaction of the indebtedness
represented by such Securities unless and until the same are surrendered to the Fiscal Agent (or
its agent) for cancellation pursuant to this Section 2.11.
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Section 2.12. Defaulted Interest.
If the Company defaults in a payment of interest on the Securities, it shall pay the
defaulted interest in any lawfal manner plus, to the extent lawfiil, interest payable on the
defaulted interest, to the Persons who are Holders on a subsequent special record date, in each
case at the rate provided in the Securities. The Company shall notify the Fiscal Agent in writing
of the amount of defaulted interest proposed to be paid on each Security and the date of the
proposed payment. The Company shall fix or cause to be fixed each such special record date and
payment date; provided that no such special record date shall be less than 10 days prior to the
related payment date for such defaulted interest. At least 15 days before the special record
date, the Company (or, upon the written request of the Company, the Fiscal Agent in the name and
at the expense of the Company) shall mail or cause to be mailed to Holders a notice that states
the special record date, the related payment date and the amount of such defaulted interest to be
paid.
Section 2.13. Persons Deemed Owners.
Prior to due presentment for the registration of a transfer of any Security, the Fiscal
Agent, any Agent, the Company and any agent of the foregoing shall deem and treat the Person in
whose name any Security is registered as the absolute owner of such Security for all purposes
(including the purpose of receiving payment of principal of, premium, if any, and interest on
such Securities; provided that defaulted interest shall be paid as set forth in Section 2.12),
and none of the Fiscal Agent, any Agent, the Company or any agent of the foregoing shall be
affected by notice to the contrary.
Section 2.14. CUSIP Numbers.
Pursuant to a recommendation promulgated by the Committee on Uniform Security Identification
Procedures, the Company will print CUSIP numbers on the Securities, and the Fiscal Agent may use
CUSIP numbers in notices of redemption and purchase as a convenience to Holders; provided,
however, that any such notices may state that no representation is made as to the correctness of
such numbers either as printed on the Securities or as contained in any notice of redemption or
purchase and that reliance may be placed only on the other identification numbers printed on the
Securities, and any such redemption or purchase shall not be affected by any defect or omission in
such numbers.
Section 2.15. Issuance of Additional Securities.
The Company shall be entitled to issue Additional Securities under this Agreement at any
time. Additional Securities shall have identical terms as the Securities, other than with
respect to the date of issuance and issue price. The Securities and any Additional Securities
shall be treated as a single class for all purposes under this Agreement.
With respect to any issuance of Additional Securities, the Company shall deliver to the
Fiscal Agent a Board Resolution and an Officers’ Certificate, and, if the Company elects, a
supplement or amendment to this Agreement, which shall together provide the following information:
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(1) the aggregate principal amount of Additional Securities to be authenticated and delivered
pursuant to this Agreement;
(2) the issue price and the issue date of such Additional Securities; and
(3) whether such Additional Securities shall be transfer restricted Securities.
Section 2.16. Legal Holidays.
A “Legal Holiday” is a Saturday, a Sunday or a day on which banking institutions in a
jurisdiction in which an action is required hereunder are not required to be open. If a payment
date is a Legal Holiday at a place of payment, payment may be made at that place on the next
succeeding day that is not a Legal Holiday, and no interest shall accrue for the intervening
period. If a regular record date is a Legal Holiday, the record date shall not be affected.
ARTICLE THREE
Redemption
Section 3.01. Notice to Fiscal Agent of Election to Redeem.
The election of the Company pursuant to Section 3.06 hereof to redeem any Securities shall
be evidenced by a Board Resolution. In case of any redemption at the election of the Company of
all or less than ail of the Securities, the Company, shall, at least 60 days prior to the
Redemption Date by the Company (unless a shorter notice shall be satisfactory to the Fiscal
Agent), notify the Fiscal Agent in writing of such Redemption Date and of the principal amount of
Securities of such series to be redeemed. Any such notice to the Fiscal Agent may be cancelled and
rescinded by the Company at any time prior to the mailing of such notice to any Holder pursuant to
Section 3.03. In the case of any redemption of Securities prior to the expiration of any
restriction on such redemption provided in the terms of such Securities or elsewhere in this
Agreement, the Company shall furnish the Fiscal Agent with an Officers’ Certificate evidencing
compliance with such restriction.
Section 3.02. Selection of Securities to be Redeemed.
In an optional redemption pursuant to Section 3.06, if less than all the Securities are to be
redeemed, the particular Securities to be redeemed shall be selected, not more than 60 days prior
to the applicable Redemption Date, by the Fiscal Agent, from the Outstanding Securities of such
series not previously called for redemption, on a pro rata basis, by lot or by such other method
as the Fiscal Agent, in its sole discretion, shall deem fair and appropriate and which may provide
for the selection for redemption of portions of the principal amount of Securities of a
denomination larger than the minimum authorized denomination for the Securities.
The Fiscal Agent shall promptly notify the Company in writing of the Securities selected for
redemption and, in the case of any Securities selected for partial redemption, the principal
amount thereof to be redeemed.
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For all purposes of this Agreement, unless the context otherwise requires, all provisions
relating to the redemption of Securities shall relate, in the case of any Securities redeemed or
to be redeemed only in part, to the portion of the principal amount of such Securities which has
been or is to be redeemed.
The Fiscal Agent may select for redemption portions of the principal amount of the
Securities that have denominations larger than $2,000. Securities and portions of them it selects
shall be in amounts of $2,000 or integral multiples of $1,000.
Section 3.03. Notice of Redemption.
Notice of redemption to the Holders of Securities to be redeemed as a whole or in part at
the option of the Company pursuant to Section 3.06 shall be given by mailing notice of such
redemption by first-class mail, postage prepaid, at least 30 days and not more than 60 days prior
to the Redemption Date to such Holders of Securities at their last addresses as they shall appear
on the Register. Any notice which is mailed in the manner herein provided shall be conclusively
presumed to have been duly given, whether or not the Holder receives the notice. Failure to give
notice by mail, or any defect in the notice, to the Holder of any Security of a series designated
for redemption as a whole or in part shall not affect the validity of the proceedings for the
redemption of any other Security.
The notice of redemption to each such Holder shall specify the CUSIP number (if any) and the
principal amount of each Security held by such Holder to be redeemed, the Redemption Date, the
redemption price, the name of the Paying Agent, Place or Places of Payment, that payment will be
made upon presentation and surrender of such Securities, that interest accrued to the Redemption
Date will be paid as specified in such notice and that on and after said date interest thereon or
on the portions thereof to be redeemed will cease to accrue. In case any Security is to be
redeemed in part only, the notice of redemption shall state the portion of the principal amount
thereof to be redeemed and shall state that on and after the Redemption Date, upon surrender of
such Security, a new Security or Securities of such series, in principal amount equal to the
unredeemed portion thereof, will be issued.
The notice of redemption of Securities to be redeemed shall be given by the Company or, at
the Company’s timely request, by the Fiscal Agent in the name and at the expense of the Company.
At least one business day prior to the Redemption Date specified in the notice of redemption
given as provided in this Section, the Company will deposit with the Fiscal Agent or with one or
more paying agents (or, if the Company is acting as Paying Agent, set aside, segregate and hold in
trust as provided in Section 2.04) an amount of money or Cash Equivalents, or combination thereof,
sufficient to redeem on the redemption date all the Securities so called for redemption at the
appropriate redemption price, together with accrued interest, if any, to the Redemption Date.
Promptly following the Redemption Date, the Paying Agent shall return to the Company any amounts of
money and Cash Equivalents so deposited which are not required to redeem the Securities called for
redemption.
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Section 3.04. Payment of Securities Called for Redemption.
If notice of redemption has been given as above provided, the Securities or portions of
Securities specified in such notice shall become due and payable on the date and at the place
stated in such notice at the applicable redemption price, together with interest accrued to the
Redemption Date, and on and after said Redemption Date (unless the Company shall default in the
payment of such Securities at the redemption price, together with interest, if any, accrued to the
Redemption Date) any interest on the Securities or portions of Securities so called for redemption
shall cease to accrue and such Securities shall cease from and after the Redemption Date to be
entitled to any benefit or security under this Agreement, and the Holders thereof shall have no
right in respect of such Securities except the right to receive the redemption price thereof and
unpaid interest to the Redemption Date. On presentation and surrender of such Securities at a
Place of Payment specified in said notice, said Securities or the specified portions thereof shall
be paid and redeemed by the Company at the applicable redemption price, together with any interest
accrued thereon to the Redemption Date; provided that any semiannual payment of interest becoming
due on the Redemption Date shall be payable to the Holders of such Securities registered as such
in the Register on the relevant record date.
If any Security called for redemption shall not be so paid upon surrender thereof for
redemption, the principal shall, until paid or duly provided for, bear interest from the
Redemption Date at the rate of interest borne by the Security.
Upon presentation of any Security redeemed in part only, the Company shall execute and the
Fiscal Agent shall authenticate and deliver to or on the order of the Holder thereof, at the
expense of the Company, a new Security or Securities of such series, of authorized denominations,
in principal amount equal to the unredeemed portion of the Security so presented.
Section 3.05. Exclusion of Certain Securities from Eligibility for Selection for Redemption.
In the case of an optional redemption pursuant to Section 3.06 hereof, Securities shall be
excluded from eligibility for selection for redemption if they are identified by registration and
certificate number or other distinguishing symbol in a written statement signed by an authorized
officer of the Company and delivered to the Fiscal Agent at least 40 days prior to the last date
on which notice of redemption may be given as being owned of record and beneficially by, and not
pledged or hypothecated by either (a) the Company or (b) an entity specifically identified in such
written statement as directly or indirectly controlling or controlled by or under direct or
indirect common control with the Company.
Section 3.06. Optional Redemption.
The Securities shall be subject to redemption at the option of the Company, in whole or in
part, at any time or from time to time, prior to maturity at the Company’s option, at a redemption
price equal to the greater of: (i) 100% of the principal amount of the Securities to be redeemed,
or (ii) as determined by the Quotation Agent (as defined below), the sum of the present values of
the remaining scheduled payments of principal and interest on the Securities to be redeemed (not
including any portion of such payments of interest accrued as of the
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Redemption Date) discounted to such Redemption Date on a semiannual basis (assuming a 360-day
year consisting of twelve 30-day months) at the Treasury Rate (as defined below), plus 25 basis
points (the “Make Whole Amount”), plus, in each case, accrued and unpaid interest on the
Securities to be redeemed to the Redemption Date. The Company shall pay any interest due on an
interest payment date which occurs on or prior to a Redemption Date (as defined below) to the
registered Holders of the Securities as of the close of business on the regular record date
immediately preceding that interest payment date.
For purposes of determining the Make Whole Amount, the following definitions apply:
The term “Comparable Treasury Issue” means the U.S. Treasury security selected by the
Quotation Agent as having a maturity comparable to the remaining term of the Securities to be
redeemed that would be utilized at the time of selection, and in accordance with customary
financial practice, in pricing new issues of corporate debt securities of comparable maturity to
the remaining term of the Securities to be redeemed.
The term “Comparable Treasury Price” means (1) the average of three Reference Treasury Dealer Quotations (as defined below) for the Redemption Date, after excluding the
highest and lowest of five Reference Treasury Dealer Quotations, or (2) if the Fiscal Agent
obtains fewer than five Reference Treasury Dealer Quotations, the average of all such Reference
Treasury Dealer Quotations.
The term “Quotation Agent means one of the Reference Treasury Dealers appointed by the Fiscal
Agent after consultation with the Company.
“Redemption Date” means the date fixed for redemption of the Securities.
The term “Reference Treasury Dealer” means Lehman Brothers Inc., Banc of America Securities
LLC, J.P. Morgan Securities Inc. and two other primary U.S. Government securities dealers.
The term “Reference Treasury Dealer Quotations” means the average, as determined by the
Fiscal Agent, of the bid and asked prices for the Comparable Treasury Issue (expressed, in each
case, as a percentage of its principal amount) quoted in writing to the Fiscal Agent by such
Reference Treasury Dealer at 3:30 p.m., New York City time, on the third business day preceding
the Redemption Date.
The term “Treasury Rate” means the rate per annum equal to the semiannual equivalent or
interpolated (on a day-count basis) yield to maturity of the Comparable Treasury Issue, assuming a
price for the Comparable Treasury Issue (expressed as a percentage of its principal amount) equal
to the Comparable Treasury Price for that Redemption Date.
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ARTICLE FOUR
Covenants
Section 4.01. Certain Definitions.
The following capitalized terms used in this Agreement shall have the meanings ascribed to
them below.
“Indebtedness” means the principal, premium and interest due on indebtedness of a Person
whether outstanding on the date of this Agreement or thereafter created, incurred or assumed,
which is indebtedness for borrowed money, and any amendments, renewals, extensions, modifications
and refîmdings of any such indebtedness. For purposes of this definition, “indebtedness for
borrowed money” means: (1) any obligation of, or any obligation guaranteed by, such person for the
repayment of borrowed money, whether or not evidenced by bonds, debentures, notes or other written
instruments; (2) any obligation of, or any such obligation guaranteed by, such person evidenced by
bonds, debentures, notes or similar written instruments, including obligations assumed or incurred
in connection with the acquisition of property, assets or businesses, provided, however, that the
deferred purchase price of any property, assets or businesses will not be considered indebtedness
if the purchase price thereof is payable in full within 90 days from the date on which such
indebtedness was created; (3) any obligation of such person as lessee under any lease required to
be capitalized on the balance sheet of the lessee under generally accepted accounting principles
or under any lease of property or assets made as part of any sale and lease-back transaction to
which such person is a party; and (4) any obligation of, or any obligation guaranteed by, any
person for the payment of amounts due under a swap agreement or similar instrument or agreement,
or under a foreign currency hedge exchange or similar instrument or agreement
“Insurance Subsidiaries” shall mean Symetra National Life Insurance Company, a Washington
corporation and First Symetra National Life Insurance Company of New York, a New York corporation.
“Lien” means any mortgage, deed of trust, pledge, lien, security interest or other
encumbrance (including, without limitation, any conditional sale or other title retention
agreement or lease in the nature thereof, and any filing or agreement to give a lien or file a
financing statement as a debtor under the Uniform Commercial Code or any similar statute, other
than to reflect ownership by a third party of property leased to the Company under a lease which
is not in the nature of a conditional sale or title retention agreement).
“Subsidiary” means a direct or indirect subsidiary of the Company.
“Symetra Life” shall mean Symetra Life Insurance Company, a Washington corporation.
“United States” means the United States of America including its territories and possessions.
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Section 4.02. Payment of Securities.
(a) The Company shall pay the principal of, premium, if any, and interest on the
Securities on the date and in the manner provided in the Securities and this Agreement. An
installment of principal or interest shall be considered paid on the date it is due if the
Fiscal
Agent or Paying Agent holds on that date money irrevocably designated for and sufficient to
pay
the installment. At the Company’s option, it may pay any interest on any Securities by
mailing
checks by first class mail to the Holders of such Securities at their address as shown on
the
Registrar’s books; provided that all payments with respect to Global Securities and
Definitive
Securities the Holders of which hâve given wire transfer instructions to the Company will be
required to be made by wire transfer of same day fonds to the accounts in the United States
specified by the Holders thereof. The Company shall pay interest on overdue principal and
premium, if any, at the rate or rates borne by the Securities; it shall, to the extent
lawful, pay
interest on overdue installments of interest at the same rate or rates.
The
Company hereby further agrees that all payments made by the Company or any successor entity of
the Company (each a “Payor”) on the Securities will be made without withholding or deduction for,
or on account of, any present or future taxes, duties, assessments or governmental charges of
whatever nature (“Taxes”) unless the withholding or deduction of such Taxes is then required by
law.
(b) The Payor will pay any present or future stamp, court or documentary taxes,
or any other excise or property taxes, charges or similar levies that arise in any
jurisdiction from
the execution, delivery or registration of any Securities or any other document or instrument
referred to therein.
Section 4.03. Limitation on Liens of Capital Stock.
As long as any Securities are outstanding, the Company shall not, and it shall not permit
Symetra Life or any Insurance Subsidiary to, directly or indirectly, create, assume, incur or
permit to exist any Lien on the capital stock of Symetra Life or any Insurance Subsidiary to
secure any Indebtedness unless the Securities are secured equally and ratably with such
Indebtedness for at least the time period such Indebtedness is so secured.
Section 4.04. Limitation on Disposition of Stock.
As long as any Securities are outstanding, the Company shall not, and it shall not permit
Symetra Life or any Insurance Subsidiary to issue, sell, transfer or otherwise dispose of any shares of Capital Stock of Symetra Life or any Insurance Subsidiary, or any securities convertible
into or exercisable or exchangeable for shares of Capital Stock of Symetra Life or any Insurance
Subsidiary, or warrants, rights or options to subscribe for or purchase shares of Capital Stock of
Symetra Life or any Insurance Subsidiary, unless such issuance, sale, transfer or other
disposition is for at least fair value (as determined by the Board of Directors acting in good
faith) (“Fair Value”) and the Company will own, directly or indirectly, at least 80% of the
Capital Stock of Symetra Life or any Insurance Subsidiary after giving effect to that transaction.
The foregoing covenant shall not prohibit any issuance or disposition of securities by any of our
Subsidiaries (other than Symetra Life or any Insurance Subsidiary) either (i) to the Company in
22
accordance with applicable law or (ii) if required by any regulation or order or any governmental
regulatory authority.
The Company shall not permit Symetra Life or any Insurance Subsidiary to (a) merge or
consolidate with or into any corporation or other person, unless such merger or consolidation is
for at least Fair Value and (i) the surviving corporation or person is the Company, or (ii) at
least 80% of the surviving corporation’s issued and outstanding voting stock is owned, directly or
indirectly, by the Company; or (b) lease, sell, assign or
transfer all or substantially all of its
properties and assets to any corporation or other person (other than the Company), unless such
lease, sale, assignment or transfer is for at least Fair Value and at least 80% of the issued and
outstanding voting stock of that corporation or other person is owned, directly or indirectly, by
the Company.
Notwithstanding anything to the contrary in this Section 4.04, the Company may (i) merge or
consolidate any of its Subsidiaries (including any Insurance Subsidiary) into or with another of
the Company’s wholly-owned Subsidiaries and (ii) sell, transfer or otherwise dispose of the
Company’s business in accordance with Article 5.
Section 4.05. Compliance Certificate.
The Company shall deliver to the Fiscal Agent within 120 days after the end of each fiscal
year of the Company an Officers’ Certificate stating whether or not the signers know of any
Default by the Company in performing its covenants and obligations hereunder that occurred during
the fiscal year and is continuing. If they do know of such a Default, the Certificate shall
describe the nature and status of the Default. The Certificate need not comply with Section 11.03.
Section 4.06.
Certain Financial Information of the Company.
The Company will furnish to the Fiscal Agent and the Holders of the Securities, (i) annually,
within 90 days of the year end date, audited Consolidated financial statements of the Company and
(ii) quarterly, within 45 days of the quarter end date, unaudited Consolidated balance sheet,
income statement and statement of cash flows of the Company. In addition, for so long as any of the
Securities remain outstanding, the Company has agreed to make available to any Holder of the
Securities or prospective purchaser of the Securities, at their request, the information required
by Rule 144A(d)(4) under the Securities Act if, at the time of such request the Company is not
subject to the reporting requirements under Section 13 or 15(d) of the Exchange Act.
ARTICLE FIVE
Successor Company
Section 5.01. When the Company May Merge, etc.
The Company may not consolidate with or merge into, or sell, convey, assign, transfer, lease
or otherwise dispose of all or substantially all of its properties or assets to another person or
entity, unless (a) (i) the Company is the continuing corporation, or (ii) the entity (if other
than the
23
Company) (the “Successor Company”) formed by the consolidation or into which the Company is
merged or the entity that acquires all or substantially all of the properties and assets of the
Company is a corporation, partnership or trust organized and validly existing under the laws of
United States, any State or the District of Columbia, and expressly assumes payment of the
principal of and any premium and interest on all the Securities and the performance of all of the
Company’s covenants applicable to the Indebtedness; (b) immediately thereafter, no Event of
Default (and no event that, after notice or lapse of time, or both, would become an Event of
Default) has occurred and is continuing; and (c) the Company has delivered to the Fiscal Agent
required certificates and opinions relating to the transaction.
The predecessor Company shall be released from its obligations under this Agreement and the
Successor Company shall succeed to, and be substituted for, and may exercise every right and
power of, the Company under this Agreement, but, in the case of a lease of all or substantially
all its assets, the predecessor Company shall not be released from the obligation to pay the
principal of and any premium and interest on the Securities.
ARTICLE SIX
Defaults and Remedies
Section 6.01. Events of Default.
An
“Event of Default’ occurs with respect to the Securities if:
(1) the Company defaults in the payment of any installment of interest on any
Security when the same becomes due and payable and such Default continues for a period of
30 days;
(2) the Company defaults in the payment of the principal of, or premium, if any, on,
any Security when the same becomes due and payable at maturity, upon redemption or
otherwise;
(3) the Company defaults in the performance of, or fails to comply with any other
term, covenant or agreement in the Securities or this Agreement (other than those referred
to in (1) or (2) above) and the default continues for the period and after the notice
specified below in the last paragraph of this Section 6.01;
(4) the Company defaults under any other series of debt securities or any agreements,
indentures or instruments under which the Company then has outstanding indebtedness in
excess of $25 million in the aggregate which indebtedness, if not already matured in
accordance with its terms, has been accelerated and the acceleration has not been rescinded
or annulled or the indebtedness has not been discharged within ten days after notice is
given to the Company by the trustee thereunder or to the Company and the trustee by the
holders of at least 25% in aggregate principal amount of outstanding debt securities of the
series, unless (a) prior to the entry of judgment in favor of the trustee thereunder, the
default under that indenture or instrument is remedied or cured by the Company or waived by
the holders of the indebtedness, or (b) the default results from an
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action of the United States government or a foreign government which prevents the Company
from performing its obligations under the agreement, indenture or instrument;
(5) the Company pursuant to or within the meaning of any Bankruptcy Law:
(a) commences a voluntary case;
(b) consents to the entry of any order for relief from claims against it in an
involuntary case;
(c)
consents to the appointment of a Custodian of it or for all or
substantially all of its property; or
(d)
makes a general assignment for the benefit of its creditors;
(6) a court of competent jurisdiction enters an order or decree under any
Bankruptcy Law that:
(a) is for relief against the Company in an involuntary case;
(b) appoints a Custodian of the Company for all or substantially all of its
property; or
(c) orders the liquidation of the Company;
and the order or decree remains unstayed and in effect for 90 days.
The term “Bankruptcy Law” means Title 11, U.S. Code or any similar Federal or State law for
the relief of debtors. The term “Custodian” means any receiver, trustee, assignee, liquidator,
custodian or similar official under any Bankruptcy Law.
A Default with respect to the Securities under clause (3) is not an Event of Default until
the Fiscal Agent notifies the Company or the Holders of at least 25% in principal amount of the
outstanding Securities notify the Fiscal Agent and the Company of the Default and the Company does
not cure the Default within 60 days after-receipt of the notice. The notice must specify the
Default, demand that it be remedied and state that the notice is a
“Notice of Default”.
Section 6.02.
Acceleration.
If an Event of Default occurs and is continuing with respect to Securities, the Fiscal Agent
by notice to the Company, or the Holders of at least 25% in principal amount of outstanding
Securities by notice to the Company and the Fiscal Agent, may declare
that the principal of,
premium, if any, and accrued interest on the Securities shall be due and payable immediately,
except that such amount shall become due and payable automatically in the case of an Event of
Default described in clauses (5) and (6) of Section 6.01. Upon such declaration, such principal (or
specified amount), premium, if any, and accrued interest shall be due and payable immediately. The
Holders of a majority in principal amount of the outstanding Securities by notice to the Company
and the Fiscal Agent may rescind an acceleration and its consequences if
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the rescission would not conflict with any judgment or decree and if all existing Events of
Default have been cured or waived except nonpayment of principal, interest or premium, if any,
that has become due solely because of the acceleration.
Section 6.03. Other Remedies.
If an Event of Default with respect to Securities occurs and is continuing, the Fiscal Agent
may pursue any available remedy by proceeding at law or in equity to collect the payment of
principal of, interest or premium, if any, on, the Securities or to enforce the performance of
any provision of the Securities or this Agreement. If an Event of Default occurs and is
continuing, the Fiscal Agent must exercise such of its rights and powers under this Agreement,
and use the same degree of care and skill in their exercise, as a prudent person would exercise
or use under the circumstances in the conduct of his or her own affairs.
The Fiscal Agent may maintain a proceeding even if it does not possess any of the Securities
or does not produce any of them in the proceeding. A delay or omission by the Fiscal Agent or any
Securityholder in exercising any right or remedy accruing upon an Event of Default shall not
impair the right or remedy or constitute a waiver of or acquiescence in the Event of Default. No
remedy is exclusive of any other remedy. All available remedies are cumulative.
Section 6.04.
Waiver of Past Defaults.
Subject to Section 9.02, the Holders of a majority in principal amount of the outstanding
Securities on behalf of the Holders of the outstanding Securities by notice to the Fiscal Agent
may waive an existing past Default or Event of Default and its consequences but such waiver shall
not extend to any future Event of Default. When a Default or Event of Default is waived by the
Holders of Securities, it is cured and stops continuing.
Section 6.05. Control by Majority.
The Holders of a majority in principal amount of the outstanding Securities may direct the
time, method and place of (1) conducting any proceeding for any remedy available to the Fiscal
Agent with respect to the Securities; or (2) exercising any trust or power conferred on the Fiscal
Agent with respect to the Securities. However, the Fiscal Agent may refuse to follow any direction
that conflicts with law or this Agreement, or, subject to Section 7.01, that the Fiscal Agent
determines would be unduly prejudicial to the rights of other Securityholders or that would
involve the Fiscal Agent in personal liability. The Fiscal Agent may require indemnity
satisfactory to it from the Holders requesting the Fiscal Agent to enforce this Agreement or the
Securities before doing so.
Section 6.06. Limitation on Suits.
A Securityholder may pursue a remedy with respect to this Agreement or the Securities only
if:
(1) the Holder gives to the Fiscal Agent written notice of a continuing Event of
Default;
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(2) the Holders of at least 25% in principal amount of the outstanding Securities
make a written request to the Fiscal Agent to pursue the remedy;
(3) such Holder or Holders offer to the Fiscal Agent indemnity satisfactory to the
Fiscal Agent against any loss, liability or expense;
(4) the Fiscal Agent does not comply with the request within 60 days after receipt of
the request and the offer of indemnity; and
(5) during such 60-day period the Holders of a majority in principal amount of the
outstanding Securities do not give the Fiscal Agent a direction inconsistent with the
request.
A Holder of Securities may not use any provision of this Agreement to prejudice the rights
of another Holder of any Securities or to obtain a preference or priority over another Holder of
any Securities.
Section 6.07. Rights of Holders to Receive Payment.
Notwithstanding any other provision of this Agreement, the right of any Holder of a Security
to receive payment of principal of, interest and premium, if any, on the Security, on or after the
respective due dates expressed in the Security, or to bring suit for the enforcement of any such
payment on or after such respective dates, shall not be impaired or affected without the consent
of the Holder.
Section 6.08. Collection Suit by Fiscal Agent.
If an Event of Default specified in Section 6.01(1) or (2) occurs and is continuing, the
Fiscal Agent may recover judgment in its own name and as trustee of an express trust against the
Company for the whole amount of principal, interest and any premium remaining unpaid on the
Securities.
Section 6.09.
Fiscal Agent May File Proofs of Claim.
The Fiscal Agent may file such proofs of claim and other papers or documents as may be
necessary or advisable in order to hâve the claims of the Fiscal Agent and the Holders of
Securities allowed in any judicial proceedings relative to the Company, its creditors or its
property.
Section 6.10. Priorities.
If the Fiscal Agent collects any money or Cash Equivalents pursuant to this Article, it shall
pay out the money or Cash Equivalents in the following order:
FIRST: to the Fiscal Agent and any predecessor fiscal agent of it for amounts due
under Section 7.05;
27
SECOND: to Holders of Securities for amounts due and unpaid on the Securities for
principal, interest and premium, if any, ratably without preference or priority of any
kind, according to the amounts due and payable on the Securities for principal, interest
and premium, if any, respectively; and
THIRD: to the Company.
The Fiscal Agent may fix a record date and payment date for any payment to Securityholders
pursuant to this Section 6.10.
Section 6.11.
Undertaking for Costs.
In any suit for the enforcement of any right or remedy under this Agreement or in any suit
against the Fiscal Agent for any action taken or omitted by it as Fiscal Agent, a court in its
discretion may require the filing by any party litigant in the suit of an undertaking to pay the
costs of the suit, and the court in its discretion may assess reasonable costs, including
reasonable attorneys’ fees, against any party litigant in the suit, having due regard to the
merits and good faith of the claims or defenses made by the party litigant. This Section does not
apply to a suit by the Fiscal Agent, a suit by a Holder pursuant to Section 6.07 or a suit by
Holders of more than 25% in principal amount of the Securities.
Section 6.12. Notice to Holders by Fiscal Agent.
The Fiscal Agent shall, within 90 days after the occurrence of a Default known to it, give
Holders of the Securities notice of Default; however, the Fiscal Agent may withhold from Holders
of the Securities notice of any continuing Default (except a Default in the payment of principal,
interest or premium, if any) if and so long as a committee of its Responsible Officers in good
faith determines that withholding the notice is in the interests of Holders of the Securities.
ARTICLE SEVEN
Fiscal Agent
Section 7.01. Duties of Fiscal Agent.
The Fiscal Agent accepts its obligations herein set forth upon the terms and conditions
hereof, including the following, to all of which the Company agrees
and to all of which the rights
of Holders of Securities are subject:
(1) In acting under this Agreement and in connection with the Securities, the Fiscal
Agent is acting solely as an agent of the Company and does not assume any responsibility
for the correctness of the recitals in the Securities (except for the correctness of the
statement of the Fiscal Agent in its certificate of authentication thereon) or any
obligation or relationship of agency, for or with any of the owners or Holders of the
Securities.
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(2) The Fiscal Agent shall (except as ordered by a court of competent jurisdiction or
as required by any applicable law), notwithstanding any notice to the contrary, be entitled
to treat the Holder of any Security as the owner thereof as set forth in Section 2.13,
shall not be liable for so doing and shall be indemnified and held harmless by the Company
against any loss, liability, claim, demand or expense arising from or based upon it so
doing.
(3) Except as may otherwise be agreed, the Fiscal Agent shall not be under any
liability for interest on monies at any time received by it pursuant to any of the
provisions of this Agreement or of the Securities.
(4) The Fiscal Agent may consult with counsel of its selection, and the advice or
opinion of counsel with respect to legal matters relating to this Agreement and the
Securities shall be full and complete authorization and protection from liability in
respect of any action taken, omitted or suffered by it hereunder in good faith and in
accordance with the advice or opinion of such counsel.
(5) The Fiscal Agent shall not be charged with knowledge of any Default or Event of
Default with respect to the Securities, unless either (a) a Responsible Officer shall have
actual knowledge of such Default or Event of Default or (b) written notice of such Default
or Event of Default shall have been given to the Fiscal Agent by the Company or by any
Holder of the Securities and such notice references this Agreement and the Securities.
(6) The permissive rights of the Fiscal Agent enumerated herein shall not be construed
as duties.
(7) The duties and obligations of the Fiscal Agent shall be determined solely by the
express provisions of this Agreement and the Securities and the Fiscal Agent shall not be
liable except for the performance of such duties and obligations as are specifically set
forth in this Agreement and the Securities, and no implied covenants or obligations shall
be read into this Agreement or the Securities against the Fiscal Agent.
Section 7.02. Rights of Fiscal Agent.
(1) The Fiscal Agent shall be protected and shall incur no liability for or in respect
of any action taken or thing suffered by it in reliance upon any Security, notice,
direction, consent, certificate, affedavit, statement, or other document to the extent that
such communication conforms to the provisions set forth herein, believed by it, in good
faith and without negligence, to be genuine and to have been passed or signed by the proper
parties.
(2) Before the Fiscal Agent acts or refrains from acting, it may require an Officers’
Certificate or any Opinion of Counsel. The Fiscal Agent shall not be liable for any action
it takes or omits to take in good faith in reliance on the Certificate or Opinion.
(3) The Fiscal Agent may act through agents and shall not be responsible for the
misconduct or negligence of any agent appointed with due care.
29
(4) The Fiscal Agent shall not be liable for any action it takes or omits to take
in good faith which it believes to be authorized or within its rights or powers.
Section 7.03. Individual Rights of Fiscal Agent.
The Fiscal Agent in its individual or any other capacity may become the owner or pledgee of
Securities and may otherwise deal with the Company with the same rights it would have if it were
not Fiscal Agent. Any Agent may do the same with like rights.
Section 7.04. Fiscal Agent’s Disclaimer.
The Fiscal Agent makes no representation as to the validity or adequacy of this Agreement or
the Securities, it shall not be accountable for the Company’s use of the proceeds from the
Securities, and it shall not be responsible for any statement in the Securities other than its
certificate of authentication.
Section 7.05.
Compensation and Indemnity.
The Company shall pay to the Fiscal Agent, from time to time, reasonable compensation for
its services under this Agreement. The Company shall reimburse the Fiscal Agent upon request for
all reasonable out-of-pocket expenses incurred by it in the performance of its duties under this
Agreement. Such expenses shall include the reasonable compensation and expenses of the Fiscal
Agent’s agents and counsel.
Except as provided below in this paragraph, the Company shall indemnify the Fiscal Agent, any
predecessor fiscal agent of it and each director, officer, employee and agent of the Fiscal Agent
or predecessor fiscal agent against any loss, liability, cost, claim, action, demand or expense
(including reasonable fees and expenses of legal counsel) incurred by it in connection with its
appointment, or the performance of its duties hereunder, including all reasonable costs and
expenses in defending itself against any claim or liability in connection with the exercise or
performance of any of its powers and duties under this Agreement, or performance of any other
duties pursuant to the terms and conditions hereof, except such as
may result from the gross
negligence, bad faith or willful misconduct of any such Person. The Fiscal Agent shall notify the
Company promptly of any claim for which it may seek indemnity but failure to do so shall not
relieve the Company of its obligations under this Section 7.05. The Company need not pay for any
settlement made by the Fiscal Agent without the Company’s consent, which consent shall not be
unreasonably withheld. The Company need not reimburse any expense or indemnify against any loss
or liability incurred by either the Fiscal Agent or any predecessor fiscal agent of it through its
own gross negligence, bad faith or willful misconduct. In respect of the Company’s payment
obligations in this Section 7.05, the Fiscal Agent shall have a senior claim to which the
Securities are hereby made subordinate on all money or property held or collected by the Fiscal
Agent as such and not in its individual capacity, except for money or property held in trust for
the benefit of the Holders to pay the principal of and interest and premium, if any, on particular
Securities. Notwithstanding anything contained in this Agreement to the contrary, the indemnity
agreement set forth in this paragraph shall survive the termination of this Agreement and the
resignation or removal of the Fiscal Agent.
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Section 7.06. Replacement of Fiscal Agent.
The Fiscal Agent may resign upon 30 days’ written notice to the Company. The Holders of a
majority in principal amount of the outstanding Securities may remove the Fiscal Agent by
notifying the removed Fiscal Agent and the Company. Those Holders may appoint a successor Fiscal
Agent with the Company’s consent. The Company may remove the Fiscal Agent without prior notice
if:
| (1) | the Fiscal Agent is adjudged a bankrupt or an insolvent; | ||
| (2) | a receiver or public officer takes charge of the Fiscal Agent or its property; or | ||
| (3) | the Fiscal Agent becomes incapable of acting. |
If the Fiscal Agent resigns or is removed or if a vacancy exists in the office of Fiscal
Agent for any reason, the Company shall promptly appoint a successor Fiscal Agent. Within one
year after the successor Fiscal Agent takes office, the Holders of a majority in principal amount
of the Securities may appoint a successor Fiscal Agent to replace the successor Fiscal Agent
appointed by the Company.
If a successor Fiscal Agent does not take office within 60 days after the retiring Fiscal
Agent resigns or is removed, the retiring Fiscal Agent, the Company or the Holders of a majority
in principal amount of the Securities may petition any court of competent jurisdiction for the
appointment of a successor Fiscal Agent.
A successor Fiscal Agent shall deliver a written acceptance of its appointment to the
retiring Fiscal Agent and to the Company. Immediately after that, the retiring Fiscal Agent shall
transfer all property held by it as Fiscal Agent to the successor Fiscal Agent, the resignation or
removal of the retiring Fiscal Agent shall become effective, and the successor Fiscal Agent shall
hâve all the rights, powers and duties of the Fiscal Agent under this Agreement. A successor
Fiscal Agent shall mail notice of its succession to each Holder of Securities for which it acts as
Fiscal Agent.
If at the time a successor to the Fiscal Agent succeeds to the trusts created by this
Agreement any of the Securities shall have been authenticated but not delivered, the successor to
the Fiscal Agent may adopt the certificate of authentication of any predecessor fiscal agent and
deliver the Securities so authenticated. If at that time any of the Securities shall not have been
authenticated, any successor to the Fiscal Agent may authenticate the Securities either in the name
of any predecessor fiscal agent hereunder or in the name of the successor fiscal agent. In all such
cases the certificate of authentication shall have the same force and effect which the provisions
of the Securities or this Agreement provided that certificates of authentication of the Fiscal
Agent shall have, except that the right to adopt the certificate of authentication of any
predecessor Fiscal Agent or to authenticate the Securities in the name of any predecessor Fiscal
Agent shall apply only to its successor or successors by merger, conversion or consolidation.
31
Section 7.07. Successor Fiscal Agent by Merger, etc.
If the Fiscal Agent consolidates, merges or converts into, or transfers all or substantially
all of its corporate trust assets to, another corporation, the successor corporation shall be the
successor Fiscal Agent, without any further act.
ARTICLE EIGHT
Defeasance and Discharge
Section 8.01. Option to Effect Covenant Defeasance.
The Company may, at the option of its Board of Directors evidenced by a Board Resolution set
forth in an Officers’ Certificate, at any time, elect to have Section 8.02 hereof be applied to
all outstanding Securities upon compliance with the conditions set forth below in this Article 8.
Section 8.02. Covenant Defeasance.
Upon the Company’s exercise under Section 8.01 hereof of the option applicable to this
Section 8.02, and subject to the satisfaction of the conditions set forth in Section 8.03 hereof,
the Company shall be released from its obligations under the covenants contained in Sections 4.03,
4.04 and 4.05 and Article 5 on and after the date the conditions set forth below are satisfied
(hereinafter, “Covenant Defeasance”), and the Securities shall thereafter be deemed not
“outstanding” for the purposes of any direction, waiver, consent or declaration or act of Holders
(and the consequences of any thereof) in connection with such covenants, but shall continue to be
deemed “outstanding” for all other purposes hereunder (it being understood that such Securities
shall not be deemed outstanding for accounting purposes). For this purpose, Covenant Defeasance
means that, with respect to the outstanding Securities, the Company may omit to comply with and
shall have no liability in respect of any term, condition or limitation set forth in any such
covenant, whether directly or indirectly, by reason of any reference elsewhere herein to any such
covenant or by reason of any reference in any such covenant to any other provision herein or in
any other document and such omission to comply shall not constitute a Default or an Event of
Default under Section 6.01 hereof, but, except as specified above, the remainder of this Agreement
and such Securities shall be unaffected thereby.
Section 8.03. Conditions to Covenant Defeasance.
In order to exercise Covenant Defeasance, the Company must irrevocably deposit, or caused to
be deposited, with the Fiscal Agent (or another fiscal agent satisfying the requirements of this
Agreement), in trust for such purpose, (1) money in an amount, (2) U.S. Government Obligations that
through the payment of principal and interest in accordance with their terms will provide money in
an amount (“Cash Equivalents”), or (3) a combination thereof, sufficient in the opinion of a
nationally recognized firm of independent public accountants expressed in a written certification
thereof delivered to the Fiscal Agent, to pay the principal of, premium, if any, and interest on,
the outstanding Securities at maturity or upon redemption, together with all other amounts payable
by the Company under this Agreement. Such Covenant Defeasance will become effective 91 days after
such deposit if and only if:
32
(i) no Default or Event of Default with respect to the Securities has
occurred and is continuing immediately prior to the time of such deposit;
(ii) no Default or Event of Default shall have occurred at any time in the
period ending on the 91st day after the date of such deposit and shall be
continuing on such 91st day;
(iii)
such defeasance does not result in a breach or violation of, or
constitute a default under, any other agreement or instrument to which the Company
is a party or by which it is bound (and, in furtherance of such condition, no
Default or Event of Default shall result under this Agreement due to the
incurrence of indebtedness to fund such deposit and the entering into of customary
documentation in connection therewith, even though such documentation may contain
provisions that would otherwise give rise to a Default or Event of Default); and
(iv) the Company has delivered to the Fiscal Agent (A) an Opinion of Counsel
to the effect that the Holders of the Securities will not recognize income, gain or
loss for federal income tax purposes as a result of such Covenant Defeasance and
will be subject to federal income tax on the same amount, in the same manner and at
the same times as would have been the case if such Covenant Defeasance had not
occurred; and (B) an Officers’ Certificate and an Opinion of Counsel, each stating
that all conditions precedent relating to such Covenant Defeasance have been
complied with.
Section 8.04. Discharge.
If (i) the Company shall deliver to the Fiscal Agent for cancellation all Securities
theretofore authenticated and delivered (other than any Securities which shall have been destroyed,
lost or stolen and in lieu of or in substitution for which other
Securities shall have been
authenticated and delivered) and not theretofore cancelled, or (ii) all Securities not theretofore
surrendered or delivered to the Fiscal Agent for cancellation shall have become due and payable, or
are by their terms to become due and payable within one year or are to be called for redemption
within one year under arrangements satisfactory to the Fiscal Agent, and the Company shall
irrevocably deposit with the Fiscal Agent, as trust fonds solely for the benefit of the Holders for
that purpose, an amount sufficient to pay at maturity or upon redemption all of the Securities
(other than any Securities which shall have been destroyed, lost or stolen and in lieu of or in
substitution for which other Securities shall have been authenticated and delivered) not
theretofore surrendered or delivered to the Fiscal Agent for cancellation, including principal,
premium, if any, and interest due or to become due to such date of maturity or redemption date, as
the case may be, then this Agreement shall cease to be of further force or effect (except as to
rights of registration of transfer or exchange of the Securities provided in this Agreement) and,
at the written request of the Company, accompanied by an
Officers’ Certificate and Opinion of
Counsel, each stating that all conditions precedent provided for herein relating to the
satisfaction and discharge of this Agreement have been complied with, and upon payment of the
costs, charges and expenses incurred or to be incurred by the Fiscal Agent in relation thereto or
in carrying out the provisions of this Agreement, the Fiscal Agent shall satisfy and discharge this
33
Agreement (“Discharge”); provided that the Company’s obligations with respect to the payment of
principal, premium, if any, and interest will not terminate until the same shall apply the moneys
so deposited to the payment to the Holders of Securities of all sums due and to become due
thereon.
Section 8.05. Deposited Money and Government Securities to be Held in Trust; Other
Miscellaneous Provisions.
Subject to Section 8.06 hereof, all money and Cash Equivalents (including the proceeds
thereof) deposited with the Fiscal Agent (or other qualifying fiscal agent, collectively for
purposes of this Section 8.05, the “Fiscal Agent”) pursuant to Section 8.02 hereof in respect of
the outstanding Securities shall be held in trust and applied by the Fiscal Agent, in accordance
with the provisions of such Securities and this Agreement, to the payment, either directly or
through the Paying Agent as the Fiscal Agent may determine, to the Holders of such Securities of
all sums due and to become due thereon in respect of principal, premium, if any, and interest but
such money and Cash Equivalents need not be segregated from other funds except to the extent
required by law.
The Company shall pay and indemnify the Fiscal Agent against any tax, fee or other charge
imposed on or assessed against the money or Cash Equivalents deposited pursuant to this Section
8.05 or the principal and interest received in respect thereof other than any such tax, fee or
other charge which by law is for the account of the Holders of the outstanding Securities.
Anything in this Article 8 to the contrary notwithstanding, the Fiscal Agent shall deliver or
pay to the Company from time to time upon the request of the Company any money or Cash Equivalents
held by it as provided in this Section 8.05 which, in the opinion of a nationally recognized firm
of independent public accountants expressed in a written certification thereof delivered to the
Fiscal Agent (which may be the opinion delivered under Section 8.03 hereof), are in excess of the
amount thereof that would then be required to be deposited to effect an equivalent Covenant
Defeasance or Discharge.
Section 8.06. Repayment to Company.
Any money and Cash Equivalents deposited with the Fiscal Agent or any Paying Agent, or then
held by the Company or any of its Subsidiaries, in trust for the payment of the principal of, or
premium, if any, or interest on, any Security and remaining unclaimed for two years after such
principal, premium, if any, or interest has become due and payable shall be paid to the Company on
its request or (if then held by the Company or any of its Subsidiaries) shall be discharged from
such trust; and the Holder of such Security shall thereafter, as an
unsecured general creditor,
look only to the Company for payment thereof, and all liability of the Fiscal Agent or such Paying
Agent with respect to such trust money and Cash Equivalents, and all liability of the Company or
any of its Subsidiaries or Affiliates as fiscal agent thereof, shall thereupon cease; provided,
however, that the Fiscal Agent or such Paying Agent, before being required to make any such
repayment, may at the expense of the Company cause to be published once, in the New York Times, The
Wall Street Journal (national edition) and such foreign publication as may be required by
applicable law, notice that such money and Cash Equivalents
34
remains
unclaimed and that, after a date specified therein, which shall not be less than 30 days
from the date of such notification or publication, any unclaimed balance of such money and Cash
Equivalents then remaining will be repaid to the Company.
Section 8.07. Reinstatement
If the Fiscal Agent or Paying Agent is unable to apply any United States dollars or Cash
Equivalents in accordance with Section 8.02 or 8.04 hereof, as the case may be, by reason of any
order or judgment of any court or governmental authority enjoining, restraining or otherwise
prohibiting such application, then the Company’s obligations under this Agreement and the
Securities shall be revived and reinstated as though no deposit had occurred pursuant to Section
8.02 or 8.04 hereof until such time as the Fiscal Agent or Paying Agent is permitted to apply all
such assets in accordance with Section 8.02 or 8.04 hereof, as the case may be; provided,
however, that, if the Company makes any payment of principal of, or premium, if any, or interest
on, any Security following the reinstatement of its obligations, the Company shall be subrogated
to the rights of the Holders of such Securities to receive such payment from the money and Cash
Equivalents held by the Fiscal Agent or Paying Agent.
ARTICLE NINE
Amendments, Supplements and Waivers
Section 9.01. Without Consent of Holders.
The Company and the Fiscal Agent may amend or supplement this Agreement or the Securities
without notice to or consent of any Securityholder:
(1)
to cure any ambiguity, omission, defect or inconsistency or to make other formal
changes;
(2) to comply with Article Four or Five;
(3) to provide for uncertificated Securities in addition to or in place of
certificated Securities;
(4) to add to the covenants of the Company or to add any additional Events of Default
for the benefit of all the Securities;
(5) to add to or change any of the provisions of this Agreement to such extent as
shall be necessary to permit or facilitate the issuance of Securities in (i) bearer form,
registrable or not registrable as to principal, and/or (ii) coupon form, registrable or
not registrable as to principal, and to provide for exchangeability of such Securities
with Securities issued hereunder in fully registered form;
35
(6) to add to or change any provisions of this Agreement as shall be necessary to
provide for or facilitate the administration of the trusts hereunder by more than one
Fiscal Agent;
(7) to issue Additional Securities pursuant to Section 2.15; or
(8) to make any change that does not adversely affect the rights of any
Securityholder;
but none of such changes shall adversely affect the rights of any Securityholder.
Section 9.02.
With Consent of Holders.
The Company and the Fiscal Agent may amend this Agreement or the Securities with the written
consent of the Holders of at least a majority in principal amount of the outstanding Securities
affected by such supplement or amendment. The Holders of a majority in principal amount of the
outstanding Securities may waive compliance by the Company in a particular instance with any
provision of this Agreement or the Securities without notice to any Holder of Securities. Without
the consent of each Securityholder affected, however, an amendment, supplement or waiver,
including a waiver pursuant to Section 6.04, may not:
(1) change the stated maturity of the principal of, or any installment of principal
of or interest on, the Securities;
(2) reduce the principal amount of (or premium, if any) or any interest on the
Securities;
(3) change the place of payment on any Security;
(4) impair the right to institute suit for the enforcement of any payment on or with
respect to the Securities on or after its stated maturity (or, in the case of redemption,
on or after the Redemption Date); or
(5) reduce the percentage in principal amount of outstanding Securities of any
series, the consent of the Holders of which is required for modification or amendment of
this Agreement or for waiver of compliance with certain provisions of this Agreement or
for waiver of certain defaults.
It shall not be necessary for the consent of the Holders under this Section to approve the
particular form of any proposed supplement, but it shall be sufficient if such consent approves
the substance thereof.
Section 9.03.
Revocation and Effect of Consents.
A consent to an amendment, supplement or waiver by a Holder of a Security is a continuing
consent, irrevocable for a period of nine months from the date given or, if earlier, until the
amendment, supplement or waiver becomes effective, both as to the Holder giving such consent and
as to every subsequent Holder of a Security or a portion of a Security that evidences
36
the same debt as the consenting Holder’s Security, even if notation of the consent is not made on
each Security. An amendment, supplement or waiver becomes effective in accordance with its terms
and thereafter binds every Securityholder.
Section 9.04. Notation on or Exchange of Securities.
If an amendment, supplement or waiver changes the term of a Security, the Fiscal Agent may
require the Holder of the Security to deliver it to the Fiscal Agent. The Fiscal Agent may place
an appropriate notation on the Security about an amendment,
supplement or waiver and return it to
the Holder. Alternatively, the Company in exchange for Securities may issue and the Fiscal Agent
shall authenticate new Securities that reflect an amendment, supplement or waiver.
Section 9.05. Fiscal Agent to Sign Amendments, etc.
The Fiscal Agent need not sign any supplement or amendment to this Agreement that adversely
affects its rights. In signing any amendment, supplement or waiver, the Fiscal Agent shall be
entitled to receive, and (subject to Section 7.02) shall be fully protected in relying upon an
Officers’ Certificate and Opinion of Counsel stating that such amendment, supplement or waiver is
not prohibited by the Agreement.
ARTICLE TEN
Miscellaneous
Section 10.01. Notices.
Any
notice or communication shall be in writing and delivered in person or mailed by
first-class mail to the other’s address as follows:
If to the Company:
|
Symetra Financial Corporation | |
| Symetra Financial Center | ||
| P.O. Box 34690 | ||
| Seattle, Washington 98124-1690 | ||
| Attn: General Counsel | ||
With a copy to:
|
Orrick Herrington & Sutcliffe LLP | |
| 719 Second Avenue, Suite 900 | ||
| Seattle, Washington 98104 | ||
| Attn: Stephen M. Graham | ||
If to the Fiscal Agent:
|
U.S. Bank National Association | |
| Corporate Trust Services | ||
| CN-OH-W6CT 425 Walnut Street |
||
| Cincinnati, Ohio 45202 | ||
| Attn: William E. Sicking |
37
The Company or the Fiscal Agent by notice to the other may designate additional or different
addresses for subsequent notices or communications.
Any
notice or communication mailed to a Holder of a Security shall be mailed by first class
mail to his or her address shown on the register kept by the
Registrar. Failure to mail a notice
or communication to a Securityholder or any defect in it shall not affect its sufficiency with
respect to other Securityholders.
If
a notice or communication is mailed in the manner provided above within the time
prescribed, it is duly given, whether or not the addressee receives it.
In
case, by reason of the suspension of regular mail service, or by reason of any other
cause, it shall be impossible to mail any notice as required by this Agreement, then such method
of notification as shall be made with the approval of the Fiscal Agent shall constitute a
sufficient mailing of such notice.
Section 10.02. Certificate and Opinion as to Conditions Precedent.
Upon any request or application by the Company to the Fiscal Agent to take any action under
this Agreement, the Company shall furnish to the Fiscal Agent:
(1) an Officers’ Certificate stating that, in the opinion of the signers, all
conditions precedent, if any, provided for in this Agreement relating to the proposed
action hâve been complied with; and
(2) an Opinion of Counsel stating that, in the opinion of such counsel, all such
conditions precedent hâve been complied with.
Section 10.03. Statements Required in Certificate or Opinion.
Each Certificate or Opinion with respect to compliance with a condition or covenant provided
for in this Agreement shall include:
(1) a statement that the person making such Certificate or Opinion has read such
covenant or condition;
(2) a brief statement as to the nature and scope of the examination or investigation
upon which the statements or opinions contained in such Certificate or Opinion are based;
(3) a statement that, in the opinion of such person, he or she has made such
examination or investigation as is necessary to enable him or her to express an informed
opinion as to whether or not such covenant or condition has been complied with; and
(4) a statement as to whether or not, in the opinion of such person, such condition or
covenant has been complied with.
38
Section 10.04. Rules by Fiscal Agent, Paying Agent, Registrar.
The Fiscal Agent may make reasonable rules for action by or a meeting of Securityholders. The
Registrar or Paying Agent may make reasonable rules and set reasonable requirements for its
functions.
Section 10.05. Governing Law.
THIS
AGREEMENT AND THE SECURITIES SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH,
THE LAWS OF THE STATE OF NEW YORK.
Section 10.06. No Recourse Against Others.
All liability described in the Securities of any director, officer, employee or stockholder,
as such, of the Company is waived and released.
Section 10.07. Successors.
All agreements of the Company in this Agreement and the Securities shall bind its successor.
All agreements of the Fiscal Agent in this Agreement shall bind its successor.
Section 10.08. Execution in Counterparts.
The parties may sign this Agreement in any number of counterparts, each of which shall be an
original, but such counterparts shall together constitute but one and the same agreement.
39
SIGNATURES
| SYMETRA FINANCIAL CORPORATION | ||||
| By | /s/ Margaret A. Meister | |||
| Name: Margaret A. Meister Title: Executive Vice President and Chief Financial Officer |
||||
| U.S. BANK NATIONAL ASSOCIATION | ||||
| By | /s/ William E. Sicking | |||
| Name: William E. Sicking Title: Vice President and Trust Officer |
||||
FISCAL AGENCY AGREEMENT
EXHIBIT A
[FORM OF FACE OF NOTE]
UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST
COMPANY, A NEW YORK CORPORATION (“DTC”), TO THE COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER,
EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE
& CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED
REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO OR TO SUCH OTHER ENTITY AS IS REQUESTED
BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR
OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE
REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.
THIS GLOBAL NOTE IS HELD BY THE DEPOSlTARY (AS DEFINED IN THE FISCAL AGENCY AGREEMENT GOVERNING
THIS NOTE) OR ITS NOMINEE IN CUSTODY FOR THE BENEFIT OF THE BENEFICIAL OWNERS HEREOF, AND IS NOT
TRANSFERABLE TO ANY PERSON UNDER ANY CIRCUMSTANCES EXCEPT THAT (I) THE FISCAL AGENT MAY MAKE SUCH
NOTATIONS HEREON AS MAY BE REQUIRED PURSUANT TO SECTION 2.06(b)(ii) AND SECTION 2.06(e) OF THE
FISCAL AGENCY AGREEMENT, (II) THIS GLOBAL NOTE MAY BE EXCHANGED IN WHOLE BUT NOT IN PART PURSUANT
TO SECTION 2.06(a) OF THE FISCAL AGENCY AGREEMENT, (III) THIS GLOBAL NOTE MAY BE DELIVERED TO THE
FISCAL AGENT FOR CANCELLATION PURSUANT TO SECTION 2.11 OF THE FISCAL AGENCY AGREEMENT AND (IV) THIS
GLOBAL NOTE MAY BE TRANSFERRED TO A SUCCESSOR DEPOSITARY WITH THE PRIOR WRITTEN CONSENT OF THE
COMPANY.
THE NOTES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE “SECURITIES ACT”), OR OTHER SECURITIES LAWS. NEITHER THIS NOTE NOR ANY INTEREST OR
PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR
OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH
REGISTRATION UNLESS THE TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, THE REGISTRATION
REQUIREMENTS OF THE SECURITIES
ACT. THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF (1) AGREES THAT IT WILL NOT PRIOR TO
(X) THE DATE WHICH IS TWO YEARS (OR SUCH SHORTER PERIOD OF TIME AS PERMITTED BY RLTLE 144(k) UNDER
THE SECURITIES ACT OR ANY SUCCESSOR PROVISION THEREUNDER) AFTER THE LATER OF THE ORIGINAL ISSUE
DATE HEREOF (OR OF ANY PREDECESSOR OF THIS NOTE) OR THE LAST DAY ON WHICH THE ISSUER OR ANY
AFFILIATE OF THE ISSUER WAS THE OWNER OF THIS NOTE (OR ANY PREDECESSOR OF THIS NOTE) AND (Y) SUCH
LATER DATE, IF ANY, AS MAY BE REQUIRED BY APPLICABLE LAW (THE “RESALE
RESTRICTION TERMINATION DATE”), OFFER, SELL OR OTHERWISE TRANSFER THIS NOTE EXCEPT (A) TO THE
ISSUER OR ONE OF ITS AFFILIATES, (B) PURSUANT TO A REGISTRATION STATEMENT WHICH HAS BEEN DECLARED
EFFECTIVE UNDER THE SECURITIES ACT, (C) FOR SO LONG AS THE NOTES ARE ELIGIBLE FOR
A-1
RESALE PURSUANT TO RULE 144A, TO A PERSON IT REASONABLY BELIEVES IS A “QUALIFIED INSTITUTIONAL
BUYER” AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR
THE
ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING
MADE IN RELIANCE ON RULE 144A, (D) PURSUANT TO OFFERS AND SALES TO NON U.S. PERSONS THAT OCCUR
OUTSIDE THE UNITED STATES WITHIN THE MEANING OF REGULATION S UNDER THE SECURITIES ACT OR (E)
PURSUANT TO ANY OTHER AVAILABLE EXEMPTION FROM THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND (2) AGREES THAT IT WILL GIVE TO EACH PERSON TO
WHOM THIS NOTE IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND; PROVIDED THAT
THE ISSUER, THE FISCAL AGENT AND THE REGISTRAR SHALL HAVE THE RIGHT PRIOR TO ANY SUCH OFFER, SALE
OR TRANSFER (I) PURSUANT TO CLAUSE (D) OR (E) TO
REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION AND/OR OTHER INFORMATION SATISFACTORY
TO EACH OF THEM, AND (II) IN EACH OF THE FOREGOING CASES, TO REQUIRE THAT A CERTIFICATION OF
TRANSFER IN THE FORM APPEARING ON THE OTHER SIDE OF THIS NOTE IS COMPLETED AND DELIVERED BY THE
TRANSFEROR TO THE FISCAL AGENT. THIS LEGEND WILL BE REMOVED UPON THE REQUEST OF THE HOLDER AFTER
THE RESALE
RESTRICTION TERMINATION DATE. AS USED HEREIN, THE TERMS “UNITED STATES” AND “U.S. PERSON” HAVE THE
MEANINGS GIVEN TO THEM BY REGULATIONS UNDER THE SECURITIES ACT.1
| 1. | (Only to be printed on Global Securities) |
A-2
CUSIP: [ 144A: 87151 Q AA 4]
[REG. S: U79664 AA 3]
ISIN: [144A: US87151QAA40
[REG S: USU79664AA36]
[REG. S: U79664 AA 3]
ISIN: [144A: US87151QAA40
[REG S: USU79664AA36]
| No. | $300,000,000 |
6.125% Senior Notes due 2016
SYMETRA FINANCIAL CORPORATION, a Delaware corporation promises to pay to
Cede & Co., or registered assigns, the principal sum of $300,000,000 on April 1, 2016.
Cede & Co., or registered assigns, the principal sum of $300,000,000 on April 1, 2016.
Interest Payment Dates: April 1 and October 1
Record Dates: March 15 and September 15
A-3
Additional provisions of this Security are set forth on the other side of this Security.
Dated: March 30, 2006
| SYMETRA FINANCIAL CORPORATION |
||||
| By: | ||||
| Name: | ||||
| Title: | ||||
FISCAL AGENT’S CERTIFICATE OF
AUTHENTICATION
Dated: March 30, 2006
| U.S. BANK NATIONAL ASSOCIATION as Fiscal Agent, certifies that this is one of the Securities referred to in the Fiscal Agency Agreement. |
||||
| by | ||||
| Authorized Signatory | ||||
A-4
[FORM OF REVERSE SIDE OF NOTE]
6.125% Senior Notes due 2016
Capitalized terms used herein but not defined shall have the meanings assigned to them
in the Fiscal Agency Agreement referred to below unless otherwise indicated.
1. Interest. The Company promises to pay interest on the principal amount of this
Security from March 30, 2006 until maturity. The Company will pay interest semi-annually on
April 1 and October 1 of each year (each an “Interest Payment Date”), commencing October 2,
2006, or if any such day is not a Business Day, on the next succeeding Business Day, which
payment shall be deemed made on such Interest Payment Date. Interest on the Securities will
accrue at the rate of 6.125% per annum from the most recent date to which interest has been
paid or, if no interest has been paid, from March 30, 2006, or as otherwise specified
therein. The Company shall pay interest (including post-petition interest in any proceeding
under any Bankruptcy Law to the extent that such interest is an allowed claim enforceable
against the debtor under such Bankruptcy Law) on overdue principal and premium, if any,
from time to time on demand at the rate equal to the rate then in effect; it shall pay
interest (including post-petition interest in any proceeding under any Bankruptcy Law) on
overdue installments of interest (without regard to any applicable grace periods) from time
to time on demand at the same rate to the extent lawful. Interest will be computed on the
basis of a 360-day year of twelve 30-day months.
2. Method of Payment. The Company shall pay the principal of, and premium and
interest on, the Securities on the dates and in the manner provided herein and in the
Fiscal Agency Agreement. Principal of, and premium and interest on, Global Securities will
be payable by the Company through the Fiscal Agent to the Depositary in immediately
available funds. At the Company’s option, payment of interest may be made by check in
immediately available funds mailed to such Holder on the applicable Interest Payment Date
at the address set forth upon the Register maintained by the Registrar; provided that all
payments with respect to Global Securities and Definitive Securities the holders of whom
have given wire transfer instructions to the Company will be required to be made by wire
transfer of same day funds to the accounts in the United States specified by the holders
thereof.
3. Paying Agent and Registrar. Initially, U.S. Bank National Association, the Fiscal
Agent under the Fiscal Agency Agreement, will act as Paying Agent and Registrar. The
Company may change any Paying Agent
or Registrar without notice to any Holder. The Company or any of its Subsidiaries
may act in any such capacity, except that none of the Company, its Subsidiaries or their
Affiliates shall act as Paying Agent or Registrar if a Default or Event of Default has
occurred and is continuing.
4. Fiscal Agency Agreement.
The Company issued the Securities under a Fiscal Agency Agreement, dated as of March
30, 2006, (as may be further amended, supplemented or restated from time to time, the
“Fiscal Agency Agreement”), among the Company and the Fiscal Agent. The terms of the
Securities include those stated in the Fiscal Agency Agreement. The Securities are
subject to all such
A-5
terms, and Holders are referred to the Fiscal Agency Agreement for a statement of such terms. The
Securities are general unsecured obligations of the Company.
5. Optional Redemption. The Securities shall be subject to redemption at the option of
the Company, in whole or in part, at any time or from time to time, prior to maturity at
the Company’s option, at a redemption price equal to the greater of: (i) 100% of the
principal amount of the Securities to be redeemed, or (ii) as determined by the Quotation
Agent (as defined in the Fiscal Agency Agreement), the sum of the present values of the
remaining scheduled payments of principal and interest on the Securities to be redeemed
(not including any payments of interest accrued as of the date fixed for redemption (the
“Redemption Date”) discounted to such Redemption Date on a semiannual basis (assuming a
360-day year consisting of twelve 30-day months) at the Treasury Rate (as defined in the
Fiscal Agency Agreement), plus 25 basis points, plus, in each case, accrued and unpaid
interest on the Securities to be redeemed to the Redemption Date.
6. Denominations, Transfer, Exchange. The Securities are in registered form without
coupons in minimum denominations of $2,000 and integral multiples of $1,000. The transfer
of Securities may be registered and Securities may be exchanged as provided in the Fiscal
Agency Agreement. The Registrar and the Fiscal Agent may require a Holder, among other
things, to furnish appropriate endorsements and transfer documents and the Company may
require a Holder to pay any taxes and fees required by law or permitted by the Fiscal
Agency Agreement. The Company need not exchange or register the transfer of any Security
or portion of a Security selected for redemption, except for the unredeemed portion of any
Security being redeemed in part. Also, it need not exchange or register the transfer of
any Securities for a period of 15 days before a selection of Securities to be redeemed or
during the period between a record date and the corresponding Interest Payment Date.
7. Persons Deemed Owners. The registered Holder of a Security may be treated as its
owner for all purposes.
8. Unclaimed Money. If money for the payment of principal, premium or interest
remains unclaimed for two years after such principal, premium or interest has become due
and payable, the Fiscal Agent and the Paying Agent will pay the money back to the Company
at its request. After that, all liability of the Fiscal Agent and such Paying Agent with
respect to such money shall cease.
9. Defeasance Prior to Redemption or Maturity. Subject to certain conditions contained in the
Fiscal Agency Agreement, the Company at any time may terminate some or all of its obligations
under the Securities and the Fiscal Agency Agreement if the Company deposits with the Fiscal Agent
money or Cash Equivalents sufficient to pay the principal of, and premium and interest on, the
Securities to redemption or maturity, as the case may be.
10. Amendment, Supplement and Waiver. Subject to certain exceptions, the Fiscal Agency
Agreement and the Securities may be amended or supplemented with the consent of the Holders of
at least a majority in principal amount of the Securities then outstanding, and any existing
Default or Event of Default or compliance with any provision of the Fiscal Agency Agreement or
the Securities may be waived with the consent of the Holders of a majority in
A-6
principal amount of the then outstanding Securities. Without notice to or the consent of any Holder
of a Security, the Fiscal Agency Agreement or the Securities may be amended or supplemented to cure
any ambiguity, omission, defect or inconsistency, to comply with the covenants contained in the
Fiscal Agency Agreement, to provide for uncertificated Securities in addition to or in place of
certificated Securities, to add to the covenants of the Company or to add any additional Events of
Default for the benefit of all the Securities, to add to or change any of the provisions of the
Fiscal Agency Agreement to such extent as shall be necessary to permit or facilitate the issuance
of Securities in bearer form, registrable or not registrable as to principal, and/or coupon form,
registrable or not registrable as to principal, and to provide for exchangeability of such
Securities with Securities issued hereunder in fully registered form, to add to or change any
provisions of the Fiscal Agency Agreement as shall be necessary to provide for or facilitate the
administration of the trusts thereunder by more than one Fiscal Agent, to issue Additional
Securities pursuant to the Fiscal Agency Agreement, or to make any change that does not adversely
affect the rights of any Holder of the Securities; provided that none of such changes shall
adversely affect the rights of any Holder of the Securities.
11. Defaults and Remedies. An Event of Default occurs if: (i) the Company defaults in
the payment of any installment of interest on any
Security when the same becomes due and payable and the Default continues for a period
of 30 days, (ii) the Company defaults in the payment of the principal of, or premium, if
any, on, any Security when the same becomes due and payable at maturity, upon redemption
or otherwise, (iii) the Company defaults in the performance of, or fails to comply with
any of its other agreements in the Securities or the Fiscal Agency Agreement (other than
those referred to in (i) or (ii) above) and the default continues for 60 days after notice
by the Fiscal Agent or Holders of at least 25% in principal amount of Securities
outstanding, (iv) the Company defaults under any other series of debt securities or any
agreements, indentures or instruments under which the Company then has outstanding
indebtedness in excess of $25 million in the aggregate which indebtedness, if not already
matured in accordance with its terms, has been accelerated and the acceleration has not
been rescinded or annulled or the indebtedness has not been discharged within ten days
after notice is given to the Company by the Fiscal Agent or to the Company and the Fiscal
Agent by the holders of at least 25% in aggregate principal amount of outstanding debt
securities of the series, unless (a) prior to the entry of judgment in favor of the Fiscal
Agent, the default under that indenture or instrument is remedied or cured by the Company
or waived by the holders of the indebtedness, or (b) the default results from an action of
the United States government or a foreign government which prevents the Company from
performing its obligations under the agreement, indenture or instrument, (v) the Company
pursuant to or within the meaning of any Bankruptcy Law: commences a voluntary case,
consents to the entry of any order for relief from claims against it in an involuntary
case, consents to the appointment of a Custodian of it or for all or substantially all of
its property, or makes a general assignment for the benefit of its creditors or (vi) a
court of competent jurisdiction enters an order or decree under any Bankruptcy Law that:
is for relief against the Company in an involuntary case, appoints a Custodian of the
Company or for all or substantially all of its property, or orders the liquidation of the
Company and the order or decree remains unstayed and in effect for 90 days.
12. Fiscal Agent’s Dealings with Company. The Fiscal Agent, in its individual or any
other capacity, may make loans to, accept deposits from, and perform services for the
Company
A-7
or Affiliates, and may otherwise deal with the Company or its Affiliates, as if it were not the Fiscal Agent.
13. No Recourse Against Others. No past, present or future director, officer,
employee, agent, manager, incorporator, stockholder or other Affiliate of the Company shall
have any liability for any obligations of the Company under any of the Securities or the
Fiscal Agency Agreement or for any claim based on, in respect of, or by reason of, such
obligations or their creation. Each Holder by accepting a Security waives and releases all
such liability. The waiver and release are part of the consideration for the issuance of
the Securities.
14. Authentication. This Security shall not be valid until authenticated by the
manual signature of the Fiscal Agent or an authenticating agent.
15. Abbreviations. Customary abbreviations may be used in the name of a Holder or an
assignee, such as: TEN COM (= tenants in common), TEN ENT (= tenants by the entireties),
JT TEN (= joint tenants with right of survivorship and not as tenants in common), CUST (=
Custodian), and U/G/M/A (= Uniform Gifts to Minors Act).
16. CUSIP Numbers. Pursuant to a recommendation promulgated by the Committee on
Uniform Security Identification Procedures, the Company has caused CUSIP numbers to be
printed on the Securities and-the Fiscal Agent may use CUSIP numbers in notices of
redemption and purchase as a convenience to Holders. No representation is made as to the
correctness of such numbers either as printed on the Securities or as contained in any
notice of redemption or purchase and reliance may be placed only on the other
identification numbers placed thereon. Any such redemption or purchase shall not be
affected by any defect or omission in such numbers.
17. Governing Law. THE FISCAL AGENCY AGREEMENT AND THIS
SECURITY SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW
YORK.
18. Successor Corporation. In the event a successor corporation assumes all the
obligations of the Company under the Securities and the Fiscal Agency Agreement, pursuant
to the terms thereof, the Company will be released from all such obligations.
The Company will furnish to any Holder upon written request and without
charge to the Holder a copy of the Fiscal Agency Agreement. Requests may be made
to:
| Attention of: | Symetra Financial Corporation PO Box 34690 Seattle, WA 98124-1690 Attn: General Counsel |
A-8
Assignment Form
To assign this Security, fill in the form below:
(I) or (we) assign and transfer this Security to:
(Insert assignee’s legal name)
(Insert assignee’s soc. sec. or tax I.D. no.)
(Print or type assignee’s name, address and zip code)
and
irrevocably appoint
to transfer this Security on the books of the Company. The agent may substitute another to act for him.
to transfer this Security on the books of the Company. The agent may substitute another to act for him.
Date:
| Your Signature: | |||||
| (Sign exactly as your name appears on the face of this Security) | |||||
Signature Guarantee* :
| * | Participant in a recognized Signature Guarantee Medallion Program (or other signature guarantor acceptable to the Fiscal Agent). |
A-9
SCHEDULE OF EXCHANGES OF INTERESTS IN THE GLOBAL SECURITY*
The following exchanges of a part of this Global Security for an interest
in another Global Security, or exchanges of a part of another Global Security for an
interest in this Global Security, have been made:
| Date of Exchange |
Amount of decrease in Principal Amount of this Global Security |
Amount of increase in Principal Amount of this Global Security |
Principal Amount of this Global Security following such decrease (or increase) |
Signature of authorized signatory of Fiscal Agent or Security Custodian |
||||
A-10
EXHIBIT B
FORM OF CERTIFICATE OF TRANSFER
Symetra Financial Corporation
P.O. Box 34690
Seattle, WA 98124-1690
Attn: General Counsel
P.O. Box 34690
Seattle, WA 98124-1690
Attn: General Counsel
U.S. Bank National Association
Corporate Trust Services
CN-OH-W6CT
425 Walnut Street
Cincinnati, Ohio 45202
Attn: William E. Sicking
Corporate Trust Services
CN-OH-W6CT
425 Walnut Street
Cincinnati, Ohio 45202
Attn: William E. Sicking
| Re: | 6.125% Senior Notes due 2016 |
Reference is hereby made to the Fiscal Agency Agreement, dated as of March
30, 2006 (the “Fiscal Agency Agreement”), between Symetra Financial Corporation,
a Delaware corporation (the “Company”) and U.S. Bank National Association, as
fiscal agent (the “Fiscal Agent). Capitalized terms used but not defined herein
shall have the meanings given to them in the Fiscal Agency Agreement.
, (the “Transferor”) owns and proposes to transfer
the Security[ies] or interest in such
Security[ies] specified in Annex A hereto, in the
principal amount of $ in such Security[ies] or
interests (the “Transfer”), to (the “Transferee”), as
further specified in Annex A hereto. In connection with
the Transfer, the Transferor hereby certifies that:
[CHECK ALL THAT APPLY]
1. o Check if Transferee will take delivery of a beneficial interest in the 144A
Global Security. The Transfer is being effected pursuant to and in accordance with Rule
144A under the United States Securities Act of 1933, as amended (the “Securities Act”),
and, accordingly, the Transferor hereby further certifies that the beneficial interest
is being transferred to a Person that the Transferor reasonably believed and believes is
purchasing the beneficial interest for its own account, or for one or more accounts with
respect to which such Person exercises sole investment discretion, and such Person and
each such account is a “qualified institutional buyer” within the meaning of Rule 144A
in a transaction meeting the requirements of Rule 144A and such Transfer is in
compliance with any applicable blue sky securities laws of any state of the United
States. Upon consummation of the proposed Transfer in accordance with the terms of the
Fiscal Agency Agreement, the transferred beneficial interest will be subject to the
restrictions on transfer enumerated in the Private Placement Legend printed on the 144A
Global Security and in the Fiscal Agency Agreement and the Securities Act.
2. o Check if Transferee will take delivery of a beneficial interest in the
Regulation S Global Security. The Transfer is being effected pursuant to and in
accordance
B-1
with Rule 903 or Rule 904 under the Securities Act and, accordingly, the Transferor hereby further
certifies that (i) the Transfer is not being made to a person in the United States and (x) at the
time the buy order was originated, the Transferee was outside the United States or such Transferor
and any Person acting on its behalf reasonably believed and believes that the Transferee was
outside the United States or (y) the transaction was executed in, on or through the facilities of a
designated offshore securities market and neither such Transferor nor any Person acting on its
behalf knows that the transaction was prearranged with a buyer in the United States, (ii) no
directed selling efforts have been made in contravention of the requirements of Rule 903(b) or Rule
904(b) of Regulation S under the Securities Act, (iii) the transaction is not part of a plan or
scheme to evade the registration requirements of the Securities Act and (iv) if the proposed
transfer is being made prior to the expiration of the Distribution Compliance Period, the transfer
is not being made to a U.S. Person or for the account or benefit of a U.S. Person. Upon
consummation of the proposed transfer in accordance with the terms of the Fiscal Agency Agreement,
the transferred beneficial interest will be subject to the restrictions on Transfer enumerated in
the Private Placement Legend printed on the Regulation S Global Security and in the Fiscal Agency
Agreement and the Securities Act.
3. o Check and complete if Transferee will take delivery of a beneficial
interest pursuant to any provision of the Securities Act other than Rule 144A or
Regulation S. The Transfer is being effected in compliance with the transfer
restrictions applicable to beneficial interests in Global Securities and pursuant to and
in accordance with the Securities Act and any applicable blue sky securities laws of any
state of the United States, and accordingly the Transferor hereby further certifies that
(check one):
(a) o such Transfer is being effected pursuant to and in accordance with Rule
144 under the Securities Act;
or
(b) o such Transfer is being effected to the Company or a subsidiary
thereof;
or
(c) o such Transfer is being effected pursuant to an effective registration
statement under the Securities Act and in compliance with the prospectus delivery
requirements of the Securities Act.
This certificate and the statements contained herein are made for your benefit and
the benefit of the Company.
| [Insert Name of Transferor] |
||||
| By: | ||||
| Name: | ||||
| Title: | ||||
B-2
ANNEX A TO CERTIFICATE OF TRANSFER
| 1. | The Transferor owns and proposes to transfer the following: |
[CHECK ONE]
| o | a beneficial interest in the: |
| o | 144A Global Security (CUSIP _______________), or | ||
| o | Regulation S Global Security (CUSIP _______________), or | ||
| o | Temporary Regulation S Global Security (CUSIP _______________). |
| 2. | After the Transfer the Transferee will hold: |
[CHECK ONE]
| o | a beneficial interest in the: |
| o | 144A Global Security (CUSIP _______________), or | ||
| o | Regulation S Global Security (CUSIP _______________), or | ||
| o | Temporary Regulation S Global Security (CUSIP _______________). |
| o | a Definitive Security |
in accordance with the terms of the Fiscal Agency Agreement
B-3
EXHIBIT C
[FORM OF CERTIFICATE TO BE DELIVERED UPON
TERMINATION OF RESTRICTED PERIOD]
TERMINATION OF RESTRICTED PERIOD]
[Date]
Symetra Financial Corporation
P.O. Box 34690
Seattle, WA 98124-1690
Attn: General Counsel
P.O. Box 34690
Seattle, WA 98124-1690
Attn: General Counsel
U.S. Bank National Association
Corporate Trust Services
CN-OH-W6CT
425 Walnut Street
Cincinnati, Ohio 45202
Attn: William E. Sicking
Corporate Trust Services
CN-OH-W6CT
425 Walnut Street
Cincinnati, Ohio 45202
Attn: William E. Sicking
Re: 6.125% Senior Notes due 2016
Ladies and Gentlemen:
Reference is hereby made to the Fiscal Agency Agreement, dated as of March
30, 2006 (the “Fiscal Agency Agreement”), between Symetra Financial Corporation,
a Delaware corporation (the “Company”) and U.S. Bank National Association, as
fiscal agent (the “Fiscal Agent). Capitalized terms used but not defined herein
shall have the meanings given to them in the Fiscal Agency Agreement.
This letter relates to Securities represented by a temporary global security
(the “Temporary Regulation S Global Security”). Pursuant to Section 2.1 of the Fiscal
Agency Agreement, we hereby certify that the persons who are the beneficial
owners of $ [ ] principal amount of Securities represented by the Temporary
Regulation S Global Security are persons outside the United States to whom
beneficial interests in such Securities could be transferred in accordance with
Rule 904 of Regulation S promulgated under the Securities Act of 1933, as amended.
Accordingly, you are hereby requested to issue a Regulation S Global Security
representing the undersigned’s interest in the principal amount of Securities
represented by the Temporary Regulation S Global Security, all in the manner
provided by the Fiscal Agency Agreement.
C-1
You and the Company are entitled to rely upon this letter and are irrevocably authorized to
produce this letter or a copy hereof to any interested party in any administrative or legal
proceedings or official inquiry with respect to the matters covered hereby. Terms used in this
letter have the meanings set forth in Regulation S.
| [Insert Name of Transferor] |
||||
| By: | ||||
| Name: | ||||
| Title: | ||||
C-2
Exhibit 4.5
[EXECUTION COPY]
CREDIT AGREEMENT
Dated as of August 16, 2007
among
SYMETRA FINANCIAL CORPORATION,
as the Borrower,
as the Borrower,
BANK OF AMERICA, N.A.,
as Administrative Agent, Swing Line Lender and Issuing Lender,
as Administrative Agent, Swing Line Lender and Issuing Lender,
and
THE OTHER LENDERS PARTY HERETO
JPMORGAN CHASE BANK, N.A.,
as Syndication Agent
and
THE BANK OF NEW YORK,
THE BANK OF TOKYO-MITSUBISHI UFJ, LTD. NEW YORK BRANCH,
and
U.S. BANK, NATIONAL ASSOCIATION
as Co-Documentation Agents
and
BANC OF AMERICA SECURITIES LLC,
as Sole Lead Arranger and Sole Book Manager
as Sole Lead Arranger and Sole Book Manager
| 1. | DEFINITIONS | 1 | ||||||||
1.1.
|
Defined Terms | 1 | ||||||||
1.2.
|
Other Definitional Provisions | 22 | ||||||||
1.3.
|
Letter of Credit Amounts | 22 | ||||||||
1.4.
|
Rounding | 23 | ||||||||
1.5.
|
Times of Day | 23 | ||||||||
| 2. | AMOUNT AND TERMS OF COMMITMENTS | 23 | ||||||||
2.1.
|
Revolving Credit Commitments | 23 | ||||||||
2.2.
|
Procedure for Revolving Credit Borrowing | 23 | ||||||||
2.3.
|
Swing Line Commitment | 24 | ||||||||
2.4.
|
Procedure for Swing Line Borrowing; Refunding of Swing Line Loans | 25 | ||||||||
2.5.
|
Repayment of Loans; Evidence of Debt | 27 | ||||||||
2.6.
|
Facility Fee, etc | 28 | ||||||||
2.7.
|
Termination or Reduction of Revolving Credit Commitments | 28 | ||||||||
2.8.
|
Prepayments | 29 | ||||||||
2.9.
|
Conversion and Continuation Options | 29 | ||||||||
2.10.
|
Maximum Number of Eurodollar Loans | 30 | ||||||||
2.11.
|
Interest Rates and Payment Dates | 30 | ||||||||
2.12.
|
Computation of Interest and Fees | 31 | ||||||||
2.13.
|
Inability to Determine Interest Rate | 31 | ||||||||
2.14.
|
Pro Rata Treatment and Payments | 32 | ||||||||
2.15.
|
Requirements of Law | 34 | ||||||||
2.16.
|
Taxes | 35 | ||||||||
2.17.
|
Compensation for Losses | 37 | ||||||||
2.18.
|
Illegality | 37 | ||||||||
2.19.
|
Change of Office | 38 | ||||||||
2.20.
|
Replacement of Lenders under Certain Circumstances | 38 | ||||||||
2.21.
|
Increase in Commitments | 38 | ||||||||
2.22.
|
Extension of Revolving Credit Termination Date | 39 | ||||||||
| 3. | LETTERS OF CREDIT | 41 | ||||||||
3.1.
|
L/C Commitment | 41 | ||||||||
3.2.
|
Procedure for Issuance and Amendment of Letter of Credit | 41 | ||||||||
3.3.
|
Drawings and Reimbursements; Funding of Participations | 42 | ||||||||
3.4.
|
Repayment of Participations | 44 | ||||||||
3.5.
|
Obligations Absolute | 45 | ||||||||
3.6.
|
Role of Issuing Lender | 45 | ||||||||
3.7.
|
Cash Collateral | 46 | ||||||||
3.8.
|
Applicability of ISP98 and UCP | 46 | ||||||||
3.9.
|
Fees and Other Charges | 47 | ||||||||
3.10.
|
Conflict with Issuer Documents | 47 | ||||||||
| 4. | CONDITIONS PRECEDENT | 47 | ||||||||
4.1.
|
Conditions to Closing | 47 | ||||||||
iv
4.2.
|
Conditions to Closing and Each Extension of Credit | 48 | ||||||||
| 5. | REPRESENTATIONS AND WARRANTIES | 49 | ||||||||
5.1.
|
Financial Statements | 49 | ||||||||
5.2.
|
Corporate Existence; Compliance with Law | 50 | ||||||||
5.3.
|
Corporate Power; Authorization; Enforceable Obligations | 50 | ||||||||
5.4.
|
No Legal Bar | 50 | ||||||||
5.5.
|
No Material Litigation | 51 | ||||||||
5.6.
|
Ownership of Property; Liens | 51 | ||||||||
5.7.
|
Intellectual Property | 51 | ||||||||
5.8.
|
Taxes | 51 | ||||||||
5.9.
|
Federal Regulations | 51 | ||||||||
5.10.
|
ERISA | 51 | ||||||||
5.11.
|
Investment Company Act; Other Regulations | 52 | ||||||||
5.12.
|
Use of Proceeds | 52 | ||||||||
5.13.
|
Accuracy of Information, etc | 52 | ||||||||
5.14.
|
Insurance Regulatory Matters | 52 | ||||||||
5.15.
|
Indebtedness and Liens | 53 | ||||||||
5.16.
|
Taxpayer Identification Number | 53 | ||||||||
| 6. | AFFIRMATIVE COVENANTS | 53 | ||||||||
6.1.
|
Financial Statements | 53 | ||||||||
6.2.
|
Certificates; Other Information | 55 | ||||||||
6.3.
|
Payment of Obligations | 56 | ||||||||
6.4.
|
Conduct of Business and Maintenance of Existence, etc | 56 | ||||||||
6.5.
|
Maintenance of Property; Insurance | 56 | ||||||||
6.6.
|
Inspection of Property; Books and Records; Discussions | 56 | ||||||||
6.7.
|
Notices | 57 | ||||||||
6.8.
|
Taxes | 58 | ||||||||
6.9.
|
Use of Proceeds | 58 | ||||||||
6.10.
|
Further Assurances | 58 | ||||||||
| 7. | NEGATIVE COVENANTS | 58 | ||||||||
7.1.
|
Financial Condition Covenants | 58 | ||||||||
7.2.
|
Limitation on Indebtedness | 59 | ||||||||
7.3.
|
Limitation on Liens | 60 | ||||||||
7.4.
|
Limitation on Changes in Fiscal Periods | 61 | ||||||||
7.5.
|
Limitation on Lines of Business | 61 | ||||||||
| 8. | EVENTS OF DEFAULT | 61 | ||||||||
8.1.
|
Events of Default | 61 | ||||||||
8.2.
|
Remedies Upon Event of Default | 63 | ||||||||
| 9. | THE ADMINISTRATIVE AGENT | 64 | ||||||||
9.1.
|
Appointment | 64 | ||||||||
v
9.2.
|
Delegation of Duties | 64 | ||||||||
9.3.
|
Liability of Administrative Agent | 64 | ||||||||
9.4.
|
Reliance by Administrative Agent | 65 | ||||||||
9.5.
|
Notice of Default | 65 | ||||||||
9.6.
|
Credit Decision; Disclosure of Information by Administrative Agent | 66 | ||||||||
9.7.
|
Indemnification of Administrative Agent | 66 | ||||||||
9.8.
|
Administrative Agent in its Individual Capacity | 67 | ||||||||
9.9.
|
Successor Administrative Agent | 67 | ||||||||
9.10.
|
Administrative Agent May File Proofs of Claim | 68 | ||||||||
9.11.
|
Guarantee and Collateral Matters | 68 | ||||||||
9.12.
|
Other Agents; Arrangers and Managers | 69 | ||||||||
| 10. | MISCELLANEOUS | 69 | ||||||||
10.1.
|
Amendments, Etc | 69 | ||||||||
10.2.
|
Notices; Effectiveness; Electronic Communication | 71 | ||||||||
10.3.
|
No Waiver; Cumulative Remedies | 73 | ||||||||
10.4.
|
Survival of Representations and Warranties | 73 | ||||||||
10.5.
|
Attorney Costs and Expenses | 74 | ||||||||
10.6.
|
Indemnification | 74 | ||||||||
10.7.
|
Successors and Assigns | 75 | ||||||||
10.8.
|
Adjustments; Set-off | 81 | ||||||||
10.9.
|
Counterparts | 81 | ||||||||
10.10.
|
Severability | 81 | ||||||||
10.11.
|
Integration | 82 | ||||||||
10.12.
|
GOVERNING LAW | 82 | ||||||||
10.13.
|
SUBMISSION TO JURISDICTION; WAIVERS | 82 | ||||||||
10.14.
|
WAIVERS OF JURY TRIAL | 83 | ||||||||
10.15.
|
No Advisory or Fiduciary Responsibility | 83 | ||||||||
10.16.
|
Confidentiality | 84 | ||||||||
10.17.
|
Accounting Changes | 84 | ||||||||
10.18.
|
USA PATRIOT Act Notice | 85 | ||||||||
10.19.
|
Interest Rate Limitation | 85 | ||||||||
SCHEDULES: |
||
1
|
Commitment Schedule | |
1A
|
Existing Letters of Credit | |
5.3
|
Consents, Authorizations, Filings and Notices | |
10.2
|
Notice Addresses | |
EXHIBITS: |
||
A
|
Form of Compliance Certificate | |
B-1
|
Form of Borrowing Request | |
B-2
|
Form of Swing Line Loan Notice | |
C-1
|
Form of Revolving Credit Note | |
C-2
|
Form of Swing Line Note | |
D
|
Form of Exemption Certificate | |
E
|
Form of Closing Certificate | |
F
|
Form of Legal Opinion of Cravath, Swaine & Moore | |
G
|
Form of Assignment and Assumption | |
H
|
Form of Instrument of Accession | |
I
|
Form of Extension Request |
CREDIT AGREEMENT
This CREDIT AGREEMENT, dated as of August 16, 2007, among (i) SYMETRA FINANCIAL CORPORATION, a
Delaware corporation (the “Borrower”), (ii) each lender from time to time party hereto
(collectively, the “Lenders”), and (iii) BANK OF AMERICA, N.A., as Administrative Agent,
Swing Line Lender and the Issuing Lender.
PRELIMINARY STATEMENTS
The Borrower has requested that the Lenders provide a revolving credit facility, and the
Lenders are willing to do so on the terms and conditions set forth herein.
In consideration of the mutual covenants and agreements herein contained, the parties hereto
covenant and agree as follows:
1. DEFINITIONS
1.1. Defined Terms. As used in this Agreement, the terms listed in this
Section 1.1 shall have the respective meanings set forth in this Section
1.1.
“Act” has the meaning specified in Section 10.18.
“Act of 1934” means the Securities Exchange Act of 1934 and the regulations
issued thereunder.
“Additional Commitment Lender” has the meaning specified in Section
2.22.
“Administrative Agent” means Bank of America, N.A., in its capacity as
administrative agent under any of the Loan Documents, or any successor administrative agent
appointed in accordance with Section 9.9.
“Administrative Agent’s Office” means the Administrative Agent’s address and,
as appropriate, account as set forth on Schedule 10.2, or such other address or
account as the Administrative Agent may from time to time notify the Borrower and the
Lenders.
“Administrative Questionnaire” means an Administrative Questionnaire in a form
supplied by the Administrative Agent.
“Affiliate” means, as to any Person, any other Person that, directly or
indirectly, is in control of, is controlled by, or is under common control with, such
Person. For purposes of this definition, “control” of a Person means the power, directly or
indirectly, either to (a) vote 10% or more of the securities having ordinary voting power
for the election of directors (or persons performing similar functions) of such Person or
(b) direct or cause the direction of the management and policies of such Person, whether by
contract or otherwise.
2
“Agent-Related Persons” means the Administrative Agent, together with its
Affiliates (including, Bank of America, N.A. in its capacity as the Administrative Agent and
Banc of America Securities LLC in its capacity as the Arranger), and the officers,
directors, employees, agents and attorneys-in-fact of such Persons and Affiliates.
“Agreement” means this Credit Agreement, as amended, restated, extended,
supplemented or otherwise modified from time to time.
“Annual Statement” means the annual statutory financial statement of any
Insurance Subsidiary required to be filed with the Department of its jurisdiction of
incorporation or organization, which statement shall be in the form required by such
Insurance Subsidiary’s jurisdiction of incorporation or organization or, if no specific form
is so required, in the form of financial statements permitted by such Department to be used
for filing annual statutory financial statements and shall contain the type of information
permitted or required by such Department to be disclosed therein, together with all exhibits
or schedules filed therewith.
“Applicable Margin” means, from time to time, the applicable percentage per
annum, based upon the Debt Rating as set forth below:
| Pricing | ||||||||
| Level | Debt Rating | Applicable Margin | ||||||
I |
A-/A3 | 0.190 | % | |||||
II |
BBB+/Baa1 | 0.275 | % | |||||
III |
BBB/Baa2 | 0.360 | % | |||||
IV |
BBB-/Baa3 | 0.430 | % | |||||
V |
<BBB-/Baa3 | 0.600 | % | |||||
“Debt Rating” means, as of any date of determination, the rating as
determined by either S&P or Moody’s (collectively, the “Debt Ratings”) of the
Borrower’s non-credit-enhanced, senior unsecured long-term debt; provided that
(a) if the respective Debt Ratings issued by the foregoing rating agencies differ by one
level, then the Pricing Level for the higher of such Debt Ratings shall apply (with the
Debt Rating for Pricing Level I being the highest and the Debt Rating for Pricing Level
V being the lowest); (b) if there is a split in Debt Ratings of more than one level,
then the Pricing Level that is one level lower than the Pricing Level of the higher Debt
Rating shall apply; and (c) if the Borrower does not have any Debt Rating, Pricing Level
V shall apply.
The Applicable Margin in effect from the Closing Date through the first Business Day
immediately following the date the first Compliance Certificate is delivered to the
Administrative Agent pursuant to Section 6.2(b), shall be the Applicable Margin set
forth in Pricing Level III. Thereafter, each change in the Applicable Margin resulting from
a publicly announced change in the Debt Rating shall be effective during
3
the period commencing on the date of the public announcement thereof and ending on the
date immediately preceding the effective date of the next such change.
“Application” means an application and agreement for the issuance or amendment
of a Letter of Credit in the form from time to time used by the Issuing Lender, which shall
not be inconsistent with this Agreement or impose additional obligations on the Borrower.
“Approved Fund” means any Fund that is administered or managed by (a) a Lender,
(b) an Affiliate of a Lender or (c) an entity or an Affiliate of an entity that administers
or manages a Lender.
“Arranger” means Banc of America Securities LLC, in its capacity as lead
arranger and sole book manager.
“Assignee Group” means two or more Eligible Assignees that are Affiliates of
one another or two or more Approved Funds managed by the same investment advisor.
“Assignment and Assumption” means an assignment and assumption entered into by
a Lender and an Eligible Assignee (with the consent of any party whose consent is required
by Section 10.7(b)), and accepted by the Administrative Agent, substantially in the
form of Exhibit G or any other form approved by the Administrative Agent.
“Attorney Costs” means and includes all reasonable fees, expenses and
disbursements of any law firm or other external counsel.
“Available Revolving Credit Commitment” means, with respect to any Lender at
any time, an amount equal to the excess, if any, of (a) such Lender’s Revolving Credit
Commitment then in effect over (b) such Lender’s Revolving Extensions of Credit then
outstanding.
“Base Rate” means, for any day, a fluctuating rate per annum equal to the
higher of (a) the Federal Funds Rate plus 1/2 of 1% and (b) the rate of interest in effect
for such day as publicly announced from time to time by Bank of America, N.A. as its “prime
rate.” The “prime rate” is a rate set by Bank of America, N.A. based upon various factors
including Bank of America, N.A.’s costs and desired return, general economic conditions and
other factors, and is used as a reference point for pricing some loans, which may be priced
at, above, or below such announced rate. Any change in such rate announced by Bank of
America, N.A. shall take effect at the opening of business on the day specified in the
public announcement of such change.
“Base Rate Loans” means Loans for which the applicable rate of interest is
based upon the Base Rate.
“Benefited Lender” has the meaning specified in Section 10.8.
4
“Berkshire Hathaway” means, Berkshire Hathaway Inc., or an Affiliate thereof.
“Board” means the Board of Governors of the Federal Reserve System of the
United States (or any successor).
“Borrower Materials” has the meaning specified in Section 6.2(e).
“Borrower” has the meaning specified in the preamble hereto.
“Borrowing Date” means any Business Day specified by the Borrower as a date on
which the Borrower requests the relevant Lenders to make Loans hereunder.
“Borrowing Request” means a notice of (a) a borrowing, (b) a conversion of
Loans from one Type to the other, or (c) a continuation of Eurodollar Loans pursuant to
Sections 2.2 or 2.9 which, if in writing, shall be substantially in the form
of Exhibit B-1.
“Business Day” means (i) with respect to any borrowing, payment or rate
selection of Eurodollar Loans, a day (other than a Saturday or Sunday) on which banks
generally are open in New York City for the conduct of substantially all of their commercial
lending activities, interbank wire transfers can be made on the Fedwire system and dealings
in Dollars are carried on in the London interbank market and (ii) for all other purposes, a
day (other than a Saturday or Sunday) on which banks generally are open in New York City for
the conduct of substantially all of the commercial lending activities, and interbank wire
transfers can be made on the Fedwire system.
“Capital Lease Obligations” means, with respect to any Person, the obligations
of such Person to pay rent or other amounts under any lease of (or other arrangement
conveying the right to use) real or personal property, or a combination thereof, which
obligations are required to be classified and accounted for as capital leases on a balance
sheet of such Person under GAAP; and, for the purposes of this Agreement, the amount of such
obligations at any time shall be the capitalized amount thereof at such time determined in
accordance with GAAP.
“Capital and Surplus” means, as of any date, (a) as to any Insurance Subsidiary
domiciled in the United States, the total surplus as regards to policyholders (or any
successor line item description that contains the same information) as shown in its Annual
Statement or Interim Statement, or an amount determined in a consistent manner for any date
other than one as of which an Annual Statement or Interim Statement is prepared and (b) as
to any other Insurance Subsidiary, the equivalent amount (determined in good faith by the
Borrower).
“Capital Stock” means any and all shares, interests, participations or other
equivalents (however designated) of capital stock or share capital of a corporation, any and
all equivalent ownership interests in a Person (other than a corporation) and any and all
warrants, rights or options to purchase any of the foregoing.
5
“Cash Collateralize” means to pledge and deposit with or deliver to the
Administrative Agent, for the benefit of the Issuing Lender and the Lenders, as collateral
for the L/C Obligations, cash or deposit account balances pursuant to documentation in form
and substance reasonably satisfactory to the Administrative Agent and the Issuing Lender
(which documents are hereby consented to by the Lenders). Derivatives of such term have
corresponding meanings.
“Change of Control” means (a) the acquisition of beneficial ownership, directly
or indirectly, by any Person or group (within the meaning of the Act of 1934 and the rules
of the SEC thereunder as in effect on the date hereof), other than the Permitted Holders, of
Capital Stock representing more than 30% of the aggregate ordinary voting power represented
by the issued and outstanding Capital Stock of the Borrower (or, if the Permitted Holders
own 30% or more of the aggregate ordinary voting power represented by the issued and
outstanding Capital Stock of the Borrower, a percentage greater than such percentage of
ownership), or (b) the occupation, within a period of two years commencing after the IPO, of
a majority of the seats (other than vacant seats) on the board of directors of the Borrower
by Persons who were neither (i) nominated by the board of directors of the Borrower nor (ii)
appointed by directors so nominated. For the avoidance of doubt, none of the Capital Stock
held by the Permitted Holders, shall be included as being owned by a Person or group when
determining whether such Person or group has met the 30% threshold set forth in clause
(a).
“Closing Certificate” means a certificate substantially in the form of
Exhibit E.
“Closing Date” means the first date on which all the conditions precedent in
Section 4.1 are satisfied or waived in accordance with Section 10.1.
“Code” means the Internal Revenue Code of 1986, as amended from time to time.
“Commitments” means, collectively the Revolving Credit Commitments, the Swing
Line Commitment, the L/C Commitment or as the context may require, any such Commitment.
“Commonly Controlled Entity” means an entity, whether or not incorporated, that
is under common control with the Borrower within the meaning of Section 4001 (a) (14) of
ERISA or that is treated as a single employer with the Borrower under Section 414 of the
Code.
“Compensation Period” has the meaning specified in Section 2.14(e)(ii).
“Compliance Certificate” means a certificate duly executed by a Responsible
Officer on behalf of the Borrower substantially in the form of Exhibit A.
“Conditional Common Equity” means convertible preferred equity issued by the
Borrower or any of its Subsidiaries which will convert to common equity of the
6
Borrower or any of its Subsidiaries upon shareholder approval (provided that such
shareholder approval is obtained within the period required by the terms thereof).
“Consolidated Net Worth” means, as at any date, the sum of all amounts that
would, in conformity with GAAP be included on a consolidated balance sheet of the Borrower
and its consolidated Subsidiaries under stockholders’ equity at such date, plus minority
interests in Subsidiaries, as determined in accordance with GAAP; provided,
however, that in calculating Consolidated Net Worth as at any date, there shall be
excluded for purposes of the calculation of Consolidated Net Worth any effects resulting
from (a) SFAS 115 or (b) the application of FIN 46R.
“Contractual Obligation” means, as to any Person, any provision of any security
issued by such Person or of any agreement, instrument or other undertaking to which such
Person is a party or by which it or any of its Property is bound.
“Debt” means indebtedness for borrowed money.
“Debt Rating” has the meaning specified in the definition of “Applicable
Margin.”
“Debtor Relief Laws” the Bankruptcy Code of the United States, and all other
liquidation, conservatorship, bankruptcy, assignment for the benefit of creditors,
moratorium, rearrangement, receivership, insolvency, reorganization, or similar debtor
relief laws of the United States or other applicable jurisdictions, domestic or foreign,
from time to time in effect and affecting the rights of creditors generally.
“Default” means any of the events specified in Section 8.1, whether or
not any requirement for the giving of notice, the lapse of time, or both, has been
satisfied.
“Defaulting Lender” means any Lender that (a) has failed to fund any portion of
the Loans or participations in the L/C Obligations required to be funded by it hereunder
within one Business Day of the date required to be funded by it hereunder unless such
failure has been cured, (b) has otherwise failed to pay over to the Administrative Agent or
any other Lender any other amount required to be paid by it hereunder within one Business
Day of the date when due unless the subject of a good faith dispute or unless such failure
has been cured or (c) has been deemed insolvent or become the subject of a bankruptcy or
insolvency proceeding.
“Default Rate” has the meaning specified in Section 2.11(c).
“Department” means, with respect to any Insurance Subsidiary, the insurance
commissioner or other Governmental Authority of such Insurance Subsidiary’s jurisdiction of
incorporation or organization.
“Dollars” and “$” means lawful currency of the United States of
America.
7
“Eligible Assignee” means any Person that meets the requirements to be an
assignee under Section 10.7(b)(iii), (v), (vi), (vii) and
(viii) (subject to such consents, if any, as may be required under Section
10.7(b)(iii)).
“Environmental Liability” means any liability, contingent or otherwise
(including any liability for damages, costs of environmental remediation, injunctive or
equitable relief, fines, penalties or indemnities), of the Borrower or any of its
Subsidiaries resulting from or based upon (a) a violation of any environmental law, (b) the
generation, use, handling, transportation, storage, treatment or disposal of any Hazardous
Materials, (c) human exposure to any Hazardous Materials, (d) the release or threatened
release of any Hazardous Materials into the environment or (e) any contract, agreement or
other consensual arrangement pursuant to which liability is assumed or imposed with respect
to any of the foregoing.
“ERISA” means the Employee Retirement Income Security Act of 1974, as amended
from time to time.
“Eurodollar Loans” means Loans for which the applicable rate of interest is
based upon the Eurodollar Rate.
“Eurodollar Rate” means, for any Interest Period with respect to a Eurodollar
Loan, the rate per annum equal to the British Bankers Association LIBOR Rate (“BBA
LIBOR”), as published by Reuters (or other commercially available source providing
quotations of BBA LIBOR as designated by the Administrative Agent from time to time) at
approximately 11:00 A.M., London time, two Business Days prior to the commencement of such
Interest Period, for Dollar deposits (for delivery on the first day of such Interest Period)
with a term equivalent to such Interest Period. If such rate is not available at such time
for any reason, then the “Eurodollar Rate” for such Interest Period shall be the rate per
annum determined by the Administrative Agent to be the rate at which deposits in Dollars for
delivery on the first day of such Interest Period in same day funds in the approximate
amount of the Eurodollar Loan being made, continued or converted by Bank of America, N.A.
and with a term equivalent to such Interest Period would be offered by Bank of America,
N.A.’s London branch to major banks in the London interbank eurodollar market at their
request at approximately 11:00 A.M. (London time) two Business Days prior to the
commencement of such Interest Period.
“Excluded Taxes” has the meaning specified in Section 2.16(a).
“Existing Credit Agreement” means that certain Credit Agreement, dated as of
June 14, 2004, among the Borrower (as successor in interest to Occum Acquisition Corp.,),
the several banks and other financial institutions or entities from time to time parties
thereto, and Bank of America, N.A., as administrative agent.
“Existing Letters of Credit” means those letters of credit set forth on
Schedule 1A.
“Existing Revolving Credit Termination Date” has the meaning specified in
Section 2.22.
8
“Extending Lender” has the meaning specified in Section 2.22.
“Extension Request” has the meaning specified in Section 2.22.
“Event of Default” means any of the events specified in Section 8.1,
provided that any requirement for the giving of notice, the lapse of time, or both, has been
satisfied.
“Facility Fee Rate” means, from time to time, the applicable percentage per
annum based upon the Debt Rating as set forth below:
| Pricing | ||||||||
| Level | Debt Rating | Facility Fee Rate | ||||||
I |
A-/A3 | 0.060 | % | |||||
II |
BBB+/Baa1 | 0.075 | % | |||||
III |
BBB/Baa2 | 0.090 | % | |||||
IV |
BBB-/Baa3 | 0.120 | % | |||||
V |
<BBB-/Baa3 | 0.150 | % | |||||
The Facility Fee Rate in effect from the Closing Date through the first Business Day
immediately following the date the first Compliance Certificate is delivered to the
Administrative Agent pursuant to Section 6.2(b), shall be the Facility Fee Rate set
forth in Pricing Level III. Thereafter, each change in the Facility Fee Rate resulting from
a publicly announced change in the Debt Rating shall be effective, in the case of an
upgrade, during the period commencing on the date of delivery by the Borrower to the
Administrative Agent of notice thereof pursuant to Section 6.7(b)(iii) and ending on
the date immediately preceding the effective date of the next such change and, in the case
of a downgrade, during the period commencing on the date of the public announcement thereof
and ending on the date immediately preceding the effective date of the next such change.
“Federal Funds Rate” means, for any day, the rate per annum equal to the
weighted average of the rates on overnight Federal funds transactions with members of the
Federal Reserve System arranged by Federal funds brokers on such day, as published by the
Federal Reserve Bank of New York on the Business Day next succeeding such day;
provided that (a) if such day is not a Business Day, the Federal Funds Rate for such
day shall be such rate on such transactions on the next preceding Business Day as so
published on the next succeeding Business Day, and (b) if no such rate is so published on
such next succeeding Business Day, the Federal Funds Rate for such day shall be the average
rate (rounded upward, if necessary, to a whole multiple of 1/100 of 1%) charged to Bank of
America, N.A. on such day on such transactions as reasonably determined by the
Administrative Agent.
9
“Fee Letter” means, that certain letter agreement dated as of July 17, 2007 by
and between the Borrower, the Administrative Agent and Banc of America Securities LLC.
“FIN 46R” means FASB Interpretation No. 46, “Consolidation of Variable Interest
Entities,” and its revision by the Financial Accounting Standards Board.
“Fund” means any Person (other than a natural person) that is (or will be)
engaged in making, purchasing, holding or otherwise investing in revolving credit facilities
and similar extensions of credit in the ordinary course of its business.
“Fundamental Change” means any of (a) the Borrower consolidating or
amalgamating with or merging into any other Person, (b) the Borrower failing to preserve,
renew and keep, in full force and effect, its corporate existence, (c) the Borrower,
directly or indirectly through one or more of its Subsidiaries, conveying or transferring
the properties and assets of the Borrower and its Subsidiaries (taken as a whole for the
Borrower and its Subsidiaries) substantially as an entirety (other than to the Borrower or
one or more of its Subsidiaries), or (d) the Borrower liquidating, winding up or dissolving
itself, other than, in the case of clauses (a) through (d), any such
transaction or transactions the sole purpose of which is to change the domicile of the
Borrower (in any such redomiciliation (x) the surviving, amalgamated or transferee entity
shall expressly assume, by an agreement reasonably satisfactory to the Administrative Agent,
the obligations of the Borrower to be performed or observed hereunder and deliver to the
Administrative Agent such corporate authority documents and legal opinions as the
Administrative Agent shall reasonably request, (y) the surviving, amalgamated or transferee
entity shall succeed to, and be substituted for, and may exercise every right and power of,
the Borrower under this Agreement with the same effect as if such surviving, amalgamated or
transferee entity had been named as the Borrower herein and (z) the surviving, amalgamated
or transferee entity shall be organized under the laws of the United States of America, any
state thereof or the District of Columbia).
“GAAP” means generally accepted accounting principles in the United States of
America as in effect from time to time and set forth in the opinions and pronouncements of
the Accounting Principles Board and the American Institute of Certified Public Accountants
and statements and pronouncements of the Financial Accounting Standards Board or such other
principles as may be approved by a significant segment of the accounting profession in the
United States, except that for purposes of Section 7.1, GAAP shall be determined on
the basis of such principles in effect on the date hereof.
“Governmental Authority” means any nation or government, any state or other
political subdivision thereof whether state or local and any entity exercising executive,
legislative, judicial, regulatory or administrative functions of or pertaining to
government, and any corporation or other entity owned or controlled, through stock or
capital ownership or otherwise, by any of the foregoing, including any board of insurance,
insurance department or insurance commissioner.
10
“Granting Lender” has the meaning specified in Section 10.7(h).
“Guarantee Obligation” means as to any Person (the “guaranteeing
person”), any obligation of (a) the guaranteeing person or (b) another Person
(including, without limitation, any bank under any letter of credit) to induce the creation
of which the guaranteeing person has issued a reimbursement, counterindemnity or similar
obligation, in either case guaranteeing or in effect guaranteeing any Indebtedness, leases,
dividends or other obligations (the “primary obligations”) of any other third Person
(the “primary obligor”) in any manner, whether directly or indirectly, including,
without limitation, any obligation of the guaranteeing person, whether or not contingent,
(i) to purchase any such primary obligation or any Property constituting direct or indirect
security therefor, (ii) to advance or supply funds (1) for the purchase or payment of any
such primary obligation or (2) to maintain working capital or equity capital of the primary
obligor or otherwise to maintain the net worth or solvency of the primary obligor, (iii) to
purchase Property, securities or services primarily for the purpose of assuring the owner of
any such primary obligation of the ability of the primary obligor to make payment of such
primary obligation or (iv) otherwise to assure or hold harmless the owner of any such
primary obligation against loss in respect thereof; provided, however, that
the term Guarantee Obligation shall not include endorsements of instruments for deposit or
collection in the ordinary course of business. The amount of any Guarantee Obligation of
any guaranteeing person shall be deemed to be the lower of (a) an amount equal to the stated
or determinable amount of the primary obligation in respect of which such Guarantee
Obligation is made and (b) the maximum amount for which such guaranteeing person may be
liable pursuant to the terms of the instrument embodying such Guarantee Obligation, unless
such primary obligation and the maximum amount for which such guaranteeing person may be
liable are not stated or determinable, in which case the amount of such Guarantee Obligation
shall be such guaranteeing person’s maximum reasonably anticipated liability in respect
thereof as determined by the Borrower in good faith.
“Hazardous Materials” means all explosive or radioactive substances or wastes,
hazardous or toxic substances or wastes, pollutants, solid, liquid or gaseous wastes,
including petroleum or petroleum distillates, asbestos or asbestos containing materials,
polychlorinated biphenyls (“PCBs”) or PCB-containing materials or equipment, radon
gas, infectious or medical wastes and all other substances or wastes of any nature regulated
pursuant to any environmental law.
“Hedge Agreements” means all interest rate swaps, caps or collar agreements or
similar arrangements entered into by the Borrower or its Subsidiaries providing for
protection against fluctuations in interest rates or currency exchange rates or otherwise
providing for the exchange of nominal interest obligations, either generally or under
specific contingencies.
“Increase Effective Date” has the meaning specified in Section 2.21(b).
“Indebtedness” means, as to any Person at any date, without duplication, all of
the following, whether or not included as Indebtedness or liabilities in accordance
11
with GAAP (a) all Debt of such Person, (b) all obligations of such Person for the
deferred purchase price of Property or services (other than trade payables incurred in the
ordinary course of such Person’s business), (c) all obligations of such Person evidenced by
notes, bonds, debentures or other similar instruments, (d) all indebtedness created or
arising under any conditional sale or other title retention agreement with respect to
Property acquired by such Person (even though the rights and remedies of the seller or
lender under such agreement in the event of default are limited to repossession or sale of
such Property), (e) all Capital Lease Obligations of such Person, (f) all obligations of
such Person, contingent or otherwise, as an account party or applicant under acceptance,
letter of credit, bank guarantees, surety bonds or similar facilities, (g) all obligations
of such Person, contingent or otherwise, to purchase, redeem, retire, defease or otherwise
acquire for value any Capital Stock of such Person, (h) all Guarantee Obligations of such
Person in respect of any of the foregoing, (i) all obligations of the kind referred to in
clauses (a) through (h) above secured by (or for which the holder of such
obligation has an existing right, contingent or otherwise, to be secured by) any Lien on
Property (including, without limitation, accounts and contract rights) owned by such Person,
whether or not such Person has assumed or become liable for the payment of such obligation
and (j) for the purposes of Section 8.1(h) only, all obligations of such Person in
respect of Hedge Agreements entered into in the ordinary course of business and not for
speculative purposes.
“Indemnified Liabilities” has the meaning specified in Section 10.6.
“Indemnitees” has the meaning specified in Section 10.6.
“Information” has the meaning specified in Section 10.16.
“Insolvency” means with respect to any Multiemployer Plan, the condition that
such Plan is insolvent within the meaning of Section 4245 of ERISA.
“Insolvent” means pertaining to a condition of Insolvency.
“Instrument of Accession” has the meaning specified in Section 2.21.
“Insurance Regulations” means any Law, directive or order applicable to an
insurance company.
“Insurance Regulator” means any Person charged with the administration,
oversight or enforcement of any Insurance Regulation.
“Insurance Subsidiary” means any Subsidiary which is required to be licensed by
any Department as an insurer or reinsurer and each direct or indirect Subsidiary of such
Subsidiary.
“Intellectual Property” means the collective reference to all rights,
priorities and privileges relating to intellectual property, arising under Laws, including,
without limitation, copyrights, copyright licenses, patents, patent licenses, trademarks,
trademark licenses, technology, know-how and processes, and all rights to sue at law or
12
in equity for any infringement or other impairment thereof, including the right to
receive all proceeds and damages therefrom.
“Interest Payment Date” means (a) as to any Base Rate Loan, the first Business
Day of each of January, April, July and October and the last day of the Revolving Credit
Commitment Period, (b) as to any Eurodollar Loan, the last day of each Interest Period
applicable to such Loan and the last day of the Revolving Credit Commitment Period;
provided, however, that if any Interest Period for a Eurodollar Loan exceeds
three months, the respective dates that fall every three months after the beginning of such
Interest Period shall also be Interest Payment Dates, and (c) as to any Loan (other than a
Base Rate Loan), the date of any repayment or prepayment made in respect thereof.
“Interest Period” means, as to any Eurodollar Loan, (a) initially, the period
commencing on the borrowing or conversion date, as the case may be, with respect to such
Eurodollar Loan and ending one, two, three or six months (or, unless unavailable to any
Lender, nine or twelve months) thereafter, as selected by the Borrower in its notice of
borrowing or notice of conversion, as the case may be, given with respect thereto; and (b)
thereafter, each period commencing on the last day of the next preceding Interest Period
applicable to such Eurodollar Loan and ending one, two, three or six months (or, unless
unavailable to any Lender, nine or twelve months) thereafter, as selected by the Borrower by
irrevocable notice to the Administrative Agent not less than three Business Days prior to
the last day of the then current Interest Period with respect thereto; provided
that, all of the foregoing provisions relating to Interest Periods are subject to the
following:
(i) if any Interest Period would otherwise end on a day that is not a
Business Day, such Interest Period shall be extended to the next succeeding
Business Day unless the result of such extension would be to carry such
Interest Period into another calendar month in which event such Interest
Period shall end on the immediately preceding Business Day;
(ii) any Interest Period in respect of the Loans that would otherwise
extend beyond the Revolving Credit Termination Date shall end on the Revolving
Credit Termination Date; and
(iii) any Interest Period that begins on the last Business Day of a
calendar month (or on a day for which there is no numerically corresponding
day in the calendar month at the end of such Interest Period) shall end on the
last Business Day of the calendar month at the end of such Interest Period.
“Interim Statement” means any interim statutory financial statement or
financial report (whether quarterly, semiannually or otherwise) of any Insurance Subsidiary
required to be filed with the Department of its jurisdiction of incorporation or
organization, which statement or report shall be in the form required by such Insurance
Subsidiary’s jurisdiction of incorporation or organization or, if no specific form is so
required, in the form of financial statements or financial reports permitted by such
13
Department to be used for filing interim statutory financial statements or financial
reports and shall contain the type of information permitted or required by such Department
to be disclosed therein, together with all exhibits or schedules filed therewith.
“IPO” means an initial public offering by the Borrower of its common stock
pursuant to an effective S-1 Registration Statement under the Securities Act of 1933, as
amended.
“ISP” means with respect to any Letter of Credit, the “International Standby
Practices 1998” published by the Institute of International Banking Law & Practice (or such
later version thereof as may be in effect at the time of issuance).
“Issuer Documents” means with respect to any Letter of Credit, the Application,
and any other document, agreement and instrument entered into by the Issuing Lender and the
Borrower (or any Subsidiary) or by the Borrower (or any Subsidiary) in favor of the Issuing
Lender and relating to any such Letter of Credit.
“Issuing Lender” means Bank of America, N.A. and any other Lender from time to
time designated by the Borrower as an Issuing Lender, with the consent of such Lender and
the Administrative Agent.
“Laws” means any law, treaty, rule, regulation or order of an arbitrator or a
court or other Governmental Authority.
“L/C Advance” means, with respect to each Lender, such Lender’s funding of its
participation in any L/C Borrowing in accordance with its Revolving Credit Percentage.
“L/C Borrowing” means an extension of credit resulting from a drawing under any
Letter of Credit which has not been reimbursed on the date when made or refinanced as a
borrowing.
“L/C Commitment” means $50,000,000, as the same may be reduced from time to
time pursuant to Section 2.7.
“L/C Credit Extension” means, with respect to any Letter of Credit, the
issuance thereof or extension of the expiry date thereof or the increase of the amount
thereof.
“L/C Fee Payment Date” means the first Business Day of each of January, April,
July and October and the last day of the Revolving Credit Commitment Period.
“L/C Obligations” means, at any time, an amount equal to the sum of (a) the
aggregate amount available to be drawn under all outstanding Letters of Credit and (b) the
aggregate amount of drawings under Letters of Credit that have not then been reimbursed
pursuant to Section 3.3. For purposes of computing the amount available to be drawn
under any Letter of Credit, the amount of such Letter of Credit shall be determined in
accordance with Section 1.3. For all purposes of this Agreement, if on any
14
date of determination a Letter of Credit has expired by its terms but any amount may
still be drawn thereunder by reason of the operation of Rule 3.14 of the ISP, such Letter of
Credit shall be deemed to be “outstanding” in the amount so remaining available to be drawn.
“L/C Participants” means, with respect to any Letter of Credit, the collective
reference to all of the Lenders, other than the Issuing Lender that issued such Letter of
Credit.
“Lenders” has the meaning specified in the preamble hereto.
“Letters of Credit” means any letters of credit issued hereunder and shall
include the Existing Letters of Credit.
“License” means any license, certificate of authority, permit or other
authorization which is required to be obtained from any Governmental Authority in connection
with the operation, ownership or transaction of insurance or reinsurance business.
“Lien” means any mortgage, pledge, security interest, encumbrance, charge or
security interest of any kind.
“Loan” means any loan made by any Lender to the Borrower pursuant to this
Agreement, including any Revolving Credit Loan and any Swing Line Loan made by the Swing
Line Lender.
“Loan Documents” means this Agreement, the Applications, the Notes, any
Instrument of Accession executed hereunder pursuant to Section 2.21 and any
Extension Request executed pursuant to Section 2.22.
“Majority Lenders” means the holders of more than 50% of the Total Revolving
Extensions of Credit (or, if no such Revolving Extensions of Credit are outstanding, prior
to any termination of the Revolving Credit Commitments, the holders of more than 50% of the
Total Revolving Credit Commitments). The Revolving Credit Commitment in effect (or, when
applicable, Revolving Extensions of Credit outstanding) of any Defaulting Lender shall be
excluded for purposes of any vote of Majority Lenders.
“Mandatory Convertible Securities” means equity securities or subordinated debt
securities (which subordinated debt securities, if issued by the Borrower, will include
subordination to the obligations of the Borrower hereunder), issued by the Borrower or one
of its Subsidiaries which (i) are not (w) Mandatory Redeemable Securities (other than
Qualified Securities) or (x) Conditional Common Equity and (ii) provide, pursuant to the
terms thereof, that the issuer of such securities (or an affiliate of such issuer) may cause
(without the payment of additional cash consideration by the issuer thereof) the conversion
or exchange of, or has agreed to convert or exchange, such securities to or for equity
securities of the Borrower or one of its Subsidiaries upon the occurrence of a certain date
or of certain events. A Mandatory
15
Convertible Security that is also a Qualified Security shall be treated as a Mandatory
Convertible Security.
“Mandatory Redeemable Securities” means debt or equity securities (other than
Conditional Common Equity, so long as such Conditional Common Equity may not be required, by
the holder thereof, to be repurchased or redeemed during the period provided for shareholder
approval of conversion pursuant to the terms of such Conditional Common Equity) issued by
the Borrower or one of its Subsidiaries which either (i) are subordinated debt securities
(which subordinated debt securities, if issued by the Borrower, will include subordination
to the obligations of the Borrower hereunder), or (ii) provide, pursuant to the terms
thereof, that such securities must be repurchased or redeemed, or the holder of such
securities may require the issuer of such securities to repurchase or redeem such
securities, upon the occurrence of a certain date or of certain events.
“Material Adverse Effect” means, a material adverse effect on (a) the business,
assets, property or financial condition of the Borrower and its Subsidiaries taken as a
whole, or (b) the validity or enforceability of this Agreement or any of the other Loan
Documents or the rights and remedies of the Administrative Agent and the Lenders hereunder
or thereunder.
“Material Insurance Subsidiary” means any Insurance Subsidiary (whether
existing on or acquired or formed after the Closing Date) having Capital and Surplus equal
to 10% or more of the Consolidated Net Worth of the Borrower as of the most recent Annual
Statement or Interim Statement of such Insurance Subsidiary.
“Maturity Extension Date” has the meaning specified in Section 2.22.
“Maximum Rate” has the meaning specified in Section 10.19(a).
“Moody’s” means Moody’s Investors Service, Inc. (or any successor thereto).
“Multiemployer Plan” means a Plan that is a multiemployer plan as defined in
Section 4001(a)(3) of ERISA.
“NAIC” means the National Association of Insurance Commissioners or any
successor thereto, or in the absence of the National Association of Insurance Commissioners
or such successor, any other association, agency or other organization performing advisory,
coordination or other like functions among insurance departments, insurance commissioners
and similar Governmental Authorities of the various states of the United States towards the
promotion of uniformity in the practices of such Governmental Authorities.
“Non-Excluded Taxes” has the meaning specified in Section 2.16(a).
“Non-Extending Lender” has the meaning specified in Section 2.22.
16
“Non-Regulated Operating Subsidiary” means each Subsidiary of the Borrower
engaged directly (as opposed to indirectly through the ownership of Capital Stock of a
Person engaged in a Principal Business) in a Principal Business, whether now owned or
hereafter acquired, which is not an Insurance Subsidiary.
“Non-U.S. Lender” has the meaning specified in Section 2.16(d).
“Note” means any promissory note, including any revolving credit note or swing
line note, made by the Borrower in favor of a Lender evidencing any Loan, substantially in
the forms of Exhibit C-1 and C-2, as the case may be and as any such Note
may be amended, restated, supplemented, modified or replaced from time to time.
“Notice Date” has the meaning specified in Section 2.22.
“Other Taxes” means any and all present or future stamp or documentary taxes or
any other excise or property taxes, charges or similar levies arising from any payment made
hereunder or from the execution, delivery or enforcement of, or otherwise with respect to,
this Agreement or any other Loan Document.
“Participant” has the meaning specified in Section 10.7(d).
“PBGC” means the Pension Benefit Guaranty Corporation established pursuant to
Subtitle A of Title IV of ERISA (or any successor).
“Permitted Holders” means collectively, Berkshire Hathaway and White Mountains.
“Permitted Liens” means (a) any Lien upon Property to secure any part of the
cost of development, construction, alteration, repair or improvement of such Property, or
Debt incurred to finance such cost; (b) any extension, renewal or replacement, in whole or
in part, of any Lien referred to in the foregoing clause (a); (c) any Lien relating
to a sale and leaseback transaction; (d) any Lien in favor of the Borrower or any Subsidiary
granted by the Borrower or any Subsidiary in order to secure any intercompany obligations;
(e) mechanic’s, materialmen’s, carriers’ or other like Liens arising in the ordinary course
of business (including construction of facilities) in respect of obligations which are not
due or which are being contested in good faith; (f) any Lien arising in connection with any
legal proceeding which is being contested in good faith; (g) Liens for taxes not yet subject
to penalties for non-payment or which are being contested in good faith by appropriate
proceedings; (h) minor survey exceptions, minor encumbrances, easements or reservations of,
or rights of others for, licenses, rights-of-way, sewers, electric lines, telegraph and
telephone lines and other similar purposes, or zoning or other restrictions as to the use of
real property or Liens incidental to the conduct of the business of such Person or to the
ownership of its properties which were not incurred in connection with Debt and which do not
in the aggregate materially adversely affect the value of said properties or materially
impair their use in the operation of the business of such Person; (i) pledges or deposits
under workers’ compensation Laws, unemployment insurance Laws or similar social security
legislation; (j) any pledge or deposit to secure performance of letters of credit, bank
guarantees, bids, leases,
17
statutory obligations, surety and appeal bonds, performance bonds or other obligations
of a like nature in the ordinary course of business; (k) any interest or title of a lessor
under any lease entered into in the ordinary course of business; (l) Liens on assets of any
Insurance Subsidiary securing (i) short-term Debt (i.e. with a maturity of less than one
year when issued, provided that such Debt may include an option to extend for up to an
additional one year period) incurred to provide short-term liquidity to facilitate claims
payments in the event of catastrophe, (ii) Debt incurred in the ordinary course of its
business or in securing insurance-related obligations (that do not constitute Debt) and
letters of credit issued for the account of any such Subsidiary in the ordinary course of
its business or in securing insurance-related obligations (that do not constitute Debt) or
(iii) insurance-related obligations (that do not constitute Debt); (m) Liens on the assets
of any mutual fund Subsidiary securing Debt incurred to provide short-term (i.e. not
anticipated to be outstanding for more than one year when incurred) liquidity to facilitate
redemption payments by such mutual fund Subsidiary; and (n) Liens securing the obligations
hereunder.
“Person” means an individual, partnership, corporation, limited liability
company, business trust, joint stock company, trust, unincorporated association, joint
venture, Governmental Authority or other entity of whatever nature.
“Plan” means at a particular time, any employee pension benefit plan that is
subject to the provisions of Title IV of ERISA or Section 412 of the Code or Section 302 of
ERISA, and in respect of which the Borrower or a Commonly Controlled Entity is (or, if such
plan were terminated at such time, would under Section 4069 of ERISA be deemed to be) an
“employer” as defined in Section 3(5) of ERISA.
“Platform” has the meaning specified in Section 6.2(e).
“Principal Business” means (a) a business of the type engaged in by the
Borrower and its Subsidiaries on the date of this Agreement, (b) any other insurance,
insurance services, insurance related, asset management, asset management related or risk
management related business and (c) any business reasonably incident to any of the
foregoing.
“Property” means any property of any kind whatsoever, whether real,
personal or mixed and whether tangible or intangible.
“Public Lender” has the meaning specified in Section 6.2(e).
“Qualified Securities” means (a) Mandatory Redeemable Securities issued by the
Borrower or one of its Subsidiaries that, pursuant to the terms thereof, must be redeemed or
repurchased or repaid, or may be required to be redeemed or repurchased or repaid at the
option of the holder of such securities (excluding redemption, repurchase or repayment upon
the occurrence of one or more events or conditions but including redemption, repurchase or
repayment upon the occurrence of a certain date), (i) if such Mandatory Redeemable
Securities are equity securities or subordinated debt securities, not sooner than the
Revolving Credit Termination Date (except to the extent permitted by
18
clause (ii) below) or (ii) only in exchange for equity securities or other Qualified
Securities of the Borrower or any of its Subsidiaries (except to the extent permitted by
clause (i) above) and (b) any other debt or equity securities issued by the Borrower or one
of its Subsidiaries whose proceeds are or would be accorded, at or about the time of
issuance, equity treatment by S&P.
“Refunded Swing Line Loans” has the meaning specified in Section
2.4(b).
“Refunding Date” has the meaning specified in Section 2.4(c).
“Register” has the meaning specified in Section 10.7(c).
“Regulation U” means Regulation U of the Board as in effect from time to time.
“Reimbursement Obligation” means the obligation of the Borrower to reimburse an
Issuing Lender pursuant to Section 3.3(a) for amounts drawn under Letters of Credit
issued by such Issuing Lender for the account of the Borrower.
“Related Person” means, with respect to any Person, such Person’s Affiliates
and the partners, directors, officers, employees, agents and advisors of such Person and of
such Person’s Affiliates.
“Reorganization” means, with respect to any Multiemployer Plan, the condition
that such plan is in reorganization within the meaning of Section 4241 of ERISA.
“Reportable Event” means any of the events set forth in Section 4043(c) of
ERISA, other than those events as to which the thirty day notice period is waived.
“Requested Reimbursement Date” has the meaning specified in Section
3.3(a).
“Requirement of Law” means, as to any Person, the Certificate of Incorporation
and By-Laws or other organizational or governing documents of such Person (excluding, in the
case of Section 2.15(a)(i), any of the foregoing relating to the Administrative
Agent or any Lender), and any Law, in each case applicable to or binding upon such Person or
any of its Property or to which such Person or any of its Property is subject.
“Responsible Officer” means, as to the Borrower or any Subsidiary, the chief
executive officer, president, chief financial officer, treasurer, chief accounting officer,
any vice president or any managing director of the Borrower or any Subsidiary, as the
context requires. Any document delivered hereunder that is signed by a Responsible Officer
on behalf of the Borrower or a Subsidiary shall be conclusively presumed to have been
authorized by all necessary corporate, partnership and/or other
19
action on the part of the Borrower or such Subsidiary and such Responsible Officer
shall be conclusively presumed to have acted on behalf of the Borrower or such Subsidiary.
“Revolving Credit Commitment” means, as to any Lender, the obligation of such
Lender, if any, to make Revolving Credit Loans and participate in Swing Line Loans and
Letters of Credit, in an aggregate principal or face amount not to exceed the amount set
forth under the heading “Revolving Credit Commitment” opposite such Lender’s name on
Schedule 1 to this Agreement, or, as the case may be, in the Assignment and
Assumption pursuant to which such Lender became a party hereto, as the same may be adjusted
from time to time pursuant to the terms hereof.
“Revolving Credit Commitment Period” means the period from and including the
Closing Date to the earliest of (a) the Revolving Credit Termination Date, (b) the date of
termination of the Revolving Credit Commitments pursuant to Section 2.7, and (c) the
date of termination of the commitment of each Lender to make Loans and of the obligation of
the Issuing Lender to make L/C Credit Extensions pursuant to Section 8.2.
“Revolving Credit Loans” has the meaning specified in Section 2.1.
“Revolving Credit Percentage” means, as to any Lender at any time, the
percentage (carried out to the ninth decimal place) which such Lender’s Revolving Credit
Commitment then constitutes of the Total Revolving Credit Commitments (or, at any time after
the commitment of each Lender to make Loans and the obligation of the Issuing Lender to make
L/C Credit Extensions shall have terminated pursuant to Section 8.2 or if the
Revolving Credit Commitments shall have expired, then the percentage which the aggregate
amount of such Lender’s Revolving Extensions of Credit then outstanding constitutes of the
amount of the Total Revolving Extensions of Credit then outstanding).
“Revolving Credit Termination Date” means August 16, 2012, or such later date
to which the Revolving Credit Termination Date may be extended pursuant to Section
2.22; provided, however, that, if such date is not a Business Day, the
Revolving Credit Termination Date shall be the next succeeding Business Day.
“Revolving Extensions of Credit” means, as to any Lender at any time, an amount
equal to the sum of (a) the aggregate principal amount of all Revolving Credit Loans made by
such Lender then outstanding, (b) the principal amount equal to such Lender’s Revolving
Credit Percentage of the L/C Obligations then outstanding and (c) the principal amount equal
to such Lender’s Revolving Credit Percentage of the aggregate principal amount of Swing Line
Loans then outstanding.
“S&P” means Standard & Poor’s Rating Services (or any successor thereto).
“SAP” means with respect to any Insurance Subsidiary, the statutory accounting
practices prescribed or permitted by the Department in the jurisdiction of incorporation or
organization of such Insurance Subsidiary for the preparation of annual
20
statements and other financial reports by insurance companies of the same type as such
Insurance Subsidiary, which are applicable to the circumstances as of the date of
determination.
“SEC” means the Securities and Exchange Commission (or successors thereto or an
analogous Governmental Authority).
“SFAS” means the Statements of Financial Accounting Standards adopted by the
Financial Accounting Standards Board.
“Single Employer Plan” means any Plan that is covered by Title IV of ERISA, but
which is not a Multiemployer Plan.
“SPC” has the meaning specified in Section 10.7(h).
“Specified Event of Default” means an Event of Default pursuant to Sections
8.1(a), 8.1(b) (with respect to Section 7.1 only) or 8.1(c).
“Stated Rate” has the meaning specified in Section 10.19(a).
“Subsidiary” of a Person means (a) any corporation more than 50% of the
outstanding securities having ordinary voting power of which shall at the time be owned or
controlled, directly or indirectly, by such Person or by one or more of its Subsidiaries or
by such Person and one or more of its Subsidiaries, or (b) any partnership, limited
liability company, association, joint venture or similar business organization more than 50%
of the ownership interests having ordinary voting power of which shall at the time be so
owned or controlled. Unless otherwise expressly provided, all references herein to a
“Subsidiary” shall mean a Subsidiary of the Borrower.
“Swing Line Commitment” means the obligation of the Swing Line Lender to make
Swing Line Loans pursuant to Section 2.3 in an aggregate principal amount at any one
time outstanding not to exceed $10,000,000.
“Swing Line Lender” means Bank of America, N.A., in its capacity as provider of
Swing Line Loans, or any successor swing line lender hereunder.
“Swing Line Loans” has the meaning specified in Section 2.3(a).
“Swing Line Participation Amount” has the meaning specified in Section
2.4(c).
“Syndication Agent” means JPMorgan Chase Bank, N.A., and any other Lender as
may be designated from time to time by the Borrower as a syndication agent, with the consent
of such Lender and the Arranger.
“Total Consolidated Capitalization” means, as at any date, the sum, without
duplication, of (a) Consolidated Net Worth plus (b) Total Consolidated Debt plus, (c) the
amounts in respect of Trust Preferred Securities, Mandatory Convertible
21
Securities, Mandatory Redeemable Securities, Conditional Common Equity and any other
preferred equity that would, in conformity with GAAP, be reflected on a consolidated balance
sheet of the Borrower and its consolidated Subsidiaries prepared as of such date and which
are not already included in clause (a) or (b) above. Total
Consolidated Capitalization shall in any event not include any effects resulting from the
application of FIN 46R.
“Total Consolidated Debt” means, at any date, the sum, without duplication, of
(a) all amounts that would, in conformity with GAAP, be reflected and classified as debt on
a consolidated balance sheet of the Borrower and its consolidated Subsidiaries prepared as
of such date (other than amounts excluded by clauses (b) and (c) below), (b) Indebtedness
represented by (i) Trust Preferred Securities or Qualified Securities (in each case, owned
by Persons other than the Borrower or any of its consolidated Subsidiaries) but only to the
extent that such securities (other than Mandatory Convertible Securities) exceed 15% of
Total Consolidated Capitalization or (ii) Mandatory Redeemable Securities (owned by Persons
other than the Borrower or any of its consolidated Subsidiaries) other than Qualified
Securities, and (c) Indebtedness represented by Mandatory Convertible Securities (owned by
Persons other than the Borrower or any of its consolidated Subsidiaries) but only to the
extent that such Mandatory Convertible Securities plus Trust Preferred Securities and
Qualified Securities (in each case, owned by Persons other than the Borrower or any of its
consolidated Subsidiaries) exceed 25% of Total Consolidated Capitalization;
provided, that in the event that the notes related to the Mandatory Convertible
Securities remain outstanding following the exercise of forward purchase contracts related
to such Mandatory Convertible Securities, then such outstanding notes will be included in
Total Consolidated Debt thereafter. Total Consolidated Debt shall, in any event, not
include (1) Hedge Agreements entered into in the ordinary course of business for
non-speculative purposes, (2) Indebtedness of the type described in Sections
7.2(a)(ii), (a)(iii), (a)(iv), (a)(vi) and (a)(vii), (3)
Conditional Common Equity, (4) any other amounts in respect of Trust Preferred Securities,
Mandatory Redeemable Securities, Mandatory Convertible Securities or Qualified Securities,
or (5) any effects resulting from the application of FIN 46R.
“Total Consolidated Debt to Total Consolidated Capitalization Ratio” means, as
at the end of any fiscal quarter of the Borrower, the ratio of (a) Total Consolidated Debt
to (b) Total Consolidated Capitalization.
“Total Revolving Credit Commitments” means, at any time, the aggregate amount
of the Revolving Credit Commitments then in effect. The aggregate amount of the Total
Revolving Credit Commitments on the Closing Date is $200,000,000.
“Total Revolving Extensions of Credit” means, at any time, the aggregate amount
of the Revolving Extensions of Credit of the Lenders outstanding at such time.
“Transferee” means a Participant or an assignee of any Lender’s rights and
obligations under this Agreement pursuant to an Assignment and Assumption.
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“Trust Preferred Securities” means preferred equity issued by a special purpose
entity, the proceeds of which are used to purchase subordinated debt securities of the
Borrower or one of its Subsidiaries having terms that substantially mirror those of such
preferred equity issued by the special purpose entity such that the subordinated debt
securities constitute credit support for obligations in respect of such preferred equity and
such preferred equity is reflected on a consolidated balance sheet of the Borrower and its
consolidated Subsidiaries in accordance with GAAP.
“Type” means, as to any Loan, its nature as a Base Rate Loan or a Eurodollar
Loan.
“Unreimbursed Amount” has the meaning specified in Section 3.3(a).
“White Mountains” means White Mountains Insurance Group, Ltd., a company
organized under the laws of Bermuda, or an Affiliate thereof.
1.2. Other Definitional Provisions. Unless otherwise specified therein, all terms
defined in this Agreement shall have the defined meanings when used in the other Loan Documents or
any certificate or other document made or delivered pursuant hereto or thereto.
(a) As used herein and in the other Loan Documents, and any certificate or other document made
or delivered pursuant hereto or thereto, accounting terms relating to the Borrower or its
Subsidiaries not defined in Section 1.1 and accounting terms partly defined in Section
1.1, to the extent not defined, shall have the respective meanings given to them under GAAP or
SAP, as the case may be.
(b) References herein to particular pages, columns, lines or sections of any Person’s Annual
Statement shall be deemed, where appropriate, to be references to the corresponding page, column,
line or section of such Person’s Interim Statement, or if no such corresponding page, column, line
or section exists or if any report form changes, then to the corresponding item referenced thereby.
(c) The words “hereof”, “herein” and “hereunder” and words of similar import when used in this
Agreement shall refer to this Agreement as a whole and not to any particular provision of this
Agreement, and Section, Schedule and Exhibit references are to this Agreement unless otherwise
specified.
(d) The meanings given to terms defined herein shall be equally applicable to both the
singular and plural forms of such terms.
(e) The word “or” is not exclusive and the words “include”, “includes” or “including” shall be
deemed to be followed by the phrase “without limitation”.
(f) References to “preferred equity” includes Capital Stock designated as preferred stock,
preference shares, preferred shares or any similar term.
1.3. Letter of Credit Amounts. Unless otherwise specified herein, the amount of a
Letter of Credit at any time shall be deemed to be the stated amount of such Letter of Credit in
23
effect at such time; provided, however, that with respect to any Letter of
Credit that, by its terms or the terms of any Issuer Document related thereto, provides for one or
more automatic increases in the stated amount thereof, other than with respect to the calculation
of fees in connection with Letters of Credit, the amount of such Letter of Credit shall be deemed
to be the maximum stated amount of such Letter of Credit after giving effect to all such increases,
whether or not such maximum stated amount is in effect at such time.
1.4. Rounding. Any financial ratios required to be maintained by the Borrower
pursuant to this Agreement shall be calculated by dividing the appropriate component by the other
component, carrying the result to one place more than the number of places by which such ratio is
expressed herein and rounding the result up or down to the nearest number (with a rounding-up if
there is no nearest number).
1.5. Times of Day. Unless otherwise specified, all references herein to times of day
shall be references to Eastern time (daylight or standard, as applicable).
2. AMOUNT AND TERMS OF COMMITMENTS
2.1. Revolving Credit Commitments. (a) Subject to the terms and conditions hereof,
the Lenders severally agree to make revolving credit loans (“Revolving Credit Loans”) to
the Borrower from time to time on any Business Day during the Revolving Credit Commitment Period in
an aggregate principal amount at any one time outstanding for each Lender which, when added to such
Lender’s Revolving Credit Percentage of the sum of (i) the L/C Obligations then outstanding and
(ii) the aggregate principal amount of the Swing Line Loans then outstanding, does not exceed the
amount of such Lender’s Revolving Credit Commitment. During the Revolving Credit Commitment Period
the Borrower may use the Revolving Credit Commitments by borrowing, prepaying the Revolving Credit
Loans in whole or in part, and reborrowing, all in accordance with the terms and conditions hereof.
The Revolving Credit Loans may from time to time be Eurodollar Loans or Base Rate Loans, as
determined by the Borrower and notified to the Administrative Agent in accordance with Sections
2.2 and 2.9, provided that no Revolving Credit Loan shall be made as a Eurodollar Loan
after the day that is one month prior to the Revolving Credit Termination Date.
(b) The Borrower shall repay to the Lenders all outstanding Revolving Credit Loans made to the
Borrower on the Revolving Credit Termination Date.
2.2. Procedure for Revolving Credit Borrowing. The Borrower may borrow under the
Revolving Credit Commitments on any Business Day during the Revolving Credit Commitment Period,
provided that the Borrower shall give the Administrative Agent a borrowing request in the form of
Exhibit B-1 hereto (hereinafter, a “Borrowing Request”) (which Borrowing Request
must be received by the Administrative Agent prior to 11:00 A.M., New York City time, (a) three
Business Days prior to the requested Borrowing Date, in the case of Eurodollar Loans, or (b) on the
requested Borrowing Date, in the case of Base Rate Loans, provided that requests for Base Rate
Loans not received prior to 11:00 A.M., New York City time on the requested Borrowing Date shall be
deemed received on the following Business Day), and must specify (i) the amount and Type of
Revolving Credit Loans to be borrowed, (ii) the requested Borrowing Date and (iii) in the case of
Eurodollar Loans, the length of the initial
24
Interest Period therefor; provided, however, that if the Borrower wishes to
request Eurodollar Loans having an Interest Period of nine or twelve months in duration as provided
in the definition of “Interest Period,” the applicable notice must be received by the
Administrative Agent not later than 11:00 A.M. New York City time, four Business Days prior to the
requested date of such borrowing, whereupon the Administrative Agent shall give prompt notice to
the Lenders of such request and determine whether the requested Interest Period is unavailable to
any of them. Not later than 10:00 A.M. New York City time, three Business Days before the
requested date of such borrowing, the Administrative Agent shall notify the Borrower (which notice
may be by telephone) whether or not the requested Interest Period is unavailable to any Lender. If
the Borrower requests a borrowing of Eurodollar Loans in any Borrowing Request, but fails to
specify an Interest Period, it will be deemed to have specified an Interest Period of one month.
Each borrowing of Revolving Credit Loans under the Revolving Credit Commitments shall be in an
amount equal to (x) in the case of Base Rate Loans, $1,000,000 or a whole multiple thereof (or, if
the then aggregate Available Revolving Credit Commitments are less than $1,000,000, such lesser
amount) and (y) in the case of Eurodollar Loans, $5,000,000 or a whole multiple of $1,000,000 in
excess thereof; provided, that the Swing Line Lender may request, on behalf of the
Borrower, borrowings of Base Rate Loans under the Revolving Credit Commitments in other amounts
pursuant to Section 2.4. Upon receipt of any such notice from the Borrower, the
Administrative Agent shall promptly notify each Lender thereof. Each Lender will make its
Revolving Credit Percentage of the amount of each borrowing of Revolving Credit Loans available to
the Administrative Agent for the account of the Borrower at the Administrative Agent’s Office prior
to 12:00 Noon, New York City time, on the Borrowing Date requested by the Borrower in funds
immediately available to the Administrative Agent. Such borrowing will then be made available to
the Borrower by the Administrative Agent in like funds as received by the Administrative Agent.
2.3. Swing Line Commitment. (a) Subject to the terms and conditions hereof, the Swing
Line Lender agrees, in reliance on the agreements of the other Lenders set forth in Section
2.4, that during the Revolving Credit Commitment Period, it will make available to the Borrower
in the form of swing line loans (“Swing Line Loans”) a portion of the credit otherwise
available to the Borrower under the Revolving Credit Commitments; provided that (i) the
aggregate principal amount of Swing Line Loans outstanding at any time shall not exceed the Swing
Line Commitment then in effect (notwithstanding that the Swing Line Loans outstanding at any time,
when aggregated with the Swing Line Lender’s other outstanding Revolving Credit Loans hereunder,
may exceed the Swing Line Commitment then in effect or such Swing Line Lender’s Revolving Credit
Commitment then in effect) and (ii) the Borrower shall not request, and the Swing Line Lender shall
not make, any Swing Line Loan if, after giving effect to the making of such Swing Line Loan, the
aggregate amount of the Available Revolving Credit Commitments would be less than zero. During the
Revolving Credit Commitment Period, the Borrower may use the Swing Line Commitment by borrowing,
repaying and reborrowing, all in accordance with the terms and conditions hereof. Swing Line Loans
shall be Base Rate Loans only.
(b) The Borrower shall repay all outstanding Swing Line Loans on the earlier to occur of (i)
the date ten Business Days after such Swing Line Loan is made and (ii) the Revolving Credit
Termination Date. Each payment in respect of Swing Line Loans shall be made to the Swing Line
Lender.
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2.4. Procedure for Swing Line Borrowing; Refunding of Swing Line Loans.
(a) The Borrower may borrow under the Swing Line Commitment on any Business Day during the
Revolving Credit Commitment Period, provided, the Borrower shall give the Swing Line Lender
irrevocable telephonic notice confirmed promptly in writing in the form of Exhibit B-2
(which telephonic notice must be received by the Swing Line Lender not later than 1:00 P.M., New
York City time, on the proposed Borrowing Date), specifying (i) the amount to be borrowed and (ii)
the requested Borrowing Date. Each borrowing under the Swing Line Commitment shall be in an amount
equal to $500,000 or a whole multiple of $100,000 in excess thereof. Not later than 3:00 P.M., New
York City time, on the Borrowing Date specified in the borrowing notice in respect of any Swing
Line Loan, the Swing Line Lender shall make available to the Administrative Agent at the
Administrative Agent’s Office an amount in immediately available funds equal to the amount of such
Swing Line Loan. The Administrative Agent shall make the proceeds of such Swing Line Loan
available to the Borrower on such Borrowing Date in like funds as received by the Administrative
Agent.
(b) The Swing Line Lender, not less frequently than once each week shall, and at any other
time, from time to time, as the Swing Line Lender elects in its sole and absolute discretion, may,
on behalf of the Borrower (which hereby irrevocably directs the Swing Line Lender to act on its
behalf), on one Business Day’s notice given by the Swing Line Lender no later than 12:00 Noon, New
York City time, request each Lender to make, and each Lender hereby agrees to make, a Revolving
Credit Loan, in an amount equal to such Lender’s Revolving Credit Percentage of the aggregate
amount of the Swing Line Loans (the “Refunded Swing Line Loans”) outstanding on the date of
such notice, to repay the Swing Line Lender. Each Lender shall make the amount of such Revolving
Credit Loan available to the Administrative Agent at the Administrative Agent’s Office in
immediately available funds, not later than 10:00 A.M., New York City time, one Business Day after
the date of such notice. The proceeds of such Revolving Credit Loans shall be made immediately
available by the Administrative Agent to the Swing Line Lender for application by the Swing Line
Lender to the repayment of the Refunded Swing Line Loans. Upon the written request of any Lender,
the Administrative Agent will, within three Business Days of such request, inform such Lender of
the aggregate amount of Swing Line Loans outstanding on the date of such request.
(c) If prior to the time a Revolving Credit Loan would have otherwise been made pursuant to
Section 2.4(b), one of the events described in Section 8.1(c) shall have occurred
and be continuing with respect to the Borrower, or if for any other reason, as determined by the
Swing Line Lender in its sole discretion, Revolving Credit Loans may not be made as contemplated by
Section 2.4(b), each Lender shall, on the date such Revolving Credit Loan was to have been
made pursuant to the notice referred to in Section 2.4(b) (the “Refunding Date”),
purchase for cash an undivided participating interest in the then outstanding Swing Line Loans by
paying to the Swing Line Lender an amount (the “Swing Line Participation Amount”) equal to
(i) such Lender’s Revolving Credit Percentage times (ii) the sum of the aggregate principal
amount of Swing Line Loans then outstanding which were to have been repaid with such Revolving
Credit Loans.
(d) If any Lender fails to make available to the Administrative Agent for the account of the
Swing Line Lender any amount required to be paid by such Lender pursuant to the
26
foregoing provisions of Section 2.4(b) by the time specified in Section
2.4(b), the Swing Line Lender shall be entitled to recover from such Lender (acting through the
Administrative Agent), on demand, such amount with interest thereon for the period from the date
such payment is required to the date on which such payment is immediately available to the Swing
Line Lender at a rate per annum equal to the greater of the Federal Funds Rate and a rate
determined by the Swing Line Lender in accordance with banking industry rules on interbank
compensation, plus any administrative, processing or similar fees customarily charged by the Swing
Line Lender in connection with the foregoing. If such Lender pays such amount (with interest and
fees as aforesaid), the amount so paid shall constitute such Lender’s Loan included in the relevant
borrowing or funded participation in the relevant Swing Line Loan, as the case may be. A
certificate of the Swing Line Lender submitted to any Lender (through the Administrative Agent)
with respect to any amounts owing under this paragraph (d) shall be conclusive absent
manifest error.
(e) Each Lender’s obligation to make the Loans referred to in Section 2.4(b) and to
purchase participating interests pursuant to Section 2.4(c) shall be absolute and
unconditional and shall not be affected by any circumstance, including, without limitation, (i) any
setoff, counterclaim, recoupment, defense or other right which such Lender may have against the
Swing Line Lender, the Borrower or any other Person for any reason whatsoever; (ii) the occurrence
or continuance of a Default or an Event of Default or the failure to satisfy any of the other
conditions specified in Section 4; (iii) any adverse change in the condition (financial or
otherwise) of the Borrower; (iv) any breach of this Agreement or any other Loan Document by the
Borrower or any Lender; or (v) any other circumstance, happening or event whatsoever, whether or
not similar to any of the foregoing. No such funding of risk participations shall relieve or
otherwise impair the obligation of the Borrower to repay Swing Line Loans, together with interest
as provided herein.
(f) Whenever, at any time after the Swing Line Lender has received from any Lender such
Lender’s Swing Line Participation Amount, the Swing Line Lender receives any payment on account of
the Swing Line Loans, the Swing Line Lender will distribute to such Lender its Swing Line
Participation Amount (appropriately adjusted, in the case of interest payments, to reflect the
period of time during which such Lender’s participating interest was outstanding and funded and, in
the case of principal and interest payments, to reflect such Lender’s pro rata
portion of such payment if such payment is not sufficient to pay the principal of and interest on
all Swing Line Loans then due); provided, however, that in the event that such
payment received by the Swing Line Lender is required to be returned, such Lender will return to
the Swing Line Lender any portion thereof previously distributed to it by the Swing Line Lender.
The obligation of the Lenders under this paragraph (f) shall survive the payment in full of
the Obligations and the termination of this Agreement.
(g) The Swing Line Lender shall be responsible for invoicing the Borrower for interest on the
Swing Line Loans. Until each Lender funds its Refunded Swing Line Loan or risk participation
pursuant to this Section 2.4 to refinance such Lender’s Revolving Credit Percentage of any
Swing Line Loan, interest in respect of such Revolving Credit Percentage shall be solely for the
account of the Swing Line Lender.
27
(h) The Borrower shall make all payments of principal and interest in respect of the Swing
Line Loans directly to the Administrative Agent for the account of the Swing Line Lender.
2.5. Repayment of Loans; Evidence of Debt. (a) The Borrower hereby unconditionally
promises to pay to the Administrative Agent for the account of the appropriate Lender (i) the then
unpaid principal amount on the Revolving Credit Termination Date (or on such earlier date on which
the Loans become due and payable pursuant to Section 8.2) of each Revolving Credit Loan of
such Lender made to the Borrower and (ii) pursuant to the terms of Section 2.3(b), each
Swing Line Loan of such Swing Line Lender made to the Borrower. The Borrower hereby further agrees
to pay interest to the Administrative Agent for the account of the appropriate Lender on the unpaid
principal amount of the Loans made to it from time to time outstanding from the date hereof until
payment in full thereof at the rates per annum, and on the dates, set forth in Section
2.11.
(b) Each Lender shall maintain in accordance with its usual practice an account or accounts
evidencing indebtedness of the Borrower to such Lender resulting from each Loan of such Lender from
time to time, including the amounts of principal and interest payable and paid to such Lender from
time to time under this Agreement.
(c) The Administrative Agent, on behalf of the Borrower, shall maintain the Register pursuant
to Section 10.7(c), and a subaccount therein for each Lender, in which shall be recorded
(i) the amount of each Loan to the Borrower made hereunder and any Note evidencing such Loan, the
Type of such Loan and each Interest Period applicable thereto, (ii) the amount of any principal or
interest due and payable or to become due and payable from the Borrower to each Lender hereunder
and (iii) both the amount of any sum received by the Administrative Agent hereunder from or for the
account of the Borrower and each Lender’s share thereof. In the event of any conflict between the
accounts and records maintained by any Lender and the accounts and records of the Administrative
Agent in respect of such matters, the accounts and records of the Administrative Agent shall
control in the absence of manifest error.
(d) The entries made in the Register and the accounts of each Lender maintained pursuant to
Section 2.5(b) shall, to the extent permitted by applicable Law, be prima
facie evidence of the existence and amounts of the obligations of the Borrower therein
recorded; provided, however, that the failure of any Lender or the Administrative
Agent to maintain the Register or any such account, or any error therein, shall not in any manner
affect the obligation of the Borrower to repay (with applicable interest) the Loans made to it by
such Lender in accordance with the terms of this Agreement.
(e) The Borrower agrees that, upon the request to the Administrative Agent by any Lender, it
will execute and deliver to such Lender a promissory note of the Borrower evidencing any Revolving
Credit Loans or Swing Line Loans, as the case may be, made by such Lender to the Borrower,
substantially in the forms of Exhibit C-1 or C-2, respectively, with appropriate
insertions as to date and principal amount. Each Lender may attach schedules to its Note and
endorse thereon the date, Type (if applicable), amount and maturity of its Loans and payments with
respect thereto.
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(f) In addition to the accounts and records referred to herein above, each Lender and the
Administrative Agent shall maintain in accordance with its usual practice accounts or records
evidencing the purchases and sales by such Lender of participations in Letters of Credit and Swing
Line Loans. In the event of any conflict between the accounts and records maintained by the
Administrative Agent and the accounts and records of any Lender in respect of such matters, the
accounts and records of the Administrative Agent shall control in the absence of manifest error.
2.6. Facility Fee, etc. (a) The Borrower agrees to pay to the Administrative Agent
for the account of each Lender in accordance with its Revolving Credit Percentage a facility fee
for the period from and including the Closing Date to the last day of the Revolving Credit
Commitment Period, computed at the Facility Fee Rate on the average daily amount of the Revolving
Credit Commitment of such Lender during the period for which payment is made. The facility fee
shall accrue at all times during the Revolving Credit Commitment Period, including at any time
during which one or more of the conditions in Section 4.2 is not met, and shall be payable
quarterly in arrears on the first Business Day of each of January, April, July and October and on
the last day of the Revolving Credit Commitment Period, commencing on the first of such dates to
occur after the Closing Date. The facility fee shall be calculated quarterly in arrears, and if
there is any change in the Facility Fee Rate during any quarter, the actual daily amount shall be
computed and multiplied by the Facility Fee Rate separately for each period during such quarter
that the Facility Fee Rate was in effect.
(b) The Borrower agrees to pay to the Arranger for its own account the fees in the amounts and
on the dates from time to time agreed to in the Fee Letter.
(c) The Borrower agrees to pay to the Administrative Agent the fees in the amounts and on the
dates from time to time agreed to in the Fee Letter.
2.7. Termination or Reduction of Revolving Credit Commitments. The Borrower shall
have the right, upon notice to the Administrative Agent, to terminate the Revolving Credit
Commitments or, from time to time, to reduce the aggregate amount of the Revolving Credit
Commitments; provided that (a) no such termination or reduction of Revolving Credit
Commitments shall be permitted if, after giving effect thereto and to any prepayments of the
Revolving Credit Loans and Swing Line Loans made on the effective date thereof, the Total Revolving
Extensions of Credit would exceed the Total Revolving Credit Commitments, (b) any such reduction
shall be in an amount equal to $1,000,000, or a whole multiple thereof (or the remaining amount of
the Revolving Credit Commitments), (c) any such notice shall be received by the Administrative
Agent not later than 11:00 A.M. New York City time, three Business Days prior to the date of
termination or reduction and (d) if, after giving effect to any reduction of the Revolving Credit
Commitments, the L/C Commitment or the Swing Line Commitment exceeds the amount of the Revolving
Credit Commitment, such Commitment shall be automatically reduced by the amount of such excess;
provided, further, that a notice of termination of the Revolving Credit Commitments
delivered by the Borrower may state that such notice is conditioned upon the effectiveness of other
credit facilities, transactions or borrowings in general, in which case such notice may be revoked
by the Borrower (by notice to the Administrative Agent on or prior to the specified effective date)
if such condition is not satisfied. The Administrative Agent will promptly notify the Lenders of
any notice of termination or
29
reduction of the Revolving Credit Commitments. Any reduction of the Revolving Credit
Commitments shall be applied to the Revolving Credit Commitment of each Lender according to its
Revolving Credit Percentage. All fees accrued until the effective date of any termination of the
Revolving Credit Commitment shall be paid on the effective date of such termination. Any reduction
shall reduce permanently the Revolving Credit Commitments then in effect.
2.8. Prepayments. (a) The Borrower may at any time and from time to time prepay the
Loans made to the Borrower, in whole or in part, without premium or penalty, upon notice delivered
to the Administrative Agent at least three Business Days prior thereto in the case of Eurodollar
Loans and on the date of prepayment in the case of Base Rate Loans, which notice shall specify the
date and amount of prepayment and whether the prepayment is of Eurodollar Loans or Base Rate Loans;
provided, that (i) if a Eurodollar Loan is prepaid on any day other than the last day of
the Interest Period applicable thereto, the Borrower shall also pay any amounts owing pursuant to
Section 2.17 and (ii) no prior notice is required for the prepayment of Swing Line
Loans; provided, further, that, if a notice of prepayment is given in
connection with a conditional notice of termination of the Revolving Credit Commitments as
contemplated by Section 2.7, then such notice of prepayment may be revoked if such notice
of termination is revoked in accordance with Section 2.7. Upon receipt of any such notice
the Administrative Agent shall promptly notify the Lenders thereof. If any such notice is given,
the amount specified in such notice shall be due and payable on the date specified therein,
together with (except in the case of Base Rate Loans) accrued interest to such date on the amount
prepaid. Partial prepayments of Revolving Credit Loans shall be in an aggregate principal amount
of $1,000,000 or a whole multiple thereof. Partial prepayments of Swing Line Loans shall be in an
aggregate principal amount of $100,000 or a whole multiple thereof.
(b) If for any reason the Total Revolving Extensions of Credit at any time exceed the Total
Revolving Credit Commitments then in effect, the Borrower shall immediately prepay the Loans and/or
Cash Collateralize the L/C Obligations in an aggregate amount equal to such excess;
provided, however, that the Borrower shall not be required to Cash Collateralize
the L/C Obligations pursuant to this Section 2.8(b) unless after the prepayment in full of
the Loans the Total Revolving Extensions of Credit exceed the Total Revolving Credit Commitments
then in effect.
2.9. Conversion and Continuation Options. (a) The Borrower may elect from time to
time to convert Eurodollar Loans made to the Borrower to Base Rate Loans by giving the
Administrative Agent at least two Business Days’ prior irrevocable notice (which may be telephonic)
of such election. The Borrower may elect from time to time to convert Base Rate Loans made to the
Borrower to Eurodollar Loans by giving the Administrative Agent at least three Business Days’ prior
irrevocable notice (which may be telephonic) of such election (which notice shall specify the
length of the initial Interest Period therefor); provided, however, that if the
Borrower wishes to request Eurodollar Loans having an Interest Period of nine or twelve months in
duration as provided in the definition of “Interest Period”, the applicable notice must be received
by the Administrative Agent not later than 11:00 A.M. New York City time, four Business Days prior
to the requested date of such conversion or continuation, whereupon the Administrative Agent shall
give prompt notice to the Lenders of such request and determine whether the requested Interest
Period is unavailable to any of them. Not later than 10:00 A.M. New York City time, three Business
Days before the requested date of such conversion or
30
continuation, the Administrative Agent shall notify the Borrower (which notice may be by
telephone) whether or not the requested Interest Period is unavailable to any of the Lenders,
provided, further that no Base Rate Loan may be converted to a Eurodollar Loan (i)
when any Event of Default has occurred and is continuing and the Administrative Agent or the
Majority Lenders have determined in its or their sole discretion not to permit such conversions or
(ii) after the date that is one month prior to the Revolving Credit Termination Date. Each
telephonic notice by the Borrower pursuant to this Section 2.9 must be confirmed promptly
by delivery to the Administrative Agent of a written Borrowing Request appropriately completed and
signed by a Responsible Officer of the Borrower. If the Borrower requests a conversion to a
Eurodollar Loan in any Borrowing Request, but fails to specify an Interest Period, it will be
deemed to have specified an Interest Period of one month. Upon receipt of any such notice the
Administrative Agent shall promptly notify the Lenders thereof.
(b) The Borrower may elect to continue any Eurodollar Loan made to the Borrower as such upon
the expiration of the then current Interest Period with respect thereto by giving irrevocable
notice (which may be telephonic) to the Administrative Agent, in accordance with the applicable
provisions of the term “Interest Period” set forth in Section 1.1, of the length of the
next Interest Period to be applicable to such Loans, provided that no Eurodollar Loan may
be continued as such (i) when any Event of Default has occurred and is continuing and the
Administrative Agent or the Majority Lenders have, determined in its or their sole discretion not
to permit such continuations or (ii) after the date that is one month prior to the Revolving Credit
Termination Date, and provided, further, that if the Borrower shall fail to give
any required notice as described above in this paragraph or if such continuation is not permitted
pursuant to the preceding proviso, such Loans shall be converted automatically to Base Rate Loans
on the last day of such then expiring Interest Period. Each telephonic notice by the Borrower
pursuant to this Section 2.9 must be confirmed promptly by delivery to the Administrative
Agent of a written Borrowing Request appropriately completed and signed by a Responsible Officer of
the Borrower. Upon receipt of any such notice the Administrative Agent shall promptly notify the
Lenders thereof.
2.10. Maximum Number of Eurodollar Loans. Notwithstanding anything to the contrary in
this Agreement, all borrowings, conversions, continuations and optional prepayments of Eurodollar
Loans and all selections of Interest Periods shall be in such amounts and be made pursuant to such
elections so that no more than ten Eurodollar Loans shall be outstanding at any one time.
2.11. Interest Rates and Payment Dates. (a) Subject to the provisions of
paragraph (c) below, each Eurodollar Loan shall bear interest on the outstanding principal
amount thereof for each day during each Interest Period with respect thereto at a rate per annum
equal to the Eurodollar Rate determined for such day plus the Applicable Margin.
(b) Each Base Rate Loan, including Swing Line Loans, shall bear interest on the outstanding
principal amount thereof from the applicable borrowing date at a rate per annum equal to the Base
Rate.
(c) (i) If all or a portion of the principal amount of any Loan or Reimbursement Obligation
shall not be paid when due (whether at the stated maturity, by
31
acceleration or otherwise), such overdue amount shall bear interest at a rate per annum that
is equal to (x) in the case of the Loans, the rate that would otherwise be applicable thereto
pursuant to the foregoing provisions of this Section 2.11 plus 2% or (y) in the
case of Reimbursement Obligations, the rate applicable to Base Rate Loans plus 2%, and (ii)
if all or a portion of any interest payable on any Loan or Reimbursement Obligation or any facility
fee or other amount payable hereunder shall not be paid when due (whether at the stated maturity,
by acceleration or otherwise), such overdue amount shall bear interest at a rate per annum equal to
the rate then applicable to Base Rate Loans plus 2%, in each case, with respect to
clauses (i) and (ii) above, from the date of such non-payment until such amount is
paid in full (each of the foregoing collectively, the “Default Rate”).
(d) Interest shall be payable in arrears on each Interest Payment Date, provided that
interest accruing pursuant to paragraph (c) of this Section 2.11 shall be payable
from time to time on demand (after as well as before judgment and before and after the commencement
of any proceeding under any Debtor Relief Law).
2.12. Computation of Interest and Fees. (a) Interest, fees and commissions payable
pursuant hereto shall be calculated on the basis of a 360-day year for the actual days elapsed
(which results in more fees or interest, as applicable, being paid than if computed on the basis of
a 365-day year), except that, all computations of interest with respect to Base Rate Loans when the
Base Rate is determined by Bank of America’s “prime rate”, shall be calculated on the basis of a
365-day (or 366-day, as the case may be) year for the actual days elapsed. The Administrative
Agent shall as soon as practicable notify the Borrower and the Lenders of each determination of a
Eurodollar Rate. Any change in the interest rate on a Loan resulting from a change in the Base
Rate shall become effective as of the opening of business on the day on which such change becomes
effective. The Administrative Agent shall as soon as practicable notify the Borrower and the
Lenders of the effective date and the amount of each such change in any interest rate. Interest
shall accrue on each Loan for the day on which the Loan is made, and shall not accrue on a Loan, or
any portion thereof, for the day on which the Loan or such portion is paid, provided that
any Loan that is repaid on the same day on which it is made shall, subject to Section
2.14(d), bear interest for one day.
(b) Each determination of an interest rate by the Administrative Agent pursuant to any
provision of this Agreement shall be conclusive and binding on the Borrower and the Lenders in the
absence of manifest error.
2.13. Inability to Determine Interest Rate. If prior to the first day of any Interest
Period:
(a) the Administrative Agent shall have determined (which determination shall be
conclusive and binding upon the Borrower) that, by reason of circumstances affecting the
relevant market, adequate and reasonable means do not exist for ascertaining the Eurodollar
Rate for such Interest Period, or
(b) the Administrative Agent shall have received notice from the Majority Lenders that
the Eurodollar Rate determined or to be determined for such Interest Period will not
adequately and fairly reflect the cost to such Lenders (as conclusively certified
32
by such Lenders) of making or maintaining their affected Loans during such Interest
Period,
the Administrative Agent shall give telecopy or telephonic notice thereof to the Borrower and the
relevant Lenders as soon as practicable thereafter. If such notice is given (x) any Eurodollar
Loans requested to be made on the first day of such Interest Period shall be made as Base Rate
Loans, (y) any Loans that were to have been converted on the first day of such Interest Period to
Eurodollar Loans shall be continued as Base Rate Loans and (z) any outstanding Eurodollar Loans
shall be converted, on the last day of the then current Interest Period with respect thereto, to
Base Rate Loans. Until such notice has been withdrawn by the Administrative Agent, no further
Eurodollar Loans shall be made or continued as such, nor shall the Borrower have the right to
convert Loans to Eurodollar Loans.
2.14. Pro Rata Treatment and Payments. (a) Each borrowing, other than borrowings of
Swing Line Loans, by the Borrower from the Lenders hereunder, each payment by the Borrower on
account of any facility fee or Letter of Credit fee, and any reduction of the Revolving Credit
Commitments of the Lenders, shall be made pro rata according to the respective Revolving Credit
Percentages of the relevant Lenders.
(b) Each payment (including each prepayment) by the Borrower on account of principal of and
interest on the Revolving Credit Loans of the Borrower shall be made pro rata
according to the respective outstanding principal amounts of the Revolving Credit Loans of the
Borrower then held by the Lenders. Each payment in respect of Reimbursement Obligations in respect
of any Letter of Credit shall be made to the relevant Issuing Lender.
(c) The application of any payment of Loans shall be made, first, to Base Rate Loans
and, second, to Eurodollar Loans. Each payment of the Eurodollar Loans shall be
accompanied by accrued interest to the date of such payment on the amount paid.
(d) All payments (including prepayments) to be made by the Borrower hereunder, whether on
account of principal, interest, fees or otherwise, shall be made without condition or deduction for
any counterclaim, defense, recoupment or setoff and shall be made prior to 12:00 Noon, New York
City time, on the due date thereof to the Administrative Agent, for the account of the relevant
Lenders, at the Administrative Agent’s Office, in Dollars and in immediately available funds. Any
payment made by the Borrower after 12:00 Noon, New York City time, on any Business Day shall be
deemed to have been made on the next following Business Day. The Administrative Agent shall
distribute such payments to the Lenders promptly upon receipt in like funds as received. If any
payment hereunder (other than payments on the Eurodollar Loans) becomes due and payable on a day
other than a Business Day, such payment shall be extended to the next succeeding Business Day. If
any payment on a Eurodollar Loan becomes due and payable on a day other than a Business Day, the
maturity thereof shall be extended to the next succeeding Business Day unless the result of such
extension would be to extend such payment into another calendar month, in which event such payment
shall be made on the immediately preceding Business Day. In the case of any extension of any
payment of principal pursuant to the preceding two sentences, interest thereon shall be payable at
the then applicable rate during such extension.
33
(e) Unless the Borrower or any Lender has notified the Administrative Agent, prior to the date
any payment is required to be made by it to the Administrative Agent hereunder, that the Borrower
or such Lender, as the case may be, will not make such payment, the Administrative Agent may assume
that the Borrower or such Lender, as the case may be, has timely made such payment and may (but
shall not be so required to), in reliance thereon, make available a corresponding amount to the
Person entitled thereto. If and to the extent that such payment was not in fact made to the
Administrative Agent in immediately available funds, then:
(i) if the Borrower failed to make such payment, each Lender shall
forthwith on demand repay to the Administrative Agent the portion of such
assumed payment that was made available to such Lender in immediately
available funds, together with interest thereon in respect of each day from
and including the date such amount was made available by the Administrative
Agent to such Lender to the date such amount is repaid to the Administrative
Agent in immediately available funds at the Federal Funds Rate from time to
time in effect; and
(ii) if any Lender failed to make such payment, such Lender shall
forthwith on demand pay to the Administrative Agent the amount thereof in
immediately available funds, together with interest thereon for the period
from the date such amount was made available by the Administrative Agent to
the Borrower to the date such amount is recovered by the Administrative Agent
(the “Compensation Period”) at a rate per annum equal to the greater
of the Federal Funds Rate and a rate determined by the Administrative Agent in
accordance with banking industry rules on interbank compensation, plus any
administrative, processing or similar fees customarily charged by the
Administrative Agent in connection with the foregoing. If such Lender pays
such amount to the Administrative Agent, then such amount shall constitute
such Lender’s Revolving Credit Percentage of the Loan included in the
applicable borrowing. If such Lender does not pay such amount forthwith upon
the Administrative Agent’s demand therefor, the Administrative Agent may make
a demand therefor upon the Borrower, and the Borrower shall pay such amount to
the Administrative Agent, together with interest thereon for the Compensation
Period at a rate per annum equal to the rate of interest applicable to the
applicable borrowing. Nothing herein shall be deemed to relieve any Lender
from its obligation to fulfill its Revolving Credit Commitment or to prejudice
any rights which the Administrative Agent or the Borrower may have against any
Lender as a result of any default by such Lender hereunder.
A notice of the Administrative Agent to any Lender or the Borrower with respect to any amount
owing under this subsection (e) shall be conclusive, absent manifest error.
(f) The obligations of the Lenders hereunder to make Loans, to fund participations in Letters
of Credit and Swing Line Loans and to make payments under Section 10.6 are several and not
joint. The failure of any Lender to make any Loan, to fund any such
34
participation or to make any payment under Section 10.6 on any date required hereunder
shall not relieve any other Lender of its corresponding obligation to do so on such date, and no
Lender shall be responsible for the failure of any other Lender to so make its Loan, to purchase
its participation or make its payment under Section 10.6.
2.15. Requirements of Law. (a) If the adoption of or any change in any Requirement
of Law or in the interpretation or application thereof or compliance by any Lender with any request
or directive (whether or not having the force of law) from any central bank or other Governmental
Authority made subsequent to the date hereof:
(i) shall subject any Lender to any tax of any kind whatsoever with
respect to this Agreement, any Letter of Credit, any Application or any
Eurodollar Loan made by it, or change the basis of taxation of payments to
such Lender in respect thereof (except for Non-Excluded Taxes or Other Taxes
covered by Section 2.16 and the imposition of, or any change in, the
rate of any Excluded Tax payable by such Lender);
(ii) shall impose, modify or hold applicable any reserve, special
deposit, compulsory loan or similar requirement against assets held by,
deposits or other liabilities in or for the account of, advances, loans or
other extensions of credit by, or any other acquisition of funds by, any
office of such Lender that is not otherwise included in the determination of
the Eurodollar Rate hereunder; or
(iii) shall impose on such Lender any other condition;
and the result of any of the foregoing is to increase the cost to such Lender, by an amount which
such Lender deems to be material, of making, converting into, continuing or maintaining Eurodollar
Loans to the Borrower or issuing or participating in Letters of Credit issued at the request of the
Borrower, or to reduce any amount receivable hereunder in respect thereof, then, in any such case,
the Borrower shall promptly pay such Lender, upon its demand, any additional amounts necessary to
compensate such Lender for such increased cost or reduced amount receivable. If any Lender becomes
entitled to claim any additional amounts pursuant to this Section 2.15, it shall promptly
notify the Borrower (with a copy to the Administrative Agent) of the event by reason of which it
has become so entitled.
(b) If any Lender shall have determined that the adoption of or any change in any Requirement
of Law regarding capital adequacy or in the interpretation or application thereof or compliance by
such Lender or any corporation controlling such Lender with any request or directive regarding
capital adequacy (whether or not having the force of law) from any Governmental Authority made
subsequent to the date hereof shall have the effect of reducing the rate of return on such Lender’s
or such corporation’s capital as a consequence of its obligations hereunder or under or in respect
of any Letter of Credit to a level below that which such Lender or such corporation could have
achieved but for such adoption, change or compliance (taking into consideration such Lender’s or
such corporation’s policies with respect to capital adequacy) by an amount deemed by such Lender to
be material, then from time to time, after submission by such Lender to the Borrower (with a copy
to the Administrative Agent) of a written request
35
therefor, the Borrower shall pay to such Lender such additional amount or amounts as will
compensate such Lender or such corporation for such reduction.
(c) In addition to, and without duplication of, amounts which may become payable from time to
time pursuant to paragraphs (a) and (b) of this Section 2.15, the Borrower
agrees to pay to each Lender which requests compensation under this paragraph (c) by notice
to the Borrower, on the last day of each Interest Period with respect to any Eurodollar Loan made
by such Lender to the Borrower, at any time when such Lender shall be required to maintain reserves
against “Eurocurrency liabilities” under Regulation D of the Board of Governors of the Federal
Reserve System (or, at any time when such Lender may be required by the Board of Governors of the
Federal Reserve System or by any other Governmental Authority, whether within the United States or
in another relevant jurisdiction, to maintain reserves against any other category of liabilities
which includes deposits by reference to which the Eurodollar Rate is determined as provided in this
Agreement or against any category of extensions of credit or other assets of such Lender which
includes any such Eurodollar Loans), an additional amount (determined by such Lender’s calculation
or, if an accurate calculation is impracticable, reasonable estimate using such reasonable means of
allocation as such Lender shall determine) equal to the actual costs, if any, incurred by such
Lender during such Interest Period as a result of the applicability of the foregoing reserves to
such Eurodollar Loans.
(d) A certificate as to any additional amounts payable pursuant to this Section 2.15
submitted by any Lender to the Borrower (with a copy to the Administrative Agent) shall be
conclusive in the absence of manifest error. No Lender shall be entitled to compensation under
this Section 2.15 from the Borrower for any costs incurred or reductions suffered more
than 180 days prior to the date that such Lender notifies the Borrower of the circumstances giving
rise to such increased costs or reductions and of such Lender’s intention to claim compensation
therefor; provided that if a change of law giving rise to such increased costs or
reductions is retroactive, then the 180-day period referred to above shall be extended to include
the period of retroactive effect thereof. The obligations of the Borrower pursuant to
this Section 2.15 shall survive the termination of this Agreement and the payment of the
Loans and all other amounts payable hereunder.
2.16. Taxes. (a) Except as required by Law, all payments made by the Borrower under
this Agreement shall be made free and clear of, and without deduction or withholding for or on
account of, any present or future income, stamp or other taxes, levies, imposts, duties, charges,
fees, deductions or withholdings, now or hereafter imposed, levied, collected, withheld or assessed
by any Governmental Authority, excluding net income taxes and franchise and doing business taxes
(imposed in lieu of net income taxes) imposed on the Administrative Agent or any Lender as a result
of a present or former connection between the Administrative Agent or such Lender and the
jurisdiction of the Governmental Authority imposing such tax or any political subdivision or taxing
authority thereof or therein (other than any such connection arising solely from the Administrative
Agent’s or such Lender’s having executed, delivered or performed its obligations or received a
payment under, or enforced, this Agreement or any other Loan Document) (such net income taxes and
franchise or doing business taxes imposed in lieu of net income taxes being referred to hereinafter
as “Excluded Taxes”). If any such taxes, levies, imposts, duties, charges, fees,
deductions or withholdings other than Excluded Taxes (“Non-Excluded Taxes”) or any Other
Taxes are required to be withheld from any amounts payable to
36
the Administrative Agent or any Lender hereunder, the amounts so payable to the Administrative
Agent or such Lender shall be increased to the extent necessary to yield to the Administrative
Agent or such Lender (after payment of all Non-Excluded Taxes and Other Taxes) interest or any such
other amounts payable hereunder at the rates or in the amounts specified in this Agreement;
provided, however, that the Borrower shall not be required to increase any such
amounts payable to any Lender with respect to any Non-Excluded Taxes (i) that are attributable to
such Lender’s failure to comply with the requirements of paragraph (d) or (e) of
this Section 2.16 or (ii) that are withholding taxes imposed on amounts payable to such
Lender at the time such Lender becomes a party to this Agreement or designates a new lending
office, except to the extent that such Lender (or its assignor, if any) was entitled, at the time
of designation of a new lending office or assignment, to receive additional amounts from the
Borrower with respect to such Non-Excluded Taxes pursuant to this Section 2.16(a).
(b) In addition, the Borrower shall pay any Other Taxes to the relevant Governmental Authority
in accordance with applicable Law.
(c) Whenever any Non-Excluded Taxes or Other Taxes are payable by the Borrower, as soon as
practicable thereafter the Borrower shall send to the Administrative Agent for its own account or
for the account of the relevant Lender, as the case may be, a certified copy of an official receipt
received by the Borrower showing payment thereof (or other evidence of such payment reasonably
satisfactory to the Administrative Agent). If the Borrower fails to pay any Non-Excluded Taxes or
Other Taxes when due to the appropriate taxing authority, the Borrower shall indemnify the
Administrative Agent and the Lenders for any incremental taxes, interest or penalties that may
become payable by the Administrative Agent or any Lender as a result of any such failure. The
agreements in this Section 2.16 shall survive the termination of this Agreement and the
payment of the Loans and all other amounts payable hereunder.
(d) Each Lender (or Transferee) that is not (i) a citizen or resident of the United States of
America, (ii) a corporation, partnership or other entity created or organized in or under the laws
of the United States of America (or any jurisdiction thereof), or (iii) an estate or trust that is
subject to U.S. federal income taxation regardless of the source of its income (a “Non-U.S.
Lender”) that may lawfully do so shall deliver to the Borrower and the Administrative Agent
(or, in the case of a Participant, to the Lender from which the related participation shall have
been purchased) two copies of either U.S. Internal Revenue Service Form W-8BEN or Form W-8ECI (or
other applicable form), or, in the case of a Non-U.S. Lender claiming exemption from U.S. federal
withholding tax under Section 871(h) or 881(c) of the Code with respect to payments of “portfolio
interest”, a statement substantially in the form of Exhibit D and a Form W-8BEN (or other
applicable form), or to the extent such Lender may lawfully do so, it shall deliver any subsequent
versions thereof or successors thereto properly completed and duly executed by such Non-U.S. Lender
claiming complete exemption from, or a reduced rate of, U.S. federal withholding tax on all
payments by the Borrower under this Agreement and the other Loan Documents. Such forms shall be
delivered by each Non-U.S. Lender on or before the date it becomes a party to this Agreement (or,
in the case of any Participant, on or before the date such Participant purchases the related
participation). In addition, to the extent it may lawfully do so, each Non-U.S. Lender shall
deliver such forms promptly upon the obsolescence or invalidity of any form previously delivered by
such Non-U.S. Lender. Each Non-U.S. Lender shall, as soon as reasonably practicable, notify the
Borrower at any time it determines that it is no longer
37
in a position to provide any previously delivered certificate to the Borrower (or any other
form of certification adopted by the U.S. taxing authorities for such purpose). Notwithstanding
any other provision of this paragraph, a Non-U.S. Lender shall not be required to deliver any form
pursuant to this paragraph that such Non-U.S. Lender is not legally able to deliver.
(e) A Lender that is entitled to an exemption from or reduction of non-U.S. withholding tax
under the Law of the jurisdiction in which the Borrower is located, or any treaty to which such
jurisdiction is a party, with respect to payments under this Agreement shall deliver to the
Borrower (with a copy to the Administrative Agent), at the time or times prescribed by applicable
Law or reasonably requested by the Borrower, such properly completed and executed documentation
prescribed by applicable Law or reasonably requested by the Borrower as will permit such payments
to be made without withholding or at a reduced rate, provided that such Lender is legally
entitled to complete, execute and deliver such documentation.
2.17. Compensation for Losses. The Borrower agrees to, upon demand of any Lender
(with a copy to the Administrative Agent) from time to time, to indemnify each Lender for, and to
hold each Lender harmless from, any loss or expense that such Lender sustains or incurs as a
consequence of (a) default by the Borrower in making a borrowing of, conversion to or continuation
of Eurodollar Loans after the Borrower has given a notice requesting the same in accordance with
the provisions of this Agreement, (b) default by the Borrower in making any prepayment after the
Borrower has given a notice thereof in accordance with the provisions of this Agreement or (c) the
making by the Borrower of a prepayment or conversion of Eurodollar Loans on a day that is not the
last day of an Interest Period with respect thereto; provided that any request for
indemnification made by a Lender pursuant to this Section 2.17 shall be made within six
months of the incurrence of the loss or expense requested to be indemnified. Such indemnification
may include an amount equal to the excess, if any, of (i) the amount of interest that would have
accrued on the amount so prepaid, or not so borrowed, converted or continued, for the period from
the date of such prepayment or of such failure to borrow, convert or continue to the last day of
such Interest Period (or, in the case of a failure to borrow, convert or continue, the Interest
Period that would have commenced on the date of such failure) in each case at the applicable rate
of interest for such Loans provided for herein (excluding, however, the Applicable Margin included
therein, if any) over (ii) the amount of interest (as reasonably determined by such Lender) that
would have accrued to such Lender on such amount by placing such amount on deposit for a comparable
period with leading banks in the interbank Eurodollar market. A certificate as to any amounts
payable pursuant to this Section 2.17 submitted to the Borrower by any Lender shall be
conclusive in the absence of manifest error. This covenant shall survive the termination of this
Agreement and the payment of the Loans and all other amounts payable hereunder.
2.18. Illegality. Notwithstanding any other provision herein, if the adoption of or
any change in any Requirement of Law or in the interpretation or application thereof shall make it
unlawful for any Lender to make or maintain Eurodollar Loans as contemplated by this Agreement, (a)
the commitment of such Lender hereunder to make Eurodollar Loans, continue Eurodollar Loans as such
and convert Base Rate Loans to Eurodollar Loans shall forthwith be canceled and (b) such Lender’s
Loans then outstanding as Eurodollar Loans, if any, shall be converted automatically to Base Rate
Loans on the respective last days of the then current Interest Periods with respect to such Loans
or within such earlier period as required by Law. If
38
any such conversion of a Eurodollar Loan to a Base Rate Loan occurs on a day which is not the
last day of the then current Interest Period with respect thereto, the Borrower shall pay to such
Lender such amounts, if any, as may be required pursuant to Section 2.17.
2.19. Change of Office. Each Lender agrees that, upon the occurrence of any event
that it knows to give rise to the operation of Sections 2.15, 2.16(a) or
2.18 with respect to such Lender, it will use all commercially reasonable efforts (subject
to overall policy considerations of such Lender) to designate another lending office for any Loans
affected by such event, or to assign its rights and obligations hereunder with respect to such
Loans to another of its offices, branches or affiliates with the object of avoiding the
consequences of such event; provided, that such designation is made on terms that, in the
reasonable sole judgment of such Lender, cause such Lender and its lending office(s) to suffer no
economic, legal or regulatory disadvantage, and provided, further, that nothing in this Section
2.19 shall affect or postpone any of the obligations of the Borrower or the rights of any
Lender pursuant to Sections 2.15, 2.16(a) or 2.18. The Borrower hereby
agrees to pay all reasonable out-of-pocket costs and expenses incurred by any Lender in connection
with any such designation or assignment.
2.20. Replacement of Lenders under Certain Circumstances. The Borrower shall be
permitted to replace any Lender (a) that requests reimbursement for amounts owing pursuant to
Section 2.15, (b) with respect to which the Borrower is required to pay any amounts under
Sections 2.16 or 2.18, (c) that defaults in its obligation to make Loans hereunder,
(d) any Non-Extending Lender pursuant to Section 2.22, or (e) that fails to approve any
amendment which, pursuant to Section 10.1, requires the approval of each Lender,
provided, that such amendment is approved by at least the Majority Lenders, with a
replacement financial institution or other entity; provided that (i) such replacement does
not conflict with any Requirement of Law, (ii) with respect to a condition described in clause
(a) or (b) above, prior to any such replacement, such replaced Lender shall have taken
no action under Section 2.19 so as to eliminate the continued need for payment of amounts
owing pursuant to Sections 2.15, 2.16, or 2.18 (iii) the replacement
financial institution or other entity shall purchase, at par, all Loans and other amounts owing to
such replaced Lender on or prior to the date of replacement, (iv) the Borrower shall be liable to
such replaced Lender under Section 2.17 (as though Section 2.17 were applicable) if
any Eurodollar Loan to the Borrower owing to such replaced Lender shall be purchased other than on
the last day of the Interest Period relating thereto, (v) the replacement financial institution or
other entity, if not already a Lender, shall be reasonably satisfactory to the Administrative Agent
and otherwise an Eligible Assignee, (vi) the replaced Lender and replacement Lender shall be
obligated to make such replacement in accordance with the provisions of Section 10.7
(including, without limitation, obtaining the consents provided for therein) (provided that the
Borrower shall be obligated to pay the registration and processing fee referred to therein), (vii)
the Borrower shall pay all additional amounts (if any) required pursuant to Section 2.15,
2.16 or 2.18, as the case may be, in respect of any period prior to the date on
which such replacement shall be consummated, and (viii) any such replacement shall not be deemed to
be a waiver of any rights that the Borrower, the Administrative Agent or any other Lender shall
have against the replaced Lender.
2.21. Increase in Commitments.
39
(a) Request for Increase. Upon notice to the Administrative Agent (which shall
promptly notify the Lenders), the Borrower may from time to time on or after the Closing Date,
increase the Total Revolving Credit Commitments by an amount not to exceed $100,000,000 less the
aggregate amount of all prior increases of the Total Revolving Credit Commitment pursuant to this
Section 2.21. Such increase in the Total Revolving Credit Commitments may be provided by
the Lenders or Eligible Assignees designated by the Borrower to become Lenders (pursuant to an
instrument of accession in the form of Exhibit H hereto, an “Instrument of
Accession”) that are willing to provide such increase; provided that (i) any such
increase shall be in a minimum amount of $5,000,000 and (ii) the aggregate amount of the Total
Revolving Credit Commitments after giving effect to any such increase shall not at any time exceed
$300,000,000. Nothing contained herein shall constitute, or otherwise be deemed to be, a
commitment on the part of any Lender to increase its Revolving Credit Commitment hereunder.
(b) Effective Date and Allocations. If the Total Revolving Credit Commitments are
increased in accordance with this Section 2.21, the Administrative Agent and the Borrower
shall determine the effective date (the “Increase Effective Date”) and the Borrower, in
consultation with the Administrative Agent, shall determine the final allocation of such increase.
The Administrative Agent shall promptly notify the Lenders of the final allocation of such increase
and the Increase Effective Date.
(c) Conditions to Effectiveness of Increase. As a condition precedent to such
increase, (i) no Default shall exist, (ii) the Borrower shall (x) deliver to the Administrative
Agent (1) an Instrument of Accession executed by the Borrower and the applicable Lender(s), and (2)
a certificate dated as of the Increase Effective Date (in sufficient copies for each Lender) signed
by a Responsible Officer of the Borrower (A) certifying and attaching the resolutions adopted by
the Borrower approving or consenting to such increase, and (B) certifying that, before and after
giving effect to such increase no Default exists and (iii) pursuant to the terms of the Fee Letter,
pay the fees to the applicable Persons. The Borrower shall prepay any Revolving Credit Loans
outstanding on the Increase Effective Date (and pay any additional amounts required pursuant to
Section 2.15) to the extent necessary to keep the outstanding Revolving Credit Loans
ratable with any revised Revolving Credit Percentages arising from any nonratable increase in the
Total Revolving Credit Commitments under this Section 2.21.
(d) Conflicting Provisions. This Section 2.21 shall supersede any provisions
in Section 2.14 or 10.1 to the contrary.
2.22. Extension of Revolving Credit Termination Date.
(a) Requests for Extension. The Borrower may, by notice to the Administrative Agent
(which shall promptly notify the Lenders) substantially in the form of Exhibit I attached
hereto (an “Extension Request”), not earlier than 120 days and not later than 35 days prior
to the first anniversary and the second anniversary of the Closing Date (the first anniversary and
the second anniversary of the Closing Date referred to herein, as applicable, as the “Maturity
Extension Date”) request that each Lender extend such Lender’s then Revolving Credit
Termination Date (the “Existing Revolving Credit Termination Date”), for an additional 364
days from the then Existing Revolving Credit Termination Date.
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(b) Lender Elections to Extend. Each Lender, acting in its sole and individual
discretion, shall, by notice to the Administrative Agent given not earlier than 90 days and not
later than the date (the “Notice Date”) that is 20 days prior to the Maturity Extension
Date, advise the Administrative Agent whether or not such Lender agrees to such extension (and each
Lender that determines not to so extend its Revolving Credit Termination Date (a “Non-Extending
Lender”) shall notify the Administrative Agent of such fact promptly after such determination
(but in any event no later than the Notice Date) and any Lender that does not so advise the
Administrative Agent on or before the Notice Date shall be deemed to be a Non-Extending Lender.
The election of any Lender to agree to such extension shall not obligate any other Lender to so
agree.
(c) Notification by Administrative Agent. The Administrative Agent shall notify the
Borrower of each Lender’s determination under this Section 2.22 no later than the date 15
days prior to the Maturity Extension Date (or, if such date is not a Business Day, on the next
preceding Business Day).
(d) Additional Commitment Lenders. The Borrower shall have the right to replace each
Non-Extending Lender, on or before the then Existing Revolving Credit Termination Date, with, and
add as “Lenders” under this Agreement in place thereof, one or more Eligible Assignees (each, an
“Additional Commitment Lender”) as provided in Section 10.7; provided that
each of such Additional Commitment Lenders shall enter into an Assignment and Assumption pursuant
to which such Additional Commitment Lender shall, effective on a date not earlier than the Maturity
Extension Date, undertake a Commitment (and, if any such Additional Commitment Lender is already a
Lender, its Commitment shall be in addition to such Lender’s Commitment hereunder on such date).
(e) Minimum Extension Requirement. If (and only if) the Majority Lenders (without
regard to the new or increased Commitment of any Additional Commitment Lender), have agreed so to
extend their Revolving Credit Termination Date (each, an “Extending Lender”), then,
effective as of the Maturity Extension Date, the Revolving Credit Termination Date of each
Extending Lender and of each Additional Commitment Lender shall be extended to the date falling 364
days after the Existing Revolving Credit Termination Date (except that, if such date is not a
Business Day, such Revolving Credit Termination Date as so extended shall be the next preceding
Business Day) and each Additional Commitment Lender shall thereupon become a “Lender” for all
purposes of this Agreement.
(f) Conditions to Effectiveness of Extensions. As a condition precedent to such
extension, the Borrower shall deliver to the Administrative Agent a certificate dated as of the
Maturity Extension Date (in sufficient copies for each Extending Lender and each Additional
Commitment Lender) signed by a Responsible Officer of the Borrower (i) certifying and attaching the
resolutions adopted by the Borrower approving or consenting to such extension and (ii) certifying
that, (A) before and after giving effect to such extension, (1) the representations and warranties
contained in Section 5 and the other Loan Documents are true and correct on and as of the
Maturity Extension Date, except to the extent that such representations and warranties specifically
refer to an earlier date, in which case they are true and correct as of such earlier date, and
except that for purposes of this Section 2.22, the representations and warranties contained
in subsections (a) and (b) of Section 5.1 shall be deemed to refer to the most recent
statements
41
furnished pursuant to subsection (a) of Section 6.1 and (2) no Default has occurred
and is continuing and (B) there has occurred no Material Adverse Effect since the date of delivery
of the most recent financial statements pursuant to Section 6.1, and (iii) on the Existing
Revolving Credit Termination Date applicable to any Non-Extending Lender, the Borrower shall prepay
any Loans outstanding on such date (and pay any additional amounts required pursuant to Section
2.17) to the extent necessary to keep outstanding Loans ratable with the revised Revolving
Credit Percentages of the respective Lenders effective as of such date.
(g) Conflicting Provisions. This Section 2.22 shall supersede any provisions
in Section 2.14 or 10.1 to the contrary.
3. LETTERS OF CREDIT
3.1. L/C Commitment. (a) Subject to the terms and conditions hereof, each Issuing
Lender, in reliance on the agreements of the other Lenders set forth in Section 3.3, agrees
to issue Letters of Credit for the account of the Borrower or any of its Subsidiaries and to amend
or extend Letters of Credit previously issued by it, in accordance with Section 3.2(b), on
any Business Day during the Revolving Credit Commitment Period in such form as may be approved from
time to time by the Issuing Lender; provided, that the Issuing Lender shall not issue any
Letter of Credit if, after giving effect to such issuance, (i) the L/C Obligations would exceed the
L/C Commitment or (ii) the aggregate amount of the Available Revolving Credit Commitments would be
less than zero. Each Letter of Credit shall (i) be denominated in Dollars and (ii) expire no later
than the earlier of (x) the first anniversary of its date of issuance and (y) the date which is
five Business Days prior to the Revolving Credit Termination Date, provided that any Letter
of Credit with a one-year term may provide for the renewal thereof for additional one-year periods
(which shall in no event extend beyond the date referred to in clause (y) above). All
Existing Letters of Credit shall be deemed to have been issued pursuant hereto, and from and after
the Closing Date shall be subject to and governed by the terms and conditions hereof.
(b) No Issuing Lender shall at any time be obligated to issue any Letter of Credit hereunder
if (i) such issuance would conflict with, or cause the Issuing Lender or any L/C Participant to
exceed any limits imposed by, any applicable Requirement of Law, (ii) such issuance would violate
one or more policies of the Issuing Lender applicable to letters of credit generally or (iii) any
order, judgment or decree of any Governmental Authority or arbitrator shall by its terms purport to
enjoin or restrain the Issuing Lender from issuing such Letter of Credit, or any Law applicable to
the Issuing Lender or any request or directive (whether or not having the force of Law) from any
Governmental Authority with jurisdiction over the Issuing Lender shall prohibit, or request that
the Issuing Lender refrain from, the issuance of letters of credit generally, or such Letter of
Credit in particular.
3.2. Procedure for Issuance and Amendment of Letter of Credit. (a) Each Letter of
Credit shall be issued or amended, as the case may be, upon the request of the Borrower delivered
to the Issuing Lender (with a copy to the Administrative Agent) in the form of an Application,
completed and signed by a Responsible Officer of the Borrower. Such Application must be received
by the Issuing Lender and the Administrative Agent not later than 11:00 A.M., New York City time,
at least two Business Days (or such later date and time as the Administrative Agent and the Issuing
Lender may agree in a particular instance in their sole
42
discretion) prior to the proposed issuance date or date of amendment, as the case may be. In
the case of a request for an initial issuance of a Letter of Credit, such Application shall specify
in form and detail reasonably satisfactory to the Issuing Lender: (A) the proposed issuance date of
the requested Letter of Credit (which shall be a Business Day); (B) the amount thereof; (C) the
expiry date thereof; (D) the name and address of the beneficiary thereof; (E) the documents to be
presented by such beneficiary in case of any drawing thereunder; (F) the full text of any
certificate to be presented by such beneficiary in case of any drawing thereunder; and (G) such
other matters as the Issuing Lender may reasonably require. In the case of a request for an
amendment of any outstanding Letter of Credit, such Application shall specify in form and detail
reasonably satisfactory to the Issuing Lender (A) the Letter of Credit to be amended; (B) the
proposed date of amendment thereof (which shall be a Business Day); (C) the nature of the proposed
amendment; and (D) such other matters as the Issuing Lender may reasonably require. Additionally,
the Borrower shall furnish to the Issuing Lender and the Administrative Agent such other documents
and information pertaining to such requested Letter of Credit issuance or amendment, including any
Issuer Documents, as the Issuing Lender or the Administrative Agent may reasonably require.
(b) Promptly after receipt of any Application, the Issuing Lender will confirm with the
Administrative Agent (by telephone or in writing) that the Administrative Agent has received a copy
of such Application from the Borrower and, if not, the Issuing Lender will provide the
Administrative Agent with a copy thereof. Unless the Issuing Lender has received written notice
from any Lender or the Administrative Agent, at least one Business Day prior to the requested date
of issuance or amendment of the applicable Letter of Credit, that one or more applicable conditions
contained in Section 4 shall not then be satisfied, then, subject to the terms and
conditions hereof, the Issuing Lender shall, on the requested date, issue a Letter of Credit for
the account of the Borrower or enter into the applicable amendment, as the case may be, in each
case in accordance with the Issuing Lender’s usual and customary business practices. Immediately
upon the issuance of each Letter of Credit, each Lender shall be deemed to, and hereby irrevocably
and unconditionally agrees to, purchase from the Issuing Lender a risk participation in such Letter
of Credit in an amount equal to the product of such Lender’s Revolving Credit Percentage
times the amount of such Letter of Credit.
(c) Promptly after its delivery of any Letter of Credit or any amendment to a Letter of Credit
to an advising bank with respect thereto or to the beneficiary thereof, the Issuing Lender will
also deliver to the Borrower and the Administrative Agent a true and complete copy of such Letter
of Credit or amendment.
3.3. Drawings and Reimbursements; Funding of Participations. (a) Upon receipt from
the beneficiary of any Letter of Credit of any notice of a drawing under such Letter of Credit, the
Issuing Lender shall notify the Borrower and the Administrative Agent thereof. The Borrower shall
reimburse the Issuing Lender, through the Administrative Agent, for the amount of any drawing under
a Letter of Credit not later than 1:00 P.M., New York City time, on the date that such drawing is
made (if the Borrower has received notice from the Issuing Lender of such drawing prior to 10:00
A.M., New York City time, on such date) or, if the Borrower has not received notice of such drawing
prior to such time on such date, then not later than 1:00 P.M., New York City time, on (i) the
Business Day that the Borrower receives such notice, if such notice is received prior to 10:00
A.M., New York City time, on the day of receipt, or (ii) the
43
Business Day immediately following the day that the Borrower receives such notice, if such
notice is not received prior to 10:00 A.M., New York City time, on the day of such receipt (the
date on which such reimbursement by the Borrower is due pursuant to this sentence being referred to
herein as the “Requested Reimbursement Date”). If the Borrower fails to so reimburse the
Issuing Lender by such time, the Administrative Agent shall promptly notify each Lender of the
Requested Reimbursement Date, the amount of the unreimbursed drawing (the “Unreimbursed
Amount”), and the amount of such Lender’s Revolving Credit Percentage thereof. In such event,
the Borrower shall be deemed to have requested a borrowing of Base Rate Loans to be disbursed on
the Requested Reimbursement Date in an amount equal to the Unreimbursed Amount, without regard to
the minimum and multiples, and notice periods, specified in Section 2.2 for the principal
amount of Base Rate Loans. Such Base Rate Loans may from time to time be converted to Eurodollar
Loans, as determined by the Borrower and notified to the Administrative Agent in accordance with
Section 2.9, provided that no Revolving Credit Loan shall be made as a Eurodollar Loan
after the day that is one month prior to the Revolving Credit Termination Date. Any notice given
by the Issuing Lender or the Administrative Agent pursuant to this Section 3.3(a) may be
given by telephone if immediately confirmed in writing; provided that the lack of such an immediate
confirmation shall not affect the conclusiveness or binding effect of such notice.
(b) Each Lender (including the Lender acting as Issuing Lender) shall upon any notice pursuant
to Section 3.3(a) make funds available to the Administrative Agent for the account of the
Issuing Lender at the Administrative Agent’s Office in an amount equal to its Revolving Credit
Percentage of the Unreimbursed Amount not later than 1:00 P.M., New York City time, on the Business
Day specified in such notice by the Administrative Agent, whereupon, subject to the provisions of
Section 3.3(a), each Lender that so makes funds available shall be deemed to have made a
Base Rate Loan to the Borrower in such amount. The Administrative Agent shall remit the funds so
received to the Issuing Lender.
(c) If any drawing is made under a Letter of Credit and is not reimbursed or refinanced on the
date such drawing is made, for any reason, the Borrower shall be deemed to have incurred from the
Issuing Lender an L/C Borrowing in the amount of the Unreimbursed Amount that is not so reimbursed
or refinanced, which L/C Borrowing (i) shall bear interest at the rate applicable to Base Rate
Loans from and including the date that such drawing is paid by the Issuing Bank to but excluding
the earlier of the date that such Unreimbursed Amount is so reimbursed or refinanced or the date
that is the next Business Day following the Requested Reimbursement Date and, if not so reimbursed
or refinanced on or prior to the date that is the next Business Day following the Requested
Reimbursement Date, then, from and after the date that is the next Business Day following the
Requested Reimbursement Date to but excluding the date so reimbursed or refinanced, the rate
applicable to Base Rate Loans plus 2% and (ii) shall, on and after the date that is the next
Business Day following the Requested Reimbursement Date, be due and payable on demand. In such
event, each Lender’s payment to the Administrative Agent for the account of the Issuing Lender
pursuant to Section 3.3(b) shall be deemed payment in respect of its participation in such
L/C Borrowing and shall constitute an L/C Advance from such Lender in satisfaction of its
participation obligation under this Section 3.3.
(d) Until each Lender funds its Loan or L/C Advance pursuant to this Section 3.3 to
reimburse the Issuing Lender for any amount drawn under any Letter of Credit, interest in
44
respect of such Lender’s Revolving Credit Percentage of such amount shall be solely for the
account of the Issuing Lender.
(e) Each Lender’s obligation to make Loans or L/C Advances to reimburse the Issuing Lender for
amounts drawn under Letters of Credit, as contemplated by this Section 3.3, shall be
absolute and unconditional and shall not be affected by any circumstance, including (A) any
set-off, counterclaim, recoupment, defense or other right which such Lender may have against the
Issuing Lender, the Borrower or any other Person for any reason whatsoever, (B) the occurrence or
continuance of a Default, or (C) any other occurrence, event or condition, whether or not similar
to any of the foregoing; provided, however, that each Lender’s obligation to make
Loans pursuant to this Section 3.3 is subject to the conditions set forth in Section
4.2 (other than delivery by the Borrower of a Loan Notice). No such making of an L/C Advance
shall relieve or otherwise impair the obligation of the Borrower to reimburse the Issuing Lender
for the amount of any payment made by the Issuing Lender under any Letter of Credit, together with
interest as provided herein.
(f) If any Lender fails to make available to the Administrative Agent for the account of the
Issuing Lender any amount required to be paid by such Lender pursuant to the foregoing provisions
of this Section 3.3 by the time specified in Section 3.3(b), the Issuing Lender
shall be entitled to recover from such Lender (acting through the Administrative Agent), on demand,
such amount with interest thereon for the period from the date such payment is required to the date
on which such payment is immediately available to the Issuing Lender at a rate per annum equal to
the greater of the Federal Funds Rate and a rate determined by the Issuing Lender in accordance
with banking industry rules on interbank compensation, plus any administrative, processing or
similar fees customarily charged by the Issuing Lender in connection with the foregoing. If such
Lender pays such amount (with interest and fees as aforesaid), the amount so paid shall constitute
such Lender’s Loan included in the relevant borrowing or L/C Advance in respect of the relevant L/C
Borrowing, as the case may be. A certificate of the Issuing Lender submitted to any Lender
(through the Administrative Agent) with respect to any amounts owing under this paragraph
(f) shall be conclusive absent manifest error.
3.4. Repayment of Participations. (a) At any time after the Issuing Lender has made
a payment under any Letter of Credit and has received from any Lender such Lender’s L/C Advance in
respect of such payment in accordance with Section 3.3(b), if the Administrative Agent
receives for the account of the Issuing Lender any payment in respect of the related Unreimbursed
Amount or interest thereon (whether directly from the Borrower or otherwise, including proceeds of
cash collateral applied thereto by the Administrative Agent), the Administrative Agent will
distribute to such Lender its Revolving Credit Percentage thereof (appropriately adjusted, in the
case of interest payments, to reflect the period of time during which such Lender’s L/C Advance was
outstanding) in the same funds as those received by the Administrative Agent.
(b) If any payment received by the Administrative Agent for the account of the Issuing Lender
pursuant to Section 3.3(b) is required to be returned under any of the circumstances
described in Section 10.8 (including pursuant to any settlement entered into by the Issuing
Lender in its discretion), each Lender shall pay to the Administrative Agent for the
45
account of the Issuing Lender its Revolving Credit Percentage thereof on demand of the
Administrative Agent, plus interest thereon from the date of such demand to the date such amount is
returned by such Lender, at a rate per annum equal to the Federal Funds Rate from time to time in
effect.
3.5. Obligations Absolute. The obligation of the Borrower to reimburse the Issuing
Lender for each drawing under each Letter of Credit and to repay each L/C Borrowing shall be
absolute, unconditional and irrevocable, and shall be paid strictly in accordance with the terms of
this Agreement under all circumstances, including the following:
(i) any lack of validity or enforceability of such Letter of Credit, this
Agreement, or any other Loan Document;
(ii) the existence of any claim, counterclaim, set-off, defense or other
right that the Borrower or any of its Subsidiaries may have at any time
against any beneficiary or any transferee of such Letter of Credit (or any
Person for whom any such beneficiary or any such transferee may be acting),
the Issuing Lender or any other Person, whether in connection with this
Agreement, the transactions contemplated hereby or by such Letter of Credit or
any agreement or instrument relating thereto, or any unrelated transaction;
(iii) any draft, demand, certificate or other document presented under
such Letter of Credit proving to be forged, fraudulent, invalid or
insufficient in any respect or any statement therein being untrue or
inaccurate in any respect; or any loss or delay in the transmission or
otherwise of any document required in order to make a drawing under such
Letter of Credit;
(iv) any payment by the Issuing Lender under such Letter of Credit
against presentation of a draft or certificate that does not strictly comply
with the terms of such Letter of Credit; or any payment made by the Issuing
Lender under such Letter of Credit to any Person purporting to be a trustee in
bankruptcy, debtor-in-possession, assignee for the benefit of creditors,
liquidator, receiver or other representative of or successor to any
beneficiary or any transferee of such Letter of Credit, including any arising
in connection with any proceeding under any Debtor Relief Law; or
(v) any other circumstance or happening whatsoever, whether or not
similar to any of the foregoing, including any other circumstance that might
otherwise constitute a defense available to, or a discharge of, the Borrower
or any of its Subsidiaries.
3.6. Role of Issuing Lender. Each Lender and the Borrower agree that, in paying any
drawing under a Letter of Credit, the Issuing Lender shall not have any responsibility to obtain
any document (other than any sight draft, certificates and documents expressly required by the
Letter of Credit) or to ascertain or inquire as to the validity or accuracy of any such
46
document or the authority of the Person executing or delivering any such document. None of
the Issuing Lender, any Agent-Related Person nor any of the respective correspondents, participants
or assignees of the Issuing Lender shall be liable to any Lender for (a) any action taken or
omitted in connection herewith at the request or with the approval of the Lenders or the Majority
Lenders, as applicable; (b) any action taken or omitted in the absence of gross negligence or
willful misconduct; or (c) the due execution, effectiveness, validity or enforceability of any
document or instrument related to any Letter of Credit or Application. The Borrower hereby assumes
all risks of the acts or omissions of any beneficiary or transferee with respect to its use of any
Letter of Credit; provided, however, that this assumption is not intended to, and
shall not, preclude the Borrower’s pursuing such rights and remedies as it may have against the
beneficiary or transferee at law or under any other agreement. None of the Issuing Lender, any
Agent-Related Person, nor any of the respective correspondents, participants or assignees of the
Issuing Lender, shall be liable or responsible for any of the matters described in clauses
(i) through (v) of Section 3.5; provided, however, that
anything in such clauses (i) through (v) to the contrary notwithstanding, the
Borrower may have a claim against the Issuing Lender, and the Issuing Lender may be liable to the
Borrower, to the extent, but only to the extent, of any direct, as opposed to consequential or
exemplary, damages suffered by the Borrower which the Borrower proves were caused by the Issuing
Lender’s willful misconduct or gross negligence or the Issuing Lender’s willful failure to pay
under any Letter of Credit after the presentation to it by the beneficiary of a sight draft and
certificate(s) strictly complying with the terms and conditions of a Letter of Credit. In
furtherance and not in limitation of the foregoing, the Issuing Lender may accept documents that
appear on their face to be in order, without responsibility for further investigation, regardless
of any notice or information to the contrary, and the Issuing Lender shall not be responsible for
the validity or sufficiency of any instrument transferring or assigning or purporting to transfer
or assign a Letter of Credit or the rights or benefits thereunder or proceeds thereof, in whole or
in part, which may prove to be invalid or ineffective for any reason.
3.7. Cash Collateral. Upon the request of the Administrative Agent, if, as of the
Revolving Credit Termination Date, any Letter of Credit for any reason remains outstanding and
partially or wholly undrawn, the Borrower shall immediately Cash Collateralize the then outstanding
amount of all L/C Obligations (in an amount equal to such outstanding amount determined as of the
Revolving Credit Termination Date). Sections 2.8 and 8.2 set forth certain
additional requirements to deliver Cash Collateral hereunder. To the extent that the Borrower is
required to Cash Collateralize L/C Obligations, the Borrower hereby grants to the Administrative
Agent, for the benefit of the Issuing Lender and the Lenders, a security interest in all cash,
deposit accounts and all balances therein and all proceeds of the foregoing. Such cash collateral
shall be maintained in blocked, interest bearing deposit accounts with the Administrative Agent.
3.8. Applicability of ISP98 and UCP. Unless otherwise expressly agreed by the Issuing
Lender and the Borrower when a Letter of Credit is issued including any such agreement as
applicable to an Existing Letter of Credit, (i) the rules of the ISP shall apply to each standby
Letter of Credit, and (ii) the rules of the Uniform Customs and Practice for Documentary Credits,
as most recently published by the International Chamber of Commerce at the time of issuance shall
apply to each commercial Letter of Credit.
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3.9. Fees and Other Charges. (a) The Borrower will pay to the Administrative Agent,
for the account of the Lenders, a fee on the daily amount available to be drawn under all
outstanding Letters of Credit issued for its account at a per annum rate equal to the Applicable
Margin then in effect with respect to Eurodollar Loans, to be shared ratably among the Lenders in
accordance with their respective Revolving Credit Percentages and payable quarterly in arrears on
each L/C Fee Payment Date after the issuance date. In addition, the Borrower shall pay to the
relevant Issuing Lender for its own account a fronting fee on the daily amount available to be
drawn under all outstanding Letters of Credit issued by such Issuing Lender for the Borrower’s
account at a rate and at the times to be agreed upon by the Borrower and such Issuing Lender. For
purposes of computing the average daily amount available to be drawn under the Letters of Credit,
the amount of such Letters of Credit shall be determined in accordance with Section 1.3.
(b) In addition to the foregoing fees, the Borrower shall pay or reimburse each Issuing Lender
for such normal and customary costs and expenses as are incurred or charged by such Issuing Lender
in issuing, negotiating, effecting payment under, amending or otherwise administering any Letter of
Credit issued for the account of the Borrower.
3.10. Conflict with Issuer Documents. In the event of any conflict between the terms
hereof and the terms of any Issuer Document, the terms hereof shall control.
4. CONDITIONS PRECEDENT
4.1. Conditions to Closing. The occurrence of the Closing Date is subject to the
satisfaction on such date of the following conditions precedent:
(a) The Administrative Agent’s receipt of the following, each of which shall be originals or
telecopies (followed promptly by originals) unless otherwise specified, each properly executed by a
Responsible Officer of the Borrower, each dated the Closing Date (or, in the case of certificates
of governmental officials, a recent date before the Closing Date) and each in form and substance
reasonably satisfactory to the Administrative Agent:
(i) executed counterparts of this Agreement, sufficient in number for
distribution to the Administrative Agent, each Lender party hereto on the date
hereof and the Borrower;
(ii) a Note executed by the Borrower in favor of each Lender requesting a
Note so long as such request is made at least 3 Business Days prior to the
Closing Date;
(iii) such certificates of resolutions or other action, incumbency
certificates and/or other certificates of Responsible Officers of the Borrower
as the Administrative Agent may reasonably require evidencing the identity,
authority and capacity of each Responsible Officer thereof authorized to act
as a Responsible Officer in connection with this Agreement and the other Loan
Documents to which the Borrower is a party;
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(iv) such documents and certifications as the Administrative Agent may
reasonably require to evidence that the Borrower is duly organized or formed,
and that the Borrower is validly existing, in good standing and qualified to
engage in business in the jurisdiction where the Borrower is organized;
(v) a Closing Certificate of the Borrower with appropriate insertions and
attachments, if any;
(vi) a certificate signed by a Responsible Officer on behalf of the
Borrower either (A) attaching copies of all consents, licenses and approvals
required in connection with the execution, delivery and performance by the
Borrower and the validity against the Borrower of the Loan Documents to which
it is a party, and such consents, licenses and approvals shall be in full
force and effect, or (B) stating that no such consents, licenses or approvals
are so required; and
(vii) a certificate signed by a Responsible Officer on behalf of the
Borrower certifying (A) that the conditions specified in Sections
4.2(a) and (b) have been satisfied, and (B) that there has been no
event or circumstance since December 31, 2006 that has had or could be
reasonably expected to have a Material Adverse Effect.
(b) Fees. (i) The Administrative Agent and the Arranger shall have received all fees
required to be paid by the Borrower on or prior to the Closing Date.
(ii) The Borrower shall have paid all fees, charges and disbursements of
Bingham McCutchen LLP, as counsel to the Administrative Agent (directly to such
counsel if requested by the Administrative Agent), to the extent required to be paid
by the Borrower and invoiced prior to the Closing Date.
(c) Legal Opinions. The Administrative Agent shall have received the legal opinion of
Cravath, Swaine & Moore LLP counsel to the Borrower substantially in the form of Exhibit F.
(d) Termination of Existing Credit Facility. The Administrative Agent shall have
received evidence (including, without limitation, payoff letters), reasonably satisfactory to the
Administrative Agent in its reasonable discretion, that the Existing Credit Agreement has been or
concurrently with the Closing Date is being terminated.
(e) Closing Date. The Closing Date shall occur on or before August 31, 2007.
(f) Material Adverse Effect. Up to and including the Closing Date, since December 31,
2006 no event or circumstance that has had or could reasonably be expected to have a Material
Adverse Effect shall have occurred.
4.2. Conditions to Closing and Each Extension of Credit. The occurrence of the
Closing Date and the agreement of each Lender to make any extension of credit requested to be
49
made by it hereunder on any date (including, without limitation, its initial extension of
credit or any issuance, or increase in the amount of, any Letter of Credit but excluding
conversions or continuations of Loans) is subject to the satisfaction of the following conditions
precedent:
(a) Representations and Warranties. Each of the representations and warranties made
by the Borrower in Section 5 (other than Section 5.5) or pursuant to any of the
other Loan Documents shall be true and correct in all material respects on and as of such date as
if made on and as of such date, except to the extent that they expressly relate to an earlier date,
in which case they shall be true and correct in all material respects as of such earlier date.
(b) No Default. No Default or Event of Default shall have occurred and be continuing
on such date or after giving effect to the extensions of credit requested to be made on such date.
(c) Borrowing Request. Except as provided in Section 3.3, the Administrative
Agent shall have received a Borrowing Request or, as applicable, an Application.
Each borrowing by and issuance of a Letter of Credit on behalf of the Borrower hereunder shall
constitute a representation and warranty by the Borrower as of the date of such extension of credit
(including any issuance, or increase in the amount of, any Letter of Credit) that the conditions
contained in Section 4.2 (a) and (b) have been satisfied on and as of the date of
the applicable extension of credit.
5. REPRESENTATIONS AND WARRANTIES
To induce the Administrative Agent and the Lenders to enter into this Agreement and to make
the Loans and issue or participate in the Letters of Credit, the Borrower hereby represents and
warrants to the Administrative Agent and each Lender that:
5.1. Financial Statements.
(a) The audited consolidated balance sheet of the Borrower and its consolidated Subsidiaries,
as at December 31, 2006 and the related consolidated statements of income and of cash flows for the
fiscal year ended on such date, reported on and accompanied by unqualified reports from Ernst &
Young LLP or another independent certified public accounting firm of nationally recognized
standing, present fairly in all material respects the consolidated financial condition of the
Borrower and its consolidated Subsidiaries, as at such date, and the consolidated results of their
operations and their consolidated cash flows for such fiscal year then ended in accordance with
GAAP applied consistently throughout the periods involved (except as approved by the aforementioned
firm of accountants and disclosed therein).
(b) The unaudited consolidated balance sheet of the Borrower and its consolidated
Subsidiaries, as of and for the fiscal quarter ended June 30, 2007, and the related unaudited
consolidated statements of income and cash flows for such fiscal quarters ended on such dates,
present fairly in all material respects the consolidated financial condition of the Borrower and
its consolidated Subsidiaries as at such dates, and the consolidated results of their operations
and their consolidated cash flows for the fiscal quarters then ended in accordance with GAAP
applied consistently throughout the periods involved (except (x) as approved by the
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aforementioned firms of accountants and disclosed therein or (y) for normal year-end audit
adjustments and the absence of footnotes).
5.2. Corporate Existence; Compliance with Law. The Borrower and each of its
Subsidiaries (a) is duly organized, validly existing and in good standing under the Laws of the
jurisdiction of its organization, except to the extent that the failure of the Subsidiaries to be
so organized, validly existing and in good standing could not, in the aggregate, reasonably be
expected to have a Material Adverse Effect, (b) has the corporate or other power and authority,
and the legal right, to own and operate its Property, to lease the Property it operates as lessee
and to conduct the business in which it is currently engaged, except to the extent that the failure
to have such power, authority and legal right could not, in the aggregate, reasonably be expected
to have a Material Adverse Effect, (c) is duly qualified as a foreign corporation and in good
standing under the Laws of each jurisdiction where its ownership, lease or operation of Property or
the conduct of its business requires such qualification, except to the extent failure to so qualify
or be in good standing could not, in the aggregate, reasonably be expected to have a Material
Adverse Effect, and (d) is in compliance with all Requirements of Law, including, without
limitation, with respect to environmental laws, except to the extent that the failure to comply
therewith could not, in the aggregate, reasonably be expected to have a Material Adverse Effect.
5.3. Corporate Power; Authorization; Enforceable Obligations. The Borrower has the
corporate or other power and authority, and the legal right, to make, deliver and perform the Loan
Documents to which it is a party and to borrow hereunder. The Borrower has taken all necessary
corporate or other action to authorize the execution, delivery and performance of the Loan
Documents to which it is a party and to authorize the borrowings on the terms and conditions of
this Agreement. No consent or authorization of, filing with, notice to or other act by or in
respect of, any Governmental Authority or any other Person is required in connection with the
borrowings hereunder or the execution, delivery, performance, validity or enforceability of this
Agreement or any of the other Loan Documents, except consents, authorizations, filings and notices
described in Schedule 5.3, which consents, authorizations, filings and notices have been
obtained or made and are in full force and effect and except to the extent failure to obtain any
consents, authorizations, filings, and notices could not, in the aggregate, reasonably be expected
to have a Material Adverse Effect. Each Loan Document to which the Borrower is a party has been
duly executed and delivered on behalf of the Borrower. This Agreement constitutes, and each other
Loan Document to which the Borrower is a party upon execution will constitute, a legal, valid and
binding obligation of the Borrower, enforceable against the Borrower in accordance with its terms,
except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization,
moratorium or similar Laws affecting the enforcement of creditors’ rights generally and by general
equitable principles (whether enforcement is sought by proceedings in equity or at law).
5.4. No Legal Bar. The execution, delivery and performance of this Agreement and the
other Loan Documents, the issuance of Letters of Credit, the borrowings hereunder and the use of
the proceeds thereof will not violate any Requirement of Law or any Contractual Obligation of the
Borrower or any of its Subsidiaries and will not result in, or require, the creation or imposition
of any Lien on any of their respective properties or revenues pursuant to any Requirement of Law or
any such Contractual Obligation, except to the extent such violation or Lien could not, in the
aggregate, reasonably be expected to have a Material Adverse Effect.
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5.5. No Material Litigation. No litigation, investigation or proceeding of or before
any arbitrator or Governmental Authority is pending or, to the knowledge of the Borrower,
threatened by or against the Borrower or any of its Subsidiaries or against any of their respective
properties or assets that (a) purport to affect or pertain to this Agreement or any other Loan
Document or any of the transactions contemplated hereby or thereby, or (b) could reasonably be
expected to have a Material Adverse Effect.
5.6. Ownership of Property; Liens. The Borrower and each of its Subsidiaries has
title in fee simple to, or a valid leasehold interest in, all its real property, and good title to,
or a valid leasehold interest in, all its other Property, and none of such Property is subject to
any Lien except as permitted by Section 7.3, except to the extent such defects in title
could not, in the aggregate, reasonably be expected to have a Material Adverse Effect.
5.7. Intellectual Property. The Borrower and each of its Subsidiaries owns, or is
licensed to use, all Intellectual Property material to the conduct of its business as currently
conducted. No material claim has been asserted and is pending by any Person challenging or
questioning the use of any Intellectual Property or the validity or effectiveness of any
Intellectual Property, nor does the Borrower know of any valid basis for any such claim, other than
claims that could not, in the aggregate, reasonably be expected to have a Material Adverse Effect.
The use of Intellectual Property by the Borrower and its Subsidiaries does not infringe on the
rights of any Person in any material respect, except for infringements that could not, in the
aggregate, reasonably be expected to have a Material Adverse Effect.
5.8. Taxes. The Borrower and each of its Subsidiaries has filed or caused to be filed
all material Federal, state and other tax returns that are required to be filed (taking into
account any applicable extensions) and has paid all taxes shown to be due and payable on said
returns or on any assessments made against it or any of its Property and all other material taxes,
fees or other charges imposed on it or any of its Property by any Governmental Authority and, to
the knowledge of the Borrower, no tax Lien has been filed, and no claim is being asserted, with
respect to any such tax, fee or other charge, except (i) those in respect of which the amount or
validity are currently being contested in good faith by appropriate proceedings and with respect to
which reserves in conformity with SAP or GAAP, as applicable, have been provided on the books of
the Borrower or its Subsidiaries, as the case may be, and (ii) any amount the failure of which to
pay could not reasonably be expected to result in a Material Adverse Effect.
5.9. Federal Regulations. No part of the proceeds of any Loans will be used for
“purchasing” or “carrying” any “margin stock” within the respective meanings of each of the quoted
terms under Regulation U as now and from time to time hereafter in effect or for any purpose that
violates the provisions of the Regulations of the Board. If requested by any Lender or the
Administrative Agent, the Borrower will furnish to the Administrative Agent and each Lender a
statement to the foregoing effect in conformity with the requirements of FR Form G-3 or FR Form U-1
referred to in Regulation U.
5.10. ERISA. Except as could not reasonably be expected to result in a Material
Adverse Effect, neither a Reportable Event nor an “accumulated funding deficiency” (within the
meaning of Section 412 of the Code or Section 302 of ERISA) has occurred during the five-year
period prior to the date on which this representation is made or deemed made with respect to any
52
Plan, and each Plan has complied in all material respects with the applicable provisions of
ERISA and the Code. No termination of a Single Employer Plan has occurred, and no Lien in favor of
the PBGC or a Plan has arisen, during such five-year period. The present value of all accrued
benefits under each Single Employer Plan (based on those assumptions used to fund such Plans) did
not, as of the last annual valuation date prior to the date on which this representation is made or
deemed made, exceed the value of the assets of such Plan allocable to such accrued benefits by an
amount which could reasonably be expected to result in a Material Adverse Effect. Neither the
Borrower nor any Commonly Controlled Entity has had a complete or partial withdrawal from any
Multiemployer Plan that has resulted or could reasonably be expected to result in a Material
Adverse Effect. Except as could not reasonably be expected to result in a Material Adverse Effect,
no such Multiemployer Plan is in Reorganization or Insolvent.
5.11. Investment Company Act; Other Regulations. The Borrower is not an “investment
company” within the meaning of the Investment Company Act of 1940, as amended. The Borrower is not
subject to regulation under any Requirement of Law (other than Regulation X of the Board) which
limits its ability to incur Indebtedness hereunder.
5.12. Use of Proceeds. The proceeds of the Loans and the Letters of Credit shall be
used for working capital and general corporate purposes of the Borrower and its Subsidiaries,
including, without limitation, (a) acquisitions, (b) the issuance of Letters of Credit, (c)
refinancings of outstanding indebtedness, if any, of the Borrower and its Subsidiaries (including
under the Existing Credit Agreement and the Existing Letters of Credit), and (d) for payment of
fees and expenses incurred in connection with this Agreement.
5.13. Accuracy of Information, etc. No statement or information contained in any
document, certificate or statement furnished to the Administrative Agent or the Lenders or any of
them, by or on behalf of the Borrower for use in connection with the transactions contemplated by
this Agreement or the other Loan Documents, taken as a whole contained, as of the date such
statement, information, document or certificate was so furnished, any untrue statement of a
material fact or omitted to state a material fact necessary in order to make the statements
contained therein not materially misleading in light of the circumstances under which such
statement, information, document or certificate was made or furnished. The projections and pro
forma financial information contained in the materials referenced above were prepared in good faith
based on assumptions believed by management of the Borrower to be reasonable at the time made, it
being recognized by the Lenders that such financial information as it relates to future events is
not to be viewed as fact and that actual results during the period or periods covered by such
financial information may differ from the projected results set forth therein by a material amount.
5.14. Insurance Regulatory Matters. No License of any Insurance Subsidiary, the loss
of which could reasonably be expected to have a Material Adverse Effect, is the subject of a
proceeding for suspension or revocation. To the knowledge of the Borrower, there is no sustainable
basis for such suspension or revocation, and no such suspension or revocation has been threatened
by any Governmental Authority.
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5.15. Indebtedness and Liens. As of the Closing Date, (i) no Subsidiary of the
Borrower had outstanding any Indebtedness that was created, incurred or assumed after June 30,
2007, except Indebtedness that would have been permitted by Section 7.2 (without giving
effect to the Indebtedness permitted by Section 7.2(a)(i)) if created, incurred or assumed
by such Subsidiary on the Closing Date and (ii) there does not exist (a) any Lien that was created,
incurred or assumed after June 30, 2007, upon any stock or Indebtedness of any Subsidiary to secure
any Debt of the Borrower or any of its Subsidiaries or any other Person (other than the obligations
hereunder) or (b) any Lien that was created, incurred or assumed after June 30, 2007, upon any
other Property, to secure any Debt of the Borrower or any of its Subsidiaries or any other Person
(other than the obligations hereunder), except, in the case of (a) or (b), Liens that would have
been permitted by Section 7.3 hereof (without giving effect to the Liens that would have
been permitted by Section 7.3(i)(x)) if so created, incurred or assumed on the Closing
Date.
5.16. Taxpayer Identification Number. As of the date hereof, the Borrower’s true and
correct U.S. taxpayer identification number is set forth on Schedule 10.02.
6. AFFIRMATIVE COVENANTS
The Borrower hereby agrees that, from and after the Closing Date and so long as, the
Commitments remain in effect, any Letter of Credit remains outstanding, there exists any unpaid
Reimbursement Obligations or any principal or interest on any Loan or any fee payable hereunder is
owing to any Lender or the Administrative Agent hereunder, the Borrower shall and shall cause each
of its Subsidiaries to:
6.1. Financial Statements. Furnish to the Administrative Agent (either electronically
or with sufficient copies for distribution by the Administrative Agent to each Lender):
(a) (i) not later than the date required to be filed pursuant to the Act of 1934 (after giving
effect to any extension permitted or granted by the SEC), but in any event (including if not
required to be filed pursuant to the Act of 1934) not later than 95 days after the end of each
fiscal year of the Borrower ending subsequent to the Closing Date, a copy of the audited
consolidated balance sheet of the Borrower and its consolidated Subsidiaries as at the end of such
fiscal year, and the related audited consolidated statements of income and of cash flows for such
fiscal year, setting forth in each case in comparative form the figures as of the end of and for
the previous fiscal year, accompanied by an opinion by Ernst & Young LLP, or other independent
certified public accounting firm of nationally recognized standing, which report shall be prepared
in accordance with generally accepted auditing standards and applicable securities laws and shall
not be subject to a “going concern” or like qualification or exception, or qualification as to the
scope of the audit (for purposes hereof, delivery of the Borrower’s annual report on Form 10-K
(which shall be deemed delivered on the date when such document is posted on the SEC’s website at
www.sec.gov or any replacement website) will be sufficient in lieu of delivery of such financial
statements); and (ii) not later than the date required to be filed pursuant to the Act of 1934
(after giving effect to any extension permitted or granted by the SEC), but in any event (including
if not required to be filed pursuant to the Act of 1934) not later than 60 days after the end of
each of the first three fiscal quarters of each fiscal year of the Borrower ending subsequent to
the Closing Date, a copy of the unaudited consolidated balance
54
sheet of the Borrower and its consolidated Subsidiaries as at the end of such fiscal quarter
and the related unaudited consolidated statements of income and of cash flows for such fiscal
quarter and the portion of the fiscal year through the end of such fiscal quarter, setting forth in
each case in comparative form the figures as of the end of and for the corresponding period in the
previous year, certified by a Responsible Officer on behalf of the Borrower as being fairly stated
in all material respects in accordance with GAAP (subject to normal year-end audit adjustments and
the absence of footnotes) (for purposes hereof, delivery of the Borrower’s Quarterly Report on Form
10-Q (which shall be deemed delivered on the date when such document is posted on the SEC’s website
at www.sec.gov or any replacement website) will be sufficient in lieu of delivery of such financial
statements and certifications); all such financial statements, together with notes to such
financial statements, to fairly present in all material respects the financial condition and income
and cash flows of the subject thereof as at the dates and for the periods covered thereby in
accordance with GAAP applied consistently throughout the periods reflected therein and with prior
periods (except (x) as approved by such accountants or officer, as the case may be, and disclosed
therein or (y) in the case of unaudited financial statements, subject to normal year-end
adjustments and the absence of footnotes);
(b) not later than the date required by Law to be prepared (or such later date as may be
allowed by the applicable Governmental Authority), but in any event not later than (i) 95 days
after the end of each fiscal year of a Material Insurance Subsidiary (as of the date of delivery
pursuant hereto), copies of the unaudited Annual Statement of such Material Insurance Subsidiary,
certified by a Responsible Officer on behalf of such Material Insurance Subsidiary; all such
statements to be prepared in accordance with SAP consistently applied throughout the periods
reflected therein and, if required by the applicable Governmental Authority, audited and certified
by independent certified public accounting firm of recognized national standing (it being
understood that delivery of audited statements shall be made within 10 days following the delivery
of such statements to the applicable Governmental Authority); and (ii) 70 days after the end of
each interim financial period of each Material Insurance Subsidiary in respect of which an Interim
Statement is required to be prepared (as of the date delivery of such Interim Statement is
required), copies of the Interim Statement of such Material Insurance Subsidiary for such interim
financial period, all such statements to be prepared in accordance with SAP consistently applied
throughout the period reflected herein;
(c) within 15 days after being delivered to any Material Insurance Subsidiary subsequent to
the Closing Date, any final Report on Examination issued by the applicable Department or the NAIC
that results in material adjustments to the financial statements referred to in paragraph
(b) above;
(d) to the extent such a statement is required by Law to be prepared, within 10 days following
the delivery to the applicable Department, a copy of each “Statement of Actuarial Opinion” and
“Management Discussion and Analysis” for a Material Insurance Subsidiary which is provided to the
applicable Department as to the adequacy of loss reserves of such Material Insurance Subsidiary,
such opinion to be in the format prescribed by the insurance code of the state of domicile of such
Material Insurance Subsidiary; and
(e) promptly after the Borrower’s receipt thereof, subject to any restrictions imposed by such
independent accountants, copies of any management letters submitted to the
55
board of directors (or the audit committee of the board of directors) of the Borrower by
independent accountants in connection with the annual audit of the Borrower or any of its
Subsidiaries.
6.2. Certificates; Other Information. Furnish to the Administrative Agent (either
electronically or with sufficient copies for distribution by the Administrative Agent to each
Lender) or, in the case of clause (d), to the relevant Lender:
(a) within 5 Business Days after the delivery of the audited financial statements referred to
in Section 6.1(a)(i), a certificate of the independent certified public accounting firm
reporting on such financial statements stating that in making the examination necessary therefor no
knowledge was obtained of any Default or Event of Default (it being understood that (i) such
certificate shall only be required if delivery by such independent certified public accounting firm
of such a certificate is not prohibited by its policies and (ii) any such certificate may be
limited in scope and qualified in accordance with customary practices of the accounting
profession), except as specified in such certificate;
(b) within 5 Business Days after the deadline for the delivery of any financial statements
pursuant to Section 6.1(a), (i) a certificate of a Responsible Officer of the Borrower
stating that such Responsible Officer has obtained no knowledge of any continuing Default or Event
of Default except as specified in such certificate and (ii) a Compliance Certificate containing all
information and calculations necessary for determining compliance by the Borrower with Section
7.1 as of the last day of the fiscal quarter or fiscal year of the Borrower;
(c) within 10 days after the same are filed with the SEC (unless posted on the SEC’s website
at www.sec.gov or any replacement website), all reports and filings on Forms 10-K, 10-Q and 8-K
that the Borrower may make to, or file with, the SEC, including any request of an extension of time
for the filing of any such reports; and
(d) promptly, such additional financial and other information as the Administrative Agent or
any Lender may from time to time reasonably request.
(e) The Borrower hereby acknowledges that (a) unless otherwise directed by the Borrower, the
Administrative Agent and/or the Arranger will make available to the Lenders and the Issuing Bank
materials and/or information provided by or on behalf of the Borrower hereunder (collectively,
“Borrower Materials”) by posting the Borrower Materials on IntraLinks or another similar
electronic system (the “Platform”), subject to confidentiality undertakings reasonably
acceptable to the Borrower and the Arranger, and (b) certain of the Lenders may be “public-side”
Lenders (i.e., Lenders that do not wish to receive material non-public information with respect to
the Borrower or its securities) (each, a “Public Lender”). The Borrower hereby agrees that
(w) all Borrower Materials that are to be made available to Public Lenders shall be clearly and
conspicuously marked “PUBLIC” which, at a minimum, shall mean that the word “PUBLIC” shall appear
prominently on the first page thereof; (x) by marking Borrower Materials “PUBLIC,” the Borrower
shall be deemed to have authorized the Administrative Agent, the Arranger, the Issuing Bank and the
Lenders to treat such Borrower Materials as either publicly available information or not material
information (although it may be sensitive and proprietary) with respect to the Borrower or its
securities for purposes of United States Federal
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and state securities laws; (y) all Borrower Materials marked “PUBLIC” are permitted to be made
available through a portion of the Platform designated “Public Investor;” and (z) the
Administrative Agent and the Arranger shall be entitled to treat any Borrower Materials that are
not marked “PUBLIC” as being suitable only for posting on a portion of the Platform not designated
“Public Investor.” Notwithstanding any of the foregoing, if the Borrower also delivers any
materials and/or information pursuant to this Section 6.2(e) in paper format to the
Administrative Agent, such paper materials shall be deemed to be Borrower Materials for all
purposes. Nothing in this Section 6.2(e) shall limit the obligations of the Administrative
Agent and the Lenders under Section 10.16.
6.3. Payment of Obligations. Pay, discharge or otherwise satisfy at or before
maturity or before they become delinquent, as the case may be, all its material obligations of
whatever nature (other than Indebtedness), except where the amount or validity thereof is currently
being contested in good faith by appropriate proceedings and reserves in conformity with GAAP with
respect thereto have been provided on the books of the Borrower or its Subsidiaries, as the case
may be; provided, that the Borrower may, in the ordinary course of business, extend
payments on those payables if beneficial to the operation of their businesses.
6.4. Conduct of Business and Maintenance of Existence, etc. (a) Except as otherwise
would not be a Fundamental Change (i) with respect to each Subsidiary of the Borrower, preserve,
renew and keep in full force and effect its corporate existence and (ii) with respect to the
Borrower and each of its Subsidiaries, take all reasonable action to maintain all licenses,
permits, rights, privileges and franchises necessary or desirable in the normal conduct of its
business, except, in the case of clause (i) above and clause (ii) above, to the
extent that failure to do so could not reasonably be expected to have a Material Adverse Effect;
and (b) comply with all Contractual Obligations (other than in respect of Indebtedness) and
Requirements of Law, except to the extent that failure to comply therewith could not, in the
aggregate, reasonably be expected to have a Material Adverse Effect.
6.5. Maintenance of Property; Insurance. (a) Keep all Property and systems useful
and necessary in its business in good working order and condition, ordinary wear and tear excepted
and (b) maintain with financially sound and reputable insurance companies (other than with the
Borrower or its Subsidiaries) insurance on all its Property in at least such amounts and against at
least such risks (but including in any event public liability, product liability and business
interruption) as are usually insured against in the same general area by companies engaged in the
same or a similar business (it being understood that, to the extent consistent with prudent
business practices of Persons carrying on a similar business in a similar location, a program of
self-insurance for first and other loss layers may be utilized).
6.6. Inspection of Property; Books and Records; Discussions. (a) Keep proper books
of records and account in which full, true and correct entries in conformity with GAAP(or SAP as
applicable) and all Requirements of Law shall be made of all material dealings and transactions in
relation to its business and activities and (b) upon reasonable prior notice, permit
representatives of the Administrative Agent (who may be accompanied by representatives of other
Lenders) and, during the continuance of an Event of Default, any Lender to (x) visit and inspect
any of its properties, (y) during the continuance of an Event of Default, conduct reasonable
examinations of (and, with the consent of the Borrower, such consent not to be
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unreasonably withheld, make abstracts from) any of its books and records at any reasonable
time and as often as may reasonably be requested and (z) discuss the business, operations,
properties and financial and other condition of the Borrower with officers and employees of the
Borrower. It is understood that (i) any information obtained by the Administrative Agent or any
Lender in any visit or inspection pursuant to this Section 6.6 shall be subject to the
confidentiality requirements of Section 10.16, (ii) the Borrower may impose, with respect
to any Lender or any Affiliate of any Lender reasonably deemed by the Borrower to be engaged
significantly in a business which is directly competitive with any material business of the
Borrower and its Subsidiaries, reasonable restrictions on access to proprietary information of the
Borrower and its Subsidiaries and (iii) the Lenders will coordinate their visits through the
Administrative Agent with a view to preventing the visits provided for by this Section 6.6
from becoming unreasonably burdensome to the Borrower and its Subsidiaries.
6.7. Notices. Give notice to the Administrative Agent (it being agreed that the
Administrative Agent shall, upon receipt of such notice, notify each Lender thereof) of the
following within the time periods specified:
(a) Promptly after any Responsible Officer of the Borrower obtains knowledge thereof, the
occurrence of any Default or Event of Default;
(b) Within five days after any Responsible Officer of the Borrower obtains knowledge thereof,
the occurrence of:
(i) any default or event of default under any Contractual Obligation
(other than in respect of Indebtedness) of the Borrower or any of its
Subsidiaries or any litigation, investigation or proceeding which may exist at
any time between the Borrower or any of its Subsidiaries and any Governmental
Authority, that in either case, if not cured or if adversely determined, as
the case may be, could reasonably be expected to have a Material Adverse
Effect;
(ii) (A) any litigation or proceeding affecting the Borrower or any of
its Subsidiaries (other than claims-related litigation involving an Insurance
Subsidiary) in which (x) the amount involved (and not covered by insurance) is
$50,000,000 or more or (y) in which injunctive or similar relief is sought
that could reasonably be expected to have a Material Adverse Effect and (B)
any claims-related litigation affecting any Insurance Subsidiary which could
reasonably be expected to have a Material Adverse Effect; and
(iii) of any announcement by Moody’s or S&P of any change in a Debt
Rating that changes the Applicable Margin.
(c) As soon as possible and, in any event, within 30 days after a Responsible Officer of the
Borrower obtains knowledge thereof: (A) the occurrence of any Reportable Event with respect to any
Plan, a failure to make any required contribution to a Plan, the creation of any Lien in favor of
the PBGC or a Plan or any withdrawal from, or the termination, Reorganization
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or Insolvency of, any Multiemployer Plan or (B) the institution of proceedings or the taking
of any other action by the PBGC or the Borrower or any Commonly Controlled Entity or any
Multiemployer Plan with respect to the withdrawal from, or the termination, Reorganization or
Insolvency of, any Plan.
Each notice pursuant to this Section 6.7 shall be accompanied by a statement of a
Responsible Officer on behalf of the Borrower setting forth details of the occurrence or such
default referred to therein and stating what action the Borrower or the relevant Subsidiary
proposes to take with respect thereto.
6.8. Taxes. Pay, discharge, or otherwise satisfy before the same shall become
overdue, all taxes, assessments and other governmental charges imposed upon it and its real estate,
sales and activities, or any part thereof, or upon the income or profits therefrom, other than
where failure to pay such taxes could not reasonably be expected to result in a Material Adverse
Effect; provided that any such tax, assessment, charge, levy or claim need not be paid if
the validity or amount thereof shall currently be contested in good faith by appropriate
proceedings and reserves in conformity with SAP or GAAP, as applicable, have been provided on the
books of the Borrower and its Subsidiaries, as the case may be.
6.9. Use of Proceeds. Use the proceeds of the Loans and the Letters of Credit solely
for the purposes set forth in Section 5.12.
6.10. Further Assurances. The Borrower will, and will cause each of its Subsidiaries
to, cooperate with the Lenders and the Administrative Agent and execute such further instruments
and documents as the Lenders or the Administrative Agent shall reasonably request to give effect to
the transactions contemplated by this Agreement and the other Loan Documents.
7. NEGATIVE COVENANTS
The Borrower hereby agrees that, from and after the Closing Date and so long as the
Commitments remain in effect, any Letter of Credit remains outstanding, there exist any unpaid
Reimbursement Obligations or any principal or interest on any Loan or any fee payable hereunder is
owing to any Lender or the Administrative Agent hereunder:
7.1. Financial Condition Covenants.
(a) Authorized Control Level Risk-Based Capital of Material Insurance Subsidiaries.
The Borrower will cause each of its Material Insurance Subsidiaries to maintain a ratio of (x)
“Total Adjusted Capital” to (y) “Company Action Level Risk-Based Capital” of at least 200%”, in
each case, as determined at the end of each fiscal year and as each such term is defined from time
to time by the rules and regulations of the NAIC.
(b) Maintenance of Total Consolidated Debt to Total Consolidated Capitalization Ratio.
The Borrower shall not permit its Total Consolidated Debt to Total Consolidated Capitalization
Ratio, as at the end of any fiscal quarter, commencing with the first fiscal quarter ending after
the Closing Date, to exceed thirty-seven and one-half percent (37.5%).
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7.2. Limitation on Indebtedness. (a) The Borrower will not permit any of its
Subsidiaries to create, incur or assume or suffer to exist any Indebtedness, except:
(i) Indebtedness outstanding as of the Closing Date and any refinancings,
refundings, renewals or extensions thereof (without any increase in the
principal amount thereof, other than by the amount of any necessary
pre-payment premiums, unpaid accrued interest and other costs of refinancing,
or any shortening of the final maturity of any principal amount thereof to a
date prior to the Revolving Credit Termination Date);
(ii) Indebtedness of any Insurance Subsidiary incurred or issued in the
ordinary course of its business or in securing insurance-related obligations
(that do not constitute Indebtedness) of such Insurance Subsidiary and letters
of credit, bank guarantees, surety bonds or similar instruments issued for the
account of any Insurance Subsidiary in the ordinary course of its business or
in securing insurance-related obligations (that do not constitute
Indebtedness) of such Insurance Subsidiary;
(iii) Indebtedness in respect of letters of credit, bank guarantees,
surety and appeal bonds, or performance bonds or other obligations of a like
nature arising in the ordinary course of business and not for capital raising
purposes and issued for the account of any Non-Regulated Operating Subsidiary;
(iv) short-term Indebtedness (i.e. with a maturity of less than one year
when issued, provided that such Indebtedness may include an option to extend
for up to an additional one year period) of any Insurance Subsidiary incurred
to provide short-term liquidity to facilitate claims payment in the event of
catastrophe;
(v) Indebtedness of a Subsidiary acquired after the Closing Date or a
corporation merged into or consolidated with a Subsidiary after the Closing
Date and Indebtedness assumed in connection with the acquisition of assets,
which Indebtedness, in each case, exists at the time of such acquisition,
merger or consolidation and is not created in contemplation of such event, as
well as any refinancings, refunds, renewals or extensions of such Indebtedness
(without increase in the principal amount thereof other than by the amount of
any necessary pre-payment premiums, unpaid accrued interest and other costs of
refinancing);
(vi) Indebtedness owing or issued by a Subsidiary to any other Subsidiary
or to the Borrower;
(vii) Guarantee Obligations made by a Subsidiary in respect of
obligations of another Subsidiary;
(viii) Indebtedness under the Loan Documents;
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(ix) Indebtedness represented by Qualified Securities, Trust Preferred
Securities or Mandatory Convertible Securities (except to the extent such
Indebtedness is included in the calculation of Total Consolidated Debt);
(x) Indebtedness of any mutual fund Subsidiary incurred to provide
short-term (i.e. not anticipated to be outstanding for more than one year when
incurred) liquidity to facilitate redemption payments by such mutual fund
Subsidiary; and
(xi) other Indebtedness of such Subsidiaries, provided that at
the time such Indebtedness is incurred or issued, the aggregate principal
amount of such Indebtedness when added to all other Indebtedness incurred or
issued pursuant to this clause (xi) and then outstanding, does not
exceed 15% of the Consolidated Net Worth of the Borrower.
7.3. Limitation on Liens. The Borrower will not, and will not permit any of its
Subsidiaries to, create, incur, assume or suffer to exist (a) any Lien upon any stock or
indebtedness of any Subsidiary, whether owned on the date of this Agreement or hereafter acquired,
to secure any Debt of the Borrower or any of its Subsidiaries or any other Person (other than the
obligations hereunder) or (b) any Lien upon any other Property of the Borrower or its Subsidiaries,
whether owned or leased on the date of this Agreement, or thereafter acquired, to secure any Debt
of the Borrower or any of its Subsidiaries or any other Person (other than the obligations
hereunder), except:
(i) (x) any Lien existing on the date of this Agreement or (y) any Lien
upon stock or Indebtedness or other Property of any Person existing at the
time such Person becomes a Subsidiary or existing upon stock or Indebtedness
of a Subsidiary or any other Property at the time of acquisition of such stock
or Indebtedness or other Property (provided that such Lien was not
created in connection with the acquisition of such Person or such Property),
and any extension, renewal or replacement (or successive extensions, renewals
or replacements) in whole or in part of any such Lien in clauses (x)
or (y) above; provided, however, that the principal
amount of Debt secured by such Lien shall not exceed the principal amount of
Debt so secured at the time of such extension, renewal or replacement; and
provided, further, that such Lien shall be limited to all or
such part of the stock or Indebtedness or other Property which secured the
Lien so extended, renewed or replaced;
(ii) any Permitted Liens; and
(iii) any Lien upon any Property if the aggregate amount of all Debt then
outstanding secured by such Lien and all other Liens permitted pursuant to
this clause (iii) does not exceed 15% of the Consolidated Net Worth of
the Borrower as shown on the audited consolidated balance sheet contained in
the latest annual report to stockholders of the Borrower;
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provided that Debt secured by Liens permitted by clauses
(i) and (ii) shall not be included in the amount of such secured
Debt.
7.4. Limitation on Changes in Fiscal Periods. The Borrower shall not permit its
fiscal year to end on a day other than December 31 or change its method of determining fiscal
quarters.
7.5. Limitation on Lines of Business. The Borrower shall not engage to any extent
that is material for the Borrower and its Subsidiaries, taken as a whole, in any business, either
directly or through any Subsidiary, other than a Principal Business.
8. EVENTS OF DEFAULT
8.1. Events of Default. If any of the following events shall occur and be continuing:
(a) The Borrower shall fail to pay any principal of any Loan made to the Borrower or
Reimbursement Obligation owing by the Borrower when due in accordance with the terms hereof; or the
Borrower shall fail to pay any interest on any Loan made to the Borrower or Reimbursement
Obligation owing to the Borrower, or any other amount payable by the Borrower hereunder or under
any other Loan Document, within three Business Days after any such interest or other amount becomes
due in accordance with the terms hereof; or
(b) The Borrower shall default in the observance or performance of any agreement contained in
Section 6.7(a) or Section 7; or
(c) (i) The Borrower or any of the Borrower’s Material Insurance Subsidiaries shall
voluntarily commence any case, proceeding or other action (A) under any Debtor Relief Law, (B)
seeking appointment of a receiver, trustee, custodian, conservator or other similar official for it
or for all or any substantial part of its assets, or the Borrower or any of the Borrower’s Material
Insurance Subsidiaries shall make a general assignment for the benefit of its creditors; or (ii)
there shall be commenced against the Borrower or any of the Borrower’s Material Insurance
Subsidiaries any case, proceeding or other action under any Debtor Relief Law that (A) results in
the entry of an order for relief or any such adjudication or appointment or (B) remains
undismissed, undischarged or unbonded for a period of 60 days; or (iii) the Borrower or any of the
Borrower’s Material Insurance Subsidiaries shall take any corporate action to authorize or effect
any of the acts set forth in clause (i), or (ii), above; or (iv) the
Borrower or any of the Borrower’s Material Insurance Subsidiaries shall generally not, or shall be
unable to, or shall admit in writing its inability to, pay its debts as they become due; or
(d) A Change of Control; or
(e) A Fundamental Change; or
(f) Any representation or warranty made or deemed made by the Borrower herein or in any other
Loan Document or that is contained in any certificate, document or financial or other statement
furnished by it at any time under or in connection with this
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Agreement or any such other Loan Document shall prove to have been inaccurate in any material
respect on or as of the date made or deemed made or furnished; or
(g) The Borrower shall default in the observance or performance of any other agreement,
covenant, term or condition contained in this Agreement or any other Loan Document (not specified
in Sections 8.1(a), 8.1(b) or 8.1(f)); or
(h) The Borrower or any of its Subsidiaries shall (i) default in making any payment of any
principal of any Indebtedness (including, without limitation, any Guarantee Obligation, but
excluding the Loans and Reimbursement Obligations) on the scheduled or original due date with
respect thereto (after giving effect to any applicable grace periods); or (ii) default in making
any payment of any interest on any such Indebtedness beyond the period of grace, if any, provided
in the instrument or agreement under which such Indebtedness was created; or (iii) default in the
observance or performance of any other agreement or condition relating to any such Indebtedness or
contained in any instrument or agreement evidencing, securing or relating thereto, the effect of
which default is to cause, or to permit the holder or beneficiary of such Indebtedness (or a
trustee or agent on behalf of such holder or beneficiary) to cause, with the giving of notice if
required, such Indebtedness to become due prior to its stated maturity or to become subject to a
mandatory offer to purchase by the obligor thereunder as a result of the occurrence of such default
thereunder or (in the case of any such Indebtedness constituting a Guarantee Obligation) to become
payable; provided, that a default described in clause (i), (ii) or
(iii) of this paragraph (h) shall not at any time constitute an Event of Default
unless, at such time, one or more defaults of the type described in clauses (i),
(ii) and (iii) of this paragraph (h) shall have occurred and be continuing
with respect to Indebtedness the outstanding principal amount of which exceeds in the aggregate
$50,000,000; or
(i) (i) Any Person shall engage in any “prohibited transaction” (as defined in Section 406 of
ERISA or Section 4975 of the Code) involving any Plan, (ii) any “accumulated funding deficiency”
(as defined in Section 302 of ERISA), whether or not waived, shall exist with respect to any Plan
or any Lien in favor of the PBGC or a Plan shall arise on the assets of the Borrower or any
Commonly Controlled Entity, (iii) a Reportable Event shall occur with respect to, or proceedings
shall commence to have a trustee appointed, or a trustee shall be appointed, to administer or to
terminate, any Single Employer Plan, which Reportable Event or commencement of proceedings or
appointment of a trustee is, in the reasonable opinion of the Majority Lenders, likely to result in
the termination of such Plan for purposes of Title IV of ERISA, (iv) any Single Employer Plan shall
terminate for purposes of Title IV of ERISA or, (v) the Borrower or any Commonly Controlled Entity
shall, or in the reasonable opinion of the Majority Lenders is likely to, incur any liability in
connection with a withdrawal from, or the Insolvency or Reorganization of, a Multiemployer Plan and
in each case in clauses (i) through (v) above, such event or condition, together
with all other such events or conditions for which liability to the Borrower is reasonably expected
to occur, if any, could, in the reasonable judgment of the Majority Lenders, reasonably be expected
to have a Material Adverse Effect; or
(j) One or more judgments or decrees shall be entered against the Borrower or any of its
Subsidiaries involving for the Borrower and its Subsidiaries taken as a whole a liability (to the
extent not paid or fully covered by insurance above applicable deductions) of
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$50,000,000 or more, and all such judgments or decrees shall not have been vacated,
discharged, stayed or bonded pending appeal within 45 days from the entry thereof; or
(k) Any License of any Insurance Subsidiary (i) shall be revoked by the Governmental Authority
which issued such License, or any action (administrative or judicial) to revoke such License shall
have been commenced against such Insurance Subsidiary and shall not have been dismissed within
thirty days after the commencement thereof, (ii) shall be suspended by such Governmental Authority
for a period in excess of thirty days or (iii) shall not be reissued or renewed by such
Governmental Authority upon the expiration thereof following application for such reissuance or
renewal of such Insurance Subsidiary, which, in the case of each of clauses (i),
(ii) and (iii) above, could reasonably be expected to have a Material Adverse
Effect.
Notwithstanding the foregoing, in the case of each of paragraphs (f) through (k) of this
Section 8.1, such event shall not constitute an Event of Default unless such event
continues unremedied for a period of 30 days after the Borrower shall have received written notice
of such event from the Administrative Agent.
8.2. Remedies Upon Event of Default. If any Event of Default specified in Section
8.1 occurs and is continuing, then, and in any such event, (a) if such event is an Event of
Default specified in clause (i) or (ii) of Section 8.1(c) above with
respect to the Borrower, automatically the commitment of each Lender to make Loans and any
obligation of the Issuing Lender to make L/C Credit Extensions shall immediately terminate and the
Loans hereunder (with accrued interest thereon) and all other amounts owing under this Agreement
and the other Loan Documents (including, without limitation, all amounts of L/C Obligations,
whether or not the beneficiaries of the then outstanding Letters of Credit shall have presented the
documents required thereunder) shall immediately become due and payable, and (b) if such event is
any other Event of Default specified in Section 8.1, either or both of the following
actions may be taken: (i) with the consent of the Majority Lenders, the Administrative Agent may,
or upon the request of the Majority Lenders, the Administrative Agent shall, by notice to the
Borrower declare the Revolving Credit Commitments and the obligation of the Issuing Lender to issue
Letters of Credit to be terminated forthwith, whereupon the Revolving Credit Commitments and the
L/C Commitment shall immediately terminate; and (ii) with the consent of the Majority Lenders, the
Administrative Agent may, or upon the request of the Majority Lenders, the Administrative Agent
shall, by notice to the Borrower, declare the Loans hereunder (with accrued interest thereon) and
all other amounts owing under this Agreement and the other Loan Documents (including, without
limitation, all amounts of L/C Obligations, whether or not the beneficiaries of the then
outstanding Letters of Credit shall have presented the documents required thereunder) to be due and
payable forthwith, whereupon the same shall immediately become due and payable. In the case of any
Letter of Credit issued for the account of the Borrower with respect to which presentment for honor
shall not have occurred at the time of an acceleration pursuant to this paragraph, the Borrower
shall at such time Cash Collateralize such L/C Obligations in an amount equal to the aggregate then
undrawn and unexpired amount of such Letters of Credit. Such cash collateral shall be applied by
the Administrative Agent to the payment of drafts drawn under such Letters of Credit, and the
unused portion thereof after all such Letters of Credit shall have expired or been fully drawn
upon, if any, shall be applied to repay other obligations of the Borrower hereunder and under the
other Loan Documents. After (a) all such Letters of Credit shall have expired or been fully drawn
upon, all Reimbursement
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Obligations shall have been satisfied and all other obligations of the Borrower hereunder and
under the other Loan Documents shall have been paid in full or (b) all Defaults and Events of
Default hereunder and under the other Loan Document shall have been cured or waived, the balance,
if any, in such cash collateral account shall be returned to the Borrower (or such other Person as
may be lawfully entitled thereto).
9. THE ADMINISTRATIVE AGENT
9.1. Appointment. (a) Each Lender hereby irrevocably appoints, designates and
authorizes the Administrative Agent to take such action on its behalf under the provisions of this
Agreement and each other Loan Document and to exercise such powers and perform such duties as are
expressly delegated to it by the terms of this Agreement or any other Loan Document, together with
such powers as are reasonably incidental thereto. Notwithstanding any provision to the contrary
contained elsewhere herein or in any other Loan Document, the Administrative Agent shall not have
any duties or responsibilities, except those expressly set forth herein, nor shall the
Administrative Agent have or be deemed to have any fiduciary relationship with any Lender or
participant, and no implied covenants, functions, responsibilities, duties, obligations or
liabilities shall be read into this Agreement or any other Loan Document or otherwise exist against
the Administrative Agent. Without limiting the generality of the foregoing sentence, the use of
the term “agent” herein and in the other Loan Documents with reference to the Administrative Agent
is not intended to connote any fiduciary or other implied (or express) obligations arising under
agency doctrine of any applicable Law. Instead, such term is used merely as a matter of market
custom, and is intended to create or reflect only an administrative relationship between
independent contracting parties.
(b) The Issuing Lender shall act on behalf of the Lenders with respect to any Letters of
Credit issued by it and the documents associated therewith, and the Issuing Lender shall have all
of the benefits and immunities (i) provided to the Administrative Agent in this Section 9
with respect to any acts taken or omissions suffered by the Issuing Lender in connection with
Letters of Credit issued by it or proposed to be issued by it and the Applications and agreements
for letters of credit pertaining to such Letters of Credit as fully as if the term “Administrative
Agent” as used in this Section 9 and in the definition of “Agent-Related Person” included
the Issuing Lender with respect to such acts or omissions, and (ii) as additionally provided herein
with respect to the Issuing Lender; provided that nothing in this Agreement shall be
construed to excuse the Issuing Lender from any liability to the Borrower for damages caused by the
gross negligence or willful misconduct of the Issuing Lender or any Agent-Related Person.
9.2. Delegation of Duties. The Administrative Agent may execute any of its duties
under this Agreement or any other Loan Document by or through agents, employees or
attorneys-in-fact and shall be entitled to advice of counsel and other consultants or experts
concerning all matters pertaining to such duties. The Administrative Agent shall not be
responsible for the negligence or misconduct of any agent or attorney-in-fact that it selects in
the absence of gross negligence or willful misconduct.
9.3. Liability of Administrative Agent. No Agent-Related Person shall (a) be liable
for any action taken or omitted to be taken by any of them under or in connection with this
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Agreement or any other Loan Document or the transactions contemplated hereby (except for its
own gross negligence or willful misconduct in connection with its duties expressly set forth
herein), or (b) be responsible in any manner to any Lender or participant for any recital,
statement, representation or warranty made by the Borrower or any officer thereof, contained herein
or in any other Loan Document, or in any certificate, report, statement or other document referred
to or provided for in, or received by the Administrative Agent under or in connection with, this
Agreement or any other Loan Document, or the validity, effectiveness, genuineness, enforceability
or sufficiency of this Agreement or any other Loan Document, or for any failure of the Borrower or
any other party to any Loan Document to perform its obligations hereunder or thereunder. No
Agent-Related Person shall be under any obligation to any Lender or participant to ascertain or to
inquire as to the observance or performance of any of the agreements contained in, or conditions
of, this Agreement or any other Loan Document, or to inspect the properties, books or records of
the Borrower or any Affiliate thereof.
9.4. Reliance by Administrative Agent. (a) The Administrative Agent shall be
entitled to rely, and shall be fully protected in relying, upon any writing, communication,
signature, resolution, representation, notice, consent, certificate, affidavit, letter, telegram,
facsimile, telex or telephone message, electronic mail message, statement or other document or
conversation believed by it to be genuine and correct and to have been signed, sent or made by the
proper Person or Persons, and upon advice and statements of legal counsel (including counsel to the
Borrower), independent accountants and other experts selected by the Administrative Agent. The
Administrative Agent may deem and treat the payee of any Note as the owner thereof for all purposes
unless such Note shall have been transferred in accordance with Section 10.7 and all
actions required by such Section 10.7 in connection with such transfer shall have been
taken. The Administrative Agent shall be fully justified in failing or refusing to take any action
under any Loan Document unless it shall first receive such advice or concurrence of the Majority
Lenders (or, if so specified by this Agreement, all Lenders) as it deems appropriate and, if it so
requests, it shall first be indemnified to its satisfaction by the Lenders against any and all
liability and expense which may be incurred by it by reason of taking or continuing to take any
such action. The Administrative Agent shall in all cases be fully protected in acting, or in
refraining from acting, under this Agreement or any other Loan Document in accordance with a
request or consent of the Majority Lenders (or such greater number of Lenders as may be expressly
required hereby in any instance) and such request and any action taken or failure to act pursuant
thereto shall be binding upon all the Lenders; provided that the Administrative Agent shall
not be required to take any action that, in its opinion or the opinion of its counsel, may expose
the Administrative Agent to liability or that is contrary to any Loan Document or applicable Law.
(b) For purposes of determining compliance with the conditions specified in Section
4.1, each Lender that has signed this Agreement shall be deemed to have consented to, approved
or accepted or to be satisfied with, each document or other matter required thereunder to be
consented to or approved by or acceptable or satisfactory to a Lender unless the Administrative
Agent shall have received notice from such Lender prior to the proposed Closing Date specifying its
objection thereto.
9.5. Notice of Default. The Administrative Agent shall not be deemed to have
knowledge or notice of the occurrence of any Default unless the Administrative Agent shall have
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received written notice from a Lender or the Borrower referring to this Agreement, describing
such Default and stating that such notice is a “notice of default.” The Administrative Agent will
notify the Lenders of its receipt of any such notice. The Administrative Agent shall take such
action with respect to such Default as may be directed by the Majority Lenders in accordance with
Section 8.2; provided, however, that unless and until the Administrative Agent has received
any such direction, the Administrative Agent may (but shall not be obligated to) take such action,
or refrain from taking such action, with respect to such Default as it shall deem advisable or in
the best interest of the Lenders.
9.6. Credit Decision; Disclosure of Information by Administrative Agent. Each Lender
acknowledges that no Agent-Related Person has made any representation or warranty to it, and that
no act by the Administrative Agent hereafter taken, including any consent to and acceptance of any
assignment or review of the affairs of the Borrower or any Affiliate thereof, shall be deemed to
constitute any representation or warranty by any Agent-Related Person to any Lender as to any
matter, including whether Agent-Related Persons have disclosed material information in their
possession. Each Lender represents to the Administrative Agent that it has, independently and
without reliance upon any Agent-Related Person and based on such documents and information as it
has deemed appropriate, made its own appraisal of and investigation into the business, prospects,
operations, property, financial and other condition and creditworthiness of the Borrower and its
Subsidiaries, and all applicable bank or other regulatory Laws relating to the transactions
contemplated hereby, and made its own decision to enter into this Agreement and to extend credit to
the Borrower hereunder. Each Lender also represents that it will, independently and without
reliance upon any Agent-Related Person and based on such documents and information as it shall deem
appropriate at the time, continue to make its own credit analysis, appraisals and decisions in
taking or not taking action under this Agreement and the other Loan Documents, and to make such
investigations as it deems necessary to inform itself as to the business, prospects, operations,
property, financial and other condition and creditworthiness of the Borrower. Except for notices,
reports and other documents expressly required to be furnished to the Lenders by the Administrative
Agent herein, the Administrative Agent shall not have any duty or responsibility to provide any
Lender with any credit or other information concerning the business, prospects, operations,
property, financial and other condition or creditworthiness of the Borrower or any of its
Affiliates which may come into the possession of any Agent-Related Person.
9.7. Indemnification of Administrative Agent. Whether or not the transactions
contemplated hereby are consummated, the Lenders shall indemnify upon demand each Agent-Related
Person (to the extent not reimbursed by or on behalf of the Borrower and without limiting the
obligation of the Borrower), pro rata, and hold harmless each Agent-Related Person from and against
any and all Indemnified Liabilities incurred by it; provided, however, that no
Lender shall be liable for the payment to any Agent-Related Person of any portion of such
Indemnified Liabilities to the extent determined in a final, nonappealable judgment by a court of
competent jurisdiction to have resulted from such Agent-Related Person’s own gross negligence or
willful misconduct, provided, however, that no action taken in accordance with the
directions of the Majority Lenders (or such greater percentage of Lenders as may be required
hereunder) shall be deemed to constitute gross negligence or willful misconduct for purposes of
this Section 9.7. Without limitation of the foregoing, each Lender shall reimburse the
Administrative Agent upon demand for its ratable share of any costs or out-of-pocket expenses
(including
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Attorney Costs) incurred by the Administrative Agent in connection with the preparation,
execution, delivery, administration, modification, amendment or enforcement (whether through
negotiations, legal proceedings or otherwise) of, or legal advice in respect of rights or
responsibilities under, this Agreement, any other Loan Document, or any document contemplated by or
referred to herein, to the extent that the Administrative Agent is not reimbursed for such expenses
by or on behalf of the Borrower. The undertaking in this Section 9.7 shall survive
termination of the Total Revolving Credit Commitments, the payment of all other obligations and the
resignation of the Administrative Agent.
9.8. Administrative Agent in its Individual Capacity. Bank of America, N.A. and its
Affiliates may make loans to, issue letters of credit for the account of, accept deposits from,
acquire equity interests in and generally engage in any kind of banking, trust, financial advisory,
underwriting or other business with the Borrower and its Affiliates as though Bank of America, N.A.
were not the Administrative Agent or the Issuing Lender hereunder and without notice to or consent
of the Lenders. The Lenders acknowledge that, pursuant to such activities, Bank of America, N.A.
or its Affiliates may receive information regarding the Borrower or its Affiliates (including
information that may be subject to confidentiality obligations in favor of the Borrower or such
Affiliate) and acknowledge that the Administrative Agent shall be under no obligation to provide
such information to them. With respect to its Loans, Bank of America, N.A. shall have the same
rights and powers under this Agreement as any other Lender and may exercise such rights and powers
as though it were not the Administrative Agent or the Issuing Lender, and the terms “Lender” and
“Lenders” include Bank of America, N.A. in its individual capacity.
9.9. Successor Administrative Agent. The Administrative Agent may resign as
Administrative Agent upon 30 days’ notice to the Lenders and the Borrower; provided that
any such resignation by Bank of America, N.A. shall also constitute its resignation as Issuing
Lender and Swing Line Lender, so long as a successor Issuing Lender and a successor Swing Line
Lender (each consented to by the Borrower, such consent not to be unreasonably withheld or delayed)
is appointed. If the Administrative Agent resigns under this Agreement, the Majority Lenders shall
appoint from among the Lenders a successor administrative agent for the Lenders, which successor
administrative agent shall be consented to by the Borrower at all times other than during the
continuance of a Specified Event of Default (which consent of the Borrower shall not be
unreasonably withheld or delayed). If no successor administrative agent is appointed prior to the
effective date of the resignation of the Administrative Agent, the Administrative Agent may
appoint, after consulting with the Lenders and the Borrower, a successor administrative agent from
among the Lenders. Upon the acceptance of its appointment as successor administrative agent
hereunder, the Person acting as such successor administrative agent shall succeed to all of the
rights, powers and duties of the retiring Administrative Agent, Issuing Lender and Swing Line
Lender and the respective terms “Administrative Agent,” “Issuing Lender” and “Swing Line Lender”
shall mean such successor administrative agent, Letter of Credit issuer and swing line lender, and
the retiring Administrative Agent’s appointment, powers and duties as Administrative Agent shall be
terminated and the retiring Issuing Lender’s and Swing Line Lender’s rights, powers and duties as
such shall be terminated, without any other or further act or deed on the part of such retiring
Issuing Lender or Swing Line Lender or any other Lender, other than the obligation of the successor
Issuing Lender to issue letters of credit in substitution for the Letters of Credit, if any,
outstanding at the time of such succession or to make other arrangements satisfactory to the
retiring Issuing Lender to
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effectively assume the obligations of the retiring Issuing Lender with respect to such Letters
of Credit. After any retiring Administrative Agent’s resignation hereunder as Administrative
Agent, the provisions of this Section 9 and Sections 10.5 and 10.6 shall
inure to its benefit as to any actions taken or omitted to be taken by it while it was
Administrative Agent under this Agreement. If no successor administrative agent has accepted
appointment as Administrative Agent by the date which is 30 days following a retiring
Administrative Agent’s notice of resignation, the retiring Administrative Agent’s resignation shall
nevertheless thereupon become effective and the Lenders shall perform all of the duties of the
Administrative Agent hereunder until such time, if any, as the Majority Lenders appoint a successor
agent as provided for above.
9.10. Administrative Agent May File Proofs of Claim. In case of the pendency of any
receivership, insolvency, liquidation, bankruptcy, reorganization, arrangement, adjustment,
composition or other judicial proceeding relative to the Borrower, the Administrative Agent
(irrespective of whether the principal of any Loan or L/C Obligation shall then be due and payable
as herein expressed or by declaration or otherwise and irrespective of whether the Administrative
Agent shall have made any demand on the Borrower) shall be entitled and empowered, by intervention
in such proceeding or otherwise:
(a) to file and prove a claim for the whole amount of the principal and interest owing and
unpaid in respect of the Loans, L/C Obligations and all other obligations that are owing and unpaid
and to file such other documents as may be necessary or advisable in order to have the claims of
the Lenders and the Administrative Agent (including any claim for the reasonable compensation,
expenses, disbursements and advances of the Lenders and the Administrative Agent and their
respective agents and counsel and all other amounts due the Lenders and the Administrative Agent
under Sections 2.5, 3.9 and 10.5) allowed in such judicial proceeding; and
(b) to collect and receive any monies or other property payable or deliverable on any such
claims and to distribute the same;
and any custodian, receiver, assignee, trustee, liquidator, sequestrator or other similar
official in any such judicial proceeding is hereby authorized by each Lender to make such payments
to the Administrative Agent and, in the event that the Administrative Agent shall consent to the
making of such payments directly to the Lenders, to pay to the Administrative Agent any amount due
for the reasonable compensation, expenses, disbursements and advances of the Administrative Agent
and its agents and counsel, and any other amounts due the Administrative Agent under Sections
2.5, 3.9 and 10.5.
Nothing contained herein shall be deemed to authorize the Administrative Agent to authorize or
consent to or accept or adopt on behalf of any Lender any plan of reorganization, arrangement,
adjustment or composition affecting the obligations of the Borrower hereunder or under any of the
other Loan Documents or the rights of any Lender or to authorize the Administrative Agent to vote
in respect of the claim of any Lender in any such proceeding.
9.11. Guarantee and Collateral Matters. The Lenders irrevocably authorize the
Administrative Agent, at its option and in its discretion,
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(a) to release any Lien on any property granted to or held by the Administrative Agent under
any Loan Document (i) upon termination of the Total Revolving Credit Commitments and payment in
full of all obligations of the Borrower hereunder or under any of the other Loan Documents (other
than contingent indemnification obligations) and the expiration or termination of all Letters of
Credit, (ii) that is sold or to be sold as part of or in connection with any sale permitted
hereunder or under any other Loan Document, or (iii) subject to Section 10.1, if approved,
authorized or ratified in writing by the Majority Lenders; and
(b) to subordinate any Lien on any property granted to or held by the Administrative Agent
under any Loan Document to the holder of any Lien on such property that is permitted by Section
7.3.
9.12. Other Agents; Arrangers and Managers. None of the Lenders or other Persons
identified on the facing page or signature pages of this Agreement as a “syndication agent,”
“documentation agent,” “co-agent,” “book manager,” “lead manager,” “arranger,” “lead arranger” or
“co-arranger” shall have any right, power, obligation, liability, responsibility or duty under this
Agreement other than, in the case of such Lenders, those applicable to all Lenders as such.
Without limiting the foregoing, none of the Lenders or other Persons so identified shall have or be
deemed to have any fiduciary relationship with any Lender. Each Lender acknowledges that it has
not relied, and will not rely, on any of the Lenders or other Persons so identified in deciding to
enter into this Agreement or in taking or not taking action hereunder.
10. MISCELLANEOUS
10.1. Amendments, Etc. No amendment or waiver of any provision of this Agreement or
any other Loan Document, and no consent to any departure by the Borrower therefrom, shall be
effective unless in writing signed by the Majority Lenders and the Borrower and delivered to the
Administrative Agent, and each such waiver or consent shall be effective only in the specific
instance and for the specific purpose for which given; provided, however, that no
such amendment, waiver or consent shall:
(a) extend the expiration date of or increase the Revolving Credit Commitment of any Lender
(or reinstate any Revolving Credit Commitment terminated pursuant to Section 8.2) without
the written consent of such Lender;
(b) postpone any date fixed by this Agreement or any other Loan Document for any payment
(excluding mandatory prepayments) of principal, interest or fees payable hereunder or under any
other Loan Document without the written consent of each Lender directly affected thereby;
(c) reduce the principal of, or the rate of interest specified herein on, any Loan or L/C
Borrowing, or, subject to clause (v) of the second proviso to this Section 10.1,
any fees or other amounts payable hereunder or under any other Loan Document without the written
consent of each Lender directly affected thereby; provided, however, that only the
consent of the Majority Lenders shall be necessary to amend the definition of “Default Rate” or to
waive any obligation of the Borrower to pay interest or Letter of Credit Fees at the Default Rate;
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(d) change Section 2.14 in a manner that would alter the pro rata sharing of payments
required thereby without the written consent of each Lender directly affected thereby; or
(e) change any provision of this Section 10.1 or the percentage in the definition of
“Majority Lenders” or any other provision hereof specifying the number or percentage of Lenders
required to amend, waive or otherwise modify any rights hereunder or make any determination or
grant any consent hereunder, without the written consent of each Lender;
(f) amend, modify or waive any provision of Section 2.3 or 2.4 without the
written consent of the Swing Line Lender;
(g) amend, modify or waive any provision of Section 3 without the consent of the
Issuing Lender;
(h) amend, modify or waive the provisions of the definition of Interest Period regarding nine
or twelve month Interest Periods for Eurodollar Loans without the consent of each relevant Lender;
or
(i) consent to the assignment or transfer by the Borrower of any of its rights and obligations
under this Agreement and the other Loan Documents;
and, provided further, that (i) no amendment, waiver or consent shall, unless in
writing and signed by the Issuing Lender in addition to the Lenders required above, modify the
rights or duties of the Issuing Lender under this Agreement or any Application relating to any
Letter of Credit issued or to be issued by it; (ii) no amendment, waiver or consent shall, unless
in writing and signed by the Swing Line Lender in addition to the Lenders required above, modify
the rights or duties of the Swing Line Lender under this Agreement; (iii) no amendment, waiver or
consent shall, unless in writing and signed by the Administrative Agent in addition to the Lenders
required above, modify the rights or duties of the Administrative Agent under this Agreement or any
other Loan Document; and (iv) Section 10.7(h) may not be amended, waived or otherwise
modified without the consent of each Granting Lender all or any part of whose Loans are being
funded by an SPC at the time of such amendment, waiver or other modification; and (v) the Fee
Letter may be amended, or rights or privileges thereunder waived, in a writing executed only by the
parties thereto. Notwithstanding anything to the contrary herein, no Defaulting Lender shall have
any right to approve or disapprove any amendment, waiver or consent hereunder, except that the
Revolving Credit Commitment of such Lender may not be increased or extended without the consent of
such Lender.
Any such waiver and any such amendment, supplement or modification shall apply equally to each
of the Lenders and shall be binding upon the Borrower, the Lenders, the Administrative Agent and
all future holders of the Loans. In the case of any waiver, the Borrower, the Lenders and the
Administrative Agent shall be restored to their former position and rights hereunder and under the
other Loan Documents, and any Default or Event of Default waived shall be deemed to be cured and
not continuing; but no such waiver shall extend to any subsequent or other Default or Event of
Default, or impair any right consequent thereon. Any
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such waiver, amendment, supplement or modification shall be effected by a written instrument
signed by the parties required to sign pursuant to the foregoing provisions of this Section
10.1; provided, that delivery of an executed signature page of any such instrument by
facsimile transmission shall be effective as delivery of a manually executed counterpart thereof.
For the avoidance of doubt, this Agreement may be amended (or amended and restated) with the
written consent of the Majority Lenders, the Administrative Agent and the Borrower party to each
relevant Loan Document (x) to add one or more additional credit facilities to this Agreement and to
permit the extensions of credit from time to time outstanding thereunder and the accrued interest
and fees in respect thereof to share ratably in the benefits of this Agreement and the other Loan
Documents with the Loans, the L/C Obligations and the accrued interest and fees in respect thereof
and (y) to include appropriately the Lenders holding such credit facilities in any determination of
the Majority Lenders.
10.2. Notices; Effectiveness; Electronic Communication.
(a) Notices Generally. Except in the case of notices and other communications
expressly permitted to be given by telephone (and except as provided in subsection (b)
below), all notices and other communications provided for herein shall be in writing and shall be
delivered by hand or overnight courier service, mailed by certified or registered mail, sent by
telecopier or by electronic mail as follows, and all notices and other communications expressly
permitted hereunder to be given by telephone shall be made to the applicable telephone number, as
follows:
(i) if to the Borrower, the Administrative Agent, the Issuing Lender or
the Swing Line Lender, to the address, telecopier number, electronic mail
address or telephone number specified for such Person on Schedule
10.2; and
(ii) if to any other Lender, to the address, telecopier number,
electronic mail address or telephone number specified in its Administrative
Questionnaire.
Notices sent by hand or overnight courier service, or mailed by certified or registered mail,
shall be deemed to have been given when received; notices sent by telecopier shall be deemed to
have been given when sent (except that, if not given during normal business hours for the
recipient, shall be deemed to have been given at the opening of business on the next business day
for the recipient). Notices delivered through electronic communications to the extent provided in
subsection (b) below, shall be effective as provided in such subsection (b).
(b) Electronic Communications. Notices and other communications to the Lenders and
the Issuing Lender hereunder may be delivered or furnished by electronic communication (including
e-mail and Internet or intranet websites) pursuant to procedures approved by the Administrative
Agent, provided that the foregoing shall not apply to service of process or to notices to
any Lender or the Issuing Lender pursuant to Section 2. The Administrative Agent or the
Borrower may, in its discretion, agree to accept notices and other communications to it hereunder
by electronic communications pursuant to procedures approved
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by it, provided that approval of such procedures may be limited to particular notices
or communications.
Unless the Administrative Agent otherwise prescribes, (i) notices and other communications sent to
an e-mail address shall be deemed received upon the sender’s receipt of an acknowledgement from the
intended recipient (such as by the “return receipt requested” function, as available, return e-mail
or other written acknowledgement), provided that if such notice or other communication is
not sent during the normal business hours of the recipient, such notice or communication shall be
deemed to have been sent at the opening of business on the next business day for the recipient, and
(ii) notices or communications posted to an Internet or intranet website shall be deemed received
upon the deemed receipt by the intended recipient at its e-mail address as described in the
foregoing clause (i) of notification that such notice or communication is available and
identifying the website address therefor.
(c) The Platform. THE PLATFORM IS PROVIDED “AS IS” AND “AS AVAILABLE.” THE
AGENT-RELATED PERSONS DO NOT WARRANT THE ACCURACY OR COMPLETENESS OF THE BORROWER MATERIALS OR THE
ADEQUACY OF THE PLATFORM, AND EXPRESSLY DISCLAIM LIABILITY FOR ERRORS IN OR OMISSIONS FROM THE
BORROWER MATERIALS. NO WARRANTY OF ANY KIND, EXPRESS, IMPLIED OR STATUTORY, INCLUDING ANY WARRANTY
OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, NON-INFRINGEMENT OF THIRD PARTY RIGHTS OR
FREEDOM FROM VIRUSES OR OTHER CODE DEFECTS, IS MADE BY ANY AGENT-RELATED PERSONS OR THE BORROWER IN
CONNECTION WITH THE BORROWER MATERIALS OR THE PLATFORM. In no event shall the Agent-Related
Persons or the Borrower have any liability to any Agent-Related Person, the Borrower, any Lender,
or the Issuing Lender for losses, claims, damages, liabilities or expenses of any kind (whether in
tort, contract or otherwise) arising out of the Borrower’s or the Administrative Agent’s
transmission of Borrower Materials through the Internet, except to the extent that such losses,
claims, damages, liabilities or expenses are determined by a court of competent jurisdiction by a
final and nonappealable judgment to have resulted from the gross negligence or willful misconduct
of such Agent-Related Persons or the Borrower; provided, however, that in no event
shall any Agent-Related Persons or the Borrower have any liability to any Agent-Related Person, the
Borrower, any Lender, or the Issuing Lender for indirect, special, incidental, consequential or
punitive damages (as opposed to direct or actual damages). Each Lender agrees that the Borrower
shall be responsible only for the Borrower Materials and shall not have any liability (unless
otherwise agreed in writing by the Borrower) for any other materials made available to the Lenders
and shall not have any liability for any errors or omissions other than errors or omissions in the
materials delivered to the Administrative Agent by the Borrower. Nothing in this Section
10.2(c) shall limit the obligation of the Administrative Agent and the Lenders under
Section 10.16.
(d) Change of Address, Etc. The Borrower, the Administrative Agent, the Issuing
Lender and the Swing Line Lender may change its address, telecopier or telephone number for notices
and other communications hereunder by notice to the other parties hereto. Each other Lender may
change its address, telecopier or telephone number for notices and other communications hereunder
by notice to the Borrower, the Administrative Agent, the Issuing Lender and the Swing Line Lender.
In addition, each Lender agrees to notify the Administrative
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Agent from time to time to ensure that the Administrative Agent has on record (i) an effective
address, contact name, telephone number, telecopier number and electronic mail address to which
notices and other communications may be sent and (ii) accurate wire instructions for such Lender.
(e) Reliance by Administrative Agent, Issuing Lender and Lenders. The Administrative
Agent, the Issuing Lender and the Lenders shall be entitled to rely and act upon any notices
(including telephonic and written Borrowing Requests and notices of Swing Line Loans) purportedly
given by or on behalf of the Borrower; provided that the foregoing shall not apply
to losses, costs, expenses and liabilities caused by the gross negligence or willful misconduct of
the relevant Lender or any Agent-Related Person even if (i) such notices were not made in a manner
specified herein, were incomplete or were not preceded or followed by any other form of notice
specified herein, or (ii) the terms thereof, as understood by the recipient, varied from any
confirmation thereof. The Borrower shall indemnify the Administrative Agent, the Issuing Lender,
each Lender and the Agent-Related Persons from all losses, costs, expenses and liabilities
resulting from the reliance by such Person on each notice purportedly given by or on behalf of the
Borrower; provided that the foregoing shall not apply to losses, costs, expenses
and liabilities caused by the gross negligence or willful misconduct of the relevant Lender or any
Agent-Related Person. All telephonic notices to and other telephonic communications with the
Administrative Agent may be recorded by the Administrative Agent, and each of the parties hereto
hereby consents to such recording.
(f) Effectiveness of Facsimile Documents and Signatures. Loan Documents may be
transmitted and/or signed by facsimile. The effectiveness of any such documents and signatures
shall, subject to applicable Law, have the same force and effect as manually-signed originals and
shall be binding on the Borrower, the Administrative Agent and the Lenders. The Administrative
Agent may also require that any such documents and signatures be confirmed by a manually-signed
original thereof; provided, however, that the failure to request or deliver the
same shall not limit the effectiveness of any facsimile document or signature.
10.3. No Waiver; Cumulative Remedies. No failure to exercise and no delay in
exercising, on the part of the Administrative Agent or any Lender, any right, remedy, power or
privilege hereunder or under the other Loan Documents shall operate as a waiver thereof; nor shall
any single or partial exercise of any right, remedy, power or privilege hereunder preclude any
other or further exercise thereof or the exercise of any other right, remedy, power or privilege.
The rights, remedies, powers and privileges herein provided are cumulative and not exclusive of any
rights, remedies, powers and privileges provided by Law.
10.4. Survival of Representations and Warranties. All representations and warranties
made hereunder and in any other Loan Document or other document delivered pursuant hereto or
thereto or in connection herewith or therewith shall survive the execution and delivery hereof and
thereof. Such representations and warranties have been or will be relied upon by the
Administrative Agent and each Lender, regardless of any investigation made by the Administrative
Agent or any Lender or on their behalf and notwithstanding that the Administrative Agent or any
Lender may have had notice or knowledge of any Default at the time of any extension of credit, and
shall continue in full force and effect as long as any Loan or
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any other obligation hereunder shall remain unpaid or unsatisfied or any Letter of Credit
shall remain outstanding.
10.5. Attorney Costs and Expenses. The Borrower agrees (a) to pay or reimburse the
Administrative Agent and the Arranger for all reasonable out-of-pocket costs and expenses incurred
in connection with the development, preparation, negotiation and execution of this Agreement and
the other Loan Documents and any amendment, waiver, consent or other modification of the provisions
hereof and thereof (whether or not the transactions contemplated hereby or thereby are
consummated), and the consummation and administration of the transactions contemplated hereby and
thereby, including all Attorney Costs, and (b) to pay or reimburse the Administrative Agent and
each Lender for all reasonable out-of-pocket costs and expenses (which may include, to the extent
reasonably incurred, all search, filing, recording, title insurance and appraisal charges and fees
and taxes related thereto, and other out-of-pocket expenses incurred by the Administrative Agent
and the cost of independent public accountants and other outside experts) incurred in connection
with the enforcement, attempted enforcement, or preservation of any rights or remedies under this
Agreement or the other Loan Documents (including all such costs and expenses incurred during any
“workout” or restructuring in respect of the obligations of the Borrower hereunder or under any of
the other Loan Documents and during any legal proceeding, including any proceeding under any Debtor
Relief Law), including all Attorney Costs. All amounts due under this Section 10.5 shall
be payable not later than 30 days following written demand. The agreements in this Section
10.5 shall survive the termination of the Total Revolving Credit Commitments and repayment of
all other obligations.
10.6. Indemnification. (a) Whether or not the transactions contemplated hereby are
consummated, the Borrower shall indemnify and hold harmless each Agent-Related Person, each
Arranger, each Lender and their respective Affiliates, directors, officers, employees, counsel,
agents, shareholders and attorneys-in-fact (collectively the “Indemnitees”) from and
against any and all liabilities, obligations, losses, damages, penalties, claims, demands, actions,
judgments, suits, settlement payments and causes of action of any kind or nature whatsoever and
reasonable related out-of-pocket costs and expenses which may at any time be imposed on, incurred,
suffered, sustained, required to be paid by or asserted against any such Indemnitee in any way
relating to or arising out of or in connection with (a) the execution, delivery, enforcement,
performance or administration of any Loan Document or any other agreement, letter or instrument
delivered in connection with the transactions contemplated thereby or the consummation of the
transactions contemplated thereby, (b) any Revolving Credit Commitment, Loan or Letter of Credit or
the use or proposed use of the proceeds therefrom (including any refusal by the Issuing Lender to
honor a demand for payment under a Letter of Credit if the documents presented in connection with
such demand do not strictly comply with the terms of such Letter of Credit), (c) any actual or
alleged presence or release of Hazardous Materials on or from any property currently or formerly
owned or operated by the Borrower or any Subsidiary, or any Environmental Liability related in any
way to the Borrower or any of its Subsidiaries, or (d) any actual or prospective claim, litigation,
investigation or proceeding relating to any of the foregoing, whether based on contract, tort or
any other theory (including any investigation of, preparation for, or defense of any pending or
threatened claim, investigation, litigation or proceeding) and regardless of whether any Indemnitee
is a party thereto (all the foregoing, collectively, the “Indemnified Liabilities”), in all
cases, whether or not caused by or arising, in whole or in part, out of the negligence of the
Indemnitee; provided that such indemnity shall not,
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as to any Indemnitee, be available to the extent that such liabilities, obligations, losses,
damages, penalties, claims, demands, actions, judgments, suits, settlement payments, causes of
action or costs or expenses are determined by a court of competent jurisdiction by final and
nonappealable judgment to have resulted from the gross negligence or willful misconduct of such
Indemnitee. In all such litigation, or the preparation therefor, the Indemnitees shall be entitled
to select counsel to the Indemnitees. To the extent reasonably practicable and not disadvantageous
to any Indemnitee (as reasonably determined by the relevant Indemnitee), it is anticipated that a
single counsel selected by the affected Lenders will be used. No Indemnitee shall be liable to the
Borrower for any damages arising from the use by unintended recipients of any information or other
materials distributed to such unintended recipients by such Indemnitee through telecommunications,
electronic or other information transmission systems in connection with this Agreement or the other
Loan Documents or the transactions contemplated hereby or thereby, and, to the fullest extent
permitted by applicable Law, the Borrower shall not assert, and hereby waives, any claim against
any Indemnitee, on any theory of liability, for special, indirect, consequential or punitive
damages (as opposed to direct or actual damages) arising out of, in connection with, or as a result
of, this Agreement, any other Loan Document or any agreement or instrument contemplated hereby, the
transactions contemplated hereby or thereby, any Loan or Letter of Credit or the use of the
proceeds thereof (whether before or after the Closing Date); provided that this sentence
shall not, as to any Indemnitee, apply to the extent such Indemnitee is found by a final
non-appealable judgment of a court of competent jurisdiction to have acted with willful misconduct
or gross negligence. All amounts due under this Section 10.6 shall be payable not later
than 30 days following written demand. The agreements in this Section 10.6 shall survive
the resignation of the Administrative Agent, the replacement of any Lender, the termination of the
Total Revolving Credit Commitments and the repayment, satisfaction or discharge of all the other
obligations of the Borrower hereunder.
(b) To the extent that the Borrower for any reason fails to indefeasibly pay any amount
required under Section 10.5 and Section 10.6(a) to be paid by it to the
Administrative Agent (or any sub-agent thereof), the Issuing Lender or any Agent-Related Person of
any of the foregoing, each Lender severally agrees to pay to the Administrative Agent (or any such
sub-agent), the Issuing Lender or such Agent-Related Person, as the case may be, such Lender’s
Revolving Credit Percentage (determined as of the time that the applicable unreimbursed expense or
indemnity payment is sought) of such unpaid amount, provided that the unreimbursed expense
or indemnified loss, claim, damage, liability or related expense, as the case may be, was incurred
by or asserted against the Administrative Agent (or any such sub-agent) or the Issuing Lender in
its capacity as such, or against any Agent-Related Person of any of the foregoing acting for the
Administrative Agent (or any such sub-agent) or Issuing Lender in connection with such capacity.
The obligations of the Lenders under this Section 10.6(b) are subject to the provisions of
Section 2.14(f).
10.7. Successors and Assigns.
(a) Successors and Assigns Generally. The provisions of this Agreement shall be
binding upon and inure to the benefit of the parties hereto and their respective successors and
assigns permitted hereby, except that the Borrower may not assign or otherwise transfer any of
their rights or obligations hereunder without the prior written consent of the Administrative Agent
and each Lender and no Lender may assign or otherwise transfer any of its rights or
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obligations hereunder except (i) to an Eligible Assignee in accordance with the provisions of
Section 10.7(b), (ii) by way of participation in accordance with the provisions of
Section 10.7(d), (iii) by way of pledge or assignment of a security interest subject to the
restrictions of Section 10.7(f), or (iv) to an SPC in accordance with the provisions of
Section 10.7(h) (and any other attempted assignment or transfer by any party hereto shall
be null and void). Nothing in this Agreement, expressed or implied, shall be construed to confer
upon any Person (other than the parties hereto, their respective successors and assigns permitted
hereby, Participants to the extent provided in Section 10.7(d) and, to the extent expressly
contemplated hereby, the Indemnitees) any legal or equitable right, remedy or claim under or by
reason of this Agreement.
(b) Assignments by Lenders. Any Lender may at any time assign to one or more Eligible
Assignees all or a portion of its rights and obligations under this Agreement (including all or a
portion of its Revolving Credit Commitment and the Loans (including for purposes of this
subsection (b), participations in L/C Obligations and in Swing Line Loans) at the time
owing to it); provided that any such assignment shall be subject to the following
conditions:
(i) Minimum Amounts.
(A) in the case of an assignment of the entire remaining amount of the
assigning Lender’s Revolving Credit Commitment and the Loans at the time
owing to it or in the case of an assignment to a Lender, an Affiliate of a
Lender or an Approved Fund, no minimum amount need be assigned; and
(B) in any case not described in subsection (b)(i)(A) of this
Section 10.7, the aggregate amount of the Revolving Credit
Commitment (which for this purpose includes Loans outstanding thereunder)
or, if the Revolving Credit Commitment is not then in effect, the principal
outstanding balance of the Loans of the assigning Lender subject to each
such assignment, determined as of the date the Assignment and Assumption
with respect to such assignment is delivered to the Administrative Agent or,
if “Trade Date” is specified in the Assignment and Assumption, as of the
Trade Date, shall not be less than $5,000,000 unless each of the
Administrative Agent and, so long as no Specified Event of Default has
occurred and is continuing, the Borrower otherwise consents (each such
consent not to be unreasonably withheld or delayed); provided,
however, that concurrent assignments to members of an Assignee Group
and concurrent assignments from members of an Assignee Group to a single
assignee (or to an assignee and members of its Assignee Group) will be
treated as a single assignment for purposes of determining whether such
minimum amount has been met.
(ii) Proportionate Amounts. Each partial assignment shall be
made as an assignment of a proportionate part of all the assigning Lender’s
rights and obligations under this Agreement with respect to the Loans or the
Revolving Credit Commitment assigned, except that this clause (ii)
shall
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not apply to the Swing Line Lender’s rights and obligations in respect of
Swing Line Loans;
(iii) Required Consents. No consent shall be required for any
assignment except to the extent required by subsection (b)(i)(B) of
this Section 10.7 and, provided that:
(A) the consent of the Borrower (such consent not to be unreasonably
withheld or delayed) shall be required unless (1) a Specified Event of
Default has occurred and is continuing at the time of such assignment or (2)
such assignment is to a Lender, an Affiliate of a Lender or an Approved
Fund;
(B) the consent of the Administrative Agent (such consent not to be
unreasonably withheld or delayed) shall be required if such assignment is to
a Person that is not a Lender, an Affiliate of such Lender or an Approved
Fund with respect to such Lender;
(C) the consent of the Issuing Lender (such consent not to be
unreasonably withheld or delayed) shall be required for any assignment that
increases the obligation of the assignee to participate in exposure under
one or more Letters of Credit (whether or not then outstanding); and
(D) the consent of the Swing Line Lender (such consent not to be
unreasonably withheld or delayed) shall be required for any assignment.
(iv) Assignment and Assumption. The parties to each assignment
shall execute and deliver to the Administrative Agent an Assignment and
Assumption, together with a processing and recordation fee in the amount of
$3,500; provided, however, that the Administrative Agent may,
in its sole discretion, elect to waive such processing and recordation fee in
the case of any assignment. The assignee, if it is not a Lender, shall
deliver to the Administrative Agent an Administrative Questionnaire.
(v) No Assignment to Borrower. No such assignment shall be made
to the Borrower or any Affiliates or Subsidiaries of the Borrower.
(vi) No Assignment to Natural Persons. No such assignment shall
be made to a natural person.
(vii) No Assignment to Approved Funds Prior to Specified Event of
Default. No such assignment shall be made to an Approved Fund prior to
the occurrence of a Specified Event of Default. After the occurrence and
during the continuance of any Specified Event of Default, an Approved Fund
shall be an Eligible Assignee hereunder.
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(viii) Creditworthiness of Affiliates and Approved Funds.
Notwithstanding the foregoing, no such assignment shall be made to an
Affiliate of a Lender or to an Approved Fund unless such Affiliate or Approved
Fund shall be a financial institution having a senior unsecured debt rating of
not less than “A-”, or its equivalent, by S&P.
Subject to acceptance and recording thereof by the Administrative Agent pursuant to
Section 10.7(c), from and after the effective date specified in each Assignment and
Assumption, the Eligible Assignee thereunder shall be a party to this Agreement and, to the extent
of the interest assigned by such Assignment and Assumption, have the rights and obligations of a
Lender under this Agreement, and the assigning Lender thereunder shall, to the extent of the
interest assigned by such Assignment and Assumption, be released from its obligations under this
Agreement (and, in the case of an Assignment and Assumption covering all of the assigning Lender’s
rights and obligations under this Agreement, such Lender shall cease to be a party hereto) but
shall continue to be entitled to the benefits of Sections 2.15, 2.16, 2.17,
2.18, 10.5 and 10.6 with respect to facts and circumstances occurring prior
to the effective date of such assignment. Upon request, the Borrower (at its expense) shall
execute and deliver a Note to the assignee Lender and a replacement Note, as applicable, to the
assigning Lender.
(c) Register. The Administrative Agent, acting solely for this purpose as an agent of
the Borrower, shall maintain at the Administrative Agent’s Office a copy of each Assignment and
Assumption delivered to it and a register for the recordation of the names and addresses of the
Lenders, and the Revolving Credit Commitments of, and principal amounts of the Loans and L/C
Obligations owing to, each Lender pursuant to the terms hereof from time to time (the
“Register”). The entries in the Register shall be conclusive, in the absence of manifest
error, and the Borrower, the Administrative Agent and the Lenders may treat each Person whose name
is recorded in the Register pursuant to the terms hereof as a Lender hereunder for all purposes of
this Agreement, notwithstanding notice to the contrary. The Register shall be available for
inspection by the Borrower and any Lender, at any reasonable time and from time to time upon
reasonable prior notice.
(d) Participations. Any Lender may at any time, without the consent of, or notice to,
the Borrower or the Administrative Agent, sell participations to any Person (other than a natural
person or the Borrower or any Affiliates or Subsidiaries of the Borrower) (each, a
“Participant”) in all or a portion of such Lender’s rights and/or obligations under this
Agreement (including all or a portion of its Revolving Credit Commitment and/or the Loans
(including such Lender’s participations in L/C Obligations and/or Swing Line Loans) owing to it);
provided that (i) such Lender’s obligations under this Agreement shall remain unchanged,
(ii) such Lender shall remain solely responsible to the other parties hereto for the performance of
such obligations and (iii) the Borrower, the Administrative Agent, the Lenders and the Issuing
Lender shall continue to deal solely and directly with such Lender in connection with such Lender’s
rights and obligations under this Agreement.
Any agreement or instrument pursuant to which a Lender sells such a participation shall
provide that such Lender shall retain the sole right to enforce this Agreement and to approve any
amendment, modification or waiver of any provision of this Agreement; provided that such
agreement or instrument may provide that such Lender will not, without the consent of the
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Participant, agree to any amendment, waiver or other modification described in the first
proviso to Section 10.1 that directly affects such Participant. Subject to Section
10.7(e), the Borrower agrees that each Participant shall be entitled to the benefits of
Sections 2.15, 2.16 or 2.17 to the same extent as if it were a Lender and
had acquired its interest by assignment pursuant to Section 10.7(b). To the extent
permitted by Law, each Participant also shall be entitled to the benefits of Section 10.8
as though it were a Lender, provided such Participant agrees to be subject to Section
2.14 as though it were a Lender.
(e) Limitations upon Participant Rights. A Participant shall not be entitled to
receive any greater payment under Sections 2.15, 2.16 or 2.17 than the
applicable Lender would have been entitled to receive with respect to the participation sold to
such Participant, unless the sale of the participation to such Participant is made with the
Borrower’s prior written consent. A Participant that would be a Non-U.S. Lender if it were a
Lender shall not be entitled to the benefits of Section 2.16 unless the Borrower is
notified of the participation sold to such Participant and such Participant agrees, for the benefit
of the Borrower, to comply with Sections 2.16(d) and (e) as though it were a
Lender.
(f) Certain Pledges. Notwithstanding anything to the contrary contained herein, any
Lender may, with notice to, but without prior consent of the Borrower and the Administrative Agent,
at any time pledge or assign a security interest in all or any portion of its rights under this
Agreement (including under its Note, if any) to secure obligations of such Lender, including any
pledge or assignment to secure obligations to a Federal Reserve Bank (provided that notice to the
Borrower and the Administrative Agent shall not be required in the case of a pledge or assignment
to secure obligations to a Federal Reserve Bank); provided further that no such pledge or
assignment shall release such Lender from any of its obligations hereunder or substitute, or permit
the substitution of, any such pledgee or assignee for such Lender as a party hereto.
(g) Electronic Execution of Assignments. The words “execution,” “signed,”
“signature,” and words of like import in any Assignment and Assumption shall be deemed to include
electronic signatures or the keeping of records in electronic form, each of which shall be of the
same legal effect, validity or enforceability as a manually executed signature or the use of a
paper-based recordkeeping system, as the case may be, to the extent and as provided for in any
applicable Law, including the Federal Electronic Signatures in Global and National Commerce Act,
the New York State Electronic Signatures and Records Act, or any other similar state laws based on
the Uniform Electronic Transactions Act.
(h) Special Purpose Funding Vehicles. Notwithstanding anything to the contrary
contained herein, any Lender (a “Granting Lender”) may, with notice to, but without prior
consent of the Borrower and the Administrative Agent grant to a special purpose funding vehicle
identified as such in writing from time to time by the Granting Lender to the Administrative Agent
and the Borrower (an “SPC”) the option to provide all or any part of any Loan that such
Granting Lender would otherwise be obligated to make pursuant to this Agreement; provided
that (i) nothing herein shall constitute a commitment by any SPC to fund any Loan, and (ii) if an
SPC elects not to exercise such option or otherwise fails to make all or any part of such Loan, the
Granting Lender shall be obligated to make such Loan pursuant to the terms hereof and, if it fails
to do so, to make such payment to the Administrative Agent as is
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required under Section 2.14(e)(ii). Each party hereto hereby agrees that (i) neither
the grant to any SPC nor the exercise by any SPC of such option shall increase the costs or
expenses or otherwise increase or change the obligations of the Borrower under this Agreement
(including its obligations under Section 2.15), (ii) no SPC shall be liable for any
indemnity or similar payment obligation under this Agreement for which a Lender would be liable,
and (iii) the Granting Lender shall for all purposes, including the approval of any amendment,
waiver or other modification of any provision of any Loan Document, remain the lender of record
hereunder. The making of a Loan by an SPC hereunder shall utilize the Revolving Credit Commitment
of the Granting Lender to the same extent, and as if, such Loan were made by such Granting Lender.
In furtherance of the foregoing, each party hereto hereby agrees (which agreement shall survive the
termination of this Agreement) that, prior to the date that is one year and one day after the
payment in full of all outstanding commercial paper or other senior debt of any SPC, it will not
institute against, or join any other Person in instituting against, such SPC any bankruptcy,
reorganization, arrangement, insolvency, or liquidation proceeding under any Debtor Relief Laws or
any other Laws. Notwithstanding anything to the contrary contained herein, any SPC may (i) with
notice to, but without prior consent of the Borrower and the Administrative Agent and with the
payment of a processing fee in the amount of $3,500 (which processing fee may be waived by the
Administrative Agent in its sole discretion), assign all or any portion of its right to receive
payment with respect to any Loan to the Granting Lender and (ii) disclose on a confidential basis
any non-public information relating to its funding of Loans to any rating agency, commercial paper
dealer or provider of any surety or guarantee or credit or liquidity enhancement to such SPC.
(i) Resignation as Issuing Lender or Swing Line Lender after Assignment.
Notwithstanding anything to the contrary contained herein, if at any time Bank of America, N.A.
assigns all of its Revolving Credit Commitment and Loans pursuant to Section 10.7(b), Bank
of America, N.A. may, (i) upon 30 days’ notice to the Borrower and the Lenders, resign as Issuing
Lender, so long as a successor Issuing Lender (consented to by the Borrower, such consent not to be
unreasonably withheld or delayed) has been appointed and/or (ii) upon 30 days’ notice to the
Borrower, resign as Swing Line Lender, so long as a successor Swing Line Lender (consented to by
the Borrower, such consent not to be unreasonably withheld or delayed) has been appointed. In the
event of any such resignation as Issuing Lender or Swing Line Lender, the Borrower shall be
entitled to appoint from among the Lenders a successor Issuing Lender or Swing Line Lender
hereunder; provided, however, that no failure by the Borrower to appoint any such
successor shall affect the resignation of Bank of America, N.A. as Issuing Lender or Swing Line
Lender, as the case may be. If Bank of America, N.A. resigns as Issuing Lender, it shall retain
all the rights and obligations of the Issuing Lender hereunder with respect to all Letters of
Credit outstanding as of the effective date of its resignation as Issuing Lender and all L/C
Obligations with respect thereto (including the right to require the Lenders to make Base Rate
Loans or fund risk participations in Unreimbursed Amounts pursuant to Section 3.3). If
Bank of America, N.A. resigns as Swing Line Lender, it shall retain all the rights of the Swing
Line Lender provided for hereunder with respect to Swing Line Loans made by it and outstanding as
of the effective date of such resignation, including the right to require the Lenders to make Base
Rate Loans or fund risk participations in outstanding Swing Line Loans pursuant to Section
2.4. Upon the appointment of a successor Issuing Lender and/or Swing Line Lender, (a) such
successor shall succeed to and become vested with all of the rights and obligations of the retiring
Issuing Lender or Swing Line Lender, as the case may be, and (b) the successor Issuing Lender shall
issue letters
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of credit in substitution for the Letters of Credit, if any, outstanding at the time of such
succession or make other arrangements satisfactory to Bank of America, N.A. to effectively assume
the obligations of Bank of America, N.A. with respect to such Letters of Credit.
10.8. Adjustments; Set-off. (a) Except to the extent that this Agreement provides for
a payment to be allocated to a particular Lender, if any Lender (a “Benefited Lender”)
shall at any time receive any payment of all or part of the obligations under the Credit Agreement
or the other Loan Documents, owing to it, or receive any collateral in respect thereof (whether
voluntarily or involuntarily, by set-off, pursuant to events or proceedings of the nature referred
to in Section 8.1(c), or otherwise), in a greater proportion than any such payment to or
collateral received by any other Lender, if any, in respect of such other Lender’s obligations
under the Credit Agreement or the other Loan Documents, such Benefited Lender shall purchase for
cash from the other Lenders a participating interest in such portion of each such other Lender’s
obligations under the Credit Agreement or the other Loan Documents, or shall provide such other
Lenders with the benefits of any such collateral, as shall be necessary to cause such Benefited
Lender to share the excess payment or benefits of such collateral ratably with each of the Lenders;
provided, however, that if all or any portion of such excess payment or benefits is thereafter
recovered from such Benefited Lender, such purchase shall be rescinded, and the purchase price and
benefits returned, to the extent of such recovery, but without interest.
(b) In addition to any rights and remedies of the Lenders provided by Law, each Lender shall
have the right, without prior notice to the Borrower, any such notice being expressly waived by the
Borrower to the extent permitted by applicable Law, upon any amount becoming due and payable by the
Borrower hereunder (whether at the stated maturity, by acceleration or otherwise), to set-off and
appropriate and apply against such amount any and all deposits (general or special, time or demand,
provisional or final), in any currency, and any other credits, indebtedness or claims, in any
currency, in each case whether direct or indirect, absolute or contingent, matured or unmatured, at
any time held or owing by such Lender or any branch or agency thereof to or for the credit or the
account of the Borrower. Each Lender agrees promptly to notify the Borrower, as the case may be,
and the Administrative Agent after any such set-off and application made by such Lender,
provided that the failure to give such notice shall not affect the validity of such set-off
and application.
10.9. Counterparts. This Agreement may be executed by one or more of the parties to
this Agreement on any number of separate counterparts, and all of said counterparts taken together
shall be deemed to constitute one and the same instrument. Delivery of an executed signature page
of this Agreement by facsimile transmission shall be effective as delivery of a manually executed
counterpart hereof. A set of the copies of this Agreement signed by all the parties shall be
lodged with the Borrower and the Administrative Agent.
10.10. Severability. Any provision of this Agreement that is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of
such prohibition or unenforceability without invalidating the remaining provisions hereof, and any
such prohibition or unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
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10.11. Integration. This Agreement, the other Loan Documents and the Fee Letter
represents the entire agreement of the Borrower, the Administrative Agent, the Arranger, the
Syndication Agent and the Lenders with respect to the subject matter hereof and thereof, and there
are no promises, undertakings, representations or warranties by the Arranger, the Administrative
Agent, the Syndication Agent or any Lender relative to subject matter hereof not expressly set
forth or referred to herein, in the other Loan Documents or in the Fee Letter. The Borrower agrees
that its obligations under the Fee Letter shall survive the execution and delivery of this
Agreement.
10.12. GOVERNING LAW. THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES
UNDER THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE
LAW OF THE STATE OF NEW YORK (EXCLUDING THE LAWS APPLICABLE TO CONFLICTS OR CHOICE OF LAW TO THE
EXTENT THAT THE APPLICATION OF THE LAW OF ANOTHER JURISDICTION WOULD BE REQUIRED THEREBY).
10.13. SUBMISSION TO JURISDICTION; WAIVERS. THE BORROWER HEREBY IRREVOCABLY AND
UNCONDITIONALLY:
(a) SUBMITS FOR ITSELF AND ITS PROPERTY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS
AGREEMENT AND THE OTHER LOAN DOCUMENTS TO WHICH IT IS A PARTY, OR FOR RECOGNITION AND ENFORCEMENT
OF ANY JUDGMENT IN RESPECT THEREOF, TO THE NON-EXCLUSIVE GENERAL JURISDICTION OF THE COURTS OF THE
STATE OF NEW YORK, THE COURTS OF THE UNITED STATES OF AMERICA FOR THE SOUTHERN DISTRICT OF NEW
YORK, AND APPELLATE COURTS FROM ANY THEREOF;
(b) CONSENTS THAT ANY SUCH ACTION OR PROCEEDING MAY BE BROUGHT IN SUCH COURTS AND WAIVES ANY
OBJECTION THAT IT MAY NOW OR HEREAFTER HAVE TO THE VENUE OF ANY SUCH ACTION OR PROCEEDING IN ANY
SUCH COURT OR THAT SUCH ACTION OR PROCEEDING WAS BROUGHT IN AN INCONVENIENT COURT AND AGREES NOT TO
PLEAD OR CLAIM THE SAME;
(c) AGREES THAT SERVICE OF PROCESS IN ANY SUCH ACTION OR PROCEEDING MAY BE EFFECTED BY MAILING
A COPY THEREOF BY REGISTERED OR CERTIFIED MAIL (OR ANY SUBSTANTIALLY SIMILAR FORM OF MAIL), POSTAGE
PREPAID, TO THE BORROWER AT ITS ADDRESS SET FORTH IN SECTION 10.2 OR AT SUCH OTHER ADDRESS
OF WHICH THE ADMINISTRATIVE AGENT SHALL HAVE BEEN NOTIFIED PURSUANT THERETO;
(d) AGREES THAT NOTHING HEREIN SHALL AFFECT THE RIGHT TO EFFECT SERVICE OF PROCESS IN ANY
OTHER MANNER PERMITTED BY LAW OR SHALL LIMIT THE RIGHT TO SUE IN ANY OTHER JURISDICTION; AND
(e) WAIVES, TO THE MAXIMUM EXTENT NOT PROHIBITED BY LAW, ANY RIGHT IT MAY HAVE TO CLAIM OR
RECOVER IN ANY LEGAL ACTION
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OR PROCEEDING REFERRED TO IN THIS SECTION 10.13 ANY SPECIAL, EXEMPLARY, PUNITIVE OR
CONSEQUENTIAL DAMAGES.
10.14. WAIVERS OF JURY TRIAL. EACH PARTY TO THIS AGREEMENT HEREBY EXPRESSLY WAIVES
ANY RIGHT TO TRIAL BY JURY OF ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION ARISING UNDER ANY LOAN
DOCUMENT OR IN ANY WAY CONNECTED WITH OR RELATED OR INCIDENTAL TO THE DEALINGS OF THE PARTIES
HERETO OR ANY OF THEM WITH RESPECT TO ANY LOAN DOCUMENT, OR THE TRANSACTIONS RELATED THERETO, IN
EACH CASE WHETHER NOW EXISTING OR HEREAFTER ARISING, AND WHETHER FOUNDED IN CONTRACT OR TORT OR
OTHERWISE; AND EACH PARTY HEREBY AGREES AND CONSENTS THAT ANY SUCH CLAIM, DEMAND, ACTION OR CAUSE
OF ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT A JURY, AND THAT ANY PARTY TO THIS AGREEMENT MAY
FILE AN ORIGINAL COUNTERPART OR A COPY OF THIS SECTION 10.14 WITH ANY COURT AS WRITTEN
EVIDENCE OF THE CONSENT OF THE SIGNATORIES HERETO TO THE WAIVER OF THEIR RIGHT TO TRIAL BY JURY.
10.15. No Advisory or Fiduciary Responsibility. In connection with this Agreement,
the Borrower acknowledges and agrees that: (a) the credit facility provided for hereunder and any
related arranging or other services in connection therewith (including in connection with any
amendment, waiver or other modification hereof or of any other Loan Document) are an arm’s-length
commercial transaction between the Borrower and its Affiliates, on the one hand, and the
Administrative Agent and the Arranger, on the other hand, and the Borrower is capable of evaluating
and understanding and understands and accepts the terms, risks and conditions of the transactions
contemplated hereby and by the other Loan Documents (including any amendment, waiver or other
modification hereof or thereof); (b) in connection with the process leading to such transaction,
the Administrative Agent and the Arranger, each is and has been acting solely as a principal and is
not the financial advisor, agent or fiduciary, for the Borrower or any of its Affiliates,
stockholders, creditors or employees or any other Person; (c) neither the Administrative Agent nor
the Arranger have assumed or will assume an advisory, agency or fiduciary responsibility in favor
of the Borrower with respect to this Agreement or the process leading thereto, including with
respect to any amendment, waiver or other modification hereof or of any other Loan Document
(irrespective of whether the Administrative Agent or the Arranger have advised or is currently
advising the Borrower or any of its Affiliates on other matters) and neither the Administrative
Agent nor the Arranger have any obligation to the Borrower or any of its Affiliates with respect to
this Agreement except those obligations expressly set forth herein and in the other Loan Documents;
(d) the Administrative Agent and the Arranger and their respective Affiliates may be engaged in a
broad range of transactions that involve interests that differ from those of the Borrower and its
Affiliates, and neither the Administrative Agent nor the Arranger have any obligation to disclose
any of such interests by virtue of any advisory, agency or fiduciary relationship; and (e) the
Administrative Agent and the Arranger have not provided and will not provide any legal, accounting,
regulatory or tax advice with respect to this Agreement (including any amendment, waiver or other
modification hereof or of any other Loan Document) and the Borrower has consulted its own legal,
accounting, regulatory and tax advisors to the extent it has deemed appropriate.
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10.16. Confidentiality. Each of the Administrative Agent and the Lenders agrees to
maintain the confidentiality of the Information (as defined below), except that Information may be
disclosed (a) to its Affiliates and to its and its Affiliates’ respective partners, directors,
officers, employees, agents, advisors and representatives (it being understood that the Persons to
whom such disclosure is made will be informed of the confidential nature of such Information and
instructed to keep such Information confidential), (b) to the extent requested by any regulatory
authority purporting to have jurisdiction over it or its Affiliates (including any self-regulatory
authority, such as the NAIC), (c) to the extent required by applicable Laws or by any subpoena or
similar legal process, (d) to any other party hereto, (e) in connection with the exercise of any
remedies hereunder or under any other Loan Document or any action or proceeding relating to this
Agreement or any other Loan Document or the enforcement of rights hereunder or thereunder, (f)
subject to an agreement containing provisions substantially the same as those of this Section
10.16, to (i) any assignee of or Participant in, or any prospective assignee of or Participant
in, any of its rights or obligations under this Agreement or (ii) any actual or prospective
counterparty (or its advisors) to any swap or derivative transaction relating to the Borrower and
its obligations, (g) with the consent of the Borrower or (h) to the extent such Information (x)
becomes publicly available other than as a result of a breach of this Section 10.16 or (y)
becomes available to the Administrative Agent or any Lender on a nonconfidential basis from a
source other than the Borrower, provided that the Administrative Agent or any such Lender, as
applicable, will notify the Borrower as soon as practical in advance of any proposed disclosure
pursuant to clause (c) above, unless such notification shall be prohibited by applicable law or
legal process, so that the Borrower may seek a protective order or other appropriate remedy and the
Administrative Agent or any such Lender, as applicable, will disclose only that portion of the
Information that it is advised by its counsel is legally required or otherwise necessary to
disclose. For purposes of this Section 10.16, “Information” means all information
received from the Borrower or any of its Subsidiaries relating to the Borrower or any Subsidiary or
any of their respective businesses, other than any such information that is available to the
Administrative Agent or any Lender on a nonconfidential basis prior to disclosure by the Borrower
or any Subsidiary, provided that, in the case of information received from the Borrower or
any Subsidiary after the date hereof, such information is clearly identified at the time of
delivery as confidential. Any Person required to maintain the confidentiality of Information as
provided in this Section 10.16 shall be considered to have complied with its obligation to
do so if such Person has exercised the same degree of care to maintain the confidentiality of such
Information as such Person would accord to its own confidential information.
Each of the Administrative Agent, the Lenders and the Issuing Lender acknowledges that (a) the
Information may include material non-public information concerning the Borrower or a Subsidiary
thereof, as the case may be, (b) it has developed compliance procedures regarding the use of
material non-public information and (c) it will handle such material non-public information in
accordance with applicable Law, including Federal and state securities Laws.
10.17. Accounting Changes. In the event that any “Accounting Change” (as defined
below) shall occur and such change results in a change in the method of calculation of financial
covenants, standards or terms in this Agreement, then the Borrower and the Administrative Agent
agree, upon the request of the Borrower or the Administrative Agent, to enter into negotiations in
order to amend such provisions of this Agreement so as to equitably
85
reflect such Accounting Change with the desired result that the criteria for evaluating the
Borrower’s financial condition shall be the same after such Accounting Change as if such Accounting
Change had not been made. Following any such request and until such time as such an amendment
shall have been executed and delivered by the Borrower, the Administrative Agent and the Majority
Lenders, all financial covenants, standards and terms in this Agreement shall continue to be
calculated or construed as if such Accounting Change had not occurred. “Accounting Change” refers
to a change in accounting principles required by the promulgation of any rule, regulation,
pronouncement or opinion by the Financial Accounting Standards Board of the American Institute of
Certified Public Accountants, applicable Insurance Regulators, the NAIC or, if applicable, the SEC.
10.18. USA PATRIOT Act Notice. Each Lender that is subject to the Act (as hereinafter
defined) and the Administrative Agent (for itself and not on behalf of any Lender) hereby notifies
the Borrower that pursuant to the requirements of the USA Patriot Act (Title III of Pub. L. 107-56
(signed into law October 26, 2001)) (the “Act”), it is required to obtain, verify and
record information that identifies the Borrower, which information includes the name and address of
the Borrower and other information that will allow such Lender or the Administrative Agent, as
applicable, to identify the Borrower in accordance with the Act.
10.19. Interest Rate Limitation.
(a) Notwithstanding anything to the contrary contained in any Loan Document, if at any time
the rate of interest payable under any Loan Document (the “Stated Rate”) would exceed the
rate of interest permitted to be charged under any applicable Law (the “Maximum Rate”),
then for so long as the Maximum Rate would be so exceeded, the rate of interest payable shall be
equal to the Maximum Rate; provided that if at any time thereafter, the Stated Rate is less
than the Maximum Rate, the Borrower shall, to the extent permitted by applicable Law, continue to
pay interest at the Maximum Rate until such time as the total interest received is equal to the
total interest which would have been received had the Stated Rate been (but for the operation of
this provision) the interest rate payable. Thereafter, the interest rate payable shall be the
Stated Rate unless and until the Stated Rate again would exceed the Maximum Rate, in which event
this provision shall again apply.
(b) In no event shall the total interest received by a Lender exceed the amount which it could
lawfully have received had the interest been calculated for the full term hereof at the Maximum
Rate.
[Remainder of Page Left Intentionally Blank]
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and
delivered by their proper and duly authorized officers as of the day and year first above written.
| The Borrower: | ||||||
| SYMETRA FINANCIAL CORPORATION | ||||||
| By: | ||||||
| Name: | ||||||
| Title: | ||||||
| BANK OF AMERICA, N.A., as | ||||||
| Administrative Agent | ||||||
| By: | ||||||
| Name: | ||||||
| Title: | ||||||
| BANK OF AMERICA, N.A., as | ||||||
| a Lender, Issuing Lender and Swing Line Lender | ||||||
| By: | ||||||
| Name: | ||||||
| Title: | ||||||
| THE BANK OF NEW YORK, as Lender | ||||||
| By: | ||||||
| Name: | ||||||
| Title: | ||||||
| THE BANK OF TOKYO-MITSUBISHI UFJ, LTD. NEW YORK BRANCH, as Lender | ||||||
| By: | ||||||
| Name: | ||||||
| Title: | ||||||
| JPMORGAN CHASE BANK, N.A., as Lender | ||||||
| By: | ||||||
| Name: Lawrence Palumbo | ||||||
| Title: Vice President | ||||||
| U.S. BANK, NATIONAL ASSOCIATION, as Lender | ||||||
| By: | ||||||
| Name: | ||||||
| Title: | ||||||
| WILLIAM STREET COMMITMENT CORPORATION, as Lender | ||||||
| By: | ||||||
| Name: | ||||||
| Title: | ||||||
| LEHMAN COMMERCIAL PAPER INC., as Lender | ||||||
| By: | ||||||
| Name: | ||||||
| Title: | ||||||
| MERRILL LYNCH BANK USA, as Lender | ||||||
| By: | ||||||
| Name: | ||||||
| Title: | ||||||
SCHEDULE 1
Commitment Schedule
| Revolving Credit | Revolving Credit | |||||||
| Lender | Commitment | Commitment Percentage | ||||||
Bank of America, N.A. |
$ | 30,000,000 | 15.000000000 | % | ||||
901 Main Street |
||||||||
Mail Code: TX1-492-64-01 |
||||||||
Dallas, TX 75202 |
||||||||
The Bank of New York |
$ | 27,500,000 | 13.750000000 | % | ||||
Insurance Division |
||||||||
One Wall Street, 17th Floor |
||||||||
New York, NY 10286 |
||||||||
Bank of Tokyo — Mitsubishi UFJ, Ltd. |
$ | 27,500,000 | 13.750000000 | % | ||||
New York Branch |
||||||||
1251 Avenue of the Americas |
||||||||
New York, NY 10020-1104 |
||||||||
JPMorgan Chase Bank, N.A. |
$ | 27,500,000 | 13.750000000 | % | ||||
270 Park Avenue |
||||||||
4th Floor |
||||||||
New York, NY 10017-2014 |
||||||||
U.S. Bank, National Association |
$ | 27,500,000 | 13.750000000 | % | ||||
1420 Fifth Avenue, 10th Floor |
||||||||
Mail Code: PDWA-T10M |
||||||||
Seattle, WA 98101 |
||||||||
William Street Commitment Corporation |
$ | 20,000,000 | 10.000000000 | % | ||||
1 New York Plaza, 48th Floor |
||||||||
New York, NY 10004 |
||||||||
Lehman Commercial Paper Inc. |
$ | 20,000,000 | 10.000000000 | % | ||||
745 7th Avenue, 5th Floor |
||||||||
New York, NY 10019 |
||||||||
Merrill Lynch Bank USA |
$ | 20,000,000 | 10.000000000 | % | ||||
15 W. South Temple St., Suite 300 |
||||||||
Salt Lake City, UT 84101 |
||||||||
Total |
$ | 200,000,000 | 100.000000000 | % | ||||
Schedule 1A to
Symetra Financial Corporation Credit Agreement
Symetra Financial Corporation Credit Agreement
Existing Letters of Credit
None.
Schedule 5.3 to
Symetra Financial Corporation Credit Agreement
Symetra Financial Corporation Credit Agreement
Consents, Authorizations, Filings and Notices
None.
SCHEDULE 10.02
ADMINISTRATIVE AGENT’S OFFICE;
CERTAIN ADDRESSES FOR NOTICES
CERTAIN ADDRESSES FOR NOTICES
BORROWER:
Symetra Financial Corporation.
777 108th Avenue NE
Suite 1200
Bellevue, Washington 98004-5135
Attention: John E. Galaviz
Telephone: 425-256-5181
Telecopier: 425-256-5818
Electronic Mail: John.Galaviz@Symetra.com
U.S. Taxpayer Identification Number (Symetra Financial Corporation): 20-0978027
Symetra Financial Corporation.
777 108th Avenue NE
Suite 1200
Bellevue, Washington 98004-5135
Attention: John E. Galaviz
Telephone: 425-256-5181
Telecopier: 425-256-5818
Electronic Mail: John.Galaviz@Symetra.com
U.S. Taxpayer Identification Number (Symetra Financial Corporation): 20-0978027
with a copy to:
Cravath, Swaine & Moore LLP
Worldwide Plaza
825 Eighth Avenue
New York, NY 10019-7475
Attention: Paul Michalski
Telecopier: 212-474-3700
Worldwide Plaza
825 Eighth Avenue
New York, NY 10019-7475
Attention: Paul Michalski
Telecopier: 212-474-3700
ADMINISTRATIVE AGENT:
Administrative Agent’s Office
(for payments and Requests for Credit Extensions):
Bank of America, N.A.
2001 Clayton Road
Mail Code: CA4-702-02-25
Concord, CA 94520
Attention: Tina Obcena
Telephone: 925-675-8768
Telecopier: 888-969-9246
Electronic Mail: tina.obcena@bankofamerica.com
Account No.: 3750836479
Ref: Symetra Financial Corporation
ABA# 026009593
(for payments and Requests for Credit Extensions):
Bank of America, N.A.
2001 Clayton Road
Mail Code: CA4-702-02-25
Concord, CA 94520
Attention: Tina Obcena
Telephone: 925-675-8768
Telecopier: 888-969-9246
Electronic Mail: tina.obcena@bankofamerica.com
Account No.: 3750836479
Ref: Symetra Financial Corporation
ABA# 026009593
Other Notices as Administrative Agent:
Bank of America, N.A.
Agency Management
1455 Market Street, 5th Floor
Mail Code: CA5-701-05-19
San Francisco, CA 94103
Attention: Aamir Saleem
Telephone: 415-436-2769
Telecopier: 415-503-5089
Electronic Mail: aamir.saleem@bankofamerica.com
Bank of America, N.A.
Agency Management
1455 Market Street, 5th Floor
Mail Code: CA5-701-05-19
San Francisco, CA 94103
Attention: Aamir Saleem
Telephone: 415-436-2769
Telecopier: 415-503-5089
Electronic Mail: aamir.saleem@bankofamerica.com
ISSUING LENDER:
Bank of America, N.A.
Trade Operations
1000 W. Temple Street
Mail Code: CA9-705-07-05
Los Angeles, CA 90012-1514
Attention: Stella Rosales
Telephone: 213-481-7828
Telecopier: 213-580-8441
Electronic Mail: stella.rosales@bankofamerica.com
Trade Operations
1000 W. Temple Street
Mail Code: CA9-705-07-05
Los Angeles, CA 90012-1514
Attention: Stella Rosales
Telephone: 213-481-7828
Telecopier: 213-580-8441
Electronic Mail: stella.rosales@bankofamerica.com
SWING LINE LENDER:
Bank of America, N.A.
2001 Clayton Road
Mail Code: CA4-702-02-25
Concord, CA 94520
Attention: Tina Obcena
Telephone: 925-675-8768
Telecopier: 888-969-9246
Electronic Mail: tina.obcena@bankofamerica.com
Account No.: 3750836479
Ref: Symetra Financial Corporation
ABA# 026009593
2001 Clayton Road
Mail Code: CA4-702-02-25
Concord, CA 94520
Attention: Tina Obcena
Telephone: 925-675-8768
Telecopier: 888-969-9246
Electronic Mail: tina.obcena@bankofamerica.com
Account No.: 3750836479
Ref: Symetra Financial Corporation
ABA# 026009593
EXHIBIT A
FORM OF COMPLIANCE CERTIFICATE
This Compliance Certificate (this “Certificate”) is delivered pursuant to Section 6.2(b) of the Credit Agreement, dated
as of August 16, 2007 (as amended, restated, extended, supplemented or otherwise modified in writing from time to time,
the “Agreement;” the terms defined therein being used herein as therein defined), among Symetra Financial Corporation,
a Delaware corporation (the “Borrower”), the Lenders from time to time party thereto and Bank of America, N.A., as
Administrative Agent, Swing Line Lender and Issuing Lender.
The undersigned hereby certifies to the Administrative Agent and the Lenders as follows:
1. I am the duly elected, qualified and acting [the Borrower to insert title of relevant
Responsible Officer] of the Borrower.
2. I have reviewed and am familiar with the contents of this Certificate.
3. I have no knowledge of the existence, as of the date of this Certificate, of any
continuing Default or Event of Default [, except
as set forth below].
4. Attached hereto as Attachment 1 are the computations showing
compliance by the
Borrower with the covenants set forth in Section 7.1 of the Agreement.
IN WITNESS WHEREOF, the undersigned has executed this Certificate as of the date set forth below.
| SYMETRA FINANCIAL CORPORATION |
||||
| By: | ||||
| Name: | ||||
| Title: | ||||
Date: , 200_
Attachment 1
to Exhibit A
to Exhibit A
COMPLIANCE CERTIFICATE WORKSHEET
| I. | Section 7.1(a) — Authorized Control Level Risk-Based Capital of Material Insurance Subsidiaries. |
| A. | Total Adjusted Capital of relevant Material Insurance Subsidiary: | $ | ________ | |||||
| B. | Company Action Level Risk-Based Capital of relevant Material Insurance Subsidiary | $ | ________ | |||||
| C. | Line A divided by Line B multiplied by 100: | ________ | % | |||||
| D. | Minimum percentage required: | 200 | % |
| II. | Section 7.1(b) — Maintenance of Total Consolidated Debt to Consolidated Capitalization Ratio: |
A. Total Consolidated Debt: |
||||||||
|
|
||||||||
|
|
1. | Amounts that would, in conformity with GAAP, be reflected and classified as debt on a consolidated balance sheet of the Borrower and its consolidated Subsidiaries: | $ | ________ | ||||
|
|
||||||||
|
|
2. | Indebtedness represented by (i) Trust Preferred Securities or Qualified Securities (in each case, owned by Persons other than the Borrower or any of its consolidated Subsidiaries) but only to the extent that such securities (other than Mandatory Convertible Securities) exceed 15% of Total Consolidated Capitalization or (ii) Mandatory Redeemable Securities (owned by Persons other than the Borrower or any of its consolidated Subsidiaries) other than Qualified Securities: | $ | ________ | ||||
|
|
||||||||
|
|
3. | Indebtedness represented by Mandatory Convertible Securities (owned by Persons other than the Borrower or any of its consolidated Subsidiaries) but only to the extent that such Mandatory Convertible Securities plus Trust Preferred Securities and Qualified Securities (in each case, owned by Persons other than the Borrower or any of its consolidated Subsidiaries) exceed 25% of Total Consolidated Capitalization; provided, that in the event that the notes related to the Mandatory Convertible Securities remain outstanding following the exercise of forward purchase contracts related to such Mandatory Convertible Securities, then such outstanding notes will be included in Total Consolidated Debt thereafter: | $ | ________ | ||||
|
|
||||||||
|
|
4. | Sum of Line A(1) plus Line A(2) plus Line A(3): | $ | ________ | ||||
-2-
B. Consolidated Capitalization: |
$ | ________ | ||||||
|
|
||||||||
|
|
1. | Consolidated Net Worth: | $ | ________ | ||||
|
|
||||||||
|
|
2. | Total Consolidated Debt (i.e. Line A(4)): | $ | ________ | ||||
|
|
||||||||
|
|
3. | Amounts in respect of Trust Preferred Securities, Mandatory Convertible Securities, Mandatory Redeemable Securities, Conditional Common Equity and any other preferred equity that would, in conformity with GAAP, be reflected on a consolidated balance sheet of the Borrower and its consolidated Subsidiaries prepared as of such date and which are not already included in Lines B(1) or B(2): | $ | ________ | ||||
|
|
||||||||
|
|
4. | Sum of Line B(1) plus Line B(2) plus Line B(3): | $ | ________ | ||||
|
|
||||||||
C.
Line A(4) divided by Line B(4) multiplied
by 100: |
________ | % | ||||||
|
|
||||||||
D. Maximum percentage permitted: |
37.5 | % | ||||||
EXHIBIT B-1
FORM OF BORROWING REQUEST
Date: ___________, ____
To: Bank of America, N.A., as Administrative Agent
Ladies and Gentlemen:
Reference is made to that certain Credit Agreement, dated as of August 16, 2007 (as amended,
restated, extended, supplemented or otherwise modified in writing from time to time, the
“Agreement;” the terms defined therein being used herein as therein defined), among Symetra
Financial Corporation, a Delaware corporation (the “Borrower”), the Lenders from time to time party
thereto and Bank of America, N.A., as Administrative Agent, Swing Line Lender and Issuing Lender.
[Pursuant to Section 2.2 of the Agreement, the Borrower hereby requests that a Revolving Credit
Loan consisting of a [Base Rate Loan in the principal amount of $_____________] [Eurodollar Loan in the
principal amount of $______________ with an Interest Period commencing on _______________ and maturing on _________]
be made on __________ ____, _____].
[Pursuant to Section 2.9 of
the Credit Agreement, the Borrower hereby requests that a Revolving
Credit Loan in a principal amount of $__________, which is currently a [Base Rate] [Eurodollar] Loan,
be [converted to] [continued as] a [Base Rate] [Eurodollar] Loan [with an Interest Period
commencing on _________ and maturing on _______________].
The undersigned hereby certifies that, to his/her knowledge, the amount of the aggregate
outstanding principal amount of the Loans plus the L/C Obligations on today’s date is $_________ and
the amount of the Total Revolving Credit Commitment available for borrowing pursuant to Section 2.1
of the Agreement is $____________.
| SYMETRA FINANCIAL CORPORATION |
||||
| By: | ||||
| Name: | ||||
| Title: | ||||
EXHIBIT B-2
FORM OF SWING LINE LOAN NOTICE
Date: ____________, ____
| To: | Bank of America, N.A., as Swing Line Lender Bank of America, N.A., as Administrative Agent |
Ladies and Gentlemen:
Reference is made to that certain Credit Agreement, dated as of August 16, 2007 (as amended,
restated, extended, supplemented or otherwise modified in writing from time to time, the
“Agreement;” the terms defined therein being used herein as therein defined), among Symetra
Financial Corporation, a Delaware corporation (the “Borrower”), the Lenders from time to time party
thereto and Bank of America, N.A., as Administrative Agent, Swing Line Lender and Issuing Lender.
The undersigned hereby requests a Swing Line Loan:
1. On __________________________(a Business Day).
2. In the amount of $________________.
The borrowing of the Swing Line Loan requested herein complies with the requirements of the
provisos to the first sentence of
Section 2.4(a) of the Agreement.
| SYMETRA FINANCIAL CORPORATION |
||||
| By: | ||||
| Name: | ||||
| Title: | ||||
EXHIBIT C-1
FORM OF REVOLVING CREDIT NOTE
THIS NOTE AND THE OBLIGATIONS REPRESENTED HEREBY MAY NOT BE TRANSFERRED EXCEPT IN COMPLIANCE WITH
THE TERMS AND PROVISIONS OF THE CREDIT AGREEMENT REFERRED TO BELOW. TRANSFERS OF THIS NOTE AND THE
OBLIGATIONS REPRESENTED HEREBY MUST BE RECORDED IN THE REGISTER MAINTAINED BY THE ADMINISTRATIVE
AGENT PURSUANT TO THE TERMS OF SUCH CREDIT AGREEMENT.
$_________
|
_________ ___, 200___ |
FOR VALUE RECEIVED, the undersigned, SYMETRA FINANCIAL CORPORATION, a Delaware corporation
(the “Borrower”), hereby unconditionally promises to pay to _____________________ (the “Lender”) or its
registered assigns at the Administrative Agent’s Office specified in the Credit Agreement (as
hereinafter defined) in lawful money of the United States and in immediately available funds, on
the Revolving Credit Termination Date the principal amount of (a) _________ DOLLARS ($______) or, if
less, (b) the aggregate unpaid principal amount of all Revolving Credit Loans made by the Lender
to the Borrower pursuant to Section 2.1 of the Credit Agreement. The Borrower further
agrees to pay interest in like money at the Administrative Agent’s Office on the unpaid principal
amount hereof from time to time outstanding at the rates and on the dates specified in Section
2.11 of the Credit Agreement.
The holder of this Note is authorized to endorse on the schedules annexed hereto and made a
part hereof or on a continuation thereof which shall be attached hereto and made a part hereof the
date, Type and amount of each Revolving Credit Loan made pursuant to the Credit Agreement and the
date and amount of each payment or prepayment of principal thereof, each continuation thereof,
each conversion of all or a portion thereof to another Type and, in the case of Eurodollar Loans,
the length of each Interest Period with respect thereto. Each such endorsement shall constitute
prima facie evidence of the accuracy of the information endorsed. The failure to make any
such endorsement or any error in any such endorsement shall not affect the obligations of the
Borrower in respect of any Revolving Credit Loan.
This Note (a) is one of the promissory notes referred to in the Credit Agreement, dated as of
August 16, 2007 (as amended, supplemented or modified from time to time, the “Credit
Agreement”), among the Borrower, the lenders from time to time party thereto (collectively,
the “Lenders”), and Bank of America, N.A., as Administrative Agent, Swing Line Lender and
Issuing Lender, (b) is subject to the provisions of the Credit Agreement and (c) is subject to
optional prepayment in whole or in part as provided in the Credit Agreement.
Upon the occurrence of any one or more of the Events of Default, all principal and all
accrued interest then remaining unpaid on this Note shall become, or may be declared to be,
immediately due and payable, all as provided in the Credit Agreement.
Unless otherwise defined herein, terms defined in the Credit Agreement and used herein shall
have the meanings given to them in the Credit Agreement.
NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED HEREIN OR IN THE CREDIT AGREEMENT, THIS
NOTE MAY NOT BE TRANSFERRED
EXCEPT PURSUANT TO AND IN ACCORDANCE WITH THE REGISTRATION AND OTHER PROVISIONS OF SECTION 10.7 OF
THE CREDIT AGREEMENT.
THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF
THE STATE OF NEW YORK.
[Remainder of Page Left Intentionally Blank]
| SYMETRA FINANCIAL CORPORATION |
||||
| By: | ||||
| Name: | ||||
| Title: | ||||
Schedule A
to Revolving Credit Note
to Revolving Credit Note
LOANS, CONVERSIONS AND REPAYMENTS OF BASE RATE LOANS
| Amount of Base | ||||||||||||||||||||||||
| Amount | Amount of Principal | Rate Loans | Unpaid Principal | |||||||||||||||||||||
| Amount of Base | Converted to | of Base Rate Loans | Converted to | Balance of Base | Notation | |||||||||||||||||||
| Date | Rate Loans | Base Rate Loans | Repaid | Eurodollar Loans | Rate Loans | Made By | ||||||||||||||||||
Schedule B
to Revolving Credit Note
to Revolving Credit Note
LOANS, CONTINUATIONS, CONVERSIONS AND REPAYMENTS OF EURODOLLAR
LOANS
LOANS
| Amount of | ||||||||||||||||||||||||||||
| Interest | Eurodollar | |||||||||||||||||||||||||||
| Amount | Period and | Loans | Unpaid | |||||||||||||||||||||||||
| Converted | Eurodollar | Amount of | Converted | Principal | ||||||||||||||||||||||||
| Amount of | to | Rate with | Principal of | to | Balance of | |||||||||||||||||||||||
| Eurodollar | Eurodollar | Respect | Eurodollar | Base Rate | Eurodollar | Notation | ||||||||||||||||||||||
| Date | Loans | Loans | Thereto | Loans Repaid | Loans | Loans | Made By | |||||||||||||||||||||
EXHIBIT C-2
FORM OF SWING LINE NOTE
THIS NOTE AND THE OBLIGATIONS REPRESENTED HEREBY MAY NOT BE TRANSFERRED EXCEPT IN
COMPLIANCE WITH THE TERMS AND PROVISIONS OF THE CREDIT AGREEMENT REFERRED TO BELOW.
TRANSFERS OF THIS NOTE AND THE OBLIGATIONS REPRESENTED HEREBY MUST BE RECORDED IN THE
REGISTER MAINTAINED BY THE ADMINISTRATIVE AGENT PURSUANT TO THE TERMS OF SUCH CREDIT
AGREEMENT.
| $ | ,200 |
FOR VALUE RECEIVED, the undersigned, SYMETRA FINANCIAL CORPORATION, a Delaware corporation (the
“Borrower”), hereby unconditionally promises to pay to Bank of America, N.A. (the “Swing Line
Lender”) or its registered assigns at the Administrative Agent’s Office specified in the Credit
Agreement (as hereinafter defined) in lawful money of the United States and in immediately
available funds, on the Revolving Credit Termination Date the principal amount of (a)
DOLLARS ($ ) or, if less, (b) the aggregate unpaid principal amount of all Swing Line Loans
made by the Lender to the Borrower pursuant to Section 2.3 of the Credit Agreement. The Borrower
further agrees to pay interest in like money at the Administrative Agent’s Office on the unpaid
principal amount hereof from time to time outstanding at the rates and on the dates specified in
Section 2.11 of the Credit Agreement.
The holder of this Note is authorized to endorse on the schedules annexed
hereto and made a part hereof or on a continuation thereof which shall be
attached hereto and made a part hereof the date and amount of each Swing Line
Loan made pursuant to the Credit Agreement and the date and amount of each
payment or prepayment of principal thereof. Each such endorsement shall
constitute prima facie evidence of the accuracy of the information endorsed.
The failure to make any such endorsement or any error in any such endorsement
shall not affect the obligations of the Borrower in respect of any Swing Line
Loan.
This Note (a) is one of the promissory notes referred to in the Credit
Agreement, dated as of August 16, 2007 (as amended, supplemented or modified
from time to time, the “Credit Agreement”), among the Borrower, the lenders
from time to time party thereto (collectively, the “Lenders”), and Bank of
America, N.A., as Administrative Agent, Swing Line Lender and Issuing Lender,
(b) is subject to the provisions of the Credit Agreement and (c) is subject to
optional prepayment in whole or in part as provided in the Credit Agreement.
Upon the occurrence of any one or more of the Events of Default, all principal
and all accrued interest then remaining unpaid on this Note shall become, or
may be declared to be, immediately due and payable, all as provided in the
Credit Agreement.
Unless otherwise defined herein, terms defined in the Credit Agreement and used
herein shall have the meanings given to them in the Credit Agreement.
NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED HEREIN OR IN THE CREDIT
AGREEMENT, THIS NOTE MAY NOT BE TRANSFERRED EXCEPT PURSUANT TO AND IN
ACCORDANCE WITH THE REGISTRATION AND OTHER PROVISIONS OF SECTION 10.7 OF THE
CREDIT AGREEMENT.
THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE
WITH, THE LAW OF THE STATE OF NEW YORK.
[Remainder of Page Left Intentionally Blank]
| SYMETRA FINANCIAL CORPORATION |
||||
| By: | ||||
| Name: | ||||
| Title: | ||||
Schedule A
to Swing Line Note
to Swing Line Note
LOANS AND REPAYMENTS OF SWING LINE LOANS
| Amount of Principal | Unpaid Principal | |||||||
| Amount of Swing | of Swing Line Loans | Balance of Swing | ||||||
| Date | Line Loans | Repaid | Line Loans | Notation Made By | ||||
EXHIBIT D
FORM OF EXEMPTION CERTIFICATE
Reference is made to that certain Credit Agreement, dated as of August 16, 2007 (as amended,
restated, extended, supplemented or otherwise modified in writing from time to time, the
“Agreement;” the terms defined therein being used herein as therein defined), among
Symetra Financial Corporation, a Delaware corporation (the “Borrower”), the Lenders from
time to time party thereto and Bank of America, N.A., as Administrative Agent, Swing Line Lender
and Issuing Lender.
(the “Non-U.S. Lender”) is providing this certificate pursuant to Section
2.16(d) of the Agreement. The Non-U.S. Lender hereby represents and warrants that:
1. The Non-U.S. Lender is the sole record and beneficial owner of the Loans [or the
obligations evidenced by Note(s)] in respect of which it is providing this certificate.
2. The
Non-U.S. Lender is not a “bank” for purposes of
Section 881(c)(3)(A) of the Internal
Revenue Code of 1986, as amended (the “Code”). In this regard, the Non-U.S. Lender further
represents and warrants that:
(a) the Non-U.S. Lender is not subject to regulatory or other legal requirements as
a bank in any jurisdiction; and
(b) the Non-U.S. Lender has not been treated as a bank for purposes of any tax,
securities law or other filing or submission made to any Governmental Authority, any
application made to a rating agency or qualification for any exemption from tax,
securities law or other legal requirements;
3. The Non-U.S. Lender is not a 10-percent shareholder of the Borrower within the meaning of
Section 881(c)(3)(B) of the Code; and
4. The Non-U.S. Lender is not a controlled foreign corporation receiving interest from a
related person within the meaning of
Section 881(c)(3)(C) of the Code.
IN WITNESS WHEREOF, the undersigned has executed this certificate as of the date set forth
below.
| [NAME OF NON-U.S. LENDER] |
||||
| By: | ||||
| Name: | ||||
| Title: | ||||
Date:
EXHIBIT E
FORM OF CLOSING CERTIFICATE
August 16, 2007
This Closing Certificate is delivered pursuant to Section 4.1(a)(v) and (vii)
of the Credit Agreement, dated as of August 16, 2007 (as amended, restated, extended, supplemented
or otherwise modified in writing from time to time, the “Agreement;” the terms defined
therein being used herein as therein defined), among Symetra Financial Corporation, a Delaware
corporation (the “Borrower”), the Lenders from time to time party thereto and Bank of
America, N.A., as Administrative Agent, Swing Line Lender and Issuing Lender.
The Borrower hereby certifies to the Administrative Agent and the Lenders as
follows:
1. The representations and warranties of the Borrower set forth in, or made pursuant to, each
of the Loan Documents to which it is a party are true and correct in all material respects on and
as of the date hereof with the same effect as if made on the date hereof, except for
representations and warranties expressly stated to relate to a specific earlier date, in which case
such representations and warranties were true and correct in all material respects as of such
earlier date.
2. No Default or Event of Default has occurred and is continuing as of the date hereof or
after giving effect to the Loans to be made on the date hereof.
3. No event or circumstance has occurred since December 31, 2006, that has had or could
reasonably be expected to have a Material Adverse Effect.
4. Assuming the required satisfaction of the Administrative Agent or the Lenders to the extent
provided therein, the conditions precedent set forth in Section 4.1 of the Agreement were
satisfied as of the Closing Date, except as set forth on Schedule I attached hereto.
IN WITNESS WHEREOF, the undersigned has executed this Closing Certificate as of the date set
forth above.
| SYMETRA FINANCIAL CORPORATION |
||||
| By: | ||||
| Name: | ||||
| Title: | ||||
Schedule I
EXHIBIT F
FORM OF LEGAL OPINION OF CRAVATH, SWAINE & MOORE LLP
[See attached]
Symetra Financial Corporation
Credit Agreement dated as of August 16, 2007
Credit Agreement dated as of August 16, 2007
Ladies and Gentlemen:
We have acted as special New York counsel to Symetra Financial
Corporation, a Delaware corporation (the “Borrower”), in connection
with the Credit Agreement dated as of August 16, 2007 (the “Credit
Agreement”), among the Borrower, the lending institutions party thereto
(the “Lenders”), Bank of America, N.A., as administrative agent for
the Lenders (the “Administrative Agent”), swingline lender and
issuing lender, JPMorgan Chase Bank, N.A., as syndication agent (the
“Syndication Agent”) and The Bank of New York, The Bank of
Tokyo-Mitsubishi UFJ, Ltd., New York Branch and U.S. Bank, National
Association, as co-documentation agents (the “Co-Documentation
Agents”). This opinion is being delivered to you pursuant to Section
4.1(c) of the Credit Agreement. Capitalized terms used but not defined herein
have the meanings assigned to them in the Credit Agreement.
In that connection, we have examined originals, or copies certified or
otherwise identified to our satisfaction, of such documents, corporate
records and other instruments as we have deemed necessary or appropriate for
purposes of this opinion, including: (i) the Credit Agreement, (ii) the
Certificate of Incorporation of the Borrower, as amended (the
“Certificate of Incorporation”), (iii) the By-laws of the Borrower
and (iv) resolutions adopted by the Board of Directors of the Borrower on
August 9, 2007. We have also relied, with respect to certain factual matters,
on the representations and warranties of the Borrower contained in the Credit
Agreement and have assumed compliance by the Borrower with the terms of the
Credit Agreement.
In rendering our opinion, we have assumed (a) the genuineness of all
signatures, (b) that each party to the Credit Agreement other than the
Borrower has all necessary power, authority and legal right to execute and
deliver the Credit Agreement and to perform its obligations thereunder and
that the Credit Agreement is a legal, valid
2
and binding obligation of each party thereto other than the Borrower, (c) the due authorization,
execution and delivery of the Credit Agreement by all parties thereto other than the Borrower, (d)
the authenticity of all documents submitted to us as originals, and (e) the conformity to original
documents of all documents submitted to us as copies and that insofar as any obligation under the
Credit Agreement is to be performed in, or by a party organized under the laws of, any jurisdiction
outside the State of New York, its performance will not be illegal or ineffective in any
jurisdiction by virtue of the law of that jurisdiction.
Based on the foregoing and subject to the qualifications hereinafter set forth, we are of
opinion as follows:
1. Based solely on a certificate from the Secretary of State of the State of
Delaware, the Borrower is a corporation validly existing and in good standing under the
laws of the State of Delaware. The Borrower has all necessary corporate power and
authority to execute and deliver the Credit Agreement and to perform its obligations
thereunder.
2. The execution and delivery by the Borrower of the Credit Agreement
and the performance by the Borrower of its obligations thereunder (a) have been duly
authorized by all requisite corporate action on the part of the Borrower and (b) will not
violate (i) the Certificate of Incorporation or By-laws of the Borrower or (ii) any law, rule
or regulation of the United States of America or the State of New York or the General
Corporation Law of the State of Delaware.
3. The Credit Agreement has been duly executed and delivered by the
Borrower, and constitutes a legal, valid and binding obligation of the Borrower,
enforceable against the Borrower in accordance with its terms, subject in each case to
applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent transfer and
other similar laws relating to or affecting creditors’ rights generally from time to time in
effect and to general principles of equity (including, without limitation, concepts of
materiality, reasonableness, good faith and fair dealing), regardless of whether considered
in a proceeding in equity or at law. The foregoing opinion is subject to the following
qualifications: (i) insofar as provisions contained in the Credit Agreement provide for
indemnification or limitations on liability, the enforceability thereof may be limited by
public policy considerations, (ii) the availability of a decree for specific performance or
an injunction is subject to the discretion of the court requested to issue any such decree or
injunction and (iii) we express no opinion as to the effect of the laws of any jurisdiction
other than the State of New York where any Lender may be located or where
enforcement of the Credit Agreement may be sought that limit the rates of interest legally
chargeable or collectible.
4. No authorization, approval or other action by, and no notice to, consent
of, order of or filing with, any United States Federal, New York State or, to the extent
required under the General Corporation Law of the State of Delaware, Delaware
governmental authority is required to be obtained or made by the Borrower in connection
with the execution, delivery and performance by the Borrower of the Credit Agreement,
other than (i) such reports to United States governmental authorities regarding
international capital and foreign currency transactions as may be required pursuant to 31
C.F.R. Part 128, (ii) those that have been made or obtained and are in full force and effect
3
or as to which the failure to be made or obtained or to be in full force and effect should not
result, individually or in the aggregate, in a material adverse effect on the Borrower and its
Subsidiaries, taken as a whole and (iii) such registrations, filings and approvals that may be
required because of the legal or regulatory status of any Lender or because of any other facts
specifically pertaining to any Lender.
We express no opinion herein as to any provision in the Credit Agreement that (a) relates to
the subject matter jurisdiction of the United States District Court for the Southern District of
New York to adjudicate any controversy related to the Credit Agreement (such as the provision found
in Section 10.13 of the Credit Agreement), (b) contains a waiver of an inconvenient forum (such as
the provision found in Section 10.13 of the Credit Agreement), (c) relates to a right of setoff in
respect of purchases of interests in loans (such as the provision found in Section 10.8 of the
Credit Agreement) or with respect to parties that may not hold mutual debts (such as the provision
found in Section 10.8 of the Credit Agreement), (d) provides for liquidated damages, (e) relates to
the waiver of rights to jury trial (such as the provision found in Section 10.14 of the Credit
Agreement) or (f) relates to any arrangement or similar fee payable to any arranger (including the
Arranger and the Administrative Agent) of the commitments or loans under the Credit Agreement or
any fee not set forth in the Credit Agreement. We also express no opinion as to (i) the
enforceability of the provisions of the Credit Agreement to the extent that such provision
constitutes a waiver of illegality as a defense to performance of contract obligations or any other
defense to performance which cannot, as a matter of law, be effectively waived, (ii) whether a
state court outside the State of New York or a Federal court of the United States would give effect
to the choice of New York law provided for in the Credit Agreement or (iii) compliance with, or the
application or effect of, Federal or state securities laws or regulations or any laws or
regulations relating to the provision of insurance or risk-management products or services to which
the Borrower or any of its Subsidiaries is subject or the necessity of any authorization, approval
or action by, or any notice to, consent of, order of, or filing with, any governmental authority,
pursuant to any such laws or regulations.
We understand that you are satisfying yourselves as to the status under Section 548 of the
Bankruptcy Code and applicable state fraudulent conveyance laws of the obligations of the Borrower
under the Credit Agreement and we express no opinion thereon.
We are admitted to practice only in the State of New York, and we express no opinion as to
matters governed by any laws other than the laws of the State of New York, the General Corporation
Law of the State of Delaware and the Federal law of the United States of America.
4
This opinion is rendered only to the Administrative Agent, the Syndication Agent, the
Co-Documentation Agents and the existing Lenders under the Credit Agreement and is solely for their
benefit in connection with the above transactions. In addition, we hereby consent to reliance on
this opinion by a permitted assign of a Lender’s interest in the Credit Agreement, provided
that such permitted assign becomes a Lender on or prior to the 30th day after the date of this
opinion. We are opining as to the matters herein only as of the date hereof, and, while you are
authorized to deliver copies of this opinion to such permitted assigns and they are permitted to
rely on this opinion, the rights to do so do not imply any obligation on our part to update this
opinion. This opinion may not be relied upon by any other person or for any other purpose or used,
circulated, quoted or otherwise referred to for any other purpose.
| Very truly yours, |
||||
The Lenders and the Administrative Agent party to the
Credit Agreement referred to above
In care of Bank of America, N.A., as Administrative Agent
Agency Management
1455 Market Street, 5th Floor
Mail Code: CA5-701-05-19
San Francisco, CA 94103
Attention: Aamir Saleem
Agency Management
1455 Market Street, 5th Floor
Mail Code: CA5-701-05-19
San Francisco, CA 94103
Attention: Aamir Saleem
JPMorgan Chase Bank, N.A., as Syndication Agent
270 Park Avenue
4th Floor
New York, NY 10017-2014
270 Park Avenue
4th Floor
New York, NY 10017-2014
The Bank of New York, as Co-Documentation Agent
Insurance Division
One Wall Street, 17th Floor
New York, NY 10286
Insurance Division
One Wall Street, 17th Floor
New York, NY 10286
The Bank of Tokyo-Mitsubishi UFJ, Ltd., as Co-Documentation Agent
New York Branch
1251 Avenue of the Americas
New York, NY 10020-1104
New York Branch
1251 Avenue of the Americas
New York, NY 10020-1104
U.S. Bank, National Association, as Co-Documentation Agent
1420 Fifth Avenue, 10th Floor
Mail Code: PDWA-T10M
Seattle, WA 98101
1420 Fifth Avenue, 10th Floor
Mail Code: PDWA-T10M
Seattle, WA 98101
EXHIBIT G
ASSIGNMENT AND ASSUMPTION
This Assignment and Assumption (this “Assignment and Assumption”) is dated as of the
Effective Date set forth below and is entered into by and between the Assignor identified in item
1 below (the “Assignor”) and the Assignee identified in item 2 below (the
“Assignee”). Capitalized terms used but not defined herein shall have the meanings given
to them in the Credit Agreement identified below (the “Credit Agreement”), receipt of a
copy of which is hereby acknowledged by the Assignee. The Standard Terms and Conditions set forth
in Annex 1 attached hereto are hereby agreed to and incorporated herein by reference and made a
part of this Assignment and Assumption as if set forth herein in full.
For an agreed consideration, the Assignor hereby irrevocably sells and assigns to the
Assignee, and the Assignee hereby irrevocably purchases and assumes from the Assignor, subject to
and in accordance with the Standard Terms and Conditions and the Credit Agreement, as of the
Effective Date inserted by the Administrative Agent as contemplated below (i) all of the
Assignor’s rights and obligations in its capacity as a Lender under the Credit Agreement and any
other documents or instruments delivered pursuant thereto to the extent related to the amount and
percentage interest identified below of all of such outstanding rights and obligations of the
Assignor under the Credit Agreement (including, without limitation, participations in L/C
Obligations and Swing Line Loans) and (ii) to the extent permitted to be assigned under applicable
Law, all claims, suits, causes of action and any other right of the Assignor (in its capacity as a
Lender) against any Person, whether known or unknown, arising under or in connection with the
Credit Agreement, any other documents or instruments delivered pursuant thereto or the loan
transactions governed thereby or in any way based on or related to any of the foregoing,
including, but not limited to, contract claims, tort claims, malpractice claims, statutory claims
and all other claims at law or in equity related to the rights and obligations sold and assigned
pursuant to clause (i) above (the rights and obligations sold and assigned by the Assignor to the
Assignee pursuant to clauses (i) and (ii) above being referred to herein collectively as the
“Assigned Interest”). Each such sale and assignment is without recourse to the Assignor
and, except as expressly provided in this Assignment and Assumption, without representation or
warranty by the Assignor.
1.
|
Assignor[s]: | |||||
2.
|
Assignee[s]: | |||||
[for each Assignee, indicate [Affiliate][Approved Fund] of [identify Lender]]
3. Borrower: Symetra Financial Corporation.
4. Administrative Agent: Bank of America, N.A., as the administrative agent under the
Credit Agreement.
5. Credit Agreement: Credit Agreement, dated as of August 16, 2007, among
Symetra
Financial Corporation, a Delaware corporation, the Lenders from time to time party thereto,
and Bank of
America, N.A., as Administrative Agent, Swing Line Lender, and Issuing Lender.
6. Assigned Interest:
| Aggregate Amount of | Amount of | Percentage Assigned | ||||||||||||||||||
| Commitment/Loans | Commitment/ Loans | of Commitment/ | ||||||||||||||||||
| Assignor | Assignee | for all Lenders1 | Assigned | Loans2 | CUSIP Number | |||||||||||||||
| $ | $ | % | ||||||||||||||||||
| $ | $ | % | ||||||||||||||||||
| $ | $ | % | ||||||||||||||||||
[7. Trade Date: ]3
Effective Date: , 20___ [MUTUALLY AGREED TO BY THE ASSIGNOR
AND ASSIGNEE AND WHICH SHALL BE THE EFFECTIVE DATE OF RECORDATION OF TRANSFER IN THE REGISTER
THEREFOR.]
| 1 | Amounts in this column and in the column immediately to the right to be adjusted by the counterparties to take into account any payments or prepayments made between the Trade Date and the Effective Date. | |
| 2 | Set forth, to at least 9 decimals, as a percentage of the Commitments/Loans of all Lenders thereunder. | |
| 3 | To be completed if the Assignor and the Assignee intend that the minimum assignment amount is to be determined as of the Trade Date. |
The terms set forth in this Assignment and Assumption are hereby agreed to:
| ASSIGNOR [NAME OF ASSIGNOR] |
||||
| By: | ||||
| Title: | ||||
| ASSIGNEE [NAME OF ASSIGNEE] |
||||
| By: | ||||
| Title: | ||||
[Consented to and] Accepted:
| BANK OF AMERICA, N.A., as Administrative Agent |
||||
| By: | ||||
| Title: | ||||
[Consented to:]4
| SYMETRA FINANCIAL CORPORATION |
||||
| By: | ||||
| Name: | ||||
| Title: | ||||
| 4 | Not required if a Specified Event of Default has occurred and is continuing. |
ANNEX 1 TO ASSIGNMENT AND ASSUMPTION
STANDARD TERMS AND CONDITIONS FOR
ASSIGNMENT AND ASSUMPTION
1. Representations and Warranties.
1.1. Assignor. The Assignor (a) represents and warrants that (i) it is the legal and
beneficial owner of the Assigned Interest, (ii) the Assigned Interest is free and clear of any
lien, encumbrance or other adverse claim and (iii) it has full power and authority, and has taken
all action necessary, to execute and deliver this Assignment and Assumption and to consummate the
transactions contemplated hereby; and (b) assumes no responsibility with respect to (i) any
statements, warranties or representations made in or in connection with the Credit Agreement or any
other Loan Document, (ii) the execution, legality, validity, enforceability, genuineness,
sufficiency or value of the Loan Documents or any collateral thereunder, (iii) the financial
condition of the Borrower, any of its Subsidiaries or Affiliates or any other Person obligated in
respect of any Loan Document or (iv) the performance or observance by the Borrower, any of its
Subsidiaries or Affiliates or any other Person of any of their respective obligations under any
Loan Document.
1.2. Assignee. The Assignee (a) represents and warrants that (i) it has full power and
authority, and has taken all action necessary, to execute and deliver this Assignment and
Assumption and to consummate the transactions contemplated hereby and to become a Lender under the
Credit Agreement, (ii) it meets all the requirements to be an assignee under Sections 10.7(b)(iii),
(iv), (v), (vi), (vii) and (viii) of the Credit Agreement
(subject to such consents, if any, as may be required under Section 10.7(b)(iii) of the
Credit Agreement), (iii) from and after the Effective Date, it shall be bound by the provisions of
the Credit Agreement as a Lender thereunder and, to the extent of the Assigned Interest, shall have
the obligations of a Lender thereunder, (iv) it is sophisticated with respect to decisions to
acquire assets of the type represented by the Assigned Interest and either it, or the Person
exercising discretion in making its decision to acquire the Assigned Interest, is experienced in
acquiring assets of such type, (v) it has received a copy of the Credit Agreement, and has received
or has been accorded the opportunity to receive copies of the most recent financial statements
delivered pursuant to Section 6.1 thereof, as applicable, and such other documents and
information as it deems appropriate to make its own credit analysis and decision to enter into this
Assignment and Assumption and to purchase the Assigned Interest, (vi) it has, independently and
without reliance upon the Administrative Agent or any other Lender and based on such documents and
information as it has deemed appropriate, made its own credit analysis and decision to enter into
this Assignment and Assumption and to purchase the Assigned Interest, and (vii) if it is a Non-U.S.
Lender, attached hereto is any documentation required to be delivered by it pursuant to the terms
of the Credit Agreement, duly completed and executed by the Assignee; and (b) agrees that (i) it
will, independently and without reliance upon the Administrative Agent, the Assignor or any other
Lender, and based on such documents and information as it shall deem appropriate at the time,
continue to make its own credit decisions in taking or not taking action under the Loan Documents,
and (ii) it will perform in accordance with their terms all of the obligations which by the terms
of the Loan Documents are required to be performed by it as a Lender.
2. Payments. From and after the Effective Date, the Administrative Agent shall make
all payments in respect of the Assigned Interest (including payments of principal, interest, fees
and other amounts) to the Assignor for amounts which have accrued to but excluding the Effective
Date and to the Assignee for amounts which have accrued from and after the Effective Date.
3. General Provisions. This Assignment and Assumption shall be binding upon, and
inure to the benefit of, the parties hereto and their respective successors and assigns. This
Assignment and Assumption may be executed in any number of counterparts, which together shall
constitute one instrument. Delivery of an executed counterpart of a signature page of this
Assignment and Assumption by telecopy shall be effective as delivery of a manually executed
counterpart of this Assignment and Assumption. This Assignment and Assumption shall be governed
by, and construed in accordance with, the law of the State of New York.
EXHIBIT H
FORM OF
INSTRUMENT OF ACCESSION
INSTRUMENT OF ACCESSION
The undersigned, , in order to commit to lend to Symetra Financial Corporation, a Delaware
corporation (the “Borrower”), any Loans (as defined in the Credit Agreement, as defined
below) provided to the Borrower in accordance with the terms and conditions set forth in
Section 2.21 of the Credit Agreement, hereby (a) agrees to become a Lender party to that
certain Credit Agreement, dated as of August 16, 2007 (as amended, restated, extended, supplemented
or otherwise modified in writing from time to time, the “Credit Agreement”), among the
Borrower, the Lenders from time to time party thereto and Bank of America, N.A., as Administrative
Agent, Swing Line Lender and Issuing Lender, a copy of which is attached hereto, and that its
Revolving Credit Commitment amount is $ and (b) represents and warrants that it
meets all of the requirements of an Eligible Assignee under the Credit Agreement (subject to
receipt of such consents as may be required under the Credit Agreement). Capitalized terms used but
not defined herein shall have the respective meanings assigned to them in the Credit Agreement. The
undersigned hereby agrees to perform all duties and obligations of a Lender under the Credit
Agreement. This Instrument of Accession shall become a part of the Credit Agreement.
THIS INSTRUMENT OF ACCESSION AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES UNDER HEREUNDER SHALL
BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK
(EXCLUDING THE LAWS APPLICABLE TO CONFLICTS OR CHOICE OF LAW TO THE EXTENT THAT THE APPLICATION OF
THE LAW OF ANOTHER JURISDICTION WOULD BE REQUIRED THEREBY).
Executed as of the date set forth below.
| [LENDER] |
||||
| By: | ||||
| Name: | ||||
| Title: | ||||
Accepted as of this ___day of
___, 200___:
| SYMETRA FINANCIAL CORPORATION |
||||
| By: | ||||
| Name: | ||||
| Title: | ||||
EXHIBIT I
FORM OF EXTENSION REQUEST
Bank of America, N.A.
Agency Management
1455 Market Street, 5th Floor
Mail Code: CA5-701-05-19
San Francisco, CA 94103
Attention: Aamir Saleem
Agency Management
1455 Market Street, 5th Floor
Mail Code: CA5-701-05-19
San Francisco, CA 94103
Attention: Aamir Saleem
Symetra Financial Corporation
Ladies and Gentlemen:
This Extension Request is delivered to you pursuant to Section 2.22 of the Credit
Agreement, dated as of August 16, 2007 (as amended, restated, extended, supplemented or otherwise
modified in writing from time to time, the “Agreement;” the terms defined therein being
used herein as therein defined), among Symetra Financial Corporation, a Delaware corporation (the
“Borrower”), the Lenders from time to time party thereto and Bank of America, N.A., as
Administrative Agent, Swing Line Lender and Issuing Lender.
In accordance with Section 2.22 of the Agreement, the Borrower hereby requests that
the Lenders consent to an extension of the Revolving Credit Termination Date for a period of 364
days after the Existing Revolving Credit Termination Date to August ___, 20___.
The Borrower hereby (i) certifies that annexed hereto as Exhibit A is a true and
correct copy of resolutions duly adopted by the Board of Directors of the Borrower authorizing the
Borrower to extend the maturity of the Credit Agreement, (ii) certifies and warrants that, (A)
before and after giving effect to such extension, (1) the representations and warranties contained
in Section 5 of the Agreement and the other Loan Documents are true and correct on and as
of the Maturity Extension Date, except to the extent that such representations and warranties
specifically refer to an earlier date, in which case they are true and correct as of such earlier
date, and except that for purposes of Section 2.22 of the Agreement, the representations
and warranties contained in subsections (a) and (b) of Section 5.1 of the Agreement shall
be deemed to refer to the most recent statements furnished pursuant to subsection (a) of
Section 6.1 of the Agreement, and (2) no Default has occurred and is continuing, and (B)
no Material Adverse Effect since the date of delivery of the most recent financial statements
pursuant to Section 6.1 of the Agreement has occurred, and (iii) on the Existing Revolving
Credit Termination Date applicable to any Non-Extending Lender, the Borrower shall prepay any
Loans outstanding on such date (and pay any additional amounts required pursuant to Section
2.17 of the Agreement) to the extent necessary to keep outstanding Loans ratable with the
revised Revolving Credit Percentages of the respective Lenders effective as of such date
The Borrower has caused this Extension Request to be executed and delivered, and the
certification and warranties contained herein to be made, by its duly authorized officer this ___
day of ___, 20___1/.
| SYMETRA FINANCIAL CORPORATION |
||||
| By: | ||||
| Name: | ||||
| Title: | ||||
| CONSENTED TO BY: BANK OF AMERICA, N.A., as Administrative Agent |
||||
| By: | ||||
| Name: | ||||
| Title: | ||||
| 1/ | A date not more than 120 days nor less than 35 days prior to the first or second anniversary of the Closing Date. |
ASSIGNMENT
AND ASSUMPTION
This Assignment and Assumption
(this “Assignment and Assumption”) is dated as of the
Effective Date set forth below and is entered into by and between the Assignor identified in item
1 below (the “Assignor”) and the Assignee identified in item 2 below (the “Assignee”). Capitalized
terms used but not defined herein shall have the meanings given to them in the Credit
Agreement identified below (the “Credit Agreement”), receipt of a copy of which is hereby
acknowledged by the Assignee. The Standard Terms and Conditions set forth in Annex 1 attached
hereto are hereby agreed to and incorporated herein by reference and
made a part of this Assignment
and Assumption as if set forth herein in full.
For an agreed
consideration, the Assignor hereby irrevocably sells and assigns to the
Assignee, and the Assignee hereby irrevocably purchases and assumes from the Assignor, subject to
and in accordance with the Standard Terms and Conditions and the Credit Agreement, as of the
Effective Date inserted by the Administrative Agent as contemplated
below (i) all of the
Assignor’s rights and obligations in its capacity as a Lender under the Credit Agreement and any
other documents or instruments delivered pursuant thereto to the extent related to the amount and
percentage interest identified below of all of such outstanding rights and obligations of the
Assignor under the Credit Agreement (including, without limitation, participations in L/C
Obligations and Swing Line Loans) and (ii) to the extent permitted to be assigned under applicable
Law, all claims, suits, causes of action and any other right of the Assignor (in its capacity as
a Lender) against any Person, whether known or unknown arising under or in connection with the
Credit Agreement, any other documents or instruments delivered pursuant thereto or the loan
transactions governed thereby or in any way based on or related to
any of the foregoing, including, but not limited to contract claims, tort claims, malpractice claims, statutory
claims
and all other claims at law or in equity related to the rights and obligations sold and assigned
pursuant to clause (i) above (the rights and obligations sold and assigned by the Assignor to the
Assignee pursuant to clauses (i) and (ii) above being referred to herein collectively as the
“Assigned Interest”). Each such sale and assignment is without recourse to the Assignor and,
except as expressly provided in this Assignment and Assumption, without representation or
warranty by the Assignor.
1. Assignor:
Lehman Commercial Paper Inc.
2. Assignee:
Barclays Bank PLC [Approved Fund]
3. Borrower: Symetra Financial Corporation.
4.
Administrative Agent: Bank of America, N.A., as the administrative agent under the
Credit Agreement.
5.
Credit Agreement: Credit Agreement, dated as of
August 16, 2007, among Symetra Financial
Corporation, a Delaware corporation, the Lenders from time to time
party thereto, and Bank of
America, N.A., as Administrative Agent, Swing Line Lender, and Issuing Lender.
6. Assigned Interest:
| Aggregate | Amount of | Percentage | ||||||||||||||||||
| Amount of | Commitment/ | Assigned of | ||||||||||||||||||
| Commitment/Loans | Loans | Commitment/ | CUSIP | |||||||||||||||||
| Assignor | Assignee | for all Lenders1 | Assigned | Loans2 | Number | |||||||||||||||
Lehman Commercial Paper Inc. |
Barclays Bank PLC | $ | 200,000,000.00 | $ | 20,000,000.00 | 10.000000 | % | |||||||||||||
7. Effective Date: October 7, 2009
The terms set forth in this Assignment and Assumption are hereby agreed to:
| Lehman Commercial Paper Inc. | ||||||
| By: | /s/ Tina Chen
|
|||||
| Tina Chen | ||||||
| Title: Authorized Signatory | ||||||
| Barclays Bank PLC | ||||||
| By: | /s/ Nicholas Bell | |||||
| Nicholas Bell | ||||||
| Title: Director | ||||||
| 1 | Amounts in this column and in the column immediately to the right to be adjusted by the counterparties to take into account any payments or prepayments made between the Trade Date and the Effective Date. | |
| 2 | Set forth, to at least 9 decimals, as percentage of the Commitments/Loans of all lenders thereunder. |
| Consented to and Accepted: | ||||
| BANK OF AMERICA, N.A., as | ||||
| Administrative Agent | ||||
By: |
/s/ Eric A. Smith
|
|||
| Eric A. Smith | ||||
| Title: Assistant Vice President | ||||
| Consented to: 3 | ||||
| SYMETRA FINANCIAL CORPORATION | ||||
By:
|
/s/
Margaret A. Meister |
|||
Name:
|
Margaret A. Meister | |||
Title:
|
Executive Vice President, Chief Financial Officer | |||
| 3 | Not required if a Specified Event of Default has occured and is continuing. |
| Consented to and Accepted: | ||||
| Bank of America N.A | ||||
| As Swingline Lender | ||||
By:
|
/s/ John Kushnerick
|
|||
| Title: Vice President | ||||
| Consented to and Accepted: | ||||
| Bank of America N.A | ||||
| As Letter of Credit Issuer | ||||
By:
|
/s/ John Kushnerick
|
|||
| Title: Vice President | ||||
ANNEX
1 TO ASSIGNMENT AND ASSUMPTION
STANDARD
TERMS AND CONDITIONS FOR
ASSIGNMENT AND ASSUMPTION
1. Representations
and Warranties.
1.1.
Assignor. The Assignor (a) represents and warrants that
(i) it is the legal and
beneficial
owner of the Assigned Interest, (ii) the Assigned Interest is free and clear of any lien,
encumbrance or
other adverse claim and (iii) it has full power and authority, and has taken all action
necessary, to execute
and deliver this Assignment and Assumption and to consummate the transactions contemplated
hereby;
and (b) assumes no responsibility with respect to (i) any statements, warranties or
representations made in
or in connection with the Credit Agreement or any other Loan Document, (ii) the execution,
legality,
validity, enforceability, genuineness, sufficiency or value of the Loan Documents or any
collateral
thereunder, (iii) the financial condition of the Borrower, any of its Subsidiaries or
Affiliates or any other
Person obligated in respect of any Loan Document or (iv) the performance or observance by the
Borrower, any of its Subsidiaries or Affiliates or any other Person of any of their respective
obligations under any Loan Document.
1.2.
Assignee. The Assignee (a) represents and warrants that (i) it has full power and
authority, and has taken all action necessary, to execute and deliver this Assignment and
Assumption and
to consummate the transactions contemplated hereby and to become a Lender under the Credit
Agreement, (ii) it meets all the requirements to be an assignee
under Sections 10.7(b)(iii),
(iv), (v), (vi),
(vii) and (viii) of the Credit Agreement (subject to such consents, if any, as may be required
under Section
10.7(b)(iii) of the Credit Agreement), (iii) from and after the Effective Date, it shall be
bound by the
provisions of the Credit Agreement as a Lender thereunder and, to the extent of the Assigned
Interest,
shall have the obligations of a Lender thereunder, (iv) it is sophisticated with respect to
decisions to
acquire assets of the type represented by the Assigned Interest and either it, or the Person
exercising
discretion in making its decision to acquire the Assigned Interest, is experienced in
acquiring assets of
such type, (v) it has received a copy of the Credit Agreement, and has received or has been
accorded the
opportunity to receive copies of the most recent financial statements delivered pursuant to
Section 6.1
thereof, as applicable, and such other documents and information as it deems appropriate to
make its own
credit analysis and decision to enter into this Assignment and Assumption and to purchase the
Assigned
Interest, (vi) it has, independently and without reliance upon the Administrative Agent or
any other
Lender and based on such documents and information as it has deemed appropriate, made its own
credit
analysis and decision to enter into this Assignment and Assumption and to purchase the
Assigned
Interest, and (vii) if it is a Non-U.S. Lender, attached hereto is any documentation required
to be delivered
by it pursuant to the terms of the Credit Agreement, duly completed and executed by the
Assignee; and
(b) agrees that (i) it will, independently and without reliance upon the Administrative Agent,
the Assignor
or any other Lender, and based on such documents and information as it shall deem appropriate
at the
time, continue to make its own credit decisions in taking or not taking action under the Loan
Documents,
and (ii) it will perform in accordance with their terms all of the obligations which by the
terms of the
Loan Documents are required to be performed by it as a Lender.
2. Payments. From and after the Effective Date, the Administrative Agent shall make
all
payments in respect of the Assigned Interest (including payments of principal, interest, fees
and other
amounts) to the Assignor for amounts which have accrued to but excluding the Effective Date
and to the
Assignee for amounts which have accrued from and after the Effective Date.
3. General Provisions. This Assignment and Assumption shall be binding upon, and inure
to the benefit of, the parties hereto and their respective successors and assigns. This Assignment
and Assumption may be executed in any number of counterparts, which together shall constitute one
instrument. Delivery of an executed counterpart of a signature page of this Assignment and
Assumption by telecopy shall be effective as delivery of a manually executed counterpart of this
Assignment and Assumption. This Assignment and Assumption shall be governed by, and construed in
accordance with, the law of the State of New York.
Exhibit 9.1
EXECUTION VERSION
SHAREHOLDERS AGREEMENT
This
SHAREHOLDERS AGREEMENT (this “Agreement”), dated as of March
8, 2004, is among Occum Acquisition Corp., a Delaware corporation (the
“Company”), and each of the Persons listed on Schedule 1 hereto
and any future security holder of the Company that becomes a party to this
Agreement (each, a “Shareholder” and collectively the
“Shareholders”).
The authorized share capital of the Company consists of 15,000,000 shares, par value U.S.
$0.01 per share (collectively or any number thereof, the “Common Shares”). Each of the
Shareholders has subscribed to purchase Common Shares and desires to promote the interests of the
Company and the mutual interests of the Shareholders by establishing herein certain terms and
conditions upon which the Common Shares (including Common Shares issued upon conversion, exchange
or exercise of any portion, warrant or other security) will be held, including provisions
restricting the transfer of Common Shares, providing certain registration rights and providing for
certain other matters.
In consideration of the mutual covenants and agreements hereinafter contained, the Company
and the Shareholders hereby agree as follows:
SECTION 1. Definitions. Capitalized terms not otherwise defined in this Agreement
have the meanings ascribed to them in the Subscription Agreement. As used in this Agreement, the
following terms shall have the respective meanings set forth below:
“Affiliate” shall mean, with respect to any specified Person, a Person that directly or
indirectly Controls, is Controlled by or is under common Control with such Person. Without limiting
the generality of the foregoing, the term “Affiliate” shall include an investment fund managed by
such Person or by a Person that directly or indirectly Controls, is Controlled by or is under
common Control with such Person.
“Agreement” shall have the meaning given such term in the first paragraph of
this Agreement.
“Berkshire” shall mean Berkshire Hathaway Inc., a Delaware corporation, or any
successor entity thereto.
“Board” shall mean the Board of Directors of the Company.
“Business Day” shall mean any day except a Saturday, Sunday or other day on which
banks in New York City are authorized or obligated by law or executive order to close.
2
“By-laws” shall mean the By-laws of the Company as in effect from time to time.
“Closing Date” shall mean the dates for the closing of the sale of up to 11,000,000
Common Shares by the Company pursuant to the several Subscription Agreements.
“Code”
shall mean the U.S. Internal Revenue Code of 1986, as amended.
“Commission” shall mean the U.S. Securities and Exchange Commission or any other
federal agency at the time administering the Securities Act or the Exchange Act.
“Control” of a Person shall mean the possession, directly or indirectly, of the power
to direct or cause the direction of the management and policies of such Person, whether through the
ownership of voting securities, by contract or otherwise, and “Controlling” and “Controlled” shall
have meanings correlative to the foregoing.
“day” shall mean a calendar day.
“Exchange Act” shall mean the U.S. Securities Exchange Act of 1934, as amended, or any
U.S. federal statute then in effect that has replaced such statute, and a reference to a particular
section thereof shall be deemed to include a reference to the comparable section, if any, of any
such replacement federal statute.
“Founders” shall mean White Mountains and Berkshire. A “Founder” shall mean
either one of them.
“Initial Public Offering” shall mean the completion, whether by the Company or by any
Shareholders, of an underwritten public offering of the Common Shares pursuant to a registration
statement filed under the Securities Act resulting in aggregate net proceeds, together with any
such underwritten public offering previously completed, of not less than U.S.$125 million, or (ii)
the completion by the Company of a merger, acquisition or comparable business combination
transaction in connection with which the Company has issued Common Shares pursuant to a
registration statement filed under the Securities Act on Form S-4, which shares have any aggregate
value, based on the average closing price of such shares during the five trading days after
completion of such transaction, of not less than U.S.$125 million; and “initial public
offering” shall mean the completion, whether by the Company or any Shareholders, of the initial
public offering of the Common Shares pursuant to a registration statement filed under the
Securities Act, regardless of the amount of net proceeds from such offering or the issuance of
Common Shares in connection with a merger, acquisition or comparable business combination
transaction pursuant to a registration statement on Form S-4 filed under the Securities Act.
3
“NASD” shall mean the U.S. National Association of Securities Dealers, Inc. or any
successor organization.
“NASDAQ” shall mean The Nasdaq National Market or any successor quotation system.
“Offering” shall mean the offering and sale of up to 11,000,000 Common Shares pursuant
to the several Subscription Agreements.
“Person” shall mean an individual, company, corporation, limited liability company,
firm, partnership, trust, estate, unincorporated association or other entity.
“Registrable Securities” shall mean (i) Common Shares (including any Common Shares
issuable on exercise of the Warrants) issued on the Closing Date to the Shareholders, (ii) the
Warrants and (iii) any securities of the Company issued successively in exchange for or in respect
of any of the foregoing, whether as a result of any successive stock split or reclassification of,
or stock dividend on, any of the foregoing or otherwise;
provided, however, that
such securities shall cease to be Registrable Securities if and when (A) a registration statement
with respect to the disposition of such securities shall have become effective under the Securities
Act and such securities shall have been disposed of pursuant to such effective registration
statement, (B) such securities are sold pursuant to Rule 144 under circumstances in which any
legend borne by such Registrable Securities relating to restrictions on the transferability thereof
under the Securities Act is removed by the Company, (C) all Common Shares then outstanding are
eligible to be sold pursuant to paragraph (k) of Rule 144, (D) such securities have ceased to be
outstanding or (E) as of any time, in the reasonable judgment of the Company, all Common Shares
then outstanding would be eligible for sale pursuant to Rule 144 under the Act (without giving
effect to the provisions of Rule 144 (k)) in the 90-day period following such time.
“Registration Expenses” shall mean all expenses incident to the Company’s performance
of or compliance with its obligations under Section 3, including all Commission, NASD and stock
exchange or NASDAQ registration and filing fees and expenses, fees and expenses of compliance with
applicable state securities or “blue sky” laws (including reasonable fees and disbursements of
counsel for the underwriters in connection with “blue sky” qualifications of the Registrable
Securities), printing expenses, messenger and delivery expenses, fees and disbursements of any
custodian, the fees and expenses incurred in connection with the listing of the securities to be
registered in an initial public offering on each securities exchange
or automated quotation system
on which such securities are to be so listed and, following such initial public offering, the fees
and expenses incurred in connection with the listing of such securities to be registered on each
securities exchange or automated quotation system on which such securities are listed, fees and
disbursements of counsel for the Company and all independent certified public accountants
(including the expenses of any annual audit and “cold comfort” letters required by or incident to
such performance and compliance), the fees and disbursements of underwriters customarily paid by
issuers or sellers of securities (including the fees and expenses of any “qualified independent
underwriter” required by
4
the NASD), the reasonable fees of one counsel retained in connection with each such registration by
the holders of a majority of the Registrable Securities being registered, the reasonable fees and
expenses of any special experts retained by the Company in connection with such registration, and
fees and expenses of other Persons retained by the Company (but not including any underwriting
discounts or commissions or transfer taxes, if any, attributable to the sale of Registrable
Securities by holders of such Registrable Securities other than the Company).
“securities” shall have the meaning given to such term under the Securities Act.
“Securities
Act” shall mean the U.S. Securities Act of 1933 or any U.S.
federal
statute then in effect which has replaced such statute, and a reference to a particular section
thereof shall be deemed to include a reference to the comparable section, if any, of any such
replacement federal statute.
“Shareholder” shall have the meaning given to such term in the first paragraph of
this Agreement.
“Subscription Agreement” shall mean all and each of the Subscription Agreements, dated
as of various dates on or before the date hereof, between the Company and each of the Investors (as
defined therein) for the purchase and sale of Common Shares in the Offering.
“Subsidiary” shall mean any corporation, limited liability company or other Person of
which shares of stock or other ownership interests having a majority of the general voting power
(without regard to the occurrence of any contingency) in electing the Board of Directors thereof or
other Persons performing a similar function are, at the time as of which any determination is being
made, owned by the Company either directly or through its Subsidiaries and any partnership in which
the Company or any Subsidiary is a general partner.
“Transfer” shall mean to sell, assign or otherwise transfer an interest, in whole or
in part, whether voluntarily or involuntarily or by operation of law or at a judicial sale or
otherwise; provided, however, that Transfer shall not include the bona fide pledge of
Common Shares or Warrants in connection with a loan by a financial institution or any transfer back
to the pledgor by the pledgee of such Common Shares or Warrants following the termination of any
such bona fide pledge.
“U.S.”
shall mean the United States of America and dependent territories or any part
thereof.
“Warrant Shares” shall mean any Common Shares issuable upon exercise of the Warrants.
“Warrants” shall mean those Warrants to be issued to White Mountains and Berkshire
pursuant to the Warrant Issuance Agreements (as defined in the Subscription Agreement).
5
“White Mountains” shall mean White Mountains Re Group, Ltd., a company existing
under the laws of Bermuda, or any successor entity thereto.
SECTION
2. Transfer of Shares or Warrants. (a) General. No Shareholder
shall Transfer any Common Shares other than
(i) to one or more third parties after having complied with Section 2(b) hereof, if
applicable,
(ii) in connection with the exercise of its tag-along rights under Section 2(b)
hereof,
(iii) in connection with the Founders’ exercise of drag-along rights under Section 2(c)
hereof or any other transaction with any Person approved by the Board and Shareholders in
accordance with the Certificate of Incorporation and By-laws pursuant to which cash, shares or
other securities of such Person are exchanged or substituted for all the Common Shares,
(iv) in the case of any Shareholder that is an individual, to any one or more of such
Shareholder’s spouse or lineal relatives, or to any custodian or trust for the benefit of any
of the foregoing,
(v) to any Affiliate of such Shareholder,
(vi) in the case of any Shareholder that is a partnership, corporation or limited
liability company, as a distribution to the partners, shareholders or members thereof,
(vii) in connection with the exercise by such Shareholder of its registration rights
under Section 3 hereof or
(viii) following an initial public offering, pursuant to Rule 144 (or any successor
provision) under the Securities Act.
No Shareholder shall Transfer any Warrants, other than (i) to one or more third parties
(including other Shareholders or the Company) after complying with Section 4 of the Warrants, (ii)
in connection with any transaction with any Person approved by the Board and Shareholders in
accordance with the Certificate of Incorporation and By-laws pursuant to which cash, shares or
other securities of such Person are exchanged or substituted for all the Common Shares, (iii) to
any Affiliate of such Shareholder or (iv) in connection with the exercise by such Shareholder of
its registration rights under Section 3 hereof; provided,
however, that a Transfer pursuant
to clauses (i) or (iv) above may not be made until the earliest of (A) the third anniversary of the
date of this Agreement, (B) such time as the Shareholders (other than the Founders) who are party
to this Agreement as of the date hereof own less than 50% of the Common Shares initially acquired
pursuant to their respective Subscription Agreements or (C) the first anniversary of the initial
closing of an Initial Public Offering; provided further, however, that at any time each of
White Mountains and Berkshire (and any Affiliate of
6
White
Mountains or Berkshire to whom Warrants have been Transferred pursuant to clause (iii)
above) may Transfer Warrants to each other.
Notwithstanding any other provision of this Agreement, no Transfer may be made in violation of
any provision or any requirement of the U.S. securities laws. Each Shareholder agrees that it will
not seek to evade the restrictions on transfer set forth in this Section 2 by Transferring Common
Shares or Warrants to an Affiliate and thereafter transferring beneficial ownership of the
Affiliate, as part of a unified plan to avoid such restrictions. If any Shareholder wishes to
Transfer any of its Common Shares or Warrants to another Person (a “Transferee”) other than
any Transfer permitted (or, in the event that such provisions shall have terminated in accordance
with Section 10 hereof, that would have been permitted) by subsection (iii), (vii) or (viii) of the
first sentence of this Section 2(a), (B) by subsection (vi) of the first sentence of this Section
2(a) if at the time of such Transfer such Shareholder would be permitted to transfer its Common
Shares pursuant to (x) subsection (viii) of the first sentence of this Section 2(a) and (y) Rule
144(k) under the Securities Act or (C) by subsection (ii) of (iv) of the second sentence of this
Section 2(a), such Shareholder shall, as a condition of such Transfer, require the Transferee to
execute and deliver an agreement in form and substance reasonably satisfactory to the Company
agreeing to be bound by all of the provisions hereof. The preceding sentence shall survive an
Initial Public Offering until the date that is 18 months following the initial closing of such
Initial Public Offering.
(b) Tag-Along Rights. (i) If, at any time, one or more Shareholders (the “Selling
Shareholders”) propose to Transfer to any Person or group of Persons (the “Proposed
Purchaser”) in any transaction or series of related transactions a number of Common Shares
equal to (x) prior to an Initial Public Offering, 5% or more of the then outstanding Common Shares,
and (y) following an Initial Public Offering, 10% or more of the then outstanding Common Shares,
the Selling Shareholders shall afford each other Shareholder the opportunity to participate
proportionately in such Transfer in accordance with this Section 2(b). At least 20 days prior to
the date proposed for such sale, the Selling Shareholders shall give notice to the Company, which
shall provide a copy to each other Shareholder with a notice of the proposed Transfer, stating
such Selling Shareholders’ intent to make such sale, the number of Common Shares proposed to be
transferred, the kind and amount of consideration to be paid for such Common Shares and the name of
the Proposed Purchaser (the “Purchase Offer”). Each other Shareholder shall have the right
to Transfer to the Proposed Purchaser a number of Common Shares equal to such Shareholder’s
Allotment. Such Shareholder’s “Allotment” shall be equal to (A) the total number of Common
Shares proposed to be Transferred by the Selling Shareholders multiplied by (B) a fraction, the
numerator of which is the number of Common Shares then owned by such Shareholder and the
denominator of which is the total number of Common Shares then outstanding (assuming, for purposes
of all calculations of outstanding Common Shares in this clause (i), the exercise of all then
outstanding Warrants).
(ii) Each Shareholder shall have 10 days from the receipt of the Purchase Offer in which to
accept such Purchase Offer by written notice to the Selling Shareholders. Contemporaneously with
the sale by the Selling Shareholders, each other
7
Shareholder so electing to participate shall, on the date of the closing, sell the Common Shares
indicated in its written notice for the same consideration and on the same terms as those provided
by the Proposed Purchaser to the Selling Shareholders as specified in the Purchase Offer.
(iii) Notwithstanding the foregoing, this Section 2(b) shall not apply to any Transfer
permitted (or, in the event that such provisions shall have terminated in accordance with Section
10 hereof, that would have been permitted) by subsections (iii) through (viii) of the first
sentence of Section 2(a) hereof.
(c) Drag-Along Rights. If, at any time, the Founders jointly propose to transfer all
of the Common Shares owned by the Founders in a single transaction to a third party (the
“Proposed Acquiror”) pursuant to a Qualified Sale (as defined below), and the Board of
Directors of the Company has approved such Qualified Sale, the Founders may cause to be included in
such Qualified Sale all, but not less than all, of the Common Shares held by each of the other
Shareholders by providing to each such other Shareholder a notice (a “Qualified Sale
Notice”) of the proposed Qualified Sale at least 20 days prior to the date proposed for such
Qualified Sale, stating the identity of the Proposed Acquiror, the kind and amount of consideration
proposed to be paid for the Common Shares to be purchased by the Proposed Acquiror and the other
material terms of such Qualified Sale. For purposes of determining the number of Common Shares
outstanding pursuant to the immediately preceding sentence, Common Shares issuable upon the
exercise of Warrants, options or other rights to acquire Common Shares, or upon the conversion or
exchange of any security outstanding as of the time of delivery of the Qualified Sale Notice, shall
not be deemed to be outstanding.
In the event the Founders so provide a Qualified Sale Notice with respect to a Qualified Sale,
each other Shareholder shall (i) be obligated to transfer all of the Common Shares owned by such
Shareholder to the Proposed Acquiror on the terms and conditions set forth in the Qualified Sale
Notice and (ii) execute and deliver such instruments of conveyance and transfer and take such other
action, including voting such Shareholder’s Common Shares in favor of such Qualified Sale and
executing any purchase agreements, merger agreements, indemnity agreements, escrow agreements or
related documents, as the Founders or the Proposed Acquiror may reasonably require in order to
carry out the terms and provisions of this Section 2(c);
provided, however that such
instruments of conveyance and transfer and such purchase agreements, merger agreements, indemnity
agreements, escrow agreements and related documents shall not include any representations or
warranties of such Shareholder except such representations and warranties as are ordinarily given
by a seller of securities with respect to such seller’s authority to sell, enforceability of
agreements against such seller, such seller’s good title in such securities and the good title in
such securities to be acquired at closing by the Proposed Acquiror,
provided further, however, that any indemnity provision included in any such instrument, agreement or related
document shall only indemnify the Proposed Acquiror with respect to breaches of such
representations and warranties by such Shareholder, without any obligation or liability for
contribution.
8
The
term “Qualified Sale” means a sale by the Founders to a third party which is not
an Affliate of the Company or any Shareholder that meets all of the following requirements:
(i) the Common Shares owned in the aggregate by the Founders (assuming for this purpose
the exercise of all outstanding Warrants) to be sold in such sale equals or exceeds 25% of the
total outstanding Common Shares (assuming for this purpose the exercise of all outstanding
Warrants), (ii) the terms of such sale were negotiated between the Founders and such
unaffiliated third party (or on their behalf by their respective agents or representatives) on
a bona fide arm’s-length basis,
(ii) the terms of such sale provide that the sale of Common Shares pursuant thereto by
each Shareholder that is not a Founder shall be made for the same type and amount of
consideration for each such Common Share sold as is to be received by each Founder for each
Common Share sold (except with respect to Electing Shareholders as set forth below) and,
subject to the provisos in the third sentence of this Section 2(c), in all other respects in a
manner such that each term and condition applicable to such Shareholder is identical to, or no
less favorable than, each corresponding term and condition applicable to either Founder; and
(iii) either (A) the consideration to be received by each Shareholder pursuant to such
Qualified Sale is solely cash or (B) effective provision is made such that at the closing of
such Qualified Sale each Electing Shareholder (as defined below) will receive the Cash
Equivalent (as defïned below) of any consideration other than cash proposed to be paid
pursuant to the terms of such Qualified Sale.
An “Electing Shareholder” is a Shareholder (other than a Founder) that gives written
notice, at least 10 days prior to the date proposed for a Qualified Sale, to the Selling
Shareholders that provided the Qualified Sale Notice of such Shareholder’s election to receive the
Cash Equivalent of any non-cash consideration proposed to be paid pursuant to the terms of such
Qualified Sale.
The term “Cash Equivalent” means an amount in cash equal to the fair market value (as
determined by a qualified appraiser with experience in the appraising of properties and businesses
in the relevant industry, to be selected by the mutual agreement of the interested parties) of
non-cash consideration to be paid in a Qualified Sale;
provided, however, that if no
agreement can be reached, then any such interested party may apply to the American Arbitration
Association for the appointment of an appraiser meeting the requirements of the preceding
sentence, and any such appointment shall be binding upon the parties; provided further,
however, that in the event that such non-cash consideration consists of publicly traded securities,
then, in lieu of using an appraiser, the fair market value of such non-cash consideration shall
equal the average closing price of the publicly traded security for the 10 Business Days ending on
the trading day immediately preceding the closing of the Qualified Sale. Any such appraiser shall
be
9
required
to report its appraisal in writing, within 60 days of its appointment, to each
interested party.
(d) Preemptive Rights. (A) Grant of Preemptive Rights. If the Company shall,
prior to an Initial Public Offering, issue, sell or distribute to any Shareholder any equity
securities of the Company, or any option, warrant, or right to acquire, or any security convertible
into or exchangeable for, any equity securities of the Company (other than (i) pursuant to an
underwritten offering pursuant to an effective registration statement under the Securities Act,
(ii) pursuant to a dividend or distribution upon the Common Stock of stock or other equity
securities of the Company, (iii) in connect with any scheme of arrangement, merger or consolidation
by the Company or any Affiliate of the Company or the acquisition by the Company or any such
Affiliate of the shares or substantially all the assets of any other Person or (iv) Warrant
Shares) (any equity securities of the Company or options, warrants, rights to acquire or securities
convertible into or exchangeable for equity securities of the Company, the issuance of which is not
covered by clauses (i) through (iv) above, being “New Securities”), each Shareholder shall
be entitled to participate in such issuance, sale or distribution for up to such number of New
Securities (such number being such Shareholder’s “Preemptive Allotment”) as is equal to (x)
the total number of New Securities proposed to be issued, sold or distributed by the Company
multiplied by (y) a fraction, the numerator of which is the number of Common Shares owned by such
Shareholder and the denominator of which is the total number of Common Shares outstanding
(assuming, for purposes of all calculations of outstanding Common Shares in this clause (y), the
exercise of all outstanding Warrants.)
(B) Company Notice; Procedures for Exercise of Preemptive Rights. If the Company
proposes to issue any New Securities, the Company shall, at least 20 days prior to
consummating the issuance of the New Securities, give written notice (the “Company
Notice”) to the Shareholders, stating the number of New Securities, the price per New
Security, the terms of payment and all other terms and conditions on which the issuer
proposes to make such issuance. In order for a Shareholder to exercise its preemptive rights
under this Section 2(d), such Shareholder must give written notice to the Company within 10
days after the receipt of the Company Notice, stating the number of New Securities that such
Shareholder desires to purchase (which number shall not be greater than such Shareholder’s
Preemptive Allotment).
(C) Re-Set of Preemptive Rights. If no option is exercised pursuant to this
Section 2(d) for any of the New Securities within 10 days after receipt of the Company Notice
(or if the option is exercised in the aggregate for less than all of the New Securities), the
Company shall be free for a period of 180 days thereafter to sell the New Securities as to
which such option has not been exercised to the proposed offerees at no less than the sale
price set forth in the Company Notice and on terms and conditions that are no more favorable
to the proposed offerees than those offered to the Shareholders. If, however, at the
expiration of such 180-day period, such New Securities have not been issued in accordance
with the terms set forth in the Company Notice, then any other issuance or proposed issuance
thereof shall be subject to all of the provisions of
10
this Agreement and such shares shall not be issued without the Company again offering its shares in the manner provided in this Section 2(d).
SECTION 3. Registration Rights. The Shareholders shall have the right to have their
Registrable Securities registered under the Securities Act and applicable U.S. state securities
laws, and the Company shall then have the related obligations, in accordance with the following
provisions.
(a)
Registration on Request. (i) At any time (x) after the third anniversary of the
date of the Closing, upon the written request of Shareholders holding in the aggregate 40% of all
Registrable Securities then held by Shareholders (assuming for this purpose exercise of all
outstanding Warrants) or (y) after an initial public offering, upon the written request of
Shareholders holding in the aggregate 10% of all Registrable Securities then held by Shareholders
(assuming for this purpose the exercise of all outstanding Warrants) (such Shareholders being
referred to as the “Requesting Holders”), the Requesting Holders may request that the
Company either (i) effect the registration under the Securities Act for an underwritten public
offering of all or part of the Registrable Securities held by them (the “Single Registration
Option”), (ii) effect the registration of all or any of their Registrable Securities by filing
a registration statement under the Securities Act (the “Shelf Registration Statement”)
which provides for the sale by the Requesting Holders of their Registrable Securities from time to
time in underwritten public offerings pursuant to Rule 415 under the Securities Act (the “Shelf
Option”), or (iii) permit the sale of Registrable Securities that are already included in an
effective Shelf Registration Statement pursuant to an underwritten public offering (the
“Takedown Option”); provided, however, that the Requesting Holders may not elect
the Shelf Option or the Takedown Option if the request thereunder is in connection with or would
constitute an initial public offering.
Upon receipt of such request, the Company will promptly give written notice to all other
holders of Registrable Securities (the “Other Holders”) that a request for registration or
for a takedown has been received. For a period of 10 days (or two Business Days in the case of a
Takedown Option request) following receipt of such notice, the Other Holders may request that the
Company also register their Registrable Securities (or include Registrable Securities in such
takedown) and the Company may determine to include its authorized and unissued securities in such
registration or takedown. The failure of any Other Holder to affirmatively indicate its intent to
include its Registrable Securities in such registration or takedown shall be deemed a waiver of any
right to so include such Registrable Securities in such registration statement or takedown. After
the expiration of such 10-day period or two-Business Day period, as the case may be, the Company
shall notify all holders of the number of Registrable Securities to be registered or included.
Subject to the provisions of this Section 3, in the case of either the Single Registration Option
or the Shelf Option, the Company shall use its reasonable best efforts to cause the prompt
registration under the Securities Act of (A) the Registrable Securities that the Requesting Holders
and the Other Holders have requested the Company to register, and (B) all other securities that the
Company has determined to register, and in connection therewith will prepare and file a
registration statement under the Securities Act to effect such registration. Such registration
statement shall be on such
11
appropriate registration form of the Commission as shall be selected by the Company, and such
selection shall be reasonably acceptable to the holders of a majority of the aggregate Registrable
Securities to be sold by the Requesting Holders. Subject to the provisions of this Section 3, in
the case of a Takedown Option, the Company shall use its reasonable best efforts to cause all
Registrable Securities so requested to be included in such underwritten public offering and shall
prepare and file any prospectus supplement reasonably necessary to effectuate a takedown.
Notwithstanding the foregoing, the Company will not be required to file a registration
statement or proceed with a takedown in any of the following situations:
(1) the Registrable Securities of Requesting Holders to be offered pursuant to such
request do not have an aggregate offering price of at least U.S.$50 million in the case of an initial public offering or U.S. $25 million with respect to any subsequent offering (based on the then current market price or, in the case of an
initial public offering, the aggregate offering price proposed to be set forth on the cover
page of the registration statement);
(2) during any period (not to exceed 60 days with respect to each request) when the
Company has determined to proceed with a public offering and, in the judgment of the managing
underwriter thereof, the requested filing would have an adverse effect on the public offering;
provided that the Company is actively employing in good faith all reasonable efforts
to cause such public offering to be consummated;
(3) during any period (not to exceed 60 days with respect to each request) when the
Company is in possession of material non-public information that the Board determines is in
the best interest of the Company not to disclose publicly; or
(4) to the extent required by the managing underwriter in an underwritten public
offering, during a period, not to exceed 180 days in the case of the initial public offering
or 90 days in the case of all other offerings, following the effectiveness of any previous
registration statement filed by the Company.
The right of the Company not to file a registration statement or proceed with a takedown
pursuant to paragraphs (2) and (4) above may not be exercised more than once in any twelve-month
period, and pursuant to paragraph (3) above may not be exercised more than twice in any
twelve-month period.
Requesting Holders holding a majority of the Registrable Securities requested to be registered
or included in a takedown may, at any time prior to the effective date of the registration
statement relating to such registration or the execution of an underwriting agreement relating to
such takedown, revoke such request, without liability to any of the other Requesting Holders or the
Other Holders, by providing a written notice to the Company revoking such request.
12
(ii) Number of Registrations; Expenses. The Company shall not be obligated to effect
more than one registration or takedown of Registrable Securities pursuant to requests from
Requesting Holders under this Section 3(a) in the 180-day period immediately following the
effective date of the last registration or takedown of Registrable Securities. The Company shall
pay all Registration Expenses in connection with the first six registrations and all takedowns that
the Requesting Holders request pursuant to this Section 3(a), including expenses in connection with
any prospectus supplement reasonably necessary to effectuate a Takedown Option. The Requesting
Holders and, if applicable, the Other Holders that requested that their Registrable Securities be
registered and the Company shall pay all Registration Expenses in connection with later
registrations pursuant to this Section 3(a) pro rata according to the number of Registrable
Securities registered by each of them pursuant to such registration. However, in connection with
all registrations and all takedowns, each Shareholder shall pay all underwriting discounts and
commissions and transfer taxes, if any, relating to the sale or disposition of such Shareholder’s
Registrable Securities pursuant to this Section 3(a). If the first request hereunder is in
connection with or would constitute an initial public offering, the Registrable Securities shall be
offered pursuant to a firm commitment underwriting.
(iii) Effective Registration Statement. If the Requesting Holders elect the Single
Registration Option in connection with a registration requested pursuant to this Section 3(a), such
registration shall not be deemed to have been effected unless the registration statement relating
thereto (A) has become effective under the Securities Act and any of the Registrable Securities of
the Shareholders included in such registration have actually been sold thereunder, and (B) has
remained effective for a period of at least 180 days (or such shorter period in which all
Registrable Securities of the Requesting Holders and, if applicable, the Company and the Other
Holders included in such registration have actually been sold
thereunder); provided, however, that if after any registration statement requested pursuant to this Section 3(a)
becomes effective (A) such registration statement is subject to any stop order, injunction or other
order or requirement of the Commission or other governmental agency or court solely due to the
actions or omissions to act of the Company and (B) less than 75% of all of the Registrable
Securities included in such registration have been sold thereunder, then such registration
statement shall not constitute a registration of Registrable Securities to be effected by the
Company pursuant to Section 3(a)(ii) hereof and the Company shall pay all the Registration Expenses
related thereto.
(iv) Selection of Underwriters. If the Requesting Holders elect the Single
Registration Option or the Takedown Option, Requesting Holders holding a majority of the
Registrable Securities requested to be registered or included in such takedown shall have the right
to select the lead managing underwriter for the offering:
provided, however, that such
selection shall be subject to approval by the Company, which approval shall not be unreasonably
withheld or delayed; and provided further, that the Company shall have the right to appoint
a co-manager in all cases subject to the approval of Requesting Holders holding a majority of the
Registrable Securities requested to be registered or included in such takedown, which approval
shall not be unreasonably withheld.
13
(v) Pro Rata Participation in Requested Registrations or Takedowns. If in connection
with a requested registration or takedown pursuant to this Section 3(a), the lead managing
underwriter advises the Company, the Requesting Holders and the Other Holders in writing that, in
its view, the number of equity securities requested to be included in such registration or takedown
exceeds the largest number of securities which can be sold without having an adverse effect on such
offering, including the price at which such securities can be sold, the number of Registrable
Securities requested to be registered by the Requesting Holders and the Other Holders included by
the Company in such registration shall be allocated pro rata (subject to adjustments for tax
considerations as provided in Subsection (C) below) among the Requesting Holders and the Other
Holders on the basis of the relative number of Registrable Securities then held by them;
provided; however, that:
(A) if the Company intends to issue Registrable Securities and to include them in such
registration or takedown, the Company’s allocation shall first be subject to reduction before
the number of Registrable Securities to be registered by the Requesting Holders and the Other
Holders is subject to any reduction; and
(B) Requesting Shareholders and Other Holders who become subject to a reduction
pursuant to this Section 3(a)(v) in the amount of Registrable Securities to be included in a
registration or takedown may elect not to sell any Registrable Securities pursuant to the
registration or takedown.
(vi) With respect to any Shelf Registration Statement that has been declared effective and
which includes Registrable Securities, the Company agrees to use its reasonable best efforts to
keep the Shelf Registration Statement continuously effective and usable for the resale of the
applicable Registrable Securities for a period ending on the first date on which all the
Registrable Securities covered by such Shelf Registration Statement have been sold pursuant to such
Shelf Registration Statement, but in no event longer than two years. The foregoing notwithstanding,
the Company shall have the right in its reasonable discretion, based on any valid business purpose
(including to avoid the disclosure of any material non-public information that the Company is not
otherwise obligated to disclose or to coordinate such distribution with other shareholders that
have registration rights with respect to any securities of the Company or with other distributions
of the Company (whether for the account of the Company or otherwise)), to suspend the use of the
applicable Shelf Registration Statement for a reasonable length of time (a “Delay Period”)
and from time to time; provided, however, that the aggregate number of days in all Delay
Periods occurring in any period of twelve consecutive months shall not exceed 90 days; and
provided further, however, that the two-year limit referred to above shall be extended by
the number of days in any applicable Delay Period. The Company shall provide written notice to each
holder of Registrable Securities covered by the Shelf Registration Statement of the beginning and
the end of each Delay Period and such holders shall cease all disposition efforts with respect to
Registrable Securities held by them immediately upon receipt of notice of the beginning of any
Delay Period.
14
(b) Incidental Registration. (i) If the Company at any time proposes to register or sell
any Common Shares or any options, warrants or other rights to acquire, or securities convertible
into or exchangeable for, Common Shares (the “Priority Securities”) under the Securities
Act (other than a registration (A) relating to shares issuable upon exercise of employee share
options or in connection with any employee benefit or similar plan of the Company, (B) in
connection with any scheme of arrangement, merger or consolidation by the Company or any Affiliate
of the Company or the acquisition by the Company or any such Affiliate of the shares or
substantially all the assets of any other Person, or (C) pursuant to Section 3(a) hereof) in a
manner that would permit registration of Registrable Securities for sale, or the sale in a
takedown, to the public under the Securities Act (whether or not for sale for its own account)),
including in an initial public offering, it shall each such time, subject to the provisions of
Section 3(b)(ii) hereof, give prompt written notice to all holders of record of Registrable
Securities of its intention to do so and of such Shareholders’ rights under this Section 3(b), at
least 10 days (or two Business Days, in the case of a takedown from an effective shelf registration
statement) prior to the anticipated filing date of the registration statement relating to Such
registration or the offering date in the case of a takedown. Such notice shall offer all such
Shareholders the opportunity to include in such registration statement or in such takedown such
number of Registrable Securities as each such Shareholder may request.
Upon the written request of any such Shareholder made within seven days (or two Business Days
in the case of a takedown) after the receipt of the Company’s notice (which request shall specify
the number of Registrable Securities intended to be disposed of by such Shareholder), the Company
shall use its reasonable best efforts to effect the registration under the Securities Act of all
Registrable Securities that the Company has been so requested to register by the Shareholders
thereof or to include requested Registrable Securities in a takedown; provided, however,
that (A) all holders of Registrable Securities requesting to be included in the Company’s
registration or takedown must sell their Registrable Securities to the underwriters selected by the
Company on substantially the same terms and conditions as apply to the Company (other than
provisions relating to the indemnification of underwriters or Shareholders), and (B) if, at any
time after giving written notice pursuant to this Section 3(b)(i) of its intention to register any
Priority Securities or to proceed with a takedown and prior to the effective date of the
registration statement filed in connection with such registration or prior to the execution of an
underwriting agreement in connection with a takedown, the Company shall determine for any reason
not to register or sell such Priority Securities, the Company shall give written notice to all
holders of Registrable Securities and shall thereupon be relieved of its obligation to register any
Registrable Securities in connection with such registration or to include requested Registrable
Securities in a takedown (without prejudice, however, to rights of Shareholders under Section 3(a)
hereof). The failure of any holder of Registrable Securities to affirmatively indicate its intent
to include its Registrable Securities in such registration or takedown shall be deemed a waiver of
any right to so include such Registrable Securities in such registration or takedown. Any holder of
Registrable Securities requesting to be included in such registration may elect, in writing prior
to the effective date of the registration statement
15
filed in connection with such registration, not to register such Registrable Securities in
connection with such registration.
No registration or takedown effected under this Section 3(b) shall relieve the Company of its
obligations to effect a registration or takedown upon request under Section 3(a) hereof. The
Company shall pay all Registration Expenses in connection with each registration or takedown of
Registrable Securities requested pursuant to this Section 3(b). However, each Shareholder shall pay
all underwriting discounts and commissions and transfer taxes, if any, relating to the sale or
disposition of such Shareholder’s Registrable Securities pursuant to a registration statement or
takedown effected pursuant to this Section 3(b).
(ii) Priority in Incidental Registrations. If in connection with a registration or a
takedown pursuant to this Section 3(b) the managing underwriter advises the Company in writing
that, in its good faith view, the number of equity securities (including all Registrable
Securities) that the Company and the Shareholders intend to include in such registration or
takedown exceeds the largest number of securities that can be sold without having an adverse effect
on such offering, including the price at which such Registrable Securities can be sold, the Company
will include in such registration or takedown (A) first, all the Priority Securities to be sold for
the Company’s own account; and (B) second, to the extent that the number of Priority Securities is
less than the number of Registrable Securities that the underwriter has advised the Company can be
sold in such offering without having the adverse effect referred to above, Registrable Securities
requested to be included in such registration or takedown by the Shareholders pursuant to Section
3(b)(i) hereof, pro rata among all Shareholders requesting registration on the basis of the
relative number of Registrable Securities then held by them. Shareholders subject to such
allocation may elect not to sell any Registrable Securities pursuant to the registration statement
or takedown.
(iii) If the Company at any time proposes to effect a public offering in a jurisdiction other
than the United States of any Common Shares or any options, warrants or other rights to acquire, or
securities convertible into or exchangeable for, Common Shares (other than a public offering (A)
relating to shares issuable upon exercise of employee share options or in connection with any
employee benefit or similar plan of the Company, or (B) in connection with any merger,
reorganization or consolidation by the Company or Affiliate of the Company or the acquisition by
the Company or an Affiliate of the Company of the shares or substantially all the assets of any
other Person), the Company and the Shareholders will have the rights and be subject to the
obligations agreed in this Section 3(b) to the extent and where applicable.
(c) Holdback Agreements. (i) Each Shareholder agrees, for the benefit of the
underwriters referred to below, not to effect any sale or distribution, including any private
placement or any sale pursuant to Rule 144 (or any successor provision) under the Securities Act,
of any Registrable Securities, other than to an Affiliate or by gift or pro rata distribution to
its shareholders, partners or other beneficial holders (in each case, which agree to be bound by
the remaining provisions hereof), and not to effect any such sale or distribution of any other
equity security of the Company or of any security
16
convertible into or exchangeable or exercisable for any equity security of the Company, during the
10 days prior to (or, in the case of a takedown, from the time on such day as such Shareholder
receives notice of such takedown), and during a period, not to exceed 180 days in the case of the
initial public offering or 90 days in the case of all other offerings, after the later of (i) the
effective date of any registration statement filed pursuant to Section 3(a) or (b) hereof in
connection with an underwritten offering and (ii) the execution of an underwriting agreement in
connection with an underwritten offering, without the consent of the managing underwriter of such
offering, except as part of such registration, if permitted;
provided, however, that each
holder of Registrable Securities shall have received written notice of such registration from
either the Company or the managing underwriter at least two Business Days prior to the anticipated
beginning of the 10-day period referred to above. Each Shareholder agrees that it will enter into
any agreement reasonably requested by the underwriters of any such underwritten offering to confirm
its agreement set forth in the preceding sentence.
(ii) The Company agrees (A) not to effect any public sale or distribution of any of its equity
securities or of any security convertible into or exchangeable or exercisable for any equity
security of the Company (other than any such sale or distribution of such securities in connection
with any merger, reorganization or consolidation by the Company or any Affiliate of the Company or
the acquisition by the Company or an Affiliate of the Company of the shares or substantially all
the assets of any other Person or in connection with an employee stock ownership or other benefit
plan) during the 10 days prior to, and during a period, not to exceed 180 days in the case of the
initial public offering or 90 days in the case of all other offerings, which begins on the later of
(i) the effective date of such registration statement and (ii) the execution of an underwriting
agreement in connection with an underwritten offering, without the consent of the managing
underwriters of such offering, and (B) that any agreement entered into after the date hereof
pursuant to which the Company issues or agrees to issue any privately placed equity securities
shall contain a provision under which the holders of such securities agree not to effect any public
sale or distribution of any such securities during the period and in the manner referred to in the
foregoing clause (A), including any private placement and any sale pursuant to Rule 144 under the
Securities Act (or any successor provision), except as part of such registration, if permitted.
(d) Registration Procedures. In connection with any offering of Registrable
Securities registered pursuant to this Section 3, the Company shall:
(i) Promptly prepare and file a registration statement with the Commission within 45 days
after receipt of a request for registration pursuant to a Single Registration Option or a
Shelf Option, and use its reasonable best efforts to cause such registration statement to
become, as soon as practicable, and remain, effective as provided herein; provided,
however, that before filing with the Commission a registration statement or prospectus
or any amendments or suppléments thereto, the Company will furnish to one counsel selected by
the holders of a majority of the Registrable Securities requested to be registered copies of
all such documents proposed to be filed for such counsel’s review and comment (and the Company
shall not file any such document to which such
17
counsel shall have reasonably objected in writing on the grounds that such document does not
comply (explaining why) in all material respects with the requirements of the Securities Act or
the rules or regulations thereunder).
(ii) Prepare and file with the Commission such amendments and supplements to such registration
statement and the prospectus used in connection therewith as may be necessary to keep such
registration statement effective for a period of not less than 180 days in the case of a Single
Registration Option, or two years in the case of a Shelf Option, or such shorter period that will
terminate when all Registrable Securities covered by such registration statement have been sold
(but not before the expiration of the periods referred to in Section 4(3) and Rule 174 of the
Securities Act or any successor provision, if applicable), and to prepare and file prospectus
supplements to effect sales pursuant to takedowns and comply with the provisions of the Securities
Act with respect to the disposition of all securities covered by such registration statement;
provided, however, that the 180-day period referred to above shall be extended by the number of
days such registration statement may be subject to a stop order or otherwise suspended.
(iii) Furnish to each holder and each underwriter, if any, of Registrable Securities covered
by such registration statement such number of copies of such registration statement, each amendment
and supplement thereto (in each case including all exhibits thereto), and the prospectus included
in such registration statement, including each preliminary prospectus, in conformity with the
requirements of the Securities Act, and such other documents as any Shareholder may reasonably
request in order to facilitate the disposition of the Registrable Securities owned by such
Shareholder.
(iv) Unless the exemption from state regulation of securities offerings under Section 18 of
the Securities Act applies, use its commercially reasonable efforts to register or qualify such
Registrable Securities under such other state securities or “blue sky” laws of such jurisdictions
as any holder, and underwriter, if any, of Registrable Securities covered by such registration
statement reasonably requests; provided, however, that the Company will not be required to
(A) qualify generally to do business in any jurisdiction where it would not otherwise be required
to qualify but for this subsection (iv), (B) subject itself or any of its Subsidiaries to taxation
or regulation (insurance or otherwise) of its or their respective businesses in any such
jurisdiction other than the United States, or (C) consent to general service of process in any such
jurisdiction.
(v) Use its commercially reasonable efforts to cause the Registrable Securities covered by
such registration statement to be registered with or approved by such other governmental agencies
or authorities as may be necessary by virtue of the business and operations of the Company and its
Subsidiaries to enable the holder or holders thereof to consummate the disposition of such
Registrable Securities in accordance with the intended method or methods of distribution thereof.
18
(vi) Promptly notify each holder of such Registrable Securities, the sale or placement agent,
if any, thereof and the managing underwriter or underwriters, if any, thereof (A) when such
registration statement or any prospectus included therein or any prospectus amendment or supplement
or post-effective amendment has been filed, and, with respect to such registration statement or any
post-effective amendment, when the same has become effective, (B) of any comments by the Commission
and by the Blue Sky or securities commissioner or regulator of any state with respect thereto or
any material request by the Commission for amendments or supplements to such registration statement
or prospectus or for additional information, (C) of the issuance by the Commission of any stop
order suspending the effectiveness of such registration statement or the initiation or threatening
of any proceedings for that purpose and (D) of the receipt by the Company of any notification with
respect to the suspension of the qualification of the Registrable Securities for sale in any
jurisdiction or the initiation or threatening of any proceeding for such purpose.
(vii) Use its commercially reasonable efforts to obtain as soon as possible the lifting of any
stop order that might be issued suspending the effectiveness of such registration statement.
(viii) Promptly notify each holder of such Registrable Securities at any time when a
prospectus relating thereto is required to be delivered under the Securities Act of the happening
of any event that comes to the Company’s attention if as a result of such event the prospectus
included in such registration statement contains an untrue statement of a material fact or omits to
state any material fact required to be stated therein or necessary to make the statements therein
not misleading; and the Company will promptly prepare and furnish to such Shareholder a supplement
or amendment to such prospectus so that, as thereafter delivered to the purchasers of such
Registrable Securities, such prospectus will not contain an untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary to make the statements
therein not misleading.
(ix) Use its commercially reasonable efforts (A) to cause all such Registrable Securities to
be listed on a national securities exchange in the United States or on NASDAQ and, if applicable,
on each securities exchange on which similar securities issued by the Company may then be listed,
and enter into such customary related agreements including a listing application and
indemnification agreement in customary form, and (B) to provide a transfer agent and registrar for
such Registrable Securities covered by such registration statement no later than the effective date
of such registration statement.
(x) Enter into such customary agreements (including an underwriting agreement or qualified
independent underwriting agreement, in each case, in customary form) and take all such other
actions as the holders of a majority of the Registrable Securities requested to be registered or
included in a takedown or the underwriters retained by such Shareholders, if any, reasonably
request in order to
19
expedite or facilitate the disposition of such Registrable Securities, including customary
representations, warranties, indemnities and agreements and preparing for, and participating in,
such number of “road shows” and all such other customary selling efforts as the underwriters
reasonably request in order to expedite or facilitate such disposition, and to use its commercially
reasonable efforts to assist the underwriters in complying with the rules of the NASD (if
applicable).
(xi) Make available for inspection, during the normal business hours of the Company, by any
holder of Registrable Securities requested to be registered or included in a takedown, any
underwriter participating in any disposition pursuant to such registration statement, and any
attorney, accountant or other agent retained by any such Shareholder or underwriter (collectively,
the “Inspectors”), all financial and other records, pertinent corporate and business documents and
documents relating to the properties of the Company and its Subsidiaries (collectively,
“Records”), if any, as shall be reasonably necessary to enable them to exercise their due
diligence responsibility, and cause the Company’s officers, directors, employees and independent
auditors, and those of the Company’s Subsidiaries, to supply all information and respond to all
inquiries reasonably requested by any such Inspector in connection with such registration statement
or takedown; provided, that each such Inspector hereby agrees to keep in confidence the
contents and existence of any Records that may contain non-public information with respect to the
Company or any of its Subsidiaries, except (but only to the extent) as required by applicable law
to disclose such non-public information.
(xii) Obtain a “cold comfort” letter addressed to the underwriters and the holders of the
Registrable Securities being sold from the Company’s appointed auditors in customary form and
covering such matters of the type customarily covered by “cold comfort” / letters as the
underwriters and the holders of a majority in interest of the Registrable Securities being sold
reasonably request, and dated the later of the effective date of such registration statement and
the date of the execution of the underwriting agreement (and also dated the date of the closing
under the underwriting agreement relating thereto).
(xiii) Obtain an opinion of counsel to the Company addressed to the underwriters and the
holders of the Registrable Securities being sold in customary form and covering such matters, of
the type customarily covered by such an opinion, as the managing underwriters, if any, or as the
holders of a majority in interest of the Registrable Securities being sold may reasonably request,
addressed to such holders and the placement or sales agent, if any, thereof and the underwriters,
if any, thereof, and dated the later of the effective date of such registration statement and the
date of the execution of the underwriting agreement (or also dated the date of the closing under
the underwriting agreement relating thereto).
20
(xiv) Otherwise use its commercially reasonable efforts to comply with all applicable
rules and regulations of the Commission and make available to the Shareholders, as soon as
reasonably practicable, an earnings statement covering a period of at least twelve months, but
not more than eighteen months, beginning with the first full calendar quarter after the
effective date of the registration statement (as the term
“effective date” is defined in Rule
158(c) under the Securities Act) which earnings statement shall satisfy the provisions of
Section 11(a) of the Securities Act and Rule 158 thereunder.
It shall be a condition precedent to the obligation of the Company to take any action with
respect to any Registrable Securities that the holder thereof shall furnish to the Company such
information regarding such holder, the Registrable Securities and any other Company securities held
by such holder as the Company shall reasonably request and as shall be required in connection with
the action taken by the Company. The Company agrees not to include in any amendment to any
registration statement with respect to any Registrable Securities, or any amendment of or
supplement to the prospectus used in connection therewith, any reference to any holder of any
Registrable Securities covered thereby by name, or otherwise identify such holder as the holder of
Registrable Securities, without the consent of such holder, such consent not to be unreasonably
withheld or delayed, unless such disclosure is required by law or regulation.
Each holder of Registrable Securities agrees that, upon receipt of any notice from the Company
of the happening of any event of the kind described in Section 3(d)(viii) or the commencement of a
Delay Period described in Section 2(a)(vi) hereof, such Shareholder will forthwith discontinue
disposition of Registrable Securities until such Shareholder’s receipt of the copies of the
supplemented or amended prospectus contemplated by Section 3(d)(viii) hereof or the end of the
Delay Period, as the case may be, and, if so directed by the Company such Shareholder will deliver
to the Company (at the Company’s expense) all copies (including any and all drafts), other than
permanent file copies, then in such Shareholder’s possession, of the prospectus covering such
Registrable Securities current at the time of receipt of such notice. In the event that the Company
shall give any such notice, the period mentioned in Section 3(d)(ii) hereof shall be extended by
the number of days during the period from and including the date of the giving of such notice
pursuant to Section 3(d)(viii) hereof to and including the date when each holder of Registrable
Securities covered by such registration statement shall have received the copies of the
supplemented or amended prospectus contemplated by Section 3(d)(viii) hereof. Each Holder of
Registrable Securities shall be entitled to reimbursement from the Company for any out-of-pocket
losses actually incurred as a result of such holder’s inability to make delivery of sold securities
due to the Company’s failure to notify the holder of any event described in Section 3(d)(viii)
hereof or of a Delay Period described in Section 2(a)(vi) hereof.
(e) Indemnification. (i) Indemnification by the Company. In consideration of
the agreements of the holders of the Registrable Securities contained herein and in the several
Subscription Agreements, and as an inducement to such holders to enter into the Subscription
Agreement, the Company shall agree that in the event of any registration under the Securities Act
pursuant to this Agreement, the Company will
21
indemnify and hold harmless, to the full extent permitted by law, each of the holders of any
Registrable Securities covered by such registration statement, their respective directors and
officers, members, general partners, limited partners, managing directors, each other Person who
participates as an underwriter in the offering or sale of such securities and each other Person, if
any, who controls, is controlled by or is under common control with any such Shareholder or any
such underwriter within the meaning of the Securities Act (and directors, officers, controlling
Persons, members, partners and managing directors of any of the foregoing) against any and all
losses, claims, damages or liabilities, joint or several, and expenses including any amounts paid
in any settlement effected with the Company’s consent, which consent will not be unreasonably
withheld, to which such Shareholder, any such director or officer, member, or general or limited
partner or managing director or any such underwriter or controlling Person may become subject under
the Securities Act, U.S. state securities “blue sky” laws, common law or otherwise, insofar as such
losses, claims, damages or liabilities (or actions or proceedings in respect thereof) or expenses
arise out of or are based upon (A) any untrue statement or alleged untrue statement of any material
fact contained in any registration statement under which such securities were registered under the
Securities Act, any preliminary, final or summary prospectus contained therein or any amendment or
supplement thereto, (B) any omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading, or (C) any
violation or alleged violation by the Company of any U.S. federal, state or common law rule or
regulation applicable to the Company and relating to action required of or inaction by the Company
in connection with any such registration. The Company shall reimburse each such Shareholder and
each such director, officer, member, general partner, limited partner, managing director or
underwriter and controlling Person for any legal or any other expenses reasonably incurred by them
in connection with investigating or defending such loss, claim, liability, action or proceeding;
provided, however, that the Company shall not be liable in any such case to the
extent that any such loss, claim, damage, liability (or action or proceeding in respect thereof) or
expense arises out of or is based upon any untrue statement or alleged untrue statement or omission
or alleged omission made in such registration statement or amendment or supplement thereto or in
any such preliminary, final or summary prospectus in reliance upon and in conformity with written
information furnished to the Company or its representatives by such Shareholder, in its capacity
as a Shareholder in the Company, or any such director, officer, member, general or limited partner,
managing director, underwriter or controlling Person expressly for use in the preparation thereof;
provided further that the Company shall not be liable to any Person who participates as an
underwriter in the offering or sale of Registrable Securities, if any, or any other Person (other
than a holder of Registrable Securities covered by the registration statement), if any, who
controls such underwriter within the meaning of the Securities Act, pursuant to this Section
3(e)(i) with respect to any preliminary prospectus or the final prospectus or the final prospectus
as amended or supplemented as the case may be, to the extent that any such loss, claim, damage or
liability of such underwriter or controlling Person (other than a holder of Registrable Securities
covered by the Registration Statement) results from the fact that such underwriter sold Registrable
Securities to a Person to whom there was not sent or given, at or
prior to the written confirmation
of such sale, a copy of the final prospectus or of the
22
final prospectus as then amended or supplemented, whichever is most recent, if the Company has
previously furnished copies thereof to such underwriter and such final prospectus, as then amended
or supplemented, had corrected any such misstatement or omission, except that the indemnification
obligation of the Company with respect to any Person who participates as an underwriter in the
offering or sale of Registrable Securities, or any other Person (other than a holder of Registrable
Securities covered by the registration statement), if any, who controls such underwriter within the
meaning of the Securities Act, pursuant to this proviso shall be modified in such manner, which
shall be reasonably acceptable to the Company and a majority of the holders of Registrable
Securities participating in any such registration, as is consistent with customary practice with
respect to underwriting agreements for offerings of such type. The indemnity provided for herein,
when it becomes a commitment of the Company, shall remain in full force and effect regardless of
any investigation made by or on behalf of such Shareholder or any such director, officer, member,
general partner, limited partner, managing director, underwriter or
controlling Person and shall
survive the transfer of such securities by such Shareholder.
(ii) Indemnification by the Shareholders and Underwriters. The Company will require,
as a condition to including any Registrable Securities in any registration statement filed in
accordance with the provisions hereof, that the Company shall have received an undertaking
reasonably satisfactory to it from the holders of such Registrable Securities or any underwriter,
to indemnify and hold harmless (in the same manner and to the same
extent as set forth in
subsection (i) above) the Company and its directors, officers, controlling persons and all other
prospective sellers and their respective directors, officers, general and limited partners,
managing directors, and their respective controlling Persons with respect to any statement or
alleged statement in or omission or alleged omission from such registration statement, any
preliminary, final or summary prospectus contained therein, or any amendment or supplement, if such
statement or alleged statement or omission or alleged omission was made in reliance upon and in
conformity with written information furnished to the Company or its representatives by or on behalf
of such Shareholder, in its capacity as a Shareholder in the Company, or such underwriter, as
applicable, expressly for use in the preparation of such registration statement, preliminary, final
or summary prospectus or amendment or supplement, or a document incorporated by reference into any
of the foregoing. Such indemnity shall remain in full force and effect regardless of any
investigation made by or on behalf of the Company or any of the holders of Registrable Securities,
underwriters or any of their respective directors, officers, members, general or limited partners,
managing directors or controlling Persons and shall survive the transfer of such securities by such
Shareholder; provided, however, that no such Shareholder shall be liable in the aggregate
for any amounts exceeding the amount of the proceeds to be received by such holder from the sale of
its Registrable Securities pursuant to such registration (after deducting any fees, discounts and
commissions applicable thereto), as reduced by any damages or other amounts that such holder was
otherwise required to pay by reason of such untrue or alleged untrue statement or omission or
alleged omission.
(iii) Notices of Claims, etc. Promptly after receipt by an indemnified party hereunder
of written notice of the commencement of any action or proceeding
with
23
respect to which a claim for indemnification may be made pursuant to this Section 3(e), such
indemnified party will, if a claim in respect thereof is to be made against an indemnifying party,
promptly give written notice to the indemnifying party of the commencement of such action;
provided, however, that the failure of any indemnified party to give notice as provided
herein shall not relieve the indemnifying party of its obligations under the preceding subsections
of this Section 3(e), except to the extent that the indemnifying party is actually materially
prejudiced by such failure to give notice. In case any such action is brought against an
indemnified party, unless in such indemnified party’s reasonable judgment a conflict of interest
between such indemnified party and indemnifying parties may exist in respect of such claim, the
indemnifying party will be entitled to participate in and, jointly with any other indemnifying
party similarly notified, to assume the defense thereof, to the extent that it may wish, with
counsel reasonably satisfactory to such indemnified party, and after notice from the indemnifying
party to such indemnified party of its election so to assume the defense thereof, the indemnifying
party will not be liable to such indemnified party for any legal or other expenses subsequently
incurred by the latter in connection with the defense thereof, unless in such indemnified party’s
reasonable judgment a conflict of interest between such indemnified and indemnifying parties arises
in respect of such claim after the assumption of the defense thereof, and the indemnifying party
will not be subject to any liability for any settlement made without its consent (which consent
shall not be unreasonably withheld). No indemnifying party will consent to entry of any judgment or
enter into any settlement that does not include as an unconditional term thereof the giving by the
claimant or plaintiff to such indemnified party of a release from all liability in respect to such
claim or litigation. An indemnifying party who is not entitled to, or elects not to, assume the
defense of a claim will not be obligated to pay the fees and expenses of more than one counsel in
any single jurisdiction for all parties indemnified by such indemnifying party with respect to such
claim, unless in the reasonable judgment of any indemnified party a conflict of interest may exist
between such indemnified party and any other of such indemnified parties with respect to such
claim, in which event the indemnifying party shall be obligated to pay the fees and expenses of
such additional counsel or counsels as may be reasonably necessary. Notwithstanding anything to the
contrary set forth herein, and without limiting any of the rights set forth above, in any event any
party will have the right to retain, at its own expense, counsel with respect to the defense of a
claim.
(iv)
Contribution. In order to provide for just and equitable contribution in
circumstances in which the indemnity agreement provided for in this Section 3(e) is for any reason
unavailable, or insufficient to hold harmless an indemnified party in respect of any loss, claim,
damage, liability (or actions or proceedings in respect thereof) or expense referred to herein,
then each indemnifying party shall contribute to the amount paid or payable by such indemnified
party as a result of such losses, claims, damages or liabilities (or actions or proceedings in
respect thereof) or expense in such proportion as is appropriate to reflect the relative fault of
the indemnifying party and the indemnified party in connection with the statements or omissions
which resulted in such losses, claims, damages or liabilities (or actions or proceedings in respect
thereof) or expense, as well as any other relevant equitable considerations. The relative fault of
such indemnifying party and indemnified party shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or omission
24
or alleged omission to state a material fact relates to information supplied by such indemnifying
party or by such indemnified party, and the parties’ relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission. The parties hereto
agree that it would not be just and equitable if contribution pursuant to this Section 3(e)(iv)
were determined by pro rata allocation or by any other method of allocation which does not take
account of the equitable considerations referred to in this Section 3(e)(iv). The amount paid or
payable by an indemnified party as a result of the losses, claims, damages, or liabilities (or
actions or proceedings in respect thereof) or expenses referred to above shall be deemed to include
any legal or other fees or expenses reasonably incurred by such indemnified party in connection
with investigating or defending any such action or claim. Notwithstanding the provisions of this
Section 3(e)(iv), no holder shall be required to contribute any amount in excess of the amount by
which the dollar amount of the proceeds received by such holder from the sale of any Registrable
Securities (after deducting any fees, discounts and commissions applicable thereto) exceeds the
amount of any damages which such holder has otherwise been required to pay by reason of such untrue
or alleged untrue statement or omission or alleged omission, and no underwriter shall be required
to contribute any amount in excess of the amount by which the total price at which the Registrable
Securities underwritten by it and distributed to the public were offered to the public exceeds the
amount of any damages which such underwriter has otherwise been required to pay by reason of such
untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent misrepresentation. The holders’
and any underwriter’s obligations in this Section 3(e)(iv) to contribute shall be several in
proportion to the number of Registrable Securities sold or underwritten, as the case may be, by
them and not joint. For purposes of this Section 3(e), each Person, if any, who controls a
Shareholder or an underwriter within the meaning of Section 15 of the Securities Act shall have the
same rights to contribution as such Shareholder or underwriter, and each director of the Company,
each officer of the Company who signed the registration statement, and each Person, if any, who
controls the Company within the meaning of Section 15 of the Securities Act shall have the same
rights to contribution as the Company.
(f) Underwriting Agreement. Holders of Registrable Securities requested to be
registered pursuant to this Section 3 shall be parties to the underwriting agreement with the
underwriters for such offering in connection with such offering and
may, at their option, require
that any or all of the representations and warranties by, and the agreements on the part of, the
Company to and for the benefit of such underwriters be made to and for the benefit of such holders
of Registrable Securities and that any or all of the conditions precedent to the obligations of
such underwriters under such underwriting agreement shall also be conditions precedent to the
obligations of such holders of Registrable Securities. No underwriting agreement or other
agreement in connection with such offering shall require any such holder of Registrable Securities
to make any representations or warranties to or agreement with the Company or the underwriters
other than representations, warranties or agreements regarding such holder, such holder’s
Registrable Securities and such holder’s intended method of distribution or any other
25
representations required by applicable law and agreements regarding indemnification and
contribution to the effect, but only to the extent, provided in Section 3(e) hereof.
(g)
Rule 144 and Rule 144A. At all times after a public offering of any Common Shares,
the Company agrees that it will file in a timely manner all reports required to be filed by it
pursuant to the Exchange Act, and, if at any time thereafter, the Company is not required to file
such reports, it will make available to the public, to the extent required to permit the sale of
Common Shares by any holder of Registrable Securities pursuant to Rule 144 and Rule 144A under the
Securities Act, current information about itself and its activities as contemplated by Rule 144 and
Rule 144A under the Securities Act, as such Rules may be amended
from time to time.
Notwithstanding the foregoing, the Company may deregister any class of its equity securities under
Section 12 of the Exchange Act or suspend its duty to file reports with respect to any class of its
securities pursuant to Section 15(d) of the Exchange Act if it is then permitted to do so pursuant
to the Exchange Act and the rules and regulations thereunder.
SECTION 4. Restrictive Legends. (a) Each certificate representing Common Shares
(including any Warrant Shares) shall be stamped or otherwise imprinted with a legend in
substantially the following form:
“Any sale, assignment, transfer, pledge or other disposition of the shares represented by this
certificate is restricted by, and the rights attaching to these shares are subject to, the
terms and conditions contained in the Shareholders Agreement dated as of [ ], 2004, as they
may be amended from time to
time, which are available for examination by registered holders of shares at the registered
office of the Company. The registered holder of the shares represented by this certificate, by
acquiring and holding such shares, shall to the extent required under the Shareholders
Agreement be deemed a party to such Shareholders Agreement for all purposes and shall be
required to agree in writing to be bound by and perform all of the
terms and provisions of
such Shareholders Agreement, all as more fully provided therein. In addition, any transferee
of the shares represented by this certificate shall to the extent required under the
Shareholders Agreement be deemed to be a party to such Shareholders
Agreement for all purposes
and shall be required by the transferring shareholder to agree in writing to acquire and hold
such shares subject to all of the terms of such Agreement, all as more fully provided therein,
which terms are to be enforced by the shareholders of the Company.
The shares represented by this certificate have not been registered under the U.S. Securities
Act of 1933 (the “Securities Act”), or any U.S. state securities laws and may not be
transferred, sold or otherwise disposed of unless (i) a registration statement is in effect
under the Securities Act with respect to such shares, or (ii) a written opinion of counsel
reasonably acceptable to the Company is provided to the Company to the effect that no such
registration is required for such transfer, sale or disposal.”
26
(b) Following
termination of Section 2(a) hereof, the Company shall, promptly upon request and
surrender of the legended certificate, deliver a replacement certificate not containing the first
paragraph of the legend above in exchange for the legended certificate. In the event that Common
Shares are disposed of pursuant to an effective registration statement or, following an initial
public offering, Rule 144 (or any successor provision) under the Securities Act or if the Company
shall have received an opinion of counsel reasonably acceptable to the Company (or a copy of a “no
action” or interpretive letter from the Commission) to the effect that such shares are eligible to
be sold pursuant to paragraph (k) of Rule 144, the Company shall promptly upon request deliver a
replacement certificate not containing either paragraph of the legend above in exchange for the
legended certificate.
SECTION
5. Competition. (a) Each Shareholder agrees that each Shareholder and its
officers, directors, employees, agents and Affiliates (other than Persons that are also the
officers of the Company or any of its Subsidiaries) may, alone or in
combination with any other
Person, engage in activities or businesses, make investments in and acquisitions of any Person, and
enter into partnerships and joint ventures with any Person, whether or not competitive now or in
the future with the businesses or activities of the Company or any Subsidiary of the Company, and
neither the Company nor any Shareholder shall have the right to disclosure of any information in
regard thereto, to participate therein, or to derive any profits therefrom.
(b) Each Shareholder and the Company agree that none of the Shareholders or any of their
respective officers, directors, employees, agents or Affiliates (other than Persons that are also
officers of the Company or any of its Subsidiaries) shall have the obligation to refer to the
Company or its Subsidiaries any business opportunities presented or developed by any of them.
SECTION 6. Restrictions on Other Agreements. Neither the Company nor any Shareholder
shall enter into or agree to be bound by any voting trust, voting agreement or any shareholder
agreement or arrangements of any kind, written or otherwise, with any person with respect to the
Common Shares on terms inconsistent with the provisions of this Agreement (whether or not such
agreements and arrangements are with other Shareholders or holders of Common Shares that are not
parties to this Agreement).
SECTION
7. Financial Statements and Other Information. (a) The Company shall furnish
or shall cause to be furnished to each Shareholder the following information at the following
times:
(i) with respect to each fiscal quarter of the Company, no later than 45 days after the
end of such quarter, a Consolidated summary balance sheet, income statement and cash flow
statement as of the end of and for such quarter and the comparable quarter of the preceding
fiscal year together with a letter from management of the Company summarizing the financial
condition, results of operations and business of the Company and its subsidiaries as of the
end of and for such quarter,
27
(ii) accompanying the financial information to be delivered pursuant to clause (a)(i)
above, a certificate, executed by the principal financial officer of the Company, stating that
such information was prepared in accordance with U.S. generally accepted accounting principles
consistently applied, with such exceptions as are set forth in detail in such certificate; and
(iii) with respect to each full fiscal year of the Company, no later than 90 days after
the end of such year, a consolidated balance sheet, income statement and cash flow statement
as of the end of and for such year prepared in accordance with U.S. generally accepted
accounting principles consistently applied and accompanied by a signed audit report by a
nationally recognized accounting firm, together with a letter from management of the Company
summarizing the financial condition, results of operations and business of the Company and its
subsidiaries as of the end of and for such year.
(b) The Company shall, and shall cause its Subsidiaries to, (1) permit each Shareholder during
normal business hours to visit and inspect any of its properties and those of its Subsidiaries,
including books and records (and, prior to an initial public offering only, make copies thereof),
(2) make appropriate officers and directors of the Company and its Subsidiaries available
periodically for consultation with such Shareholder with respect to matters relating to the
respective business and affairs of the Company and its Subsidiaries, including, without limitation,
significant changes in management personnel and compensation of employees, introduction of new
products or new lines of business, important acquisitions or dispositions of plants and equipment,
significant research and development programs, the purchasing or selling of important licenses,
trademarks or concessions, and the proposed commencement or compromise of significant litigation
and (3) consider the recommendations of such Shareholder in connection with the matters on which it
is consulted as described above, recognizing that the ultimate discretion with respect to all such
matters shall be retained by the Company and its Subsidiaries.
(c) Notwithstanding any other provision of this Agreement the Company may, as a condition to
the rights of any Shareholder under this Section 7, require such Shareholder to execute and deliver
a confidentiality agreement in commercially reasonable form covering all non-public information
conveyed to such Shareholder.
SECTION
8. Board of Directors; Committees. (a) On and after the Closing Date and
prior to an initial public offering, each Shareholder shall take all action necessary, including
the voting of the Common Shares held by such Shareholder, to cause the Board of Directors of the
Company to consist at all times of seven directors, and to vote in favor of three individuals
designated by White Mountains to be members of such Board of Directors. Following an initial public
offering, the number of individuals designated by White Mountains for whom the Shareholders shall
be obligated to vote as members of the Board of Directors of the Company shall be reduced to two,
so long as White Mountains owns, directly or indirectly, Common Shares, including Common Shares
issuable upon exercise of outstanding Warrants (whether or not currently exercisable), at least 20%
of the outstanding Common Shares (assuming for this
28
purpose the exercise of all outstanding Warrants), and such number shall be further reduced to one
if White Mountains’ ownership (as calculated in the preceding clause) is less than 20% but at least
equal to 10%. If such ownership falls below 10%, no Shareholder shall have any further obligations
under this Section 8(a). White Mountains hereby designates David Foy, John Gillespie and John J.
Byrn as its designees for the Board of Directors of the Company, which designation shall continue
until such time as White Mountains shall otherwise designate in writing to the other parties
hereto.
(b) On and after the Closing Date, and prior to an initial public offering, each Shareholder
shall take all action necessary, including the voting of Common Shares held by such Shareholder, to
cause one or more individuals designated by White Mountains to be appointed by the Board of
Directors as Chairman of the Board, and to be appointed chairman of any audit committee, finance
committee or compensation committee of the Board. White Mountains hereby designates David Foy as
its designee to be Chairman of the Board, David Foy to be chairman of the audit committee, John
Gillespie to be chairman of the finance committee and David Foy to be chairman of the compensation
committee, which designations shall continue until such time as White Mountains shall otherwise
designate in writing to the other parties hereto.
(c) Notwithstanding anything to the contrary contained in this Section 8, this Section 8 shall
be subject to applicable law and any applicable regulations of governmental entities and
self-regulatory organizations.
SECTION 9. Further Action. Each Shareholder shall, for so long as such Shareholder
owns any Common Shares or Warrants, (i) take any and all action
(on a timely basis) necessary to
carry out the intentions of the Shareholders set forth in this Agreement, including voting (or
causing the voting of), all Common Shares held by such Shareholder in favor of any necessary
amendment to the Certificate of Incorporation or the By-laws of the Company and (ii) refrain from
taking any wilful action knowingly inconsistent with this Agreement including, without limitation,
voting (or causing the voting of) any Common Shares held by such Shareholder in a manner
inconsistent with this Agreement.
SECTION 10. Term. This Agreement shall terminate upon the first to occur of
(a) an Initial Public Offering,
(b) the consent of the Company and all Shareholders who are parties to this Agreement that the
Agreement be terminated,
(c) any transaction with any Person pursuant to which shares or other securities of such
Person are exchanged or substituted for all the Common Shares, provided that the shares or
securities of such Person issued to the Shareholders are registered under the Securities Act and
applicable U.S. state securities laws and listed on a U.S. national securities exchange or on
NASDAQ; provided, however, that the Shareholders receive freely tradable shares or
securities, other than any limits on transfer
29
arising form any Shareholder’s status as an affiliate (as such term is used in the Securities Act and the
rules thereunder), of such Person or the Company; and provided
further, however, that all
Shareholders that are subject to such limits on transfer described in the preceding proviso receive
registration rights entitling such Shareholders to request registration of the shares or securities
received,
(d) the liquidation or dissolution of the Company or
(e) the
tenth anniversary of the date of this Agreement; provided,
however, that
(i) in the case of termination pursuant to clauses (a) or (b),
(A) the provisions of Section 3 (other than the proviso in Section 3(d)(xi) and
Section 3(e)) shall survive until the earlier of (x) the occurrence of an event
described in clause (d) above and (y) the tenth anniversary of the termination of this
Agreement, in each case to the extent that the rights under such
provisions have not
theretofore been exercised;
(B) the last two sentences of Section 2(a) shall survive any Initial Public
Offering as set forth therein;
(C) the second sentence of Section 2(a) and the entirety of Section 2(b) shall
survive until the first anniversary of the initial closing of the Initial Public
Offering, and
(ii) in any case the proviso in Section 3(d)(xi) and the provisions of Sections
3(e), 5, 8(a), 9, 10, 11(b) and 12 through 22 shall survive the termination of this
Agreement indefinitely.
SECTION
11. Additional Matters.
(a) No Inconsistent Agreements. The Company shall not grant registration rights other
than those granted under this Agreement, with respect to the Common Shares or any other securities
of the Company, which are more favorable than the registration rights contained in this Agreement
without the prior written consent of the holders of a majority of the Common Shares then held by
all of the Shareholders that are parties to this Agreement. Without limiting the generality of the
foregoing, in no event shall the holders of such other registration
rights have priority over
Shareholders with respect to the inclusion of their securities in any registration or takedown (it
being understood that such other registration rights may be
pari passu with the
registration rights granted under this Agreement with respect to registrations or takedowns).
(b)
VCI Status. To the extent that any Shareholder is subject to such regulations,
the Company shall reasonably cooperate with such Shareholder to provide to such Shareholder such
rights of consultation as may be required pursuant to regulations,
30
advisory opinions or announcements issued after the date of this Agreement by the United States
Department of Labor or by a court of competent jurisdiction in order for such Shareholder’s
investment in the Company to continue to qualify as a “venture capital investment” for purposes of
the United States Department of Labor Regulation published at 29 C.F.R. Section 2510.3-101(d)(3)(i). Notwithstanding anything to the contrary in this Agreement, Section 7(b) hereof shall
survive any Initial Public Offering with respect to any Shareholder who is a party to this
Agreement as of the date hereof as long as such Shareholder holds any Common Shares purchased under
its Subscription Agreement, if and only to the extent that such Shareholder establishes, to the
reasonable satisfaction of the Company, that such survival is necessary in order for such
Shareholder’s investment in the Company to qualify as a “Venture capital investment” for purposes
of the United States Department of Labor Regulation published at 29 C.F.R. Section
2510.3-101(d)(3)(i).
SECTION
12. Amendments. Neither this Agreement nor any provision hereof may be
amended except by an instrument in writing signed by the Company and Shareholders holding at least
two-thirds (or such higher percentage as may be required by any provision which is the subject of a
proposed amendment) of the outstanding Common Shares then held by all of the Shareholders who are
parties to this Agreement (assuming for this purpose the exercise of
all outstanding Warrants). Any
amendment approved in the foregoing manner will be effective as to all Shareholders. For the
avoidance of doubt, the addition or deletion of any Person as a party hereto in accordance with the
terms hereof shall not constitute an amendment hereof.
SECTION 13. Waiver and Consent. No action taken pursuant to this Agreement,
including, without limitation, any investigation by or on behalf of any party, shall be deemed to
constitute a waiver by the party taking such action of compliance
with any representations,
warranties, covenants or agreements contained herein. The waiver by any party hereto of a breach of
any provision of this Agreement shall not operate or be construed as a waiver of any preceding or
succeeding breach, and no failure by any party to exercise any right
or privilege hereunder shall
be deemed a waiver of such party’s rights or privileges hereunder or shall be deemed a waiver of
such party’s rights to exercise the same at any subsequent time or times hereunder.
SECTION 14. Recapitalization, Exchanges, etc. Except as expressly provided otherwise
herein, the provisions of this Agreement shall apply to the full extent set forth herein with
respect to shares or other securities in the Company or any other Person that may be issued in
respect of, in exchange for, or in substitution of the Common Shares or the Warrants.
SECTION 15. Notices. AU notices, requests, demands and other communications hereunder
shall be in writing and shall be deemed, unless otherwise specified
herein, to have been duly given
if sent by hand, mail, courier service, cable, telex, facsimile or other mode of representing words
in a legible and non-transitory form (a) if to the Shareholders, at their respective addresses in
the Register of Shareholders of the Company or at such other address as any of the Shareholders may
have furnished to the Company in writing, and (b) if to the Company, at 370 Church Street,
Guilford,
31
Connecticut 06437, Attention: Reid Campbell, Treasurer, Telephone: 203-458-2380, Facsimile:
203-458-0754, or such other address as the Company may have furnished to the Shareholders in
writing.
All such communications shall be deemed to have been given, delivered or received when so
received, if sent by hand, cable, telex, facsimile or similar mode, on the next Business Day after
sending if sent by Federal Express or other similar overnight delivery service, on the fifth
Business Day after mailing if sent by mail and otherwise on the actual day of receipt.
SECTION 16. Specific Performance. Each of the parties hereto acknowledges and agrees
that in the event of any breach of this Agreement, the non-breaching parties would be irreparably
harmed and could not be made whole by monetary damages. Accordingly, each of the parties hereto
agrees that the other parties, in addition to any other remedy to which they may be entitled at law
or in equity, shall be entitled, subject to applicable law, to compel specific performance of this
Agreement.
SECTION 17. Entire Agreement. This Agreement (including any schedules, annexes or
other attachments hereto) and all Subscription Agreements and any other agreements delivered at the
Closing with respect to the subject matter hereof constitute the entire agreement between the
parties hereto and supersede all prior agreements and understandings, oral and written, between the
parties hereto with respect to the subject matter hereof.
SECTION
18. Severability. To the fullest extent permitted by applicable law, any
provision of this Agreement that is prohibited, unenforceable or not authorized in any jurisdiction
shall, as to such jurisdiction, be ineffective to the extent of such prohibition, unenforceability
or lack of authorization without invalidating the remaining provisions hereof or affecting the
validity, unenforceability or legality of such provision in any other jurisdiction.
SECTION 19. Binding Effect; Benefit. Except for Section 3(c)(i) hereof, which shall
be enforceable by the underwriters referred to therein, nothing in this Agreement, express or
implied, is intended to confer on any Person other than the parties hereto, and their respective
successors, legal representatives and permitted assigns, any rights, remedies, obligations or
liabilities under or by reason of this Agreement.
SECTION 20. Successors and Assigns. This Agreement shall inure to the benefit of and
be binding upon the parties hereto, and their respective successors, légal representatives and
permitted assigns. Neither this Agreement nor any rights or obligations hereunder shall be
assignable by any Shareholder except in connection with a Transfer of Common Shares or Warrants
permitted hereunder, in which case, subject to the next sentence, the rights and obligations
hereunder shall be transferred pro rata. No such assignment shall be effective unless the assignee
shall execute and deliver an agreement in form and substance reasonably satisfactory to the Company
agreeing to be bound by this Agreement (or the surviving provisions hereof).
32
SECTION 21. Interpretation. The Table of Contents and the Headings contained in this
Agreement are for convenience only and shall not affect the meaning or interpretation of this
Agreement. All references herein to Sections, subsections, clauses and Schedules shall be deemed
references to such parts of this Agreement, unless the context otherwise requires. All pronouns and
any variations thereof refer to the masculine, feminine or neuter, as the case may require. The
definitions of terms in this Agreement shall be applicable to both the singular and plural forms
of the terms defined where either such form is used in this Agreement. Whenever the words
“include”, “includes” and “including” are used in this Agreement, they shall be deemed to be
followed by the words “without limitation.” The words “herein”, “hereof”, and “hereunder”, and
other words of similar import, refer to this Agreement as a whole and not to any particular
Section, Subsection, or clause.
SECTION 22. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original and all of which together shall be
deemed to be one and the same instrument.
SECTION 23. Applicable Law. The validity of this Agreement, its construction,
interprétation and enforcement, and the rights of the parties hereunder, shall be determined under,
governed by and construed in acçordance with the laws of New York. Each party hereto agrees that any
suit, action or other proceeding arising out of this Agreement may be brought and litigated in the
appropriate Federal and state courts of the State of New York and each party hereto hereby
irrevocably consents to personal jurisdiction and venue in any such court and hereby waives any
claim it may have that such court is an inconvenient forum for the purposes of any such suit,
action or other proceeding. The Shareholders and the Company each hereby irrevocably designates and
appoints CT Corporation with offices on the date hereof at 111 Eighth Avenue, New York, NY 10011,
and its successors, as its agent to receive, accept or acknowledge for or on behalf of it, service
of any and all legal process, summonses, notices and documents that may be served in any such suit,
action or proceeding in any such court. Each Shareholder acknowledges that CT Corporation will
transmit services of any and all legal process, summonses, notices and documents that may be served
in any such suit, action or proceeding in any such court to such Shareholder’s address as shown in
the stock transfer books of the Company from time to time. Each Shareholder further irrevocably
consents to the service of any and all legal process, summonses, notices and documents by the
mailing of copies thereof by registered or certified air mail, postage prepaid, to such party at
the address of such party as shown in the stock transfer books of the Company from time to time.
IN WITNESS WHEREOF, the parties hereto have caused this Shareholders Agreement to be
executed as of the date first above written.
| OCCUM ACQUISITION CORP., | ||||||
| by | /s/
|
|||||
| Name: | ||||||
| Title: | ||||||
| By | ||||||
| Name: | ||||||
| Title: | ||||||
[Signature Page to Shareholders Agreement]
33
IN WITNESS WHEREOF, the parties hereto have caused this Shareholders Agreement to
be executed as of the date first above written.
| OCCUM ACQUISITION CORP., | ||||||
| by | /s/
|
|||||
| Name: | ||||||
| Title: | ||||||
| GOVERNMENT EMPLOYEES, INSURANCE COMPANY | ||||||
| By | /s/ Michael H Campbell
|
|||||
| Title: Vice President Corporate Financial Reporting | ||||||
[Signature
Page to Shareholders Agreement]
33
IN WITNESS WHEREOF, the parties hereto have caused this
Shareholders Agreement to be executed as of the date first above written.
| OCCUM ACQUISITION CORP., |
||||
| by | ||||
| Name: | ||||
| Title: | ||||
| GENERAL REINSURANCE CORPORATION |
||||
| By | /s/ William G. Gasdaska | |||
| Name: | William G. Gasdaska | |||
| Title: | Senior Vice President, Treasurer & Chief Financial Officer | |||
[Signature Page to Shareholders Agreement]
33
IN WITNESS WHEREOF, the parties hereto have caused this Shareholders Agreement to
be executed as of the date first above written.
| OCCUM ACQUISITION CORP., |
||||
| by | /s/ Kernan V. Oberting | |||
| Name: | Kernan V. Oberting | |||
| Title: | President | |||
| WHITE MOUNTAINS RE GROUP, LTD., |
||||
| By | /s/ Dennis Beaulieu | |||
| Name: | Dennis Beaulieu | |||
| Title: | Vice President | |||
[Signature Page to Shareholders Agreement]
IN WITNESS WHEREOF, the parties hererto have caused this Shareholders Agreement to be
executed as of the date first above written.
| OCCUM ACQUISITION CORP., |
||||
| by | /s/ Kernan V. Oberting | |||
| Name: | ||||
| Title: | ||||
| HIGHFIELDS CAPITAL LTD By Highfields Capital Management LP, Its Investment Manager |
||||
| /s/ Kenneth H. Colburn | ||||
| Name: | Kenneth H. Colburn | |||
| Title: | Chief Operating Officer | |||
IN WITNESS WHEREOF, the parties hererto have caused this Shareholders Agreement to
be executed as of the date first above written.
| OCCUM ACQUISITION CORP., |
||||
| by | /s/ Kernan V. Oberting | |||
| Name: | ||||
| Title: | ||||
| HIGHFIELDS CAPITAL II LP By Highfields Capital Management LP, Its Investment Manager |
||||
| /s/ Kenneth H. Colburn | ||||
| Name: | Kenneth H. Colburn | |||
| Title: | Chief Operating Officer | |||
IN WITNESS WHEREOF, the parties hererto have caused this Shareholders Agreement to be executed
as of the date first above written.
| OCCUM ACQUISITION CORP., |
||||
| by | /s/ Kernan V. Oberting | |||
| Name: | ||||
| Title: | ||||
| HIGHFIELDS CAPITAL I LP By Highfields Capital Management LP, Its Investment Manager |
||||
| /s/ Kenneth H. Colburn | ||||
| Name: | Kenneth H. Colburn | |||
| Title: | Chief Operating Officer | |||
32
IN WITNESS WHEREOF, the parties hereto have caused this Shareholders Agreement to be
executed as of the date first above written.
| OCCUM ACQUISITION CORP., | ||||||||
| by | /s/ Kernan V. Oberting
|
|||||||
| Title: President | ||||||||
| MUTUAL, QUALIFIED FUND | ||
| MUTUAL BEACON FUND | ||
| MUTUAL BEACON FUND (CANADA) | ||
| MUTUAL FINANCIAL SERVICES FUND | ||
| MUTUAL RECOVERY FUND, LTD. | ||
| FRANKLIN MUTUAL RECOVERY FUND | ||
| FRANKLIN MUTUAL BEACON FUND. |
| BY: | FRANKLIN MUTUAL ADVISERS, LLC | |||||
| BY: | Bradley Takahashi
|
|||||
| TITLE: VICE PRESIDENT |
[Signature Page to Shareholders Agreement]
33
IN WITNESS WHEREOF, the parties hereto have caused this
Shareholders Agreement to be executed as of the date first above written.
| OCCUM ACQUISITION CORP., | ||||||||
| by | /s/ Kernan V. Oberting
|
|||||||
| Title: President | ||||||||
| CxICH, LLC |
||||
| By | /s/ John G. Forbes, Jr. | |||
| Name: | John G. Forbes. Jr. | |||
| Title: | CFO, Caxton Associates,
L.L.C., Manager |
|||
[Signature Page to Shareholders Agreement]
33
IN WITNESS WHEREOF, the parties hereto have caused this Shareholders Agreement to be
executed as of the date first above written.
| OCCUM ACQUISITION CORP., | ||||||||
| by | /s/ Kernan V. Oberting
|
|||||||
| Title: President | ||||||||
| OZ MASTER FUND, LTD. | ||||||||
| By: OZ Management, L.L.C., its Investment Manager |
||||||||
| By | /s/ Daniel S. OCH
|
|||||||
| Title: Senior Managing Member | ||||||||
[Signature Page to Shareholders Agreement]
32
IN WITNESS WHEREOF, the parties hereto have caused this Shareholders Agreement to be executed
as of the date first above written.
| OCCUM ACQUISITION CORP., | ||||||||
| by | /s/ Kernan V. Oberting
|
|||||||
| Title: President | ||||||||
| DLJ Growth Capital Partners, L.P. | ||||||||
| DLJ Growth Capital Inc, its Managing General Partner | ||||||||
| By | /s/ George Hornig
|
|||||
| Title: Attorney in Fact |
[Signature Page to Shareholders Agreement]
33
IN WITNESS WHEREOF, the parties hereto have caused this Shareholders Agreement to be executed
as of the date first above written.
| OCCUM ACQUISITION CORP., | ||||||||
| by | /s/ Kernan V. Oberting
|
|||||||
| Title: President | ||||||||
| GCP Plan Investors, L.P. | ||||||||
| DLJ LBO Plans Management Corp II, its Managing General Partner | ||||||||
| By | /s/ George Hornig | |||
| Name: George Hornig | ||||
| Title: Attorney in Fact | ||||
[Signature Page to Shareholders Agreement]
33
IN WITNESS WHEREOF, the parties hereto have caused this
Shareholders Agreement to be executed as of the date first above written.
| OCCUM ACQUISITION CORP., | ||||||||
| by | /s/ Kernan V. Oberting
|
|||||||
| Name: Kernan V. Oberting | ||||||||
| Title: President | ||||||||
| By | /s/ Sander M. Levy | |||
| Name: | Sander M. Levy | |||
| Title: | Managing Director Vestar Capital Partners IV, L.P. |
|||
[Signature Page to Shareholders Agreement]
33
IN WITNESS WHEREOF, the parties hereto have caused this
Shareholders Agreement to be executed as of the date first above written.
| OCCUM ACQUISITION CORP., | ||||||||
| by | /s/ Kernan V. Oberting
|
|||||||
| Title: President | ||||||||
| J. C. Flowers I LP | ||||||||
| By: JCF Associates I LLC | ||||||||
| By | /s/ Sally Rocker | |||||||
| Title: Principal | ||||||||
[Signature Page to Shareholders Agreement]
33
IN WITNESS WHEREOF, the parties hereto have caused this
Shareholders Agreement to be executed as of the date first above written.
| OCCUM ACQUISITION CORP., | ||||||||
| by | /s/ Kernan V. Oberting | |||||||
| Title: President | ||||||||
| By: | Prospector Partners, LLC | |||||||
| its Investment Manager | ||||||||
| By | /s/ John D Gillespie | |||||||
| Title: Managing Member | ||||||||
[Signature Page to Shareholders Agreement]
33
IN WITNESS WHEREOF, the parties hereto have caused this
Shareholders Agreement to be executed as of the date first above written.
| OCCUM ACQUISITION CORP., | ||||||||
| by | /s/ Kernan V. Oberting | |||||||
| Title: President | ||||||||
| Holdings Ltd. | ||||||||
| By | /s/
|
|||||||
| Title: CEO | ||||||||
[Signature Page to Shareholders Agreement]
33
IN WITNESS WHEREOF, the parties hereto have caused this Shareholders Agreement to be
executed as of the date first above written.
| OCCUM ACQUISITION CORP., | ||||||||
| by | /s/ Kernan V. Oberting | |||||||
| Name: | Kernan V. Oberting | |||||||
| Title: | President | |||||||
| By | /s/ Bruce R. Berkowitz | |||
| Name: | Bruce R. Berkowitz | |||
| Title: | Managing Member TEL. 973.379.6557 FAX. 973.379.2478 |
|||
[Signature Page to Shareholders Agreement]
33
IN WITNESS WHEREOF, the parties hereto have caused this
Shareholders Agreement to be executed as of the date first above written.
| OCCUM ACQUISITION CORP., | ||||||||||
| by | /s/ Kernan V. Oberting | |||||||||
| Name: | Kernan V. Oberting | |||||||||
| Title: | President | |||||||||
| MARSHFIELD INSURANCE II, LLC | ||||||||||
| By | /s/ Christopher M. Niemczewski | |||||||||
| Name: | Christopher M. Niemczewski | |||||||||
| Title: | Managing Member, Marshfield Management II, LLC | |||||||||
[Signature Page to Shareholders Agreement]
32
IN WITNESS WHEREOF, the parties hereto have caused this
Shareholders Agreement to be executed as of the date first above written.
| OCCUM ACQUISITION CORP., | ||||||||
| by | /s/ Kernan V. Oberting | |||||||
| Title: President | ||||||||
| By | /s/ | |||||||
| Title: | ||||||||
[Signature Page to Shareholders Agreement]
32
IN WITNESS WHEREOF, the parties hereto have caused this
Shareholders Agreement to be executed as of the date first above written.
| OCCUM ACQUISITION CORP., | ||||||||
| by | /s/ Kernan V. Oberting | |||||||
| Title: President | ||||||||
| By | /s/ | |||||||
| Title: | ||||||||
[Signature Page to Shareholders Agreement]
32
IN WITNESS WHEREOF, the parties hereto have caused this Shareholders Agreement
to be executed as of the date first above written.
| OCCUM ACQUISITION CORP., |
||||
| by | /s/ Kernan V. Oberting | |||
| Name: | Kernan V. Oberting | |||
| Title: | President | |||
| By | /s/ Michael F. Price | |||
| Name: | Michael F. Price | |||
| Title: | ||||
[Signature Page to Shareholders Agreement]
33
IN WITNESS WHEREOF, the parties hereto have caused this Shareholders Agreement
to be executed as of the date first above written.
| OCCUM ACQUISITION CORP., |
||||
| by | /s/ Kernan V. Oberting | |||
| Name: | Kernan V. Oberting | |||
| Title: | President | |||
| CAI MANAGERS & CO., L.P. |
||||
| By | /s/ Leslie B. Daniels | |||
| Name: | Leslie B. Daniels | |||
| Title: | Partner | |||
[Signature Page to Shareholders Agreement]
33
IN WITNESS WHEREOF, the parties hereto have caused this Shareholders Agreement
to be executed as of the date first above written.
| OCCUM ACQUISITION CORP., |
||||
| by | /s/ Kernan V. Oberting | |||
| Name: | Kernan V. Oberting | |||
| Title: | President | |||
| By | /s/ | |||
| Name: | ||||
| Title: | ||||
[Signature Page to Shareholders Agreement]
33
IN WITNESS WHEREOF, the parties hereto have caused this Shareholders Agreement
to be executed as of the date first above written.
| OCCUM ACQUISITION CORP., |
||||
| by | /s/ Kernan V. Oberting | |||
| Name: | Kernan V. Oberting | |||
| Title: | President | |||
/s/
|
By | /s/
|
||||||
| Title: Authorised Signatory |
[Signature Page to Shareholders Agreement]
33
IN WITNESS WHEREOF, the parties hereto have caused this Shareholders Agreement
to be executed as of the date first above written.
| OCCUM ACQUISITION CORP., |
||||
| by | /s/ Kernan V. Oberting | |||
| Name: | Kernan V. Oberting | |||
| Title: | President | |||
| NASH FAMILY PARTNERSHIP, L.P. |
||||
| By | /s/ Joshua Nash | |||
| Name: | Joshua Nash | |||
| Title: | General Partner | |||
[Signature Page to Shareholders Agreement]
IN WITNESS WHEREOF, the parties hereto have caused this Shareholders Agreement
to be executed as of the date first above written.
| OCCUM ACQUISITION CORP., |
||||
| by | /s/ Kernan V. Oberting | |||
| Name: | Kernan V. Oberting | |||
| Title: | President | |||
| JOSHUA NASH |
||||
| By | /s/ Joshua Nash | |||
| Name: | ||||
| Title: | ||||
[Signature Page to Shareholders Agreement]
33
IN WITNESS WHEREOF, the parties hereto have caused this Shareholders Agreement
to be executed as of the date first above written.
| OCCUM ACQUISITION CORP., |
||||
| by | /s/ Kernan V. Oberting | |||
| Name: | Kernan V. Oberting | |||
| Title: | President | |||
| JACK NASH |
||||
| By | /s/ Joshua Nash | |||
| Name: | Joshua Nash As Attorney-in-Fact for Jack Nash | |||
| Title: | ||||
[Signature Page to Shareholders Agreement]
30
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be executed as of the date first above written.
| OCCUM ACQUISITION CORP., |
||||
| by | /s/ Kernan V. Oberting | |||
| Name: | Kernan V. Oberting | |||
| Title: | President | |||
| [SHAREHOLDERS], |
||||
| By | /s/ George Rohr | |||
| Name: | George Rohr | |||
| Title: | ||||
33
IN WITNESS WHEREOF, the parties hereto have caused this shareholders Agreement
to be executed as of the date first above written.
| OCCUM ACQUISITION CORP., |
||||
| by | /s/ Kernan V. Oberting | |||
| Name: | Kernan V. Oberting | |||
| Title: | President | |||
| Estate of |
||||
| By | /s/ Shelby White | |||
| Name: | Shelby White | |||
| Title: | Executor | |||
[Signature Page to Shareholders Agreement]
33
IN WITNESS WHEREOF, the parties hereto have caused this Shareholders Agreement
to be executed as of the date first above written.
| OCCUM ACQUISITION CORP., |
||||
| by | /s/ Kernan V. Oberting | |||
| Name: | Kernan V. Oberting | |||
| Title: | President | |||
| By | /s/ Shelby White | |||
| Name: | Shelby White | |||
| Title: | ||||
[Signature Page to Shareholders Agreement]
Schedule 1
Signatories to Shareholders Agreement
Exhibit 9.2
EXECUTION VERSION
SHAREHOLDERS AGREEMENT
This
SHAREHOLDERS AGREEMENT (this “Agreement”), dated as of March 19, 2004, is among Occum
Acquisition Corp., a Delaware corporation (the “Company”), and each of the Persons listed
on Schedule 1 hereto and any future security holder of the Company that becomes a party to
this Agreement (each, a “Shareholder” and collectively the “Shareholders”).
The authorized share capital of the Company consists of 15,000,000 shares, par value U.S.
$0.01 per share (collectively or any number thereof, the “Common Shares”). Each of the
Shareholders has subscribed to purchase Common Shares and desires to promote the interests of the
Company and the mutual interests of the Shareholders by establishing herein certain terms and
conditions upon which the Common Shares (including Common Shares issued upon conversion, exchange
or exercise of any portion, warrant or other security) will be held, including provisions
restricting the transfer of Common Shares, providing certain registration rights and providing for
certain other matters.
In consideration of the mutual covenants and agreements hereinafter contained, the Company and
the Shareholders hereby agree as follows:
SECTION 1. Definitions. Capitalized terms not otherwise defined in this Agreement have
the meanings ascribed to them in the Subscription Agreement. As used in this Agreement, the
following terms shall have the respective meanings set forth below:
“Affiliate” shall mean, with respect to any specified Person, a Person that directly
or indirectly Controls, is Controlled by or is under common Control with such Person. Without
limiting the generality of the foregoing, the term “Affiliate” shall include an investment
fund managed by such Person or by a Person that directly or indirectly Controls, is Controlled by
or is under common Control with such Person.
“Agreement” shall have the meaning given such term in the first paragraph of this
Agreement.
“Berkshire” shall mean Berkshire Hathaway Inc., a Delaware corporation, or any
successor entity thereto.
“Board” shall mean the Board of Directors of the Company.
“Business Day” shall mean any day except a Saturday, Sunday or other day on which
banks in New York City are authorized or obligated by law or executive order to close.
2
“By-laws” shall mean the By-laws of the Company as in effect from time to time.
“Closing Date” shall mean the dates for the closing of the sale of up to 11,000,000
Common Shares by the Company pursuant to the several Subscription Agreements.
“Code” shall mean the U.S. Internal Revenue Code of 1986, as amended.
“Commission” shall mean the U.S. Securities and Exchange Commission or any other
federal agency at the time administering the Securities Act or the Exchange Act.
“Control” of a Person shall mean the possession, directly or indirectly, of the power
to direct or cause the direction of the management and policies of such Person, whether through the
ownership of voting securities, by contract or otherwise, and “Controlling” and
“Controlled” shall have meanings correlative to the foregoing.
“day” shall mean a calendar day.
“Exchange Act” shall mean the U.S. Securities Exchange Act of 1934, as amended, or any
U.S. federal statute then in effect that has replaced such statute, and a reference to a particular
section thereof shall be deemed to include a reference to the comparable section, if any, of any
such replacement federal statute.
“Founders” shall mean White Mountains and Berkshire. A “Founder” shall mean
either one of them.
“Initial Public Offering” shall mean the completion, whether by the Company or by any
Shareholders, of an underwritten public offering of the Common Shares pursuant to a registration
statement filed under the Securities Act resulting in aggregate net proceeds, together with any
such underwritten public offering previously completed, of not less
than U.S.$125 million, or (ii)
the completion by the Company of a merger, acquisition or comparable business combination
transaction in connection with which the Company has issued Common Shares pursuant to a
registration statement filed under the Securities Act on Form S-4, which shares have any aggregate
value, based on the average closing price of such shares during the five trading days after
completion of such transaction, of not less than U.S.$125 million; and “initial public
offering” shall mean the completion, whether by the Company or any Shareholders, of the initial
public offering of the Common Shares pursuant to a registration statement filed under the
Securities Act, regardless of the amount of net proceeds from such offering or the issuance of
Common Shares in connection with a merger, acquisition or comparable business combination
transaction pursuant to a registration statement on Form S-4 filed under the Securities Act.
3
“NASD” shall mean the U.S. National Association of Securities Dealers, Inc. or any
successor organization.
“NASDAQ” shall mean The Nasdaq National Market or any successor quotation system.
“Offering” shall mean the offering and sale of up to 11,000,000 Common Shares pursuant
to the several Subscription Agreements.
“Person” shall mean an individual, company, corporation, limited liability company,
firm, partnership, trust, estate, unincorporated association or other entity.
“Registrable Securities” shall mean (i) Common Shares (including any Common Shares
issuable on exercise of the Warrants) issued on the Closing Date to the Shareholders, (ii) the
Warrants and (iii) any securities of the Company issued successively in exchange for or in respect
of any of the foregoing, whether as a result of any successive stock split or reclassification of,
or stock dividend on, any of the foregoing or otherwise;
provided, however, that
(c) such securities shall cease to be Registrable Securities if and when (A) a registration statement
with respect to the disposition of such securities shall have become effective under the Securities
Act and such securities shall have been disposed of pursuant to such effective registration
statement, (B) such securities are sold pursuant to Rule 144 under circumstances in which any
legend borne by such Registrable Securities relating to restrictions
on the transferability thereof
under the Securities Act is removed by the Company, (C) such securities are eligible to be sold
pursuant to paragraph (k) of Rule 144, (D) such securities have ceased to be outstanding or (E) as
of any time, in the reasonable judgment of the Company, such securities would be eligible for sale
pursuant to Rule 144 under the Act (without giving effect to the provisions of Rule 144 (k)) in the
90-day period following such time. Notwithstanding clauses (C) and (E) above, Common Shares shall
continue to be deemed Registrable Securities until such time as the holder of such Common Shares
could sell all of such holder’s Registrable Securities pursuant to clause (C) or (E) above.
“Registration Expenses” shall mean all expenses incident to the Company’s performance
of or compliance with its obligations under Section 3, including all Commission, NASD and stock
exchange or NASDAQ registration and filing fees and expenses, fees and expenses of compliance with
applicable state securities or “blue sky” laws (including reasonable fees and disbursements
of counsel for the underwriters in connection with “blue sky” qualifications of the
Registrable Securities), printing expenses, messenger and delivery expenses, fees and disbursements
of any custodian, the fees and expenses incurred in connection with the listing of the securities
to be registered in an initial public offering on each securities exchange or automated quotation
system on which such securities are to be so listed and, following such initial public offering,
the fees and expenses incurred in connection with the listing of such securities to be registered
on each securities exchange or automated quotation system on which such securities are listed, fees
and disbursements of counsel for the Company and all independent certified public accountants
(including the expenses of any annual audit and “cold comfort” letters required by or
incident to such performance and compliance), the
4
fees and disbursements of underwriters customarily paid by issuers or sellers of securities
(including the fees and expenses of any “qualified independent underwriter” required by the
NASD), the reasonable fees of one counsel retained in connection with each such registration by the
holders of a majority of the Registrable Securities being registered, the reasonable fees and
expenses of any special experts retained by the Company in connection with such registration, and
fees and expenses of other Persons retained by the Company (but not including any underwriting
discounts or commissions or transfer taxes, if any, attributable to the sale of Registrable
Securities by holders of such Registrable Securities other than the Company).
“securities” shall have the meaning given to such term under the Securities Act.
“Securities Act” shall mean the U.S. Securities Act of 1933 or any U.S. federal
statute then in effect which has replaced such statute, and a reference to a particular section
thereof shall be deemed to include a reference to the comparable section, if any, of any such
replacement federal statute.
“Shareholder” shall have the meaning given to such term in the first paragraph of this
Agreement.
“Subscription Agreement” shall mean all and each of the Subscription Agreements, dated
as of various dates on or before the date hereof, between the Company and each of the Investors (as
defined therein) for the purchase and sale of Common Shares in the Offering.
“Subsidiary” shall mean any corporation, limited liability company or other Person of
which shares of stock or other ownership interests having a majority of the general voting power
(without regard to the occurrence of any contingency) in electing the Board of Directors thereof or
other Persons performing a similar function are, at the time as of which any determination is being
made, owned by the Company either directly or through its Subsidiaries and any partnership in which
the Company or any Subsidiary is a general partner.
“Transfer” shall mean to sell, assign or otherwise transfer an interest, in whole or
in part, whether voluntarily or involuntarily or by operation of law or at a judicial sale or
otherwise; provided, however, that Transfer shall not include the bona fide pledge
of Common Shares or Warrants in connection with a loan by a financial institution or any transfer
back to the pledgor by the pledgee of such Common Shares or Warrants following the termination of
any such bona fide pledge.
“U.S.” shall mean the United States of America and dependent territories or
any part thereof.
“Warrant Shares” shall mean any Common Shares issuable upon exercise of the Warrants.
5
“Warrants” shall mean those Warrants to be issued to White Mountains and Berkshire
pursuant to the Warrant Issuance Agreements (as defined in the Subscription Agreement).
“White Mountains” shall mean White Mountains Re Group, Ltd., a company existing under
the laws of Bermuda, or any successor entity thereto.
SECTION
2. Transfer of Shares or Warrants. (a) General. No Shareholder shall
Transfer any Common Shares other than
(i) to one or more third parties after having complied with Section 2(b) hereof, if
applicable,
(ii) in connection with the exercise of its tag-along rights under Section 2(b) hereof,
(iii) in connection with the Founders’ exercise of drag-along rights under Section 2(c) hereof
or any other transaction with any Person approved by the Board and Shareholders in accordance with
the Certificate of Incorporation and By-laws pursuant to which cash, shares or other securities of
such Person are exchanged or substituted for all the Common Shares,
(iv) in the case of any Shareholder that is an individual, to any one or more of such
Shareholder’s spouse or lineal relatives, or to any custodian or trust for the benefit of any of
the foregoing,
(v) to any Affiliate of such Shareholder,
(vi) in the case of any Shareholder that is a partnership, corporation or limited liability
company, as a distribution to the partners, shareholders or members thereof,
(vii) in connection with the exercise by such Shareholder of its registration rights under
Section 3 hereof or
(viii) following an initial public offering, pursuant to Rule 144 (or any successor provision)
under the Securities Act.
No Shareholder shall Transfer any Warrants, other than (i) to one or more third parties
(including other Shareholders or the Company) after complying with Section 4 of the Warrants, (ii)
in connection with any transaction with any Person approved by the Board and Shareholders in
accordance with the Certificate of Incorporation and By-laws pursuant to which cash, shares or
other securities of such Person are exchanged or substituted for all the Common Shares, (iii) to
any Affiliate of such Shareholder or (iv) in connection with the exercise by such Shareholder of
its registration rights under Section 3 hereof; provided, however, that a Transfer
pursuant to clauses (i) or (iv) above may not be made until the earliest of (A) the third
anniversary of the date of this Agreement, (B) such time as the Shareholders (other than the
Founders)
6
who are party to this Agreement as of the date hereof own less than 50% of the Common Shares
initially acquired pursuant to their respective Subscription Agreements or (C) the first
anniversary of the initial closing of an Initial Public Offering; provided further,
however, that at any time each of White Mountains and Berkshire (and any Affiliate of White
Mountains or Berkshire to whom Warrants have been Transferred pursuant to clause (iii) above) may
Transfer Warrants to each other.
Notwithstanding any other provision of this Agreement, no Transfer may be made in violation of
any provision or any requirement of the U.S. securities laws. Each Shareholder agrees that it will
not seek to evade the restrictions on transfer set forth in this Section 2 by Transferring Common
Shares or Warrants to an Affiliate and thereafter transferring beneficial ownership of the
Affiliate, as part of a unified plan to avoid such restrictions. If any Shareholder wishes to
Transfer any of its Common Shares or Warrants to another Person (a “Transferee”) other than
any Transfer permitted (or, in the event that such provisions shall have terminated in accordance
with Section 10 hereof, that would have been permitted) (A) by subsection (iii), (vii) or (viii) of
the first sentence of this Section 2(a), (B) by subsection (vi) of the first sentence of this
Section 2(a) if at the time of such Transfer such Shareholder would be permitted to transfer its
Common Shares pursuant to (x) subsection (viii) of the first sentence of this Section 2(a) and (y)
Rule 144(k) under the Securities Act or (C) by subsection (ii) or (iv) of the second sentence of
this Section 2(a), such Shareholder shall, as a condition of such Transfer, require the Transferee
to execute and deliver an agreement in form and substance reasonably satisfactory to the Company
agreeing to be bound by all of the provisions hereof. The preceding sentence shall survive an
Initial Public Offering until the date that is 18 months following the initial closing of such
Initial Public Offering.
(b)
Tag-Along Rights. (i) If, at any time, one or more Shareholders (the “Selling
Shareholders”) propose to Transfer to any Person or group of Persons (the “Proposed
Purchaser”) in any transaction or series of related transactions a number of Common Shares
equal to (x) prior to an Initial Public Offering, 5% or more of the then outstanding Common Shares,
and (y) following an Initial Public Offering, 10% or more of the then outstanding Common Shares,
the Selling Shareholders shall afford each other Shareholder the opportunity to participate
proportionately in such Transfer in accordance with this Section 2(b). At least 20 days prior to
the date proposed for such sale, the Selling Shareholders shall give notice to the Company, which
shall provide a copy to each other Shareholder with a notice of the proposed Transfer, stating such
Selling Shareholders’ intent to make such sale, the number of Common Shares proposed to be
transferred, the kind and amount of consideration to be paid for such Common Shares and the name of
the Proposed Purchaser (the “Purchase Offer”). Each other Shareholder shall have the right
to Transfer to the Proposed Purchaser a number of Common Shares equal to such Shareholder’s
Allotment. Such Shareholder’s “Allotment” shall be equal to (A) the total number of Common
Shares proposed to be Transferred by the Selling Shareholders multiplied by (B) a fraction, the
numerator of which is the number of Common Shares then owned by such Shareholder and the
denominator of which is the total number of Common Shares then outstanding (assuming, for purposes
of all calculations of outstanding Common Shares in this clause (i), the exercise of all then
outstanding Warrants).
7
(ii) Each Shareholder shall have 10 days from the receipt of the Purchase Offer in which to
accept such Purchase Offer by written notice to the Selling Shareholders. Contemporaneously with
the sale by the Selling Shareholders, each other Shareholder so electing to participate shall, on
the date of the closing, sell the Common Shares indicated in its written notice for the same
consideration and on the same terms as those provided by the Proposed Purchaser to the Selling
Shareholders as specified in the Purchase Offer.
(iii) Notwithstanding the foregoing, this Section 2(b) shall not apply to any Transfer
permitted (or, in the event that such provisions shall have terminated in accordance with Section
10 hereof, that would have been permitted) by subsections (iii) through (viii) of the first
sentence of Section 2(a) hereof.
(c) Drag-Along Rights. If, at any time, the Founders jointly propose to transfer all
of the Common Shares owned by the Founders in a single transaction to
a third party (the “Proposed
Acquiror”) pursuant to a Qualified Sale (as defined below), and the Board of Directors of the
Company has approved such Qualified Sale, the Founders may cause to be included in such Qualified
Sale all, but not less than all, of the Common Shares held by each of the other Shareholders by
providing to each such other Shareholder a notice (a “Qualified Sale Notice”) of the
proposed Qualified Sale at least 20 days prior to the date proposed for such Qualified Sale,
stating the identity of the Proposed Acquiror, the kind and amount of consideration proposed to be
paid for the Common Shares to be purchased by the Proposed Acquiror and the other material terms of
such Qualified Sale. For purposes of determining the number of Common Shares outstanding pursuant
to the immediately preceding sentence, Common Shares issuable upon the exercise of Warrants,
options or other rights to acquire Common Shares, or upon the conversion or exchange of any
security outstanding as of the time of delivery of the Qualified Sale Notice, shall not be deemed
to be outstanding.
In the event the Founders so provide a Qualified Sale Notice with respect to a Qualified Sale,
each other Shareholder shall (i) be obligated to transfer all of the Common Shares owned by such
Shareholder to the Proposed Acquiror on the terms and conditions set forth in the Qualified Sale
Notice and (ii) execute and deliver such instruments of conveyance and transfer and take such other
action, including voting such Shareholder’s Common Shares in favor of such Qualified Sale and
executing any purchase agreements, merger agreements, indemnity agreements, escrow agreements or
related documents, as the Founders or the Proposed Acquiror may reasonably require in order to
carry out the terms and provisions of this Section 2(c); provided, however, that
such instruments of conveyance and transfer and such purchase agreements, merger agreements,
indemnity agreements, escrow agreements and related documents shall not include any representations
or warranties of such Shareholder except such representations and warranties as are ordinarily
given by a seller of securities with respect to such seller’s authority to sell, enforceability of
agreements against such seller, such seller’s good title in such securities and the good title in
such securities to be acquired at closing by the Proposed Acquiror,
provided further, however, that any indemnity provision included in any such instrument, agreement or related
document shall only indemnify the Proposed
8
Acquiror with respect to breaches of such representations and warranties by such Shareholder,
without any obligation or liability for contribution.
The term “Qualified Sale” means a sale by the Founders to a third party which is not
an Affiliate of the Company or any Shareholder that meets all of the following requirements:
(i) the Common Shares owned in the aggregate by the Founders (assuming for this purpose the
exercise of all outstanding Warrants) to be sold in such sale equals or exceeds 25% of the total
outstanding Common Shares (assuming for this purpose the exercise of all outstanding Warrants),
(ii) the terms of such sale were negotiated between the Founders and such unaffiliated third party
(or on their behalf by their respective agents or representatives) on a bona fide arm’s-length
basis,
(ii)
the terms of such sale provide that the sale of Common Shares pursuant thereto by each
Shareholder that is not a Founder shall be made for the same type and amount of consideration for
each such Common Share sold as is to be received by each Founder for each Common Share sold (except
with respect to Electing Shareholders as set forth below) and, subject to the provisos in the third
sentence of this Section 2(c), in all other respects in a manner such that each term and condition
applicable to such Shareholder is identical to, or no less favorable than, each corresponding term
and condition applicable to either Founder; and
(iii) either (A) the consideration to be received by each Shareholder pursuant to such
Qualified Sale is solely cash or (B) effective provision is made such that at the closing of such
Qualified Sale each Electing Shareholder (as defined below) will receive the Cash Equivalent (as
defined below) of any consideration other than cash proposed to be paid pursuant to the terms of
such Qualified Sale.
An
“Electing Shareholder” is a Shareholder (other than a Founder) that gives written
notice, at least 10 days prior to the date proposed for a Qualified Sale, to the Selling
Shareholders that provided the Qualified Sale Notice of such Shareholder’s election to receive the
Cash Equivalent of any non-cash consideration proposed to be paid pursuant to the terms of such
Qualified Sale.
The term “Cash Equivalent” means an amount in cash equal to the fair market value (as
determined by a qualified appraiser with experience in the appraising of properties and businesses
in the relevant industry, to be selected by the mutual agreement of
the interested parties) of
non-cash consideration to be paid in a Qualified Sale;
provided, however, that if
no agreement can be reached, then any such interested party may apply to the American Arbitration
Association for the appointment of an appraiser meeting the requirements of the preceding sentence,
and any such appointment shall be binding upon the parties;
provided further,
however, that in the event that such non-cash consideration consists of publicly traded
securities, then, in lieu of using an appraiser, the fair market value of such non-cash
consideration shall equal the average closing price of
9
the publicly traded security for the 10 Business Days ending on the trading day immediately
preceding the closing of the Qualified Sale. Any such appraiser shall be required to report its
appraisal in writing, within 60 days of its appointment, to each interested party.
(d) Preemptive Rights. (A) Grant of Preemptive Rights. If the Company shall,
prior to an Initial Public Offering, issue, sell or distribute to any Shareholder any equity
securities of the Company, or any option, warrant, or right to acquire, or any security convertible
into or exchangeable for, any equity securities of the Company (other than (i) pursuant to an
underwritten offering pursuant to an effective registration statement under the Securities Act,
(ii) pursuant to a dividend or distribution upon the Common Stock of stock or other equity
securities of the Company, (iii) in connection with any scheme of arrangement, merger or
consolidation by the Company or any Affiliate of the Company or the acquisition by the Company or
any such Affiliate of the shares or substantially all the assets of any other Person or (iv)
Warrant Shares) (any equity securities of the Company or options, warrants, rights to acquire or
securities convertible into or exchangeable for equity securities of the Company, the issuance of
which is not covered by clauses (i) through (iv) above, being “New Securities”), each
Shareholder shall be entitled to participate in such issuance, sale or distribution for up to such
number of New Securities (such number being such Shareholder’s “Preemptive Allotment”) as
is equal to (x) the total number of New Securities proposed to be issued, sold or distributed by
the Company multiplied by (y) a fraction, the numerator of which is the number of Common Shares
owned by such Shareholder and the denominator of which is the total number of Common Shares
outstanding (assuming, for purposes of all calculations of
outstanding Common Shares in this clause
(y), the exercise of all outstanding Warrants.)
(B) Company Notice; Procedures for Exercise of Preemptive Rights. If the Company
proposes to issue any New Securities, the Company shall, at least 20 days prior to consummating the
issuance of the New Securities, give written notice (the “Company Notice”) to the
Shareholders, stating the number of New Securities, the price per New Security, the terms of
payment and all other terms and conditions on which the issuer proposes to make such issuance. In
order for a Shareholder to exercise its preemptive rights under this Section 2(d), such Shareholder
must give written notice to the Company within 10 days after the receipt of the Company Notice,
stating the number of New Securities that such Shareholder desires to purchase (which number shall
not be greater than such Shareholder’s Preemptive Allotment).
(C) Re-Set of Preemptive Rights. If no option is exercised pursuant to this Section
2(d) for any of the New Securities within 10 days after receipt of the Company Notice (or if the
option is exercised in the aggregate for less than all of the New Securities), the Company shall be
free for a period of 180 days thereafter to sell the New Securities as to which such option has not
been exercised to the proposed offerees at no less than the sale price set forth in the Company
Notice and on terms and conditions that are no more favorable to the proposed offerees than those
offered to the Shareholders. If, however, at the
10
expiration of such 180-day period, such New Securities have not been issued in accordance with
the terms set forth in the Company Notice, then any other issuance or proposed issuance thereof
shall be subject to all of the provisions of this Agreement and such shares shall not be issued
without the Company again offering its shares in the manner provided in this Section 2(d).
SECTION 3. Registration Rights. The Shareholders shall have the right to have their
Registrable Securities registered under the Securities Act and applicable U.S. state securities
laws, and the Company shall then have the related obligations, in accordance with the following
provisions.
(a)
Registration on Request. (i) At any time (x) after the third anniversary of the
date of the Closing, upon the written request of Shareholders holding in the aggregate 40% of all
Registrable Securities then held by Shareholders (assuming for this purpose exercise of all
outstanding Warrants) or (y) after an initial public offering, upon the written request of
Shareholders holding in the aggregate 10% of all Registrable Securities then held by Shareholders
(assuming for this purpose the exercise of all outstanding Warrants) (such Shareholders being
referred to as the “Requesting Holders”), the Requesting Holders may request that the
Company either (i) effect the registration under the Securities Act for an underwritten public
offering of all or part of the Registrable Securities held by them
(the “Single Registration
Option”), (ii) effect the registration of all or any of their Registrable Securities by filing a
registration statement under the Securities Act (the “Shelf Registration
Statement”) which provides for the sale by the Requesting Holders of their Registrable
Securities from time to time in underwritten public offerings pursuant to Rule 415 under the
Securities Act (the “Shelf Option”), or (iii) permit the sale of Registrable Securities that are
already included in an effective Shelf Registration Statement pursuant to an underwritten public
offering (the “Takedown Option”); provided, however, that the Requesting
Holders may not elect the Shelf Option or the Takedown Option if the request thereunder is in
connection with or would constitute an initial public offering.
Upon receipt of such request, the Company will promptly give written notice to all other
holders of Registrable Securities (the “Other Holders”) that a request for registration or
for a takedown has been received. For a period of 10 days (or two Business Days in the case of a
Takedown Option request) following receipt of such notice, the Other Holders may request that the
Company also register their Registrable Securities (or include Registrable Securities in such
takedown) and the Company may determine to include its authorized and unissued securities in such
registration or takedown. The failure of any Other Holder to affirmatively indicate its intent to
include its Registrable Securities in such registration or takedown shall be deemed a waiver of any
right to so include such Registrable Securities in such registration statement or takedown. After
the expiration of such 10-day period or two-Business Day period, as the case may be, the Company
shall notify all holders of the number of Registrable Securities to be registered or included.
Subject to the provisions of this Section 3, in the case of either the Single Registration Option
or the Shelf Option, the Company shall use its reasonable best efforts to cause the prompt
registration under the Securities Act of (A) the Registrable Securities that the Requesting Holders
and the Other Holders have requested
11
the Company to register, and (B) all other securities that the Company has determined to
register, and in connection therewith will prepare and file a registration statement under the
Securities Act to effect such registration. Such registration statement shall be on such
appropriate registration form of the Commission as shall be selected by the Company, and such
selection shall be reasonably acceptable to the holders of a majority of the aggregate Registrable
Securities to be sold by the Requesting Holders. Subject to the provisions of this Section 3, in
the case of a Takedown Option, the Company shall use its reasonable best efforts to cause all
Registrable Securities so requested to be included in such underwritten public offering and shall
prepare and file any prospectus supplement reasonably necessary to effectuate a takedown.
Notwithstanding the foregoing, the Company will not be required to file a registration
statement or proceed with a takedown in any of the following situations:
(1) the Registrable Securities of Requesting Holders to be offered pursuant to such request do
not have an aggregate offering price of at least
U.S. $50 million in the case of an initial public offering or U.S. $25 million with respect to
any subsequent offering (based on the then current market price or, in the case of an initial
public offering, the aggregate offering price proposed to be set forth on the cover page of the
registration statement);
(2) during any period (not to exceed 60 days with respect to each request) when the Company
has determined to proceed with a public offering and, in the judgment of the managing underwriter
thereof, the requested filing would have an adverse effect on the public offering; provided
that the Company is actively employing in good faith all reasonable efforts to cause such public
offering to be consummated;
(3) during any period (not to exceed 60 days with respect to each request) when the Company is
in possession of material non-public information that the Board determines is in the best interest
of the Company not to disclose publicly; or
(4) to the extent required by the managing underwriter in an underwritten public offering,
during a period, not to exceed 180 days in the case of the initial public offering or 90 days in
the case of all other offerings, following the effectiveness of any previous registration statement
filed by the Company.
The right of the Company not to file a registration statement or proceed with a takedown
pursuant to paragraphs (2) and (4) above may not be exercised more than once in any twelve-month
period, and pursuant to paragraph (3) above may not be exercised more than twice in any
twelve-month period.
Requesting Holders holding a majority of the Registrable Securities requested to be registered
or included in a takedown may, at any time prior to the effective date of the registration
statement relating to such registration or the execution of an underwriting agreement relating to
such takedown, revoke such request, without
12
liability to any of the other Requesting Holders or the Other Holders, by providing a written
notice to the Company revoking such request.
(ii)
Number of Registrations; Expenses. The Company shall not be obligated to effect
more than one registration or takedown of Registrable Securities pursuant to requests from
Requesting Holders under this Section 3(a) in the 180-day period immediately following the
effective date of the last registration or takedown of Registrable Securities. The Company shall
pay all Registration Expenses in connection with the first six registrations and all takedowns that
the Requesting Holders request pursuant to this Section 3(a), including expenses in connection
with any prospectus supplement reasonably necessary to effectuate a Takedown Option. The Requesting
Holders and, if applicable, the Other Holders that requested that their Registrable Securities be
registered and the Company shall pay all Registration Expenses in connection with later
registrations pursuant to this Section 3(a) pro rata according to the number of Registrable
Securities registered by each of them pursuant to such registration. However, in connection with
all registrations and all takedowns, each Shareholder shall pay all underwriting discounts and
commissions and transfer taxes, if any, relating to the sale or disposition of such Shareholder’s
Registrable Securities pursuant to this Section 3(a). If the first request hereunder is in
connection with or would constitute an initial public offering, the Registrable Securities shall be
offered pursuant to a firm commitment underwriting.
(iii)
Effective Registration Statement. If the Requesting Holders elect the Single
Registration Option in connection with a registration requested pursuant to this Section 3(a),
such registration shall not be deemed to have been effected unless the registration statement
relating thereto (A) has become effective under the Securities Act and any of the Registrable
Securities of the Shareholders included in such registration have actually been sold thereunder,
and (B) has remained effective for a period of at least 180 days (or such shorter period in which
all Registrable Securities of the Requesting Holders and, if applicable, the Company and the Other
Holders included in such registration have actually been sold
thereunder); provided,
however, that if after any registration statement requested pursuant to this Section 3(a)
becomes effective (A) such registration statement is subject to any stop order, injunction or other
order or requirement of the Commission or other governmental agency or court solely due to the
actions or omissions to act of the Company and (B) less than 75% of all of the Registrable
Securities included in such registration have been sold thereunder, then such registration
statement shall not constitute a registration of Registrable Securities to be effected by the
Company pursuant to Section 3(a)(ii) hereof and the Company shall pay all the Registration Expenses
related thereto.
(iv) Selection of Underwriters. If the Requesting Holders elect the Single
Registration Option or the Takedown Option, Requesting Holders holding a majority of the Registrable
Securities requested to be registered or included in such takedown shall have the right to select
the lead managing underwriter for the offering; provided, however, that such
selection shall be subject to approval by the Company, which approval shall not be unreasonably
withheld or delayed; and provided further, that the Company shall have the right to appoint
a co-manager in all cases subject to the approval
13
of Requesting Holders holding a majority of the Registrable Securities requested to be
registered or included in such takedown, which approval shall not be unreasonably withheld.
(v) Pro Rata Participation in Requested Registrations or Takedowns. If in connection
with a requested registration or takedown pursuant to this Section 3(a), the lead managing
underwriter advises the Company, the Requesting Holders and the Other Holders in writing that, in
its view, the number of equity securities requested to be included in such registration or takedown
exceeds the largest number of securities which can be sold without having an adverse effect on such
offering, including the price at which such securities can be sold, the number of Registrable
Securities requested to be registered by the Requesting Holders and the Other Holders included by
the Company in such registration shall be allocated pro rata (subject to adjustments for tax
considerations as provided in Subsection (C) below) among the Requesting Holders and the Other
Holders on the basis of the relative number of Registrable Securities then held by them;
provided, however, that:
(A) if the Company intends to issue Registrable Securities and to include them in such
registration or takedown, the Company’s allocation shall first be subject to reduction before the
number of Registrable Securities to be registered by the Requesting Holders and the Other Holders
is subject to any reduction; and
(B) Requesting Shareholders and Other Holders who become subject to a reduction pursuant to
this Section 3(a)(v) in the amount of Registrable Securities to be included in a registration or
takedown may elect not to sell any Registrable Securities pursuant to the registration or takedown.
(vi) With respect to any Shelf Registration Statement that has been declared effective and
which includes Registrable Securities, the Company agrees to use its reasonable best efforts to
keep the Shelf Registration Statement continuously effective and usable for the resale of the
applicable Registrable Securities for a period ending on the first date on which all the
Registrable Securities covered by such Shelf Registration Statement have been sold pursuant to such
Shelf Registration Statement, but in no event longer than two years. The foregoing notwithstanding,
the Company shall have the right in its reasonable discretion, based on any valid business purpose
(including to avoid the disclosure of any material non-public information that the Company is not
otherwise obligated to disclose or to coordinate such distribution with other shareholders that
have registration rights with respect to any securities of the Company or with other distributions
of the Company (whether for the account of the Company or otherwise)), to suspend the use of the
applicable Shelf Registration Statement for a reasonable length of time (a “Delay Period”)
and from time to time; provided, however, that the aggregate number of days in all
Delay Periods occurring in any period of twelve consecutive months shall not exceed 90 days; and
provided further, however, that the two-year limit referred to above shall be
extended by the number of days in any applicable Delay Period. The Company shall provide written
notice to each holder of Registrable Securities covered by the Shelf Registration Statement of the
beginning and the end of each Delay Period and such holders shall cease all disposition efforts
with respect to
14
Registrable Securities held by them immediately upon receipt of notice of the beginning of any
Delay Period.
(b)
Incidental Registration. (i) If the Company at any time proposes to register or
sell any Common Shares or any options, warrants or other rights to acquire, or securities
convertible into or exchangeable for, Common Shares (the
“Priority Securities”) under the
Securities Act (other than a registration (A) relating to shares issuable upon exercise of employee
share options or in connection with any employee benefit or similar plan of the Company, (B) in
connection with any scheme of arrangement, merger or consolidation by the Company or any Affiliate
of the Company or the acquisition by the Company or any such Affiliate of the shares or
substantially all the assets of any other Person, or (C) pursuant to Section 3(a) hereof) in a
manner that would permit registration of Registrable Securities for sale, or the sale in a
takedown, to the public under the Securities Act (whether or not for sale for its own account)),
including in an initial public offering, it shall each such time, subject to the provisions of
Section 3(b)(ii) hereof, give prompt written notice to all holders of record of Registrable
Securities of its intention to do so and of such Shareholders’ rights under this Section 3(b), at
least 10 days (or two Business Days, in the case of a takedown from an effective shelf registration
statement) prior to the anticipated filing date of the registration statement relating to such
registration or the offering date in the case of a takedown. Such notice shall offer all such
Shareholders the opportunity to include in such registration statement or in such takedown such
number of Registrable Securities as each such Shareholder may request.
Upon the written request of any such Shareholder made within seven days (or two Business Days
in the case of a takedown) after the receipt of the Company’s notice (which request shall specify
the number of Registrable Securities intended to be disposed of by such Shareholder), the Company
shall use its reasonable best efforts to effect the registration under the Securities Act of all
Registrable Securities that the Company has been so requested to register by the Shareholders
thereof or to include requested Registrable Securities in a takedown;
provided, however, that (A) all holders of Registrable Securities requesting to be included in the
Company’s registration or takedown must sell their Registrable Securities to the underwriters
selected by the Company on substantially the same terms and conditions as apply to the Company
(other than provisions relating to the indemnification of underwriters or Shareholders), and (B)
if, at any time after giving written notice pursuant to this Section 3(b)(i) of its intention to
register any Priority Securities or to proceed with a takedown and prior to the effective date of
the registration statement filed in connection with such registration or prior to the execution of
an underwriting agreement in connection with a takedown, the Company shall determine for any reason
not to register or sell such Priority Securities, the Company shall give written notice to all
holders of Registrable Securities and shall thereupon be relieved of its obligation to register any
Registrable Securities in connection with such registration or to include requested Registrable
Securities in a takedown (without prejudice, however, to rights of Shareholders under Section 3(a)
hereof). The failure of any holder of Registrable Securities to affirmatively indicate its intent
to include its Registrable Securities in such registration or takedown shall be deemed a waiver of
any right to so include such Registrable Securities in such registration or
15
takedown. Any holder of Registrable Securities requesting to be included in such registration
may elect, in writing prior to the effective date of the registration statement filed in connection
with such registration, not to register such Registrable Securities in connection with such
registration.
No registration or takedown effected under this Section 3(b) shall relieve the Company of its
obligations to effect a registration or takedown upon request under Section 3(a) hereof. The
Company shall pay all Registration Expenses in connection with each registration or takedown of
Registrable Securities requested pursuant to this Section 3(b). However, each Shareholder shall pay
all underwriting discounts and commissions and transfer taxes, if any, relating to the sale or
disposition of such Shareholder’s Registrable Securities pursuant to a registration statement or
takedown effected pursuant to this Section 3(b).
(ii) Priority in Incidental Registrations. If in connection with a registration or a
takedown pursuant to this Section 3(b) the managing underwriter advises the Company in writing
that, in its good faith view, the number of equity securities (including all Registrable
Securities) that the Company and the Shareholders intend to include in such registration or
takedown exceeds the largest number of securities that can be sold without having an adverse effect
on such offering, including the price at which such Registrable Securities can be sold, the Company
will include in such registration or takedown (A) first, all the Priority Securities to be sold for
the Company’s own account; and (B) second, to the extent that the number of Priority Securities is
less than the number of Registrable Securities that the underwriter has advised the Company can be
sold in such offering without having the adverse effect referred to above, Registrable Securities
requested to be included in such registration or takedown by the Shareholders pursuant to Section
3(b)(i) hereof, pro rata among all Shareholders requesting registration on the basis of the
relative number of Registrable Securities then held by them. Shareholders subject to such
allocation may elect not to sell any Registrable Securities pursuant to the registration statement
or takedown.
(iii) If the Company at any time proposes to effect a public offering in a jurisdiction other
than the United States of any Common Shares or any options, warrants or other rights to acquire, or
securities convertible into or exchangeable for, Common Shares (other than a public offering (A)
relating to shares issuable upon exercise of employee share options or in connection with any
employee benefit or similar plan of the Company, or (B) in connection with any merger,
reorganization or consolidation by the Company or Affiliate of the Company or the acquisition by
the Company or an Affiliate of the Company of the shares or substantially all the assets of any
other Person), the Company and the Shareholders will have the rights and be subject to the
obligations agreed in this Section 3(b) to the extent and where applicable.
(c)
Holdback Agreements. (i) Each Shareholder agrees, for the benefit of the
underwriters referred to below, not to effect any sale or distribution, including any private
placement or any sale pursuant to Rule 144 (or any successor provision) under the Securities Act,
of any Registrable Securities, other than to an Affiliate or by gift or pro rata distribution to
its shareholders, partners or other beneficial holders (in each case,
16
which agree to be bound by the remaining provisions hereof), and not to effect any such sale
or distribution of any other equity security of the Company or of any security convertible into or
exchangeable or exercisable for any equity security of the Company, during the 10 days prior to
(or, in the case of a takedown, from the time on such day as such Shareholder receives notice of
such takedown), and during a period, not to exceed 180 days in the case of the initial public
offering or 90 days in the case of all other offerings, after the later of (i) the effective date
of any registration statement filed pursuant to Section 3(a) or (b) hereof in connection with an
underwritten offering and (ii) the execution of an underwriting agreement in connection with an
underwritten offering, without the consent of the managing underwriter of such offering, except as
part of such registration, if permitted; provided, however, that each holder of
Registrable Securities shall have received written notice of such registration from either the
Company or the managing underwriter at least two Business Days prior to the anticipated beginning
of the 10-day period referred to above. Each Shareholder agrees that it will enter into any
agreement reasonably requested by the underwriters of any such underwritten offering to confirm its
agreement set forth in the preceding sentence.
(ii) The Company agrees (A) not to effect any public sale or distribution of any of its equity
securities or of any security convertible into or exchangeable or exercisable for any equity
security of the Company (other than any such sale or distribution of such securities in connection
with any merger, reorganization or consolidation by the Company or any Affiliate of the Company or
the acquisition by the Company or an Affiliate of the Company of the shares or substantially all
the assets of any other Person or in connection with an employee stock ownership or other benefit
plan) during the 10 days prior to, and during a period, not to exceed 180 days in the case of the
initial public offering or 90 days in the case of all other offerings, which begins on the later of
(i) the effective date of such registration statement and (ii) the execution of an underwriting
agreement in connection with an underwritten offering, without the consent of the managing
underwriters of such offering, and (B) that any agreement entered into after the date hereof
pursuant to which the Company issues or agrees to issue any privately placed equity securities
shall contain a provision under which the holders of such securities agree not to effect any public
sale or distribution of any such securities during the period and in the manner referred to in the
foregoing clause (A), including any private placement and any sale pursuant to Rule 144 under the
Securities Act (or any successor provision), except as part of such registration, if permitted.
(d) Registration Procedures. In connection with any offering of Registrable Securities
registered pursuant to this Section 3, the Company shall:
(i) Promptly prepare and file a registration statement with the Commission within 45 days
after receipt of a request for registration pursuant to a Single Registration Option or a Shelf
Option, and use its reasonable best efforts to cause such registration statement to become, as soon
as practicable, and remain, effective as provided herein;
provided, however, that
before filing with the Commission a registration statement or prospectus or any amendments or
supplements thereto, the Company will furnish to one counsel selected by the holders of a majority
of the Registrable Securities requested to be registered
17
copies of all such documents proposed to be filed for such counsel’s review and comment (and
the Company shall not file any such document to which such counsel shall have reasonably objected
in writing on the grounds that such document does not comply (explaining why) in all material
respects with the requirements of the Securities Act or the rules or regulations thereunder).
(ii) Prepare and file with the Commission such amendments and supplements to such registration
statement and the prospectus used in connection therewith as may be necessary to keep such
registration statement effective for a period of not less than 180 days in the case of a Single
Registration Option, or two years in the case of a Shelf Option, or such shorter period that will
terminate when all Registrable Securities covered by such registration statement have been sold
(but not before the expiration of the periods referred to in Section 4(3) and Rule 174 of the
Securities Act or any successor provision, if applicable), and to prepare and file prospectus
supplements to effect sales pursuant to takedowns and comply with the provisions of the Securities
Act with respect to the disposition of all securities covered by such registration statement;
provided, however, that the 180-day period referred to above shall be extended by
the number of days such registration statement may be subject to a stop order or otherwise
suspended.
(iii) Furnish to each holder and each underwriter, if any, of Registrable Securities covered
by such registration statement such number of copies of such registration statement, each amendment
and supplement thereto (in each case including all exhibits thereto), and the prospectus included
in such registration statement, including each preliminary prospectus, in conformity with the
requirements of the Securities Act, and such other documents as any Shareholder may reasonably
request in order to facilitate the disposition of the Registrable Securities owned by such
Shareholder.
(iv) Unless the exemption from state regulation of securities offerings under Section 18 of
the Securities Act applies, use its commercially reasonable efforts to register or qualify such
Registrable Securities under such other state securities or “blue sky” laws of such jurisdictions
as any holder, and underwriter, if any, of Registrable Securities covered by such registration
statement reasonably requests; provided, however, that the Company will not be
required to (A) qualify generally to do business in any jurisdiction where it would not otherwise
be required to qualify but for this subsection (iv), (B) subject itself or any of its Subsidiaries
to taxation or regulation (insurance or otherwise) of its or their respective businesses in any
such jurisdiction other than the United States, or (C) consent to general service of process in any
such jurisdiction.
(v) Use its commercially reasonable efforts to cause the Registrable Securities covered by
such registration statement to be registered with or approved by such other governmental agencies
or authorities as may be necessary by virtue of the business and operations of the Company and its
Subsidiaries to enable the holder or holders thereof to consummate the disposition of such
18
Registrable Securities in accordance with the intended method or methods of distribution
thereof.
(vi) Promptly notify each holder of such Registrable Securities, the sale or placement agent,
if any, thereof and the managing underwriter or underwriters, if any, thereof (A) when such
registration statement or any prospectus included therein or any prospectus amendment or supplement
or post-effective amendment has been filed, and, with respect to such registration statement or any
post-effective amendment, when the same has become effective, (B) of any comments by the Commission
and by the Blue Sky or securities commissioner or regulator of any state with respect thereto or
any material request by the Commission for amendments or supplements to such registration statement
or prospectus or for additional information, (C) of the issuance by the Commission of any stop
order suspending the effectiveness of such registration statement or the initiation or threatening
of any proceedings for that purpose and (D) of the receipt by the Company of any notification with
respect to the suspension of the qualification of the Registrable Securities for sale in any
jurisdiction or the initiation or threatening of any proceeding for such purpose.
(vii) Use its commercially reasonable efforts to obtain as soon as possible the lifting of any
stop order that might be issued suspending the effectiveness of such registration statement.
(viii) Promptly notify each holder of such Registrable Securities at any time when a
prospectus relating thereto is required to be delivered under the Securities Act of the happening
of any event that comes to the Company’s attention if as a result of such event the prospectus
included in such registration statement contains an untrue statement of a material fact or omits to
state any material fact required to be stated therein or necessary to make the statements therein
not misleading; and the Company will promptly prepare and furnish to such Shareholder a supplement
or amendment to such prospectus so that, as thereafter delivered to the purchasers of such
Registrable Securities, such prospectus will not contain an untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary to make the statements
therein not misleading.
(ix) Use its commercially reasonable efforts (A) to cause all such Registrable Securities to
be listed on a national securities exchange in the United States or on NASDAQ and, if applicable,
on each securities exchange on which similar securities issued by the Company may then be listed,
and enter into such customary related agreements including a listing application and
indemnification agreement in customary form, and (B) to provide a transfer agent and registrar for
such Registrable Securities covered by such registration statement no later than the effective date
of such registration statement.
(x) Enter into such customary agreements (including an underwriting agreement or qualified
independent underwriting agreement, in each case, in
19
customary form) and take all such other actions as the holders of a majority of the
Registrable Securities requested to be registered or included in a takedown or the underwriters
retained by such Shareholders, if any, reasonably request in order to expedite or facilitate the
disposition of such Registrable Securities, including customary representations, warranties,
indemnities and agreements and preparing for, and participating in, such number of “road shows” and
all such other customary selling efforts as the underwriters reasonably request in order to
expedite or facilitate such disposition, and to use its commercially reasonable efforts to assist
the underwriters in complying with the rules of the NASD (if applicable).
(xi) Make available for inspection, during the normal business hours of the Company, by any
holder of Registrable Securities requested to be registered or included in a takedown, any
underwriter participating in any disposition pursuant to such registration statement, and any
attorney, accountant or other agent retained by any such Shareholder or underwriter (collectively,
the “Inspectors”), all financial and other records, pertinent corporate and business documents and
documents relating to the properties of the Company and its Subsidiaries (collectively, “Records”),
if any, as shall be reasonably necessary to enable them to exercise their due diligence
responsibility, and cause the Company’s officers, directors, employees and independent auditors,
and those of the Company’s Subsidiaries, to supply all information and respond to all inquiries
reasonably requested by any such Inspector in connection with such registration statement or
takedown; provided, that each such Inspector hereby agrees to keep in confidence the
contents and existence of any Records that may contain non-public information with respect to the
Company or any of its Subsidiaries, except (but only to the extent) as required by applicable law
to disclose such non-public information.
(xii) Obtain a “cold comfort” letter addressed to the underwriters and the holders of the
Registrable Securities being sold from the Company’s appointed auditors in customary form and
covering such matters of the type customarily covered by “cold comfort” letters as the underwriters
and the holders of a majority in interest of the Registrable Securities being sold reasonably
request, and dated the later of the effective date of such registration statement and the date of
the execution of the underwriting agreement (and also dated the date of the closing under the
underwriting agreement relating thereto).
(xiii) Obtain an opinion of counsel to the Company addressed to the underwriters and the
holders of the Registrable Securities being sold in customary form and covering such matters, of
the type customarily covered by such an opinion, as the managing underwriters, if any, or as the
holders of a majority in interest of the Registrable Securities being sold may reasonably request,
addressed to such holders and the placement or sales agent, if any, thereof and the underwriters,
if any, thereof, and dated the later of the effective date of such registration statement and the
date of the execution of the underwriting agreement
20
(or also dated the date of the closing under the underwriting agreement relating
thereto).
(xiv) Otherwise use its commercially reasonable efforts to comply with all applicable rules
and regulations of the Commission and make available to the Shareholders, as soon as reasonably
practicable, an earnings statement covering a period of at least twelve months, but not more than
eighteen months, beginning with the first mil calendar quarter after the effective date of the
registration statement (as the term “effective date” is defined in Rule 158(c) under the Securities
Act) which earnings statement shall satisfy the provisions of
Section 11(a) of the Securities Act
and Rule 158 thereunder.
It shall be a condition precedent to the obligation of the Company to take any action with
respect to any Registrable Securities that the holder thereof shall furnish to the Company such
information regarding such holder, the Registrable Securities and any other Company securities held
by such holder as the Company shall reasonably request and as shall be required in connection with
the action taken by the Company. The Company agrees not to include in any amendment to any
registration statement with respect to any Registrable Securities, or any amendment of or
supplement to the prospectus used in connection therewith, any reference to any holder of any
Registrable Securities covered thereby by name, or otherwise identify such holder as the holder of
Registrable Securities, without the consent of such holder, such consent not to be unreasonably
withheld or delayed, unless such disclosure is required by law or regulation.
Each holder of Registrable Securities agrees that, upon receipt of any notice from the Company
of the happening of any event of the kind described in Section 3(d)(viii) or the commencement of a
Delay Period described in Section 2(a)(vi) hereof, such Shareholder will forthwith discontinue
disposition of Registrable Securities until such Shareholder’s receipt of the copies of the
supplemented or amended prospectus contemplated by Section 3(d)(viii) hereof or the end of the
Delay Period, as the case may be, and, if so directed by the Company such Shareholder will deliver
to the Company (at the Company’s expense) all copies (including any and all drafts), other than
permanent file copies, then in such Shareholder’s possession, of the prospectus covering such
Registrable Securities current at the time of receipt of such notice. In the event that the Company
shall give any such notice, the period mentioned in Section 3(d)(ii) hereof shall be extended by
the number of days during the period from and including the date of the giving of such notice
pursuant to Section 3(d)(viii) hereof to and including the date when each holder of Registrable
Securities covered by such registration statement shall have received the copies of the
supplemented or amended prospectus contemplated by Section 3(d)(viii) hereof. Each Holder of
Registrable Securities shall be entitled to reimbursement from the Company for any out-of-pocket
losses actually incurred as a result of such holder’s inability to make delivery of sold securities
due to the Company’s failure to notify the holder of any event described in Section 3(d)(viii)
hereof or of a Delay Period described in Section 2(a)(vi) hereof.
(e) Indemnification, (i) Indemnification by the Company. In consideration of
the agreements of the holders of the Registrable Securities contained
21
herein and in the several Subscription Agreements, and as an inducement to such holders to
enter into the Subscription Agreement, the Company shall agree that in the event of any
registration under the Securities Act pursuant to this Agreement, the Company will indemnify and
hold harmless, to the full extent permitted by law, each of the holders of any Registrable
Securities covered by such registration statement, their respective directors and officers,
members, general partners, limited partners, managing directors, each other Person who participates
as an underwriter in the offering or sale of such securities and each other Person, if any, who
controls, is controlled by or is under common control with any such Shareholder or any such
underwriter within the meaning of the Securities Act (and directors, officers, controlling Persons,
members, partners and managing directors of any of the foregoing) against any and all losses,
claims, damages or liabilities, joint or several, and expenses including any amounts paid in any
settlement effected with the Company’s consent, which consent will not be unreasonably withheld, to
which such Shareholder, any such director or officer, member, or general or limited partner or
managing director or any such underwriter or controlling Person may become subject under the
Securities Act, U.S. state securities “blue sky” laws, common law or otherwise, insofar as such
losses, claims, damages or liabilities (or actions or proceedings in respect thereof) or expenses
arise out of or are based upon (A) any untrue statement or alleged untrue statement of any material
fact contained in any registration statement under which such securities were registered under the
Securities Act, any preliminary, final or summary prospectus contained therein or any amendment or
supplement thereto, (B) any omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading, or (C) any
violation or alleged violation by the Company of any U.S. federal, state or common law rule or
regulation applicable to the Company and relating to action required of or inaction by the Company
in connection with any such registration. The Company shall reimburse each such Shareholder and
each such director, officer, member, general partner, limited partner, managing director or
underwriter and controlling Person for any legal or any other expenses reasonably incurred by them
in connection with investigating or defending such loss, claim, liability, action or proceeding;
provided, however, that the Company shall not be liable in any such case to the
extent that any such loss, claim, damage, liability (or action or proceeding in respect thereof) or
expense arises out of or is based upon any untrue statement or alleged untrue statement or omission
or alleged omission made in such registration statement or amendment or supplement thereto or in
any such preliminary, final or summary prospectus in reliance upon and in conformity with written
information furnished to the Company or its representatives by such Shareholder, in its capacity as
a Shareholder in the Company, or any such director, officer, member, general or limited partner,
managing director, underwriter or controlling Person expressly for use in the preparation thereof;
provided further that the Company shall not be liable to any Person who participates as an
underwriter in the offering or sale of Registrable Securities, if any, or any other Person (other
than a holder of Registrable Securities covered by the registration statement), if any, who
controls such underwriter within the meaning of the Securities Act, pursuant to this Section
3(e)(i) with respect to any preliminary prospectus or the final prospectus or the final prospectus
as amended or supplemented as the case may be, to the extent that any such loss, claim, damage or
liability of such underwriter or controlling Person (other than a holder of Registrable
22
Securities covered by the Registration Statement) results from the fact that such underwriter
sold Registrable Securities to a Person to whom there was not sent or given, at or prior to the
written confirmation of such sale, a copy of the final prospectus or of the final prospectus as
then amended or supplemented, whichever is most recent, if the Company has previously furnished
copies thereof to such underwriter and such final prospectus, as then amended or supplemented, had
corrected any such misstatement or omission, except that the indemnification obligation of the
Company with respect to any Person who participates as an underwriter in the offering or sale of
Registrable Securities, or any other Person (other than a holder of Registrable Securities covered
by the registration statement), if any, who controls such underwriter within the meaning of the
Securities Act, pursuant to this proviso shall be modified in such manner, which shall be
reasonably acceptable to the Company and a majority of the holders of Registrable Securities
participating in any such registration, as is consistent with customary practice with respect to
underwriting agreements for offerings of such type. The indemnity provided for herein, when it
becomes a commitment of the Company, shall remain in full force and effect regardless of any
investigation made by or on behalf of such Shareholder or any such director, officer, member,
general partner, limited partner, managing director, underwriter or controlling Person and shall
survive the transfer of such securities by such Shareholder.
(ii) Indemnification by the Shareholders and Underwriters. The Company will require,
as a condition to including any Registrable Securities in any registration statement filed in
accordance with the provisions hereof, that the Company shall have received an undertaking
reasonably satisfactory to it from the holders of such Registrable Securities or any underwriter,
to indemnify and hold harmless (in the same manner and to the same extent as set forth in
subsection (i) above) the Company and its directors, officers, controlling persons and all other
prospective sellers and their respective directors, officers, general and limited partners,
managing directors, and their respective controlling Persons with respect to any statement or
alleged statement in or omission or alleged omission from such registration statement, any
preliminary, final or summary prospectus contained therein, or any amendment or supplement, if such
statement or alleged statement or omission or alleged omission was made in reliance upon and in
conformity with written information furnished to the Company or its representatives by or on behalf
of such Shareholder, in its capacity as a Shareholder in the Company, or such underwriter, as
applicable, expressly for use in the preparation of such registration statement, preliminary, final
or summary prospectus or amendment or supplement, or a document incorporated by reference into any
of the foregoing. Such indemnity shall remain in full force and effect regardless of any
investigation made by or on behalf of the Company or any of the holders of Registrable Securities,
underwriters or any of their respective directors, officers, members, general or limited partners,
managing directors or controlling Persons and shall survive the transfer of such securities by such
Shareholder; provided, however, that no such Shareholder shall be liable in the
aggregate for any amounts exceeding the amount of the proceeds to be received by such holder from
the sale of its Registrable Securities pursuant to such registration (after deducting any fees,
discounts and commissions applicable thereto), as reduced by any damages or other amounts that such
holder was otherwise required to pay by reason of such untrue or alleged untrue statement or
omission or alleged omission.
23
(iii) Notices of Claims, etc. Promptly after receipt by an indemnified party hereunder
of written notice of the commencement of any action or proceeding with respect to which a claim for
indemnification may be made pursuant to this Section 3(e), such indemnified party will, if a claim
in respect thereof is to be made against an indemnifying party, promptly give written notice to the
indemnifying party of the commencement of such action; provided, however, that the
failure of any indemnified party to give notice as provided herein shall not relieve the
indemnifying party of its obligations under the preceding subsections of this Section 3(e), except
to the extent that the indemnifying party is actually materially prejudiced by such failure to give
notice. In case any such action is brought against an indemnified party, unless in such indemnified
party’s reasonable judgment a conflict of interest between such indemnified party and indemnifying
parties may exist in respect of such claim, the indemnifying party will be entitled to participate
in and, jointly with any other indemnifying party similarly notified, to assume the defense
thereof, to the extent that it may wish, with counsel reasonably satisfactory to such indemnified
party, and after notice from the indemnifying party to such indemnified party of its election so to
assume the defense thereof, the indemnifying party will not be liable to such indemnified party for
any legal or other expenses subsequently incurred by the latter in connection with the defense
thereof, unless in such indemnified party’s reasonable judgment a conflict of interest between such
indemnified and indemnifying parties arises in respect of such claim after the assumption of the
defense thereof, and the indemnifying party will not be subject to any liability for any settlement
made without its consent (which consent shall not be unreasonably withheld). No indemnifying party
will consent to entry of any judgment or enter into any settlement that does not include as an
unconditional term thereof the giving by the claimant or plaintiff to such indemnified party of a
release from all liability in respect to such claim or litigation. An indemnifying party who is not
entitled to, or elects not to, assume the defense of a claim will not be obligated to pay the fees
and expenses of more than one counsel in any single jurisdiction for all parties indemnified by
such indemnifying party with respect to such claim, unless in the reasonable judgment of any
indemnified party a conflict of interest may exist between such indemnified party and any other of
such indemnified parties with respect to such claim, in which event the indemnifying party shall be
obligated to pay the fees and expenses of such additional counsel or counsels as may be reasonably
necessary. Notwithstanding anything to the contrary set forth herein, and without limiting any of
the rights set forth above, in any event any party will have the right to retain, at its own
expense, counsel with respect to the defense of a claim.
(iv) Contribution. In order to provide for just and equitable contribution in
circumstances in which the indemnity agreement provided for in this Section 3(e) is for any reason
unavailable, or insufficient to hold harmless an indemnified party in respect of any loss, claim,
damage, liability (or actions or proceedings in respect thereof) or expense referred to herein,
then each indemnifying party shall contribute to the amount paid or payable by such indemnified
party as a result of such losses, claims, damages or liabilities (or actions or proceedings in
respect thereof) or expense in such proportion as is appropriate to reflect the relative fault of
the indemnifying party and the indemnified party in connection with the statements or omissions
which resulted in such losses, claims, damages or liabilities (or actions or proceedings in respect
thereof) or expense, as well as any other relevant equitable considerations. The relative fault of
such
24
indemnifying party and indemnified party shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material feet or omission or alleged
omission to state a material fact relates to information supplied by such indemnifying party or by
such indemnified party, and the parties’ relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission. The parties hereto agree that it
would not be just and equitable if contribution pursuant to this Section 3(e)(iv) were determined
by pro rata allocation or by any other method of allocation which does not take account of the
equitable considerations referred to in this Section 3(e)(iv). The amount paid or payable by an
indemnified party as a result of the losses, claims, damages, or liabilities (or actions or
proceedings in respect thereof) or expenses referred to above shall be deemed to include any legal
or other fees or expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. Notwithstanding the provisions of this Section
3(e)(iv), no holder shall be required to contribute any amount in excess of the amount by which the
dollar amount of the proceeds received by such holder from the sale of any Registrable Securities
(after deducting any fees, discounts and commissions applicable thereto) exceeds the amount of any
damages which such holder has otherwise been required to pay by reason of such untrue or alleged
untrue statement or omission or alleged omission, and no underwriter shall be required to
contribute any amount in excess of the amount by which the total price at which the Registrable
Securities underwritten by it and distributed to the public were offered to the public exceeds the
amount of any damages which such underwriter has otherwise been required to pay by reason of such
untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent misrepresentation. The holders’
and any underwriter’s obligations in this Section 3(e)(iv) to contribute shall be several in
proportion to the number of Registrable Securities sold or underwritten, as the case may be, by
them and not joint. For purposes of this Section 3(e), each Person, if any, who controls a
Shareholder or an underwriter within the meaning of Section 15 of the Securities Act shall have the
same rights to contribution as such Shareholder or underwriter, and each director of the Company,
each officer of the Company who signed the registration statement, and each Person, if any, who
controls the Company within the meaning of Section 15 of the Securities Act shall have the same
rights to contribution as the Company.
(f) Underwriting Agreement. Holders of Registrable Securities requested to be
registered pursuant to this Section 3 shall be parties to the underwriting agreement with the
underwriters for such offering in connection with such offering and may, at their option, require
that any or all of the representations and warranties by, and the agreements on the part of, the
Company to and for the benefit of such underwriters be made to and for the benefit of such holders
of Registrable Securities and that any or all of the conditions precedent to the obligations of
such underwriters under such underwriting agreement shall also be conditions precedent to the
obligations of such holders of Registrable Securities. No underwriting agreement or other agreement
in connection with such offering shall require any such holder of Registrable Securities to make
any representations or warranties to or agreement with the Company or the underwriters other than
representations, warranties or agreements regarding such holder, such holder’s
25
Registrable Securities and such holder’s intended method of distribution or any other
representations required by applicable law and agreements regarding indemnification and
contribution to the effect, but only to the extent, provided in Section 3(e) hereof.
(g) Rule 144 and Rule 144A. At all times after a public offering of any Common Shares,
the Company agrees that it will file in a timely manner all reports required to be filed by it
pursuant to the Exchange Act, and, if at any time thereafter, the Company is not required to file
such reports, it will make available to the public, to the extent required to permit the sale of
Common Shares by any holder of Registrable Securities pursuant to Rule 144 and Rule 144A under the
Securities Act, current information about itself and its activities as contemplated by Rule 144 and
Rule 144A under the Securities Act, as such Rules may be amended from time to time. Notwithstanding
the foregoing, the Company may deregister any class of its equity securities under Section 12 of
the Exchange Act or suspend its duty to file reports with respect to any class of its securities
pursuant to Section 15(d) of the Exchange Act if it is then permitted to do so pursuant to the
Exchange Act and the rules and regulations thereunder.
SECTION 4. Restrictive Legends. (a) Each certificate representing Common Shares
(including any Warrant Shares) shall be stamped or otherwise imprinted with a legend in
substantially the following form:
“Any sale, assignment, transfer, pledge or other disposition of the shares represented by this
certificate is restricted by, and the rights attaching to these shares are subject to, the terms
and conditions contained in the Shareholders Agreement dated as of [ ], 2004, as they may
be amended from time to time, which are available for examination by registered holders of shares
at the registered office of the Company. The registered holder of the shares represented by this
certificate, by acquiring and holding such shares, shall to the extent required under the
Shareholders Agreement be deemed a party to such Shareholders Agreement for all purposes and shall
be required to agree in writing to be bound by and perform all of the terms and provisions of such
Shareholders Agreement, all as more fully provided therein. In addition, any transferee of the
shares represented by this certificate shall to the extent required under the Shareholders
Agreement be deemed to be a party to such Shareholders Agreement for all purposes and shall be
required by the transferring shareholder to agree in writing to acquire and hold such shares
subject to all of the terms of such Agreement, all as more fully provided therein, which terms are
to be enforced by the shareholders of the Company.
The shares represented by this certificate have not been registered under the U.S. Securities
Act of 1933 (the “Securities Act”), or any U.S. state securities laws and may not be transferred,
sold or otherwise disposed of unless (i) a registration statement is in effect under the Securities
Act with respect to such shares, or (ii) a written opinion of counsel reasonably acceptable to the
Company is provided to the Company to the effect that no such registration is required for such
transfer, sale or disposal.”
26
(b) Following termination of Section 2(a) hereof, the Company shall, promptly upon request and
surrender of the legended certificate, deliver a replacement certificate not containing the first
paragraph of the legend above in exchange for the legended certificate. In the event that Common
Shares are disposed of pursuant to an effective registration statement or, following an initial
public offering, Rule 144 (or any successor provision) under the Securities Act or if the Company
shall have received an opinion of counsel reasonably acceptable to the Company (or a copy of a “no
action” or interpretive letter from the Commission) to the effect that such shares are eligible to
be sold pursuant to paragraph (k) of Rule 144, the Company shall promptly upon request deliver a
replacement certificate not containing either paragraph of the legend above in exchange for the
legended certificate.
SECTION 5. Competition, (a) Each Shareholder agrees that each Shareholder and its
officers, directors, employees, agents and Affiliates (other than Persons that are also the
officers of the Company or any of its Subsidiaries) may, alone or in combination with any other
Person, engage in activities or businesses, make investments in and acquisitions of any Person, and
enter into partnerships and joint ventures with any Person, whether or not competitive now or in
the future with the businesses or activities of the Company or any Subsidiary of the Company, and
neither the Company nor any Shareholder shall have the right to disclosure of any information in
regard thereto, to participate therein, or to derive any profits therefrom.
(b) Each Shareholder and the Company agree that none of the
Shareholders or any of their respective officers, directors, employees, agents or Affiliates
(other than Persons that are also officers of the Company or any of its Subsidiaries) shall have
the obligation to refer to the Company or its Subsidiaries any business opportunities presented or
developed by any of them.
SECTION 6. Restrictions on Other Agreements. Neither the Company nor any Shareholder
shall enter into or agree to be bound by any voting trust, voting agreement or any shareholder
agreement or arrangements of any kind, written or otherwise, with any person with respect to the
Common Shares on terms inconsistent with the provisions of this Agreement (whether or not such
agreements and arrangements are with other Shareholders or holders of Common Shares that are not
parties to this Agreement).
SECTION 7. Financial Statements and Other Information. (a) The Company shall furnish
or shall cause to be furnished to each Shareholder the following information at the following
times:
(i) with respect to each fiscal quarter of the Company, no later than 45 days after the end of
such quarter, a consolidated summary balance sheet, income statement and cash flow statement as of
the end of and for such quarter and the comparable quarter of the preceding fiscal year together
with a letter from management of the Company summarizing the financial condition, results of
operations and business of the Company and its subsidiaries as of the end of and for such quarter;
27
(ii) accompanying the financial information to be delivered pursuant to clause (a)(i) above, a
certificate, executed by the principal financial officer of the Company, stating that such
information was prepared in accordance with U.S. generally accepted accounting principles
consistently applied, with such exceptions as are set forth in detail in such certificate; and
(iii) with respect to each full fiscal year of the Company, no later than 90 days after the
end of such year, a consolidated balance sheet, income statement and cash flow statement as of the
end of and for such year prepared in accordance with U.S. generally accepted accounting principles
consistently applied and accompanied by a signed audit report by a nationally recognized accounting
firm, together with a letter from management of the Company summarizing the financial condition,
results of operations and business of the Company and its subsidiaries as of the end of and for
such year.
(b) The Company shall, and shall cause its Subsidiaries to, (1) permit each Shareholder during
normal business hours to visit and inspect any of its properties and those of its Subsidiaries,
including books and records (and, prior to an initial public offering only, make copies thereof),
(2) make appropriate officers and directors of the Company and its Subsidiaries available
periodically for consultation with such Shareholder with respect to matters relating to the
respective business and affairs of the Company and its Subsidiaries, including, without limitation,
significant changes in management personnel and compensation of employees, introduction of new
products or new lines of business, important acquisitions or dispositions of plants and equipment,
significant research and development programs, the purchasing or selling of important licenses,
trademarks or concessions, and the proposed commencement or compromise of significant litigation
and (3) consider the recommendations of such Shareholder in connection with the matters on which it
is consulted as described above, recognizing that the ultimate discretion with respect to all such
matters shall be retained by the Company and its Subsidiaries.
(c) Notwithstanding any other provision of this Agreement the Company may, as a condition to
the rights of any Shareholder under this Section 7, require such Shareholder to execute and deliver
a confidentiality agreement in commercially reasonable form covering all non-public information
conveyed to such Shareholder.
SECTION 8. Board of Directors; Committees. (a) On and after the Closing Date and prior
to an initial public offering, each Shareholder shall take all action necessary, including the
voting of the Common Shares held by such Shareholder, to cause the Board of Directors of the
Company to consist at all times of seven directors, and to vote in favor of three individuals
designated by White Mountains to be members of such Board of Directors. Following an initial public
offering, the number of individuals designated by White Mountains for whom the Shareholders shall
be obligated to vote as members of the Board of Directors of the Company shall be reduced to two,
so long as White Mountains owns, directly or indirectly, Common Shares, including Common Shares
issuable upon exercise of outstanding Warrants (whether or not currently exercisable), at least 20%
of the outstanding Common Shares (assuming for this
28
purpose the exercise of all outstanding Warrants), and such number shall be further reduced to
one if White Mountains’ ownership (as calculated in the preceding clause) is less than 20% but at
least equal to 10%. If such ownership falls below 10%, no Shareholder shall have any further
obligations under this Section 8(a). White Mountains hereby designates David Foy, John Gillespie
and John J. Byrne as its designees for the Board of Directors of the Company, which designation
shall continue until such time as White Mountains shall otherwise designate in writing to the other
parties hereto.
(b) On and after the Closing Date, and prior to an initial public offering, each Shareholder
shall take all action necessary, including the voting of Common Shares held by such Shareholder, to
cause one or more individuals designated by White Mountains to be appointed by the Board of
Directors as Chairman of the Board, and to be appointed chairman of any audit committee, finance
committee or compensation committee of the Board. White Mountains hereby designates David Foy as
its designee to be Chairman of the Board, David Foy to be chairman of the audit committee, John
Gillespie to be chairman of the finance committee and David Foy to be chairman of the compensation
committee, which designations shall continue until such time as White Mountains shall otherwise
designate in writing to the other parties hereto.
(c) Notwithstanding anything to the contrary contained in this Section 8, this Section 8 shall
be subject to applicable law and any applicable regulations of governmental entities and
self-regulatory organizations.
SECTION 9. Further Action. Each Shareholder shall, for so long as such Shareholder
owns any Common Shares or Warrants, (i) take any and all action (on a timely basis) necessary to
carry out the intentions of the Shareholders set forth in this Agreement, including voting (or
causing the voting of), all Common Shares held by such Shareholder in favor of any necessary
amendment to the Certificate of Incorporation or the By-laws of the Company and (ii) refrain from
taking any wilful action knowingly inconsistent with this Agreement including, without limitation,
voting (or causing the voting of) any Common Shares held by such Shareholder in a manner
inconsistent with this Agreement.
SECTION 10. Term. This Agreement shall terminate upon the first to occur of
(a) an Initial Public Offering,
(b) the consent of the Company and all Shareholders who are parties to this Agreement that the
Agreement be terminated,
(c) any transaction with any Person pursuant to which shares or other securities of
such Person are exchanged or substituted for all the Common Shares, provided that the shares or
securities of such Person issued to the Shareholders are registered under the Securities Act and
applicable U.S. state securities laws and listed on a U.S. national securities exchange or on
NASDAQ; provided, however, that the Shareholders receive freely tradable shares or
securities, other than any limits on transfer
29
arising from any Shareholder’s status as an affiliate (as such term is used in the Securities
Act and the rules thereunder), of such Person or the Company; and provided further,
however, that all Shareholders that are subject to such limits on transfer described in the
preceding proviso receive registration rights entitling such Shareholders to request registration
of the shares or securities received,
(d) the liquidation or dissolution of the Company or
(e) the tenth anniversary of the date of this Agreement; provided, however,
that
(i) in the case of termination pursuant to clauses (a) or (b),
(A) the provisions of Section 3 (other than the proviso in Section 3(d)(xi) and Section 3(e))
shall survive until the earlier of (x) the occurrence of an event described in clause (d) above and
(y) the tenth anniversary of the termination of this Agreement, in each case to the extent that the
rights under such provisions have not theretofore been exercised;
(B) the last two sentences of Section 2(a) shall survive any Initial Public Offering as set
forth therein;
(C) the second sentence of Section 2(a) and the entirety of Section 2(b) shall survive until
the first anniversary of the initial closing of the Initial Public Offering, and
(ii) in any case the proviso in Section 3(d)(xi) and the provisions of Sections 3(e), 5.8(a),
9.10, 1l(b) and 12 through 22 shall survive the termination of this Agreement indefinitely.
SECTION 11. Additional Matters.
(a) No Inconsistent Agreements. The Company shall not grant registration rights other
than those granted under this Agreement, with respect to the Common Shares or any other securities
of the Company, which are more favorable than the registration rights contained in this Agreement
without the prior written consent of Shareholders holding at least two-thirds of the outstanding
Common Shares then held by all of the Shareholders who are parties to this Agreement (assuming for
this purpose the exercise of all outstanding Warrants). Without limiting the generality of the
foregoing, in no event shall the holders of such other registration rights have priority over
Shareholders with respect to the inclusion of their securities in any registration or takedown (it
being understood that such other registration rights may be pari passu with the
registration rights granted under this Agreement with respect to registrations or takedowns).
(b) VCI Status. To the extent that any Shareholder is subject to such regulations, the
Company shall reasonably cooperate with such Shareholder to provide to
30
such Shareholder such rights of consultation as may be required pursuant to regulations,
advisory opinions or announcements issued after the date of this Agreement by the United States
Department of Labor or by a court of competent jurisdiction in order for such Shareholder’s
investment in the Company to continue to qualify as a “Venture capital investment” for purposes of
the United States Department of Labor Regulation published at 29 C.F.R. Section
2510.3-101(d)(3)(i). Notwithstanding anything to the contrary in this Agreement, Section 7(b)
hereof shall survive any Initial Public Offering with respect to any Shareholder who is a party to
this Agreement as of the date hereof as long as such Shareholder holds any Common Shares purchased
under its Subscription Agreement, if and only to the extent that such Shareholder establishes, to
the reasonable satisfaction of the Company, that such survival is necessary in order for such
Shareholder’s investment in the Company to qualify as a “Venture capital investment” for purposes
of the United States Department of Labor Regulation published at 29 C.F.R. Section
2510.3-101(d)(3)(i).
SECTION 12. Amendments. Neither this Agreement nor any provision hereof may be amended
except by an instrument in writing signed by the Company and Shareholders holding at least
two-thirds (or such higher percentage as may be required by any provision which is the subject of a
proposed amendment) of the outstanding Common Shares then held by all of the Shareholders who are
parties to this Agreement (assuming for this purpose the exercise of all outstanding Warrants). Any
amendment approved in the foregoing manner will be effective as to all Shareholders. For the
avoidance of doubt, the addition or deletion of any Person as a party hereto in accordance with the
terms hereof shall not constitute an amendment hereof.
SECTION 13. Waiver and Consent. No action taken pursuant to this Agreement, including,
without limitation, any investigation by or on behalf of any party, shall be deemed to constitute a
waiver by the party taking such action of compliance with any representations, warranties,
covenants or agreements contained herein. The waiver by any party hereto of a breach of any
provision of this Agreement shall not operate or be construed as a waiver of any preceding or
succeeding breach, and no failure by any party to exercise any right or privilege hereunder shall
be deemed a waiver of such party’s rights or privileges hereunder or shall be deemed a waiver of
such party’s rights to exercise the same at any subsequent time or times hereunder.
SECTION 14. Recapitalization, Exchanges, etc. Except as expressly provided otherwise
herein, the provisions of this Agreement shall apply to the full extent set forth herein with
respect to shares or other securities in the Company or any other Person that may be issued in
respect of, in exchange for, or in substitution of the Common Shares or the Warrants.
SECTION 15. Notices. All notices, requests, demands and other communications hereunder
shall be in writing and shall be deemed, unless otherwise specified herein, to have been duly given
if sent by hand, mail, courier service, cable, telex, facsimile or other mode of representing words
in a legible and non-transitory form (a) if to the Shareholders, at their respective addresses in
the Register of Shareholders of the Company or at such other address as any of the Shareholders may
have furnished to
31
the Company in writing, and (b) if to the Company, at 370 Church Street, Guilford, Connecticut
06437, Attention: Reid Campbell, Treasurer, Telephone: 203-458-2380, Facsimile: 203-458-0754, or
such other address as the Company may have furnished to the Shareholders in writing.
All such communications shall be deemed to have been given, delivered or received when so
received, if sent by hand, cable, telex, facsimile or similar mode, on the next Business Day after
sending if sent by Federal Express or other similar overnight delivery service, on the fifth
Business Day after mailing if sent by mail and otherwise on the actual day of receipt.
SECTION 16. Specific Performance. Each of the parties hereto acknowledges and agrees
that in the event of any breach of this Agreement, the non-breaching parties would be irreparably
harmed and could not be made whole by monetary damages. Accordingly, each of the parties hereto
agrees that the other parties, in addition to any other remedy to which they may be entitled at law
or in equity, shall be entitled, subject to applicable law, to compel specific performance of this
Agreement.
SECTION 17. Entire Agreement. This Agreement (including any schedules, annexes or
other attachments hereto) and all Subscription Agreements and any other agreements delivered at the
Closing with respect to the subject matter hereof constitute the entire agreement between the
parties hereto and supersede all prior agreements and understandings, oral and written, between the
parties hereto with respect to the subject matter hereof.
SECTION 18. Severability. To the fullest extent permitted by applicable law, any
provision of this Agreement that is prohibited, unenforceable or not authorized in any jurisdiction
shall, as to such jurisdiction, be ineffective to the extent of such prohibition, unenforceability
or lack of authorization without invalidating the remaining provisions hereof or affecting the
validity, unenforceability or legality of such provision in any other jurisdiction.
SECTION 19. Binding Effect; Benefit. Except for Section 3(c)(i) hereof, which shall be
enforceable by the underwriters referred to therein, nothing in this Agreement, express or implied,
is intended to confer on any Person other than the parties hereto, and their respective successors,
legal representatives and permitted assigns, any rights, remedies, obligations or liabilities under
or by reason of this Agreement.
SECTION 20. Successors and Assigns. This Agreement shall inure to the benefit of and
be binding upon the parties hereto, and their respective successors, legal representatives and
permitted assigns. Neither this Agreement nor any rights or obligations hereunder shall be
assignable by any Shareholder except in connection with a Transfer of Common Shares or Warrants
permitted hereunder, in which case, subject to the next sentence, the rights and obligations
hereunder shall be transferred pro rata. No such assignment shall be effective unless the assignee
shall execute and deliver an agreement in form and substance reasonably satisfactory to the Company
agreeing to be bound by this Agreement (or the surviving provisions hereof).
32
SECTION 21. Interpretation. The Table of Contents and the Headings contained in this
Agreement are for convenience only and shall not affect the meaning or interpretation of this
Agreement. All references herein to Sections, subsections, clauses and Schedules shall be deemed
references to such parts of this Agreement, unless the context otherwise requires. All pronouns and
any variations thereof refer to the masculine, feminine or neuter, as the case may require. The
definitions of terms in this Agreement shall be applicable to both the singular and plural forms of
the terms defined where either such form is used in this Agreement. Whenever the words “include”,
“includes” and “including” are used in this Agreement, they shall be deemed to be followed by the
words “without limitation.” The words “herein”, “hereof, and “hereunder”, and other words of
similar import, refer to this Agreement as a whole and not to any particular Section, Subsection,
or clause.
SECTION 22. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original and all of which together shall be
deemed to be one and the same instrument.
SECTION 23. Applicable Law. The validity of this Agreement, its construction,
interpretation and enforcement, and the rights of the parties hereunder, shall be determined under,
governed by and construed in accordance with the laws of New York. Each party hereto agrees that
any suit, action or other proceeding arising out of this Agreement may be brought and litigated in
the appropriate Federal and state courts of the State of New York and each party hereto hereby
irrevocably consents to personal jurisdiction and venue in any such court and hereby waives any
claim it may have that such court is an inconvenient forum for the purposes of any such suit,
action or other proceeding. The Shareholders and the Company each hereby irrevocably designates and
appoints CT Corporation with offices on the date hereof at 111 Eighth Avenue, New York, NY 10011,
and its successors, as its agent to receive, accept or acknowledge for or on behalf of it, service
of any and all legal process, summonses, notices and documents that may be served in any such suit,
action or proceeding in any such court. Each Shareholder acknowledges that CT Corporation will
transmit services of any and all legal process, summonses, notices and documents that may be served
in any such suit, action or proceeding in any such court to such Shareholder’s address as shown in
the stock transfer books of the Company from time to time. Each Shareholder further irrevocably
consents to the service of any and all legal process, summonses, notices and documents by the
mailing of copies thereof by registered or certified air mail, postage prepaid, to such party at
the address of such party as shown in the stock transfer books of the Company from time to time.
33
IN WITNESS WHEREOF, the parties hereto have caused this Shareholders Agreement to be executed
as of the date first above written.
| OCCUM ACQUISITION CORP., | ||||||
| by | /s/ Kernan V. Oberting | |||||
| Title: President | ||||||
| Wellington Management Company, LLP as investment adviser on behalf of the client accounts listed on Schedule A |
||||||
| By | /s/ Julie A. Jenkins | |||||
| Name: Julie A. Jenkins | ||||||
| Title: Vice President and Counsel | ||||||
| April 8, 2004 | ||||||
[Signature Page to Shareholders Agreement]
Schedule A
Bay Pond Partners, L.P. |
75,000 | $ | 7,500,000.00 | |||||
Bay Pond Investors (Bermuda) L.P. |
25,000 | $ | 2,500,000.00 |
33
IN WITNESS WHEREOF, the parties hereto have caused this Shareholders Agreement to be executed
as of the date first above written.
| OCCUM ACQUISITION CORP., |
||||
| by | /s/ Kernan V. Oberting | |||
| Name: | Kernan V. Oberting | |||
| Title: | President | |||
| LEMMING CAPITAL PARTNERS |
||||
| By | /s/ Vincent J. Dowling Jr. | |||
| Name: | Vincent J. Dowling Jr. | |||
| Title: | Managing Member | |||
[Signature Page to Shareholders Agreement]
33
IN WITNESS WHEREOF, the parties hereto have caused this Shareholders Agreement to be executed
as of the date first above written.
| OCCUM ACQUISITION CORP., |
||||
| by | /s/ Kernan V. Oberting | |||
| Name: Kernan V. Oberting | ||||
| Title: President | ||||
| By | /s/ Jeffrey P. Hughes | |||
| Name: | Jeffrey P. Hughes | |||
| Title: | ||||
[Signature Page to Shareholders Agreement]
33
IN WITNESS WHEREOF, the parties hereto have caused this Shareholders Agreement to be executed
as of the date first above written.
| OCCUM ACQUISITION CORP., |
||||
| by | /s/ Kernan V. Oberting | |||
| Name: | Kernan V. Oberting | |||
| Title: | President | |||
| By | /s/ | |||
| Name: | ||||
| Title: | ||||
[Signature Page to Shareholders Agreement]
33
IN WITNESS WHEREOF, the parties hereto have caused this Shareholders Agreement to be executed
as of the date first above written.
| OCCUM ACQUISITION CORP., |
||||
| by | /s/ Kernan V. Oberting | |||
| Name: | Kernan V. Oberting | |||
| Title: President | ||||
| By | /s/ William Spiegel | |||
| Name: | William Spiegel | |||
| Title: | ||||
[Signature Page to Shareholders Agreement]
33
IN WITNESS WHEREOF, the parties hereto have caused this Shareholders Agreement to be executed
as of the date first above written.
| OCCUM ACQUISITION CORP., |
||||
| by | /s/ Kernan V. Oberting | |||
| Name: | Kernan V. Oberting | |||
| Title: | President | |||
| By | /s/ Gene Lee | |||
| Name: | Gene Lee | |||
| Title: | ||||
[Signature Page to Shareholders Agreement]
33
IN WITNESS WHEREOF, the parties hereto have caused this Shareholders Agreement to be executed
as of the date first above written.
| OCCUM ACQUISITION CORP., |
||||
| by | /s/ Kernan V. Oberting | |||
| Name: | Kernan V. Oberting | |||
| Title: | President | |||
| By | /s/ Alath Dalal | |||
| Name: | Alath Dalal | |||
| Title: | ||||
[Signature Page to Shareholders Agreement]
33
IN WITNESS WHEREOF, the parties hereto have caused this Shareholders Agreement to be executed
as of the date first above written.
| OCCUM ACQUISITION CORP., |
||||
| by | /s/ Kernan V. Oberting | |||
| Name: | Kernan V. Oberting | |||
| Title: | President | |||
| CHOU ASSOCIATES MANAGEMENT INC. |
||||
| By | /s/ Francis Chou | |||
| Name: | Francis Chou | |||
| Title: | President | |||
[Signature Page to Shareholders Agreement]
33
IN WITNESS WHEREOF, the parties hereto have caused this Shareholders Agreement to be executed
as of the date first above written.
| OCCUM ACQUISITION CORP., |
||||
| by | /s/ Kernan V. Oberting | |||
| Name: | Kernan V. Oberting | |||
| Title: | President | |||
| By | /s/ Roger K. Taylor | |||
| Name: | Roger K. Taylor | |||
| Title: | ||||
[Signature Page to Shareholders Agreement]
33
IN WITNESS WHEREOF, the parties hereto have caused this Shareholders Agreement to be executed
as of the date first above written.
OCCUM
ACQUISITION CORP., |
||||
| by | /s/ Kernan V. Oberting | |||
| Name: | Kernan V. Oberting | |||
| Title: | President | |||
| By | /s/ Randall H. Talbot | |||
| Name: | Randall H. Talbot | |||
| Title: | ||||
[Signature Page to Shareholders Agreement]
33
IN WITNESS WHEREOF, the parties hereto have caused this Shareholders Agreement to be executed
as of the date first above written.
OCCUM
ACQUISITION CORP., |
||||
| by | /s/ Kernan V. Oberting | |||
| Name: | Kernan V. Oberting | |||
| Title: | President | |||
| By | /s/ Terry L. Baxter | |||
| Name: | Terry L. Baxter | |||
| Title: | ||||
[Signature Page to Shareholders Agreement]
33
IN
WITNESS WHEREOF, the parties hereto have caused this Shareholders Agreement to be executed
as of the date first above written.
OCCUM
ACQUISITION CORP., |
||||
| by | /s/ Kernan V. Oberting | |||
| Name: | Kernan V. Oberting | |||
| Title: | President | |||
| By | /s/ Roger F. Harbin | |||
| Name: | Roger F. Harbin | |||
| Title: | ||||
[Signature Page to Shareholders Agreement]
33
IN WITNESS WHEREOF, the parties hereto have caused this Shareholders Agreement to be executed
as of the date first above written.
OCCUM
ACQUISITION CORP., |
||||
| by | /s/ Kernan V. Oberting | |||
| Name: | Kernan V. Oberting | |||
| Title: | President | |||
| By | /s/ Robert E Snyder | |||
| Name: | Robert E Snyder | |||
| Title: | Trustee R E SNYDER & CO, Profit Sharing Plan |
|||
[Signature Page to Shareholders Agreement]
Schedule 1
Signatories to Shareholders Agreement
Exhibit 9.3
EXECUTION VERSION
SHAREHOLDERS AGREEMENT
This
SHAREHOLDERS AGREEMENT (this “Agreement”), dated as of April 16, 2004, is
among Occum Acquisition Corp., a Delaware corporation (the “Company”), and each of
the Persons listed on Schedule 1 hereto and any future security holder of
the Company that becomes a party to this Agreement (each, a “Shareholder” and
collectively the “Shareholders”).
The authorized share capital of the Company consists of
15,000,000 shares, par value U.S. $0.01 per share (collectively or any number thereof, the “Common
Shares”). Each of the Shareholders has subscribed to purchase Common Shares and desires to promote
the interests of the Company and the mutual interests of the Shareholders by establishing herein
certain terms and conditions upon which the Common Shares (including Common Shares issued upon
conversion, exchange or exercise of any portion, warrant or other security) will be held, including
provisions restricting the transfer of Common Shares, providing certain registration rights and
providing for certain other matters.
In consideration of the mutual covenants and agreements hereinafter contained, the Company
and the Shareholders hereby agree as follows:
SECTION 1. Definitions. Capitalized terms not otherwise defined in this Agreement
have the meanings ascribed to them in the Subscription Agreement. As used in this Agreement, the
following terms shall have the respective meanings set forth below:
“Affiliate” shall mean, with respect to any specified Person, a Person that directly or
indirectly Controls, is Controlled by or is under common Control with such Person. Without limiting
the generality of the foregoing, the term “Affiliate” shall include an investment fund managed by
such Person or by a Person that directly or indirectly Controls, is Controlled by or is under
common Control with such Person.
“Agreement” shall have the meaning given such term in the first paragraph of this
Agreement.
“Berkshire” shall mean Berkshire Hathaway Inc., a Delaware corporation, or any successor
entity thereto.
“Board” shall mean the Board of Directors of the Company.
“Business Day” shall mean any day except a Saturday, Sunday or other day on which banks in
New York City are authorized or obligated by law or executive order to close.
2
“By-laws” shall mean the By-laws of the Company as in effect from time to time.
“Closing Date” shall mean the dates for the closing of the sale of up to 11,000,000 Common
Shares by the Company pursuant to the several Subscription Agreements.
“Code” shall mean the U.S. Internal Revenue Code of 1986, as amended.
“Commission” shall mean the U.S. Securities and Exchange Commission or any other federal
agency at the time administering the Securities Act or the Exchange Act.
“Control” of a Person shall mean the possession, directly or indirectly, of the power to
direct or cause the direction of the management and policies of such Person, whether through the
ownership of voting securities, by contract or otherwise, and “Controlling” and “Controlled” shall
have meanings correlative to the foregoing.
“day” shall mean a calendar day.
“Exchange Act” shall mean the U.S. Securities Exchange Act of 1934, as amended, or any U.S.
federal statute then in effect that has replaced such statute, and a reference to a particular
section thereof shall be deemed to include a reference to the comparable section, if any, of any
such replacement federal statute.
“Founders” shall mean White Mountains and Berkshire. A “Founder” shall mean either one of
them.
“Initial Public Offering” shall mean the completion, whether by the Company or by any
Shareholders, of an underwritten public offering of the Common Shares pursuant to a registration
statement filed under the Securities Act resulting in aggregate net proceeds, together with any
such underwritten public offering previously completed, of not less than U.S.$ 125 million, or (ii)
the completion by the Company of a merger, acquisition or comparable business combination
transaction in connection with which the Company has issued Common Shares pursuant to a
registration statement filed under the Securities Act on Form S-4, which shares have any aggregate
value, based on the average closing price of such shares during the five trading days after
completion of such transaction, of not less than U.S.$125 million; and “initial public
offering” shall mean the completion, whether by the Company or any Shareholders, of the initial
public offering of the Common Shares pursuant to a registration statement filed under the
Securities Act, regardless of the amount of net proceeds from such offering or the issuance of
Common Shares in connection with a merger, acquisition or comparable business combination
transaction pursuant to a registration statement on
Form S-4 filed under the Securities Act.
Form S-4 filed under the Securities Act.
3
“NASD” shall mean the U.S. National Association of Securities Dealers, Inc. or any
successor organization.
“NASDAQ” shall mean The Nasdaq National Market or any successor quotation system.
“Offering” shall mean the offering and sale of up to 11,000,000 Common Shares pursuant to the
several Subscription Agreements.
“Person” shall mean an individual, company, corporation, limited liability company, firm,
partnership, trust, estate, unincorporated association or other entity.
“Registrable Securities” shall mean (i) Common Shares (including any Common Shares
issuable on exercise of the Warrants) issued on the Closing Date to the Shareholders, (ii) the
Warrants and (iii) any securities of the Company issued successively in exchange for or in respect
of any of the foregoing, whether as a result of any successive stock split or reclassification of,
or stock dividend on, any of the foregoing or otherwise; provided, however, that
such securities shall cease to be Registrable Securities if and when (A) a registration statement
with respect to the disposition of such securities shall have become effective under the Securities
Act and such securities shall have been disposed of pursuant to such effective registration
statement, (B) such securities are sold pursuant to Rule 144 under circumstances in which any
legend borne by such Registrable Securities relating to restrictions on the transferability thereof
under the Securities Act is removed by the Company, (C) such securities are eligible to be sold
pursuant to paragraph (k) of Rule 144, (D) such securities have ceased to be outstanding or (E) as
of any time, in the reasonable judgment of the Company, such securities would be eligible for sale
pursuant to Rule 144 under the Act (without giving effect to the provisions of Rule 144 (k)) in the
90-day period following such time. Notwithstanding clauses (C) and (E) above, Common Shares shall
continue to be deemed Registrable Securities until such time as the holder of such Common Shares
could sell all of such holder’s Registrable Securities pursuant to clause (C) or (E) above.
“Registration Expenses” shall mean all expenses incident to the
Company’s performance of or compliance with its obligations under Section 3, including all
Commission, NASD and stock exchange or NASDAQ registration and filing fees and expenses, fees and
expenses of compliance with applicable state securities or “blue sky” laws (including reasonable
fees and disbursements of counsel for the underwriters in connection with “blue sky” qualifications
of the Registrable Securities), printing expenses, messenger and delivery expenses, fees and
disbursements of any custodian, the fees and expenses incurred in connection with the listing of
the securities to be registered in an initial public offering on each securities exchange or
automated quotation system on which such securities are to be so listed and, following such initial
public offering, the fees and expenses incurred in connection with the listing of such securities
to be registered on each securities exchange or automated quotation system on which such securities
are listed, fees and disbursements of counsel for the Company and all independent certified public
accountants (including the expenses of any annual audit and “cold comfort” letters required by or
incident to such performance and compliance), the
4
fees and disbursements of underwriters customarily paid by issuers or sellers of securities
(including the fees and expenses of any “qualified independent underwriter” required by the NASD),
the reasonable fees of one counsel retained in connection with each such registration by the
holders of a majority of the Registrable Securities being registered, the reasonable fees and
expenses of any special experts retained by the Company in connection with such registration, and
fees and expenses of other Persons retained by the Company (but not including any underwriting
discounts or commissions or transfer taxes, if any, attributable to the sale of Registrable
Securities by holders of such Registrable Securities other than the Company).
“securities” shall have the meaning given to such term under the Securities Act.
“Securities Act” shall mean the U.S. Securities Act of 1933 or any U.S. federal statute then
in effect which has replaced such statute, and a reference to a particular section thereof shall be
deemed to include a reference to the comparable section, if any, of any such replacement federal
statute.
“Shareholder” shall have the meaning given to such term in the first paragraph of
this Agreement.
“Subscription Agreement” shall mean all and each of the Subscription Agreements, dated
as of various dates on or before the date hereof, between the Company and each of the Investors (as
defined therein) for the purchase and sale of Common Shares in the Offering.
“Subsidiary” shall mean any corporation, limited liability company or other Person of which
shares of stock or other ownership interests having a majority of the general voting power (without
regard to the occurrence of any contingency) in electing the Board of Directors thereof or other
Persons performing a similar function are, at the time as of which any determination is being made,
owned by the Company either directly or through its Subsidiaries and any partnership in which the
Company or any Subsidiary is a general partner.
“Transfer” shall mean to sell, assign or otherwise transfer an interest, in whole or in part,
whether voluntarily or involuntarily or by operation of law or at a judicial sale or otherwise;
provided, however, that Transfer shall not include the bona fide pledge of Common
Shares or Warrants in connection with a loan by a financial institution or any transfer back to the
pledgor by the pledgee of such Common Shares or Warrants following the termination of any such bona
fide pledge.
“U.S.” shall mean the United States of America and dependent territories or any part thereof.
“Warrant Shares” shall mean any Common Shares issuable upon exercise of the Warrants.
5
“Warrants” shall mean those Warrants to be issued to White Mountains and Berkshire pursuant to
the Warrant Issuance Agreements (as defined in the Subscription Agreement).
“White Mountains” shall mean White Mountains Re Group, Ltd., a company existing
under the laws of Bermuda, or any successor entity thereto.
SECTION 2. Transfer of Shares or Warrants. (a) General. No Shareholder
shall Transfer any Common Shares other than
(i) to one or more third parties after having complied with Section 2(b) hereof, if
applicable,
(ii) in connection with the exercise of its tag-along rights under Section 2(b)
hereof,
(iii) in connection with the Founders’ exercise of drag-along rights under Section 2(c)
hereof or any other transaction with any Person approved by the Board and Shareholders in
accordance with the Certificate of Incorporation and By-laws pursuant to which cash, shares or
other securities of such Person are exchanged or substituted for all the Common Shares,
(iv) in the case of any Shareholder that is an individual, to any one or more of such
Shareholder’s spouse or lineal relatives, or to any custodian or trust for the benefit of any
of the foregoing,
(v) to any Affiliate of such Shareholder,
(vi) in the case of any Shareholder that is a partnership, corporation or limited
liability company, as a distribution to the partners, shareholders or members thereof,
(vii) in connection with the exercise by such Shareholder of its registration rights
under Section 3 hereof or
(viii) following an initial public offering, pursuant to Rule 144 (or any successor
provision) under the Securities Act.
No Shareholder shall Transfer any Warrants, other than (i) to one or more third parties
(including other Shareholders or the Company) after complying with Section 4 of the Warrants, (ii)
in connection with any transaction with any Person approved by the Board and Shareholders in
accordance with the Certificate of Incorporation and By-laws pursuant to which cash, shares or
other securities of such Person are exchanged or substituted for all the Common Shares, (iii) to
any Affiliate of such Shareholder or (iv) in connection with the exercise by such Shareholder of
its registration rights under Section 3 hereof; provided, however, that a Transfer
pursuant to clauses (i) or (iv) above may not be made until the earliest of (A) the third
anniversary of the date of this Agreement, (B) such time as the Shareholders (other than the
Founders)
6
who are party to this Agreement as of the date hereof own less than 50% of the Common Shares
initially acquired pursuant to their respective Subscription Agreements or (C) the first
anniversary of the initial closing of an Initial Public Offering;
provided further, however, that at any time each of White Mountains and Berkshire (and any Affiliate of White
Mountains or Berkshire to whom Warrants have been Transferred pursuant to clause (iii) above) may
Transfer Warrants to each other.
Notwithstanding any other provision of this Agreement, no Transfer may be made in violation of
any provision or any requirement of the U.S. securities laws. Each Shareholder agrees that it will
not seek to evade the restrictions on transfer set forth in this Section 2 by Transferring Common
Shares or Warrants to an Affiliate and thereafter transferring beneficial ownership of the
Affiliate, as part of a unified plan to avoid such restrictions. If any Shareholder wishes to
Transfer any of its Common Shares or Warrants to another Person (a “Transferee”) other than
any Transfer permitted (or, in the event that such provisions shall have terminated in accordance
with Section 10 hereof, that would have been permitted) (A) by subsection (iii), (vii) or (viii) of
the first sentence of this Section 2(a), (B) by subsection (vi) of the first sentence of this
Section 2(a) if at the time of such Transfer such Shareholder would be permitted to transfer its
Common Shares pursuant to (x) subsection (viii) of the first sentence of this Section 2(a) and (y)
Rule 144(k) under the Securities Act or (C) by subsection (ii) or (iv) of the second sentence of
this Section 2(a), such Shareholder shall, as a condition of such Transfer, require the Transferee
to execute and deliver an agreement in form and substance reasonably satisfactory to the Company
agreeing to be bound by all of the provisions hereof. The preceding sentence shall survive an
Initial Public Offering until the date that is 18 months following the initial closing of such
Initial Public Offering.
(b) Tag-Along Rights. (i) If, at any time, one or more Shareholders (the “Selling
Shareholders”) propose to Transfer to any Person or group of Persons (the “Proposed Purchaser”) in
any transaction or series of related transactions a number of Common Shares equal to (x) prior to
an Initial Public Offering, 5% or more of the then outstanding Common Shares, and (y) following an
Initial Public Offering, 10% or more of the then outstanding Common Shares, the Selling
Shareholders shall afford each other Shareholder the opportunity to participate proportionately in
such Transfer in accordance with this Section 2(b). At least 20 days prior to the date proposed for
such sale, the Selling Shareholders shall give notice to the Company, which shall provide a copy to
each other Shareholder with a notice of the proposed Transfer, stating such Selling Shareholders’
intent to make such sale, the number of Common Shares proposed to be transferred, the kind and
amount of consideration to be paid for such Common Shares and the name of the Proposed Purchaser
(the “Purchase Offer”). Each other Shareholder shall have the right to Transfer to the
Proposed Purchaser a number of Common Shares equal to such Shareholder’s Allotment. Such
Shareholder’s “Allotment” shall be equal to (A) the total number of Common Shares proposed to be
Transferred by the Selling Shareholders multiplied by (B) a fraction, the numerator of which is the
number of Common Shares then owned by such Shareholder and the denominator of which is the total
number of Common Shares then outstanding (assuming, for purposes of all calculations of outstanding
Common Shares in this clause (i), the exercise of all then outstanding Warrants).
7
(ii) Each Shareholder shall have 10 days from the receipt of the Purchase Offer in which to
accept such Purchase Offer by written notice to the Selling Shareholders. Contemporaneously with
the sale by the Selling Shareholders, each other Shareholder so electing to participate shall, on
the date of the closing, sell the Common Shares indicated in its written notice for the same
consideration and on the same terms as those provided by the Proposed Purchaser to the Selling
Shareholders as specified in the Purchase Offer.
(iii) Notwithstanding the foregoing, this Section 2(b) shall not apply to any Transfer
permitted (or, in the event that such provisions shall have terminated in accordance with Section
10 hereof, that would have been permitted) by subsections (iii) through (viii) of the first
sentence of Section 2(a) hereof.
(c) Drag-Along Rights. If, at any time, the Founders jointly propose to transfer all
of the Common Shares owned by the Founders in a single transaction to a third party (the
“Proposed Acquiror”) pursuant to a Qualified Sale (as defined below), and the Board of
Directors of the Company has approved such Qualified Sale, the Founders may cause to be included in
such Qualified Sale all, but not less than all, of the Common Shares held by each of the other
Shareholders by providing to each such other Shareholder a notice (a “Qualified Sale Notice”) of
the proposed Qualified Sale at least 20 days prior to the date proposed for such Qualified Sale,
stating the identity of the Proposed Acquiror, the kind and amount of consideration proposed to be
paid for the Common Shares to be purchased by the Proposed Acquiror and the other material terms of
such Qualified Sale. For purposes of determining the number of Common Shares outstanding pursuant
to the immediately preceding sentence, Common Shares issuable upon the exercise of Warrants,
options or other rights to acquire Common Shares, or upon the conversion or exchange of any
security outstanding as of the time of delivery of the Qualified Sale Notice, shall not be deemed
to be outstanding.
In the event the Founders so provide a Qualified Sale Notice with respect to a Qualified Sale,
each other Shareholder shall (i) be obligated to transfer all of the Common Shares owned by such
Shareholder to the Proposed Acquiror on the terms and conditions set forth in the Qualified Sale
Notice and (ii) execute and deliver such instruments of conveyance and transfer and take such other
action, including voting such Shareholder’s Common Shares in favor of such Qualified Sale and
executing any purchase agreements, merger agreements, indemnity agreements, escrow agreements or
related documents, as the Founders or the Proposed Acquiror may reasonably require in order to
carry out the terms and provisions of this Section 2(c); provided, however, that
such instruments of conveyance and transfer and such purchase agreements, merger agreements,
indemnity agreements, escrow agreements and related documents shall not include any representations
or warranties of such Shareholder except such representations and warranties as are ordinarily
given by a seller of securities with respect to such seller’s authority to sell, enforceability of
agreements against such seller, such seller’s good title in such securities and the good title in
such securities to be acquired at closing by the Proposed Acquiror, provided further,
however, that any indemnity provision included in any such instrument, agreement or related
document shall only indemnify the Proposed
8
Acquiror with respect to breaches of such representations and warranties by such Shareholder,
without any obligation or liability for contribution.
The term “Qualified Sale” means a sale by the Founders to a third party which is not
an Affiliate of the Company or any Shareholder that meets all of the following requirements:
(i) the Common Shares owned in the aggregate by the Founders (assuming for this purpose
the exercise of all outstanding Warrants) to be sold in such sale equals or exceeds 25% of the
total outstanding Common Shares (assuming for this purpose the exercise of all outstanding
Warrants), (ii) the terms of such sale were negotiated between the Founders and such
unaffiliated third party (or on their behalf by their respective agents or representatives) on
a bona fide arm’s-length basis,
(ii) the terms of such sale provide that the sale of Common Shares pursuant thereto by
each Shareholder that is not a Founder shall be made for the same type and amount of
consideration for each such Common Share sold as is to be received by each Founder for each
Common Share sold (except with respect to Electing Shareholders as set forth below) and,
subject to the provisos in the third sentence of this Section 2(c), in all other respects in a
manner such that each term and condition applicable to such Shareholder is identical to, or no
less favorable than, each corresponding term and condition applicable to either Founder; and
(iii) either (A) the consideration to be received by each Shareholder pursuant to such
Qualified Sale is solely cash or (B) effective provision is made such that at the closing of
such Qualified Sale each Electing Shareholder (as defined below) will receive the Cash
Equivalent (as defined below) of any consideration other than cash proposed to be paid
pursuant to the terms of such Qualified Sale.
An “Electing Shareholder” is a Shareholder (other than a Founder) that gives written
notice, at least 10 days prior to the date proposed for a Qualified Sale, to the Selling
Shareholders that provided the Qualified Sale Notice of such Shareholder’s election to receive the
Cash Equivalent of any non-cash consideration proposed to be paid pursuant to the terms of such
Qualified Sale.
The term “Cash Equivalent” means an amount in cash equal to the fair market value (as
determined by a qualified appraiser with experience in the appraising of properties and businesses
in the relevant industry, to be selected by the mutual agreement of the interested parties) of
non-cash consideration to be paid in a Qualified Sale; provided, however, that if
no agreement can be reached, then any such interested party may apply to the American Arbitration
Association for the appointment of an appraiser meeting the requirements of the preceding sentence,
and any such appointment shall be binding upon the parties; provided further,
however, that in the event that such non-cash consideration consists of publicly traded
securities, then, in lieu of using an appraiser, the fair market value of such non-cash
consideration shall equal the average closing price of
9
the publicly traded security for the 10 Business Days ending on the trading day immediately
preceding the closing of the Qualified Sale. Any such appraiser shall be required to report its
appraisal in writing, within 60 days of its appointment, to each interested party.
(d) Preemptive
Rights. (A) Grant of Preemptive Rights. If the Company shall, prior to an
Initial Public Offering, issue, sell or distribute to any Shareholder any equity securities of the
Company, or any option, warrant, or right to acquire, or any security convertible into or
exchangeable for, any equity securities of the Company (other than (i) pursuant to an underwritten
offering pursuant to an effective registration statement under the Securities Act, (ii) pursuant to
a dividend or distribution upon the Common Stock of stock or other equity securities of the
Company, (iii) in connection with any scheme of arrangement, merger or consolidation by the Company
or any Affiliate of the Company or the acquisition by the Company or any such Affiliate of the
shares or substantially all the assets of any other Person or (iv) Warrant Shares) (any equity
securities of the Company or options, warrants, rights to acquire or securities convertible into or
exchangeable for equity securities of the Company, the issuance of which is not covered by clauses
(i) through (iv) above, being “New Securities”), each Shareholder shall be entitled to
participate in such issuance, sale or distribution for up to such number of New Securities (such
number being such Shareholder’s “Preemptive
Allotment”) as is equal to (x) the total number
of New Securities proposed to be issued, sold or distributed by the Company multiplied by (y) a
fraction, the numerator of which is the number of Common Shares owned by such Shareholder and the
denominator of which is the total number of Common Shares outstanding (assuming, for purposes of
all calculations of outstanding Common Shares in this clause (y), the exercise of all outstanding
Warrants.)
(B) Company Notice; Procedures for Exercise of Preemptive Rights. If the Company
proposes to issue any New Securities, the Company shall, at least 20 days prior to
consummating the issuance of the New Securities, give written notice (the “Company
Notice”) to the Shareholders, stating the number of New Securities, the price per New
Security, the terms of payment and all other terms and conditions on which the issuer
proposes to make such issuance. In order for a Shareholder to exercise its preemptive rights
under this Section 2(d), such Shareholder must give written notice to the Company within 10
days after the receipt of the Company Notice, stating the number of New Securities that such
Shareholder desires to purchase (which number shall not be greater than such Shareholder’s
Preemptive Allotment).
(C) Re-Set of Preemptive Rights. If no option is exercised pursuant to this
Section 2(d) for any of the New Securities within 10 days after receipt of the Company Notice
(or if the option is exercised in the aggregate for less than all of the New Securities), the
Company shall be free for a period of 180 days thereafter to sell the New Securities as to
which such option has not been exercised to the proposed offerees at no less than the sale
price set forth in the Company Notice and on terms and conditions that are no more favorable
to the proposed offerees than those offered to the Shareholders. If, however, at the
10
expiration of such 180-day period, such New Securities have not been issued in
accordance with the terms set forth in the Company Notice, then any other issuance or
proposed issuance thereof shall be subject to all of the provisions of this Agreement and
such shares shall not be issued without the Company again offering its shares in the manner
provided in this Section 2(d).
SECTION
3. Registration Rights. The Shareholders shall have the right to have their
Registrable Securities registered under the Securities Act and applicable U.S. state securities
laws, and the Company shall then have the related obligations, in accordance with the following
provisions.
(a) Registration
on Request. (i) At any time (x) after the third anniversary of the
date of the Closing, upon the written request of Shareholders holding in the aggregate 40% of all
Registrable Securities then held by Shareholders (assuming for this purpose exercise of all
outstanding Warrants) or (y) after an initial public offering, upon the written request of
Shareholders holding in the aggregate 10% of all Registrable Securities then held by Shareholders
(assuming for this purpose the exercise of all outstanding Warrants) (such Shareholders being
referred to as the “Requesting Holders”), the Requesting Holders may request that the
Company either (i) effect the registration under the Securities Act for an underwritten public
offering of all or part of the Registrable Securities held by them (the “Single Registration
Option”), (ii) effect the registration of all or any of their Registrable Securities by filing a
registration statement under the Securities Act (the “Shelf Registration Statement”) which
provides for the sale by the Requesting Holders of their Registrable Securities from time to time
in underwritten public offerings pursuant to Rule 415 under the Securities Act (the “Shelf
Option”), or (iii) permit the sale of Registrable Securities that are already included in an
effective Shelf Registration Statement pursuant to an underwritten public offering (the “Takedown
Option”); provided, however, that the Requesting Holders may not elect the Shelf
Option or the Takedown Option if the request thereunder is in connection with or would constitute
an initial public offering.
Upon receipt of such request, the Company will promptly give written notice to all other
holders of Registrable Securities (the “Other Holders”) that a request for registration or for a
takedown has been received. For a period of 10 days (or two Business Days in the case of a Takedown
Option request) following receipt of such notice, the Other Holders may request that the Company
also register their Registrable Securities (or include Registrable Securities in such takedown) and
the Company may determine to include its authorized and unissued securities in such registration or
takedown. The failure of any Other Holder to affirmatively indicate its intent to include its
Registrable Securities in such registration or takedown shall be deemed a waiver of any right to so
include such Registrable Securities in such registration statement or takedown. After the
expiration of such 10-day period or two-Business Day period, as the case may be, the Company shall
notify all holders of the number of Registrable Securities to be registered or included. Subject to
the provisions of this Section 3, in the case of either the Single Registration Option or the Shelf
Option, the Company shall use its reasonable best efforts to cause the prompt registration under
the Securities Act of (A) the Registrable Securities that the Requesting Holders and the Other
Holders have requested
11
the Company to register, and (B) all other securities that the Company has determined to
register, and in connection therewith will prepare and file a registration statement under the
Securities Act to effect such registration. Such registration statement shall be on such
appropriate registration form of the Commission as shall be selected by the Company, and such
selection shall be reasonably acceptable to the holders of a majority of the aggregate Registrable
Securities to be sold by the Requesting Holders. Subject to the provisions of this Section 3, in
the case of a Takedown Option, the Company shall use its reasonable best efforts to cause all
Registrable Securities so requested to be included in such underwritten public offering and shall
prepare and file any prospectus supplement reasonably necessary to effectuate a takedown.
Notwithstanding the foregoing, the Company will not be required to file a registration
statement or proceed with a takedown in any of the following situations:
(1) the Registrable Securities of Requesting Holders to be offered pursuant to such
request do not have an aggregate offering price of at least
U.S. $50 million in the case of an initial public offering or U.S. $25 million with respect
to any subsequent offering (based on the then current market price or, in the case of an
initial public offering, the aggregate offering price proposed to be set forth on the cover
page of the registration statement);
(2) during any period (not to exceed 60 days with respect to each request) when the
Company has determined to proceed with a public offering and, in the judgment of the managing
underwriter thereof, the requested filing would have an adverse effect on the public offering;
provided that the Company is actively employing in good faith all reasonable efforts
to cause such public offering to be consummated;
(3) during any period (not to exceed 60 days with respect to each request) when the
Company is in possession of material non-public information that the Board determines is in
the best interest of the Company not to disclose publicly; or
(4) to the extent required by the managing underwriter in an underwritten public
offering, during a period, not to exceed 180 days in the case of the initial public offering
or 90 days in the case of all other offerings, following the effectiveness of any previous
registration statement filed by the Company.
The right of the Company not to file a registration statement or proceed with a takedown
pursuant to paragraphs (2) and (4) above may not be exercised more than once in any twelve-month
period, and pursuant to paragraph (3) above may not be exercised more than twice in any
twelve-month period.
Requesting Holders holding a majority of the Registrable Securities requested to be registered
or included in a takedown may, at any time prior to the effective date of the registration
statement relating to such registration or the execution of an underwriting agreement relating to
such takedown, revoke such request, without
12
liability to any of the other Requesting Holders or the Other Holders, by providing a written
notice to the Company revoking such request.
(ii) Number
of Registrations; Expenses. The Company shall not be obligated to effect
more than one registration or takedown of Registrable Securities pursuant to requests from
Requesting Holders under this Section 3(a) in the 180-day period immediately following the
effective date of the last registration or takedown of Registrable Securities. The Company shall
pay all Registration Expenses in connection with the first six registrations and all takedowns that
the Requesting Holders request pursuant to this Section 3(a), including expenses in connection with
any prospectus supplement reasonably necessary to effectuate a Takedown Option. The Requesting
Holders and, if applicable, the Other Holders that requested that their Registrable Securities be
registered and the Company shall pay all Registration Expenses in connection with later
registrations pursuant to this Section 3(a) pro rata according to the number of Registrable
Securities registered by each of them pursuant to such registration. However, in connection with
all registrations and all takedowns, each Shareholder shall pay all underwriting discounts and
commissions and transfer taxes, if any, relating to the sale or disposition of such Shareholder’s
Registrable Securities pursuant to this Section 3(a). If the first request hereunder is in
connection with or would constitute an initial public offering, the Registrable Securities shall be
offered pursuant to a firm commitment underwriting.
(iii) Effective Registration Statement. If the Requesting Holders elect the Single
Registration Option in connection with a registration requested pursuant to this Section 3(a), such
registration shall not be deemed to have been effected unless the registration statement relating
thereto (A) has become effective under the Securities Act and any of the Registrable Securities of
the Shareholders included in such registration have actually been sold thereunder, and (B) has
remained effective for a period of at least 180 days (or such shorter period in which all
Registrable Securities of the Requesting Holders and, if applicable, the Company and the Other
Holders included in such registration have actually been sold
thereunder); provided, however, that if after any registration statement requested pursuant to this Section 3(a)
becomes effective (A) such registration statement is subject to any stop order, injunction or other
order or requirement of the Commission or other governmental agency or court solely due to the
actions or omissions to act of the Company and (B) less than 75% of all of the Registrable
Securities included in such registration have been sold thereunder, then such registration
statement shall not constitute a registration of Registrable Securities to be effected by the
Company pursuant to Section 3(a)(ii) hereof and the Company shall pay all the Registration Expenses
related thereto.
(iv) Selection of Underwriters. If the Requesting Holders elect the Single
Registration Option or the Takedown Option, Requesting Holders holding a majority of the
Registrable Securities requested to be registered or included in such takedown shall have the right
to select the lead managing underwriter for the offering; provided, however, that such
selection shall be subject to approval by the Company, which approval shall not be unreasonably
withheld or delayed; and provided further, that the Company shall have the right to appoint
a co-manager in all cases subject to the approval
13
of Requesting Holders holding a majority of the Registrable Securities requested to be
registered or included in such takedown, which approval shall not be unreasonably withheld.
(v) Pro Rata Participation in Requested Registrations or Takedowns. If in connection
with a requested registration or takedown pursuant to this Section 3(a), the lead managing
underwriter advises the Company, the Requesting Holders and the Other Holders in writing that, in
its view, the number of equity securities requested to be included in such registration or takedown
exceeds the largest number of securities which can be sold without having an adverse effect on such
offering, including the price at which such securities can be sold, the number of Registrable
Securities requested to be registered by the Requesting Holders and the Other Holders included by
the Company in such registration shall be allocated pro rata (subject to adjustments for tax
considerations as provided in Subsection (C) below) among the Requesting Holders and the Other
Holders on the basis of the relative number of Registrable Securities then held by them;
provided, however, that:
(A) if the Company intends to issue Registrable Securities and to include them in such
registration or takedown, the Company’s allocation shall first be subject to reduction before
the number of Registrable Securities to be registered by the Requesting Holders and the Other
Holders is subject to any reduction; and
(B) Requesting Shareholders and Other Holders who become subject to a reduction pursuant
to this Section 3(a)(v) in the amount of Registrable Securities to be included in a
registration or takedown may elect not to sell any Registrable Securities pursuant to the
registration or takedown.
(vi) With respect to any Shelf Registration Statement that has been declared effective and
which includes Registrable Securities, the Company agrees to use its reasonable best efforts to
keep the Shelf Registration Statement continuously effective and usable for the resale of the
applicable Registrable Securities for a period ending on the first date on which all the
Registrable Securities covered by such Shelf Registration Statement have been sold pursuant to such
Shelf Registration Statement, but in no event longer than two years. The foregoing notwithstanding,
the Company shall have the right in its reasonable discretion, based on any valid business purpose
(including to avoid the disclosure of any material non-public information that the Company is not
otherwise obligated to disclose or to coordinate such distribution with other shareholders that
have registration rights with respect to any securities of the Company or with other distributions
of the Company (whether for the account of the Company or otherwise)), to suspend the use of the
applicable Shelf Registration Statement for a reasonable length of time (a “Delay Period”)
and from time to time; provided, however, that the aggregate number of days in all
Delay Periods occurring in any period of twelve consecutive months shall not exceed 90 days; and
provided further, however, that the two-year limit referred to above shall be
extended by the number of days in any applicable Delay Period. The Company shall provide written
notice to each holder of Registrable Securities covered by the Shelf Registration Statement of the
beginning and the end of each Delay Period and such holders shall cease all disposition efforts
with respect to
14
Registrable Securities held by them immediately upon receipt of notice of the beginning of any
Delay Period.
(b) Incidental
Registration. (i) If the Company at any time proposes to register or
sell any Common Shares or any options, warrants or other rights to acquire, or securities
convertible into or exchangeable for, Common Shares (the
“Priority Securities”) under the
Securities Act (other than a registration (A) relating to shares issuable upon exercise of employee
share options or in connection with any employee benefit or similar plan of the Company, (B) in
connection with any scheme of arrangement, merger or consolidation by the Company or any Affiliate
of the Company or the acquisition by the Company or any such Affiliate of the shares or
substantially all the assets of any other Person, or (C) pursuant to Section 3 (a) hereof) in a
manner that would permit registration of Registrable Securities for sale, or the sale in a
takedown, to the public under the Securities Act (whether or not for sale for its own account)),
including in an initial public offering, it shall each such time, subject to the provisions of
Section 3(b)(ii) hereof, give prompt written notice to all holders of record of Registrable
Securities of its intention to do so and of such Shareholders’ rights under this Section 3(b), at
least 10 days (or two Business Days, in the case of a takedown from an effective shelf registration
statement) prior to the anticipated filing date of the registration statement relating to such
registration or the offering date in the case of a takedown. Such notice shall offer all such
Shareholders the opportunity to include in such registration statement or in such takedown such
number of Registrable Securities as each such Shareholder may request.
Upon the written request of any such Shareholder made within seven days (or two Business Days
in the case of a takedown) after the receipt of the Company’s notice (which request shall specify
the number of Registrable Securities intended to be disposed of by such Shareholder), the Company
shall use its reasonable best efforts to effect the registration under the Securities Act of all
Registrable Securities that the Company has been so requested to register by the Shareholders
thereof or to include requested Registrable Securities in a takedown; provided,
however, that (A) all holders of Registrable Securities requesting to be included in the
Company’s registration or takedown must sell their Registrable Securities to the underwriters
selected by the Company on substantially the same terms and conditions as apply to the Company
(other than provisions relating to the indemnification of underwriters or Shareholders), and (B)
if, at any time after giving written notice pursuant to this Section 3(b)(i) of its intention to
register any Priority Securities or to proceed with a takedown and prior to the effective date of
the registration statement filed in connection with such registration or prior to the execution of
an underwriting agreement in connection with a takedown, the Company shall determine for any reason
not to register or sell such Priority Securities, the Company shall give written notice to all
holders of Registrable Securities and shall thereupon be relieved of its obligation to register any
Registrable Securities in connection with such registration or to include requested Registrable
Securities in a takedown (without prejudice, however, to rights of Shareholders under Section 3(a)
hereof). The failure of any holder of Registrable Securities to affirmatively indicate its intent
to include its Registrable Securities in such registration or takedown shall be deemed a waiver of
any right to so include such Registrable Securities in such registration or
15
takedown. Any holder of Registrable Securities requesting to be included in such registration may
elect, in writing prior to the effective date of the registration statement filed in connection
with such registration, not to register such Registrable Securities in connection with such
registration.
No registration or takedown effected under this Section 3(b) shall relieve the Company of its
obligations to effect a registration or takedown upon request under Section 3(a) hereof. The
Company shall pay all Registration Expenses in connection with each registration or takedown of
Registrable Securities requested pursuant to this Section 3(b). However, each Shareholder shall pay
all underwriting discounts and commissions and transfer taxes, if any, relating to the sale or
disposition of such Shareholder’s Registrable Securities pursuant to a registration statement or
takedown effected pursuant to this Section 3(b).
(ii) Priority in Incidental Registrations. If in connection with a registration or a
takedown pursuant to this Section 3(b) the managing underwriter advises the Company in writing
that, in its good faith view, the number of equity securities (including all Registrable
Securities) that the Company and the Shareholders intend to include in such registration or
takedown exceeds the largest number of securities that can be sold without having an adverse effect
on such offering, including the price at which such Registrable Securities can be sold, the Company
will include in such registration or takedown (A) first, all the Priority Securities to be sold for
the Company’s own account; and (B) second, to the extent that the number of Priority Securities is
less than the number of Registrable Securities that the underwriter has advised the Company can be
sold in such offering without having the adverse effect referred to above, Registrable Securities
requested to be included in such registration or takedown by the Shareholders pursuant to Section
3(b)(i) hereof, pro rata among all Shareholders requesting registration on the basis of the
relative number of Registrable Securities then held by them. Shareholders subject to such
allocation may elect not to sell any Registrable Securities pursuant to the registration statement
or takedown.
(iii) If the Company at any time proposes to effect a public offering in a jurisdiction other
than the United States of any Common Shares or any options, warrants or other rights to acquire, or
securities convertible into or exchangeable for, Common Shares (other than a public offering (A)
relating to shares issuable upon exercise of employee share options or in connection with any
employee benefit or similar plan of the Company, or (B) in connection with any merger,
reorganization or consolidation by the Company or Affiliate of the Company or the acquisition by
the Company or an Affiliate of the Company of the shares or substantially all the assets of any
other Person), the Company and the Shareholders will have the rights and be subject to the
obligations agreed in this Section 3(b) to the extent and where applicable.
(c) Holdback
Agreements. (i) Each Shareholder agrees, for the benefit of the
underwriters referred to below, not to effect any sale or distribution, including any private
placement or any sale pursuant to Rule 144 (or any successor provision) under the Securities Act,
of any Registrable Securities, other than to an Affiliate or by gift or pro rata distribution to
its shareholders, partners or other beneficial holders (in each case,
16
which agree to be bound by the remaining provisions hereof), and not to effect any such sale
or distribution of any other equity security of the Company or of any security convertible into or
exchangeable or exercisable for any equity security of the Company, during the 10 days prior to
(or, in the case of a takedown, from the time on such day as such Shareholder receives notice of
such takedown), and during a period, not to exceed 180 days in the case of the initial public
offering or 90 days in the case of all other offerings, after the later of (i) the effective date
of any registration statement filed pursuant to Section 3(a) or (b) hereof in connection with an
underwritten offering and (ii) the execution of an underwriting agreement in connection with an
underwritten offering, without the consent of the managing underwriter of such offering, except as
part of such registration, if permitted; provided, however, that each holder of
Registrable Securities shall have received written notice of such registration from either the
Company or the managing underwriter at least two Business Days prior to the anticipated beginning
of the 10-day period referred to above. Each Shareholder agrees that it will enter into any
agreement reasonably requested by the underwriters of any such underwritten offering to confirm its
agreement set forth in the preceding sentence.
(ii) The Company agrees (A) not to effect any public sale or distribution of any of its equity
securities or of any security convertible into or exchangeable or exercisable for any equity
security of the Company (other than any such sale or distribution of such securities in connection
with any merger, reorganization or consolidation by the Company or any Affiliate of the Company or
the acquisition by the Company or an Affiliate of the Company of the shares or substantially all
the assets of any other Person or in connection with an employee stock ownership or other benefit
plan) during the 10 days prior to, and during a period, not to exceed 180 days in the case of the
initial public offering or 90 days in the case of all other offerings, which begins on the later of
(i) the effective date of such registration statement and (ii) the execution of an underwriting
agreement in connection with an underwritten offering, without the consent of the managing
underwriters of such offering, and (B) that any agreement entered into after the date hereof
pursuant to which the Company issues or agrees to issue any privately placed equity securities
shall contain a provision under which the holders of such securities agree not to effect any public
sale or distribution of any such securities during the period and in the manner referred to in the
foregoing clause (A), including any private placement and any sale pursuant to Rule 144 under the
Securities Act (or any successor provision), except as part of such registration, if permitted.
(d) Registration Procedures. In connection with any offering of Registrable
Securities registered pursuant to this Section 3, the Company shall:
(i) Promptly prepare and file a registration statement with the Commission within 45 days
after receipt of a request for registration pursuant to a Single Registration Option or a
Shelf Option, and use its reasonable best efforts to cause such registration statement to
become, as soon as practicable, and remain, effective as provided herein; provided,
however, that before filing with the Commission a registration statement or prospectus
or any amendments or supplements thereto, the Company will furnish to one counsel selected by
the holders of a majority of the Registrable Securities requested to be registered
17
copies of all such documents proposed to be filed for such counsel’s review and comment (and the
Company shall not file any such document to which such counsel shall have reasonably objected in
writing on the grounds that such document does not comply (explaining why) in all material respects
with the requirements of the Securities Act or the rules or regulations thereunder).
(ii) Prepare and file with the Commission such amendments and supplements to such registration
statement and the prospectus used in connection therewith as may be necessary to keep such
registration statement effective for a period of not less than 180 days in the case of a Single
Registration Option, or two years in the case of a Shelf Option, or such shorter period that will
terminate when all Registrable Securities covered by such registration statement have been sold
(but not before the expiration of the periods referred to in Section 4(3) and Rule 174 of the
Securities Act or any successor provision, if applicable), and to prepare and file prospectus
supplements to effect sales pursuant to takedowns and comply with the provisions of the Securities
Act with respect to the disposition of all securities covered by such registration statement;
provided, however, that the 180-day period referred to above shall be extended by
the number of days such registration statement may be subject to a stop order or otherwise
suspended.
(iii) Furnish to each holder and each underwriter, if any, of Registrable Securities covered
by such registration statement such number of copies of such registration statement, each amendment
and supplement thereto (in each case including all exhibits thereto), and the prospectus included
in such registration statement, including each preliminary prospectus, in conformity with the
requirements of the Securities Act, and such other documents as any Shareholder may reasonably
request in order to facilitate the disposition of the Registrable Securities owned by such
Shareholder.
(iv) Unless the exemption from state regulation of securities offerings under Section 18 of
the Securities Act applies, use its commercially reasonable efforts to register or qualify such
Registrable Securities under such other state securities or “blue sky” laws of such jurisdictions
as any holder, and underwriter, if any, of Registrable Securities covered by such registration
statement reasonably requests; provided, however, that the Company will not be
required to (A) qualify generally to do business in any jurisdiction where it would not otherwise
be required to qualify but for this subsection (iv), (B) subject itself or any of its Subsidiaries
to taxation or regulation (insurance or otherwise) of its or their respective businesses in any
such jurisdiction other than the United States, or (C) consent to general service of process in any
such jurisdiction.
(v) Use its commercially reasonable efforts to cause the Registrable Securities covered by
such registration statement to be registered with or approved by such other governmental agencies
or authorities as may be necessary by virtue of the business and operations of the Company and its
Subsidiaries to enable the holder or holders thereof to consummate the disposition of such
18
Registrable Securities in accordance with the intended method or methods of distribution
thereof.
(vi) Promptly notify each holder of such Registrable Securities, the sale or placement agent,
if any, thereof and the managing underwriter or underwriters, if any, thereof (A) when such
registration statement or any prospectus included therein or any prospectus amendment or supplement
or post-effective amendment has been filed, and, with respect to such registration statement or any
post-effective amendment, when the same has become effective, (B) of any comments by the Commission
and by the Blue Sky or securities commissioner or regulator of any state with respect thereto or
any material request by the Commission for amendments or supplements to such registration statement
or prospectus or for additional information, (C) of the issuance by the Commission of any stop
order suspending the effectiveness of such registration statement or the initiation or threatening
of any proceedings for that purpose and (D) of the receipt by the Company of any notification with
respect to the suspension of the qualification of the Registrable Securities for sale in any
jurisdiction or the initiation or threatening of any proceeding for such purpose.
(vii) Use its commercially reasonable efforts to obtain as soon as possible the lifting of any
stop order that might be issued suspending the effectiveness of such
registration statement.
(viii) Promptly notify each holder of such Registrable Securities at any time when a
prospectus relating thereto is required to be delivered under the Securities Act of the happening
of any event that comes to the Company’s attention if as a result of such event the prospectus
included in such registration statement contains an untrue statement of a material fact or omits to
state any material fact required to be stated therein or necessary to make the statements therein
not misleading; and the Company will promptly prepare and furnish to such Shareholder a supplement
or amendment to such prospectus so that, as thereafter delivered to the purchasers of such
Registrable Securities, such prospectus will not contain an untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary to make the statements
therein not misleading.
(ix) Use its commercially reasonable efforts (A) to cause all such Registrable Securities to
be listed on a national securities exchange in the United States or on NASDAQ and, if applicable,
on each securities exchange on which similar securities issued by the Company may then be listed,
and enter into such customary related agreements including a listing application and
indemnification agreement in customary form, and (B) to provide a transfer agent and registrar for
such Registrable Securities covered by such registration statement no later than the effective date
of such registration statement.
(x) Enter into such customary agreements (including an underwriting agreement or qualified
independent underwriting agreement, in each case, in
19
customary form) and take all such other actions as the holders of a majority of the
Registrable Securities requested to be registered or included in a takedown or the underwriters
retained by such Shareholders, if any, reasonably request in order to expedite or facilitate the
disposition of such Registrable Securities, including customary representations, warranties,
indemnities and agreements and preparing for, and participating in, such number of “road shows” and
all such other customary selling efforts as the underwriters reasonably request in order to
expedite or facilitate such disposition, and to use its commercially reasonable efforts to assist
the underwriters in complying with the rules of the NASD (if applicable).
(xi) Make available for inspection, during the normal business hours of the Company, by any
holder of Registrable Securities requested to be registered or included in a takedown, any
underwriter participating in any disposition pursuant to such registration statement, and any
attorney, accountant or other agent retained by any such Shareholder or underwriter (collectively,
the “Inspectors”), all financial and other records, pertinent corporate and business documents and
documents relating to the properties of the Company and its
Subsidiaries (collectively, “Records”),
if any, as shall be reasonably necessary to enable them to exercise their due diligence
responsibility, and cause the Company’s officers, directors, employees and independent auditors,
and those of the Company’s Subsidiaries, to supply all information and respond to all inquiries
reasonably requested by any such Inspector in connection with such registration statement or
takedown; provided, that each such Inspector hereby agrees to keep in confidence the
contents and existence of any Records that may contain non-public information with respect to the
Company or any of its Subsidiaries, except (but only to the extent) as required by applicable law
to disclose such non-public information.
(xii) Obtain a “cold comfort” letter addressed to the underwriters and the holders of the
Registrable Securities being sold from the Company’s appointed auditors in customary form and
covering such matters of the type customarily covered by “cold comfort” letters as the underwriters
and the holders of a majority in interest of the Registrable Securities being sold reasonably
request, and dated the later of the effective date of such registration statement and the date of
the execution of the underwriting agreement (and also dated the date of the closing under the
underwriting agreement relating thereto).
(xiii) Obtain an opinion of counsel to the Company addressed to the underwriters and the
holders of the Registrable Securities being sold in customary form and covering such matters, of
the type customarily covered by such an opinion, as the managing underwriters, if any, or as the
holders of a majority in interest of the Registrable Securities being sold may reasonably request,
addressed to such holders and the placement or sales agent, if any, thereof and the underwriters,
if any, thereof, and dated the later of the effective date of such registration statement and the
date of the execution of the underwriting agreement
20
(or also dated the date of the closing under the underwriting agreement relating
thereto).
(xiv) Otherwise use its commercially reasonable efforts to comply with all applicable
rules and regulations of the Commission and make available to the Shareholders, as soon as
reasonably practicable, an earnings statement covering a period of at least twelve months, but
not more than eighteen months, beginning with the first full calendar quarter after the
effective date of the registration statement (as the term “effective date” is defined in Rule
158(c) under the Securities Act) which earnings statement shall satisfy the provisions of
Section 11(a) of the Securities Act and Rule 158 thereunder.
It shall be a condition precedent to the obligation of the Company to take any action with
respect to any Registrable Securities that the holder thereof shall famish to the Company such
information regarding such holder, the Registrable Securities and any other Company securities held
by such holder as the Company shall reasonably request and as shall be required in connection with
the action taken by the Company. The Company agrees not to include in any amendment to any
registration statement with respect to any Registrable Securities, or any amendment of or
supplement to the prospectus used in connection therewith, any reference to any holder of any
Registrable Securities covered thereby by name, or otherwise identify such holder as the holder of
Registrable Securities, without the consent of such holder, such consent not to be unreasonably
withheld or delayed, unless such disclosure is required by law or regulation.
Each holder of Registrable Securities agrees that, upon receipt of any notice from the Company
of the happening of any event of the kind described in Section 3(d)(viii) or the commencement of a
Delay Period described in Section 2(a)(vi) hereof, such Shareholder will forthwith discontinue
disposition of Registrable Securities until such Shareholder’s receipt of the copies of the
supplemented or amended prospectus contemplated by Section 3(d)(viii) hereof or the end of the
Delay Period, as the case may be, and, if so directed by the Company such Shareholder will deliver
to the Company (at the Company’s expense) all copies (including any and all drafts), other than
permanent file copies, then in such Shareholder’s possession, of the prospectus covering such
Registrable Securities current at the time of receipt of such notice. In the event that the Company
shall give any such notice, the period mentioned in Section 3(d)(ii) hereof shall be extended by
the number of days during the period from and including the date of the giving of such notice
pursuant to Section 3(d)(viii) hereof to and including the date when each holder of Registrable
Securities covered by such registration statement shall have received the copies of the
supplemented or amended prospectus contemplated by Section 3(d)(viii) hereof. Each Holder of
Registrable Securities shall be entitled to reimbursement from the Company for any out-of-pocket
losses actually incurred as a result of such holder’s inability to make delivery of sold securities
due to the Company’s failure to notify the holder of any event described in Section 3(d)(viii)
hereof or of a Delay Period described in Section 2(a)(vi) hereof.
(e) Indemnification. (i) Indemnification by the Company. In consideration of
the agreements of the holders of the Registrable Securities contained
21
herein and in the several Subscription Agreements, and as an inducement to such holders to enter
into the Subscription Agreement, the Company shall agree that in the event of any registration
under the Securities Act pursuant to this Agreement, the Company will indemnify and hold harmless,
to the full extent permitted by law, each of the holders of any Registrable Securities covered by
such registration statement, their respective directors and officers, members, general partners,
limited partners, managing directors, each other Person who participates as an underwriter in the
offering or sale of such securities and each other Person, if any, who controls, is controlled by
or is under common control with any such Shareholder or any such underwriter within the meaning of
the Securities Act (and directors, officers, controlling Persons, members, partners and managing
directors of any of the foregoing) against any and all losses, claims, damages or liabilities,
joint or several, and expenses including any amounts paid in any settlement effected with the
Company’s consent, which consent will not be unreasonably withheld, to which such Shareholder, any
such director or officer, member, or general or limited partner or managing director or any such
underwriter or controlling Person may become subject under die Securities Act, U.S. state
securities “blue sky” laws, common law or otherwise, insofar as such losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) or expenses arise out of or are based
upon (A) any untrue statement or alleged untrue statement of any material fact contained in any
registration statement under which such securities were registered under the Securities Act, any
preliminary, final or summary prospectus contained therein or any amendment or supplement thereto,
(B) any omission or alleged omission to state therein a material fact required to be stated therein
or necessary to make the Statements therein not misleading, or (C) any violation or alleged
violation by the Company of any U.S. federal, state or common law rule or regulation applicable to
the Company and relating to action required of or inaction by the Company in connection with any
such registration. The Company shall reimburse each such Shareholder and each such director,
officer, member, general partner, limited partner, managing director or underwriter and controlling
Person for any legal or any other expenses reasonably incurred by them in connection with
investigating or defending such loss, claim, liability, action or proceeding; provided,
however, that the Company shall not be liable in any such case to the extent that any such
loss, claim, damage, liability (or action or proceeding in respect thereof) or expense arises out
of or is based upon any untrue statement or alleged untrue statement or omission or alleged
omission made in such registration statement or amendment or supplement thereto or in any such
preliminary, final or summary prospectus in reliance upon and in conformity with written
information furnished to the Company or its representatives by such Shareholder, in its capacity as
a Shareholder in the Company, or any such director, officer, member, general or limited partner,
managing director, underwriter or controlling Person expressly for use in the preparation thereof;
provided further that the Company shall not be liable to any Person who participates as an
underwriter in the offering or sale of Registrable Securities, if any, or any other Person (other
than a holder of Registrable Securities covered by the registration statement), if any, who
controls such underwriter within the meaning of the Securities Act, pursuant to this Section
3(e)(i) with respect to any preliminary prospectus or the final prospectus or the final prospectus
as amended or supplemented as the case may be, to the extent that any such loss, claim, damage or
liability of such underwriter or controlling Person (other than a holder of Registrable
22
Securities covered by the Registration Statement) results from the fact that such underwriter
sold Registrable Securities to a Person to whom there was not sent or given, at or prior to the
written confirmation of such sale, a copy of the final prospectus or of the final prospectus as
then amended or supplemented, whichever is most recent, if the Company has previously furnished
copies thereof to such underwriter and such final prospectus, as then amended or supplemented, had
corrected any such misstatement or omission, except that the indemnification obligation of the
Company with respect to any Person who participates as an underwriter in the offering or sale of
Registrable Securities, or any other Person (other than a holder of Registrable Securities covered
by the registration statement), if any, who controls such underwriter within the meaning of the
Securities Act, pursuant to this proviso shall be modified in such manner, which shall be
reasonably acceptable to the Company and a majority of the holders of Registrable Securities
participating in any such registration, as is consistent with customary practice with respect to
underwriting agreements for offerings of such type. The indemnity provided for herein, when it
becomes a commitment of the Company, shall remain in full force and effect regardless of any
investigation made by or on behalf of such Shareholder or any such director, officer, member,
general partner, limited partner, managing director, underwriter or controlling Person and shall
survive the transfer of such securities by such Shareholder.
(ii) Indemnification by the Shareholders and Underwriters. The Company will require,
as a condition to including any Registrable Securities in any registration statement filed in
accordance with the provisions hereof, that the Company shall have received an undertaking
reasonably satisfactory to it from the holders of such Registrable Securities or any underwriter,
to indemnify and hold harmless (in the same manner and to the same extent as set forth in
subsection (i) above) the Company and its directors, officers, controlling persons and all other
prospective sellers and their respective directors, officers, general and limited partners,
managing directors, and their respective controlling Persons with respect to any statement or
alleged statement in or omission or alleged omission from such registration statement, any
preliminary, final or summary prospectus contained therein, or any amendment or supplement, if such
statement or alleged statement or omission or alleged omission was made in reliance upon and in
conformity with written information furnished to the Company or its representatives by or on behalf
of such Shareholder, in its capacity as a Shareholder in the Company, or such underwriter, as
applicable, expressly for use in the preparation of such registration statement, preliminary, final
or summary prospectus or amendment or supplement, or a document incorporated by reference into any
of the foregoing. Such indemnity shall remain in full force and effect regardless of any
investigation made by or on behalf of the Company or any of the holders of Registrable Securities,
underwriters or any of their respective directors, officers, members, general or limited partners,
managing directors or controlling Persons and shall survive the transfer of such securities by such
Shareholder, provided, however, that no such Shareholder shall be liable in the
aggregate for any amounts exceeding the amount of the proceeds to be received by such holder from
the sale of its Registrable Securities pursuant to such registration (after deducting any fees,
discounts and commissions applicable thereto), as reduced by any damages or other amounts that such
holder was otherwise required to pay by reason of such untrue or alleged untrue statement or
omission or alleged omission.
23
(iii) Notices of Claims, etc. Promptly after receipt by an indemnified party
hereunder of written notice of the commencement of any action or proceeding with respect to which a
claim for indemnification may be made pursuant to this Section 3(e), such indemnified party will,
if a claim in respect thereof is to be made against an indemnifying party, promptly give written
notice to the indemnifying party of the commencement of such action; provided,
however, that the failure of any indemnified party to give notice as provided herein shall
not relieve the indemnifying party of its obligations under the preceding subsections of this
Section 3(e), except to the extent that the indemnifying party is actually materially prejudiced by
such failure to give notice. In case any such action is brought against an indemnified party,
unless in such indemnified party’s reasonable judgment a conflict of interest between such
indemnified party and indemnifying parties may exist in respect of such claim, the indemnifying
party will be entitled to participate in and, jointly with any other indemnifying party similarly
notified, to assume the defense thereof, to the extent that it may wish, with counsel reasonably
satisfactory to such indemnified party, and after notice from the indemnifying party to such
indemnified party of its election so to assume the defense thereof, the indemnifying party will not
be liable to such indemnified party for any legal or other expenses subsequently incurred by the
latter in connection with the defense thereof, unless in such indemnified party’s reasonable
judgment a conflict of interest between such indemnified and indemnifying parties arises in respect
of such claim after the assumption of the defense thereof, and the indemnifying party will not be
subject to any liability for any settlement made without its consent (which consent shall not be
unreasonably withheld). No indemnifying party will consent to entry of any judgment or enter into
any settlement that does not include as an unconditional term thereof the giving by the claimant or
plaintiff to such indemnified party of a release from all liability in respect to such claim or
litigation. An indemnifying party who is not entitled to, or elects not to, assume the defense of a
claim will not be obligated to pay the fees and expenses of more than one counsel in any single
jurisdiction for all parties indemnified by such indemnifying party with respect to such claim,
unless in the reasonable judgment of any indemnified party a conflict of interest may exist between
such indemnified party and any other of such indemnified parties with respect to such claim, in
which event the indemnifying party shall be obligated to pay the fees and expenses of such
additional counsel or counsels as may be reasonably necessary. Notwithstanding anything to the
contrary set forth herein, and without limiting any of the rights set forth above, in any event any
party will have the right to retain, at its own expense, counsel with respect to the defense of a
claim.
(iv) Contribution. In order to provide for just and equitable contribution in
circumstances in which the indemnity agreement provided for in this Section 3(e) is for any reason
unavailable, or insufficient to hold harmless an indemnified party in respect of any loss, claim,
damage, liability (or actions or proceedings in respect thereof) or expense referred to herein,
then each indemnifying party shall contribute to the amount paid or payable by such indemnified
party as a result of such losses, claims, damages or liabilities (or actions or proceedings in
respect thereof) or expense in such proportion as is appropriate to reflect the relative fault of
the indemnifying party and the indemnified party in connection with the statements or omissions
which resulted in such losses, claims, damages or liabilities (or actions or proceedings in respect
thereof) or expense, as well as any other relevant equitable considerations. The relative fault of
such
24
indemnifying party and indemnified party shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or omission or alleged
omission to state a material fact relates to information supplied by such indemnifying party or by
such indemnified party, and the parties’ relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission. The parties hereto agree that it
would not be just and equitable if contribution pursuant to this Section 3(e)(iv) were determined
by pro rata allocation or by any other method of allocation which does not take account of the
equitable considerations referred to in this Section 3(e)(iv). The amount paid or payable by an
indemnified party as a result of the losses, claims, damages, or liabilities (or actions or
proceedings in respect thereof) or expenses referred to above shall be deemed to include any legal
or other fees or expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. Notwithstanding the provisions of this Section
3(e)(iv), no holder shall be required to contribute any amount in excess of the amount by which the
dollar amount of the proceeds received by such holder from the sale of any Registrable Securities
(after deducting any fees, discounts and commissions applicable thereto) exceeds the amount of any
damages which such holder has otherwise been required to pay by reason of such untrue or alleged
untrue statement or omission or alleged omission, and no underwriter shall be required to
contribute any amount in excess of the amount by which the total price at which the Registrable
Securities underwritten by it and distributed to the public were offered to the public exceeds the
amount of any damages which such underwriter has otherwise been required to pay by reason of such
untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent
misrepresentation (within the meaning of Section 1 l(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent misrepresentation. The holders’
and any underwriter’s obligations in this Section 3(e)(iv) to contribute shall be several in
proportion to the number of Registrable Securities sold or underwritten, as the case may be, by
them and not joint. For purposes of this Section 3(e), each Person, if any, who controls a
Shareholder or an underwriter within the meaning of Section 15 of the Securities Act shall have the
same rights to contribution as such Shareholder or underwriter, and each director of the Company,
each officer of the Company who signed the registration statement, and each Person, if any, who
controls the Company within the meaning of Section 15 of the Securities Act shall have the same
rights to contribution as the Company.
(f) Underwriting Agreement. Holders of Registrable Securities requested to be
registered pursuant to this Section 3 shall be parties to the underwriting agreement with the
underwriters for such offering in connection with such offering and may, at their option, require
that any or all of the representations and warranties by, and the agreements on the part of, the
Company to and for the benefit of such underwriters be made to and for the benefit of such holders
of Registrable Securities and that any or all of the conditions precedent to the obligations of
such underwriters under such underwriting agreement shall also be conditions precedent to the
obligations of such holders of Registrable Securities. No underwriting agreement or other agreement
in connection with such offering shall require any such holder of Registrable Securities to make
any representations or warranties to or agreement with the Company or the underwriters other than
representations, warranties or agreements regarding such holder, such holder’s
25
Registrable Securities and such holder’s intended method of distribution or any other
representations required by applicable law and agreements regarding indemnification and
contribution to the effect, but only to the extent, provided in Section 3(e) hereof.
(g) Rule 144 and Rule 144A. At all times after a public offering of any Common Shares,
the Company agrees that it will file in a timely manner all reports required to be filed by it
pursuant to the Exchange Act, and, if at any time thereafter, the Company is not required to file
such reports, it will make available to the public, to the extent required to permit the sale of
Common Shares by any holder of Registrable Securities pursuant to Rule 144 and Rule 144A under the
Securities Act, current information about itself and its activities as contemplated by Rule 144 and
Rule 144A under the Securities Act, as such Rules may be amended from time to time. Notwithstanding
the foregoing, the Company may deregister any class of its equity securities under Section 12 of
the Exchange Act or suspend its duty to file reports with respect to any class of its securities
pursuant to Section 15(d) of the Exchange Act if it is then permitted to do so pursuant to the
Exchange Act and the rules and regulations thereunder.
SECTION 4. Restrictive Legends. (a) Each certificate representing Common Shares
(including any Warrant Shares) shall be stamped or otherwise imprinted with a legend in
substantially the following form:
“Any sale, assignment, transfer, pledge or other disposition of the shares represented by this
certificate is restricted by, and the rights attaching to these shares are subject to, the
terms and conditions contained in the Shareholders Agreement dated as of [ ], 2004, as they
may be amended from time to
time, which are available for examination by registered holders of shares at the registered
office of the Company. The registered holder of the shares represented by this certificate, by
acquiring and holding such shares, shall to the extent required under the Shareholders
Agreement be deemed a party to such Shareholders Agreement for all purposes and shall be
required to agree in writing to be bound by and perform all of the terms and provisions of
such Shareholders Agreement, all as more fully provided therein. In addition, any transferee
of the shares represented by this certificate shall to the extent required under the
Shareholders Agreement be deemed to be a party to such Shareholders Agreement for all purposes
and shall be required by the transferring shareholder to agree in writing to acquire and hold
such shares subject to all of the terms of such Agreement, all as more fully provided therein,
which terms are to be enforced by the shareholders of the Company.
The shares represented by this certificate have not been registered under the U.S. Securities
Act of 1933 (the “Securities Act”), or any U.S. state securities laws and may not be
transferred, sold or otherwise disposed of unless (i) a registration statement is in effect
under the Securities Act with respect to such shares, or (ii) a written opinion of counsel
reasonably acceptable to the Company is provided to the Company to the effect that no such
registration is required for such transfer, sale or disposal.”
26
(b) Following termination of Section 2(a) hereof, the Company shall, promptly upon
request and surrender of the legended certificate, deliver a replacement certificate not containing
the first paragraph of the legend above in exchange for the legended certificate. In the event that
Common Shares are disposed of pursuant to an effective registration statement or, following an
initial public offering, Rule 144 (or any successor provision) under the Securities Act or if the
Company shall have received an opinion of counsel reasonably acceptable to the Company (or a copy
of a “no action” or interpretive letter from the Commission) to the effect that such shares are
eligible to be sold pursuant to paragraph (k) of Rule 144, the Company shall promptly upon request
deliver a replacement certificate not containing either paragraph of the legend above in exchange
for the legended certificate.
SECTION 5. Competition. (a) Each Shareholder agrees that each Shareholder and its
officers, directors, employees, agents and Affiliates (other than Persons that are also the
officers of the Company or any of its Subsidiaries) may, alone or in combination with any other
Person, engage in activities or businesses, make investments in and acquisitions of any Person, and
enter into partnerships and joint ventures with any Person, whether or not competitive now or in
the future with the businesses or activities of the Company or any Subsidiary of the Company, and
neither the Company nor any Shareholder shall have the right to disclosure of any information in
regard thereto, to participate therein, or to derive any profits therefrom.
(b) Each Shareholder and the Company agree that none of the
Shareholders or any of their respective officers, directors, employees, agents or Affiliates
(other than Persons that are also officers of the Company or any of its Subsidiaries) shall have
the obligation to refer to the Company or its Subsidiaries any business opportunities presented or
developed by any of them.
SECTION 6. Restrictions on Other Agreements. Neither the Company nor any Shareholder
shall enter into or agree to be bound by any voting trust, voting agreement or any shareholder
agreement or arrangements of any kind, written or otherwise, with any person with respect to the
Common Shares on terms inconsistent with the provisions of this Agreement (whether or not such
agreements and arrangements are with other Shareholders or holders of Common Shares that are not
parties to this Agreement).
SECTION 7. Financial Statements and Other Information. (a) The Company shall furnish
or shall cause to be furnished to each Shareholder the following information at the following
times:
(i) with respect to each fiscal quarter of the Company, no later than 45 days after the
end of such quarter, a consolidated summary balance sheet, income statement and cash flow
statement as of the end of and for such quarter and the comparable quarter of the preceding
fiscal year together with a letter from management of the Company summarizing the financial
condition, results of operations and business of the Company and its subsidiaries as of the
end of and for such quarter;
27
(ii) accompanying the financial information to be delivered pursuant to clause
(a)(i) above, a certificate, executed by the principal financial officer of the Company,
stating that such information was prepared in accordance with U.S. generally accepted
accounting principles consistently applied, with such exceptions as are set forth in detail in
such certificate; and
(iii) with respect to each full fiscal year of the Company, no later than 90 days after
the end of such year, a consolidated balance sheet, income statement and cash flow statement
as of the end of and for such year prepared in accordance with U.S. generally accepted
accounting principles consistently applied and accompanied by a signed audit report by a
nationally recognized accounting firm, together with a letter from management of the Company
summarizing the financial condition, results of operations and business of the Company and its
subsidiaries as of the end of and for such year.
(b) The Company shall, and shall cause its Subsidiaries to, (1) permit each Shareholder during
normal business hours to visit and inspect any of its properties and those of its Subsidiaries,
including books and records (and, prior to an initial public offering only, make copies thereof),
(2) make appropriate officers and directors of the Company and its Subsidiaries available
periodically for consultation with such Shareholder with respect to matters relating to the
respective business and affairs of the Company and its Subsidiaries, including, without limitation,
significant changes in management personnel and compensation of employees, introduction of new
products or new lines of business, important acquisitions or dispositions of plants and equipment,
significant research and development programs, the purchasing or selling of important licenses,
trademarks or concessions, and the proposed commencement or compromise of significant litigation
and (3) consider the recommendations of such Shareholder in connection with the matters on which it
is consulted as described above, recognizing that the ultimate discretion with respect to all such
matters shall be retained by the Company and its Subsidiaries.
(c) Notwithstanding any other provision of this Agreement the Company may, as a condition to
the rights of any Shareholder under this Section 7, require such Shareholder to execute and deliver
a confidentiality agreement in commercially reasonable form covering all non-public information
conveyed to such Shareholder.
SECTION 8. Board of Directors; Committees. (a) On and after the Closing Date and
prior to an initial public offering, each Shareholder shall take all action necessary, including
the voting of the Common Shares held by such Shareholder, to cause the Board of Directors of the
Company to consist at all times of seven directors, and to vote in favor of three individuals
designated by White Mountains to be members of such Board of Directors. Following an initial public
offering, the number of individuals designated by White Mountains for whom the Shareholders shall
be obligated to vote as members of the Board of Directors of the Company shall be reduced to two,
so long as White Mountains owns, directly or indirectly, Common Shares, including Common Shares
issuable upon exercise of outstanding Warrants (whether or not currently exercisable), at least 20%
of the outstanding Common Shares (assuming for this
28
purpose the exercise of all outstanding Warrants), and such number shall be further reduced to
one if White Mountains’ ownership (as calculated in the preceding clause) is less than 20% but at
least equal to 10%. If such ownership falls below 10%, no Shareholder shall have any further
obligations under this Section 8(a). White Mountains hereby designates David Foy, John Gillespie
and John J. Byrne as its designees for the Board of Directors of the Company, which designation
shall continue until such time as White Mountains shall otherwise designate in writing to the other
parties hereto.
(b) On and after the Closing Date, and prior to an initial public offering, each Shareholder
shall take all action necessary, including the voting of Common Shares held by such Shareholder, to
cause one or more individuals designated by White Mountains to be appointed by the Board of
Directors as Chairman of the Board, and to be appointed chairman of any audit committee, finance
committee or compensation committee of the Board. White Mountains hereby designates David Foy as
its designee to be Chairman of the Board, David Foy to be chairman of the audit committee, John
Gillespie to be chairman of the finance committee and David Foy to be chairman of the compensation
committee, which designations shall continue until such time as White Mountains shall otherwise
designate in writing to the other parties hereto.
(c) Notwithstanding anything to the contrary contained in this Section 8, this Section 8 shall
be subject to applicable law and any applicable regulations of governmental entities and
self-regulatory organizations.
SECTION 9. Further Action. Each Shareholder shall, for so long as such Shareholder
owns any Common Shares or Warrants, (i) take any and all action (on a timely basis) necessary to
carry out the intentions of the Shareholders set forth in this Agreement, including voting (or
causing the voting of), all Common Shares held by such Shareholder in favor of any necessary
amendment to the Certificate of Incorporation or the By-laws of the Company and (ii) refrain from
taking any wilful action knowingly inconsistent with this Agreement including, without limitation,
voting (or causing the voting of) any Common Shares held by such Shareholder in a manner
inconsistent with this Agreement.
SECTION 10. Term. This Agreement shall terminate upon the first to occur of
(a) an Initial Public Offering,
(b) the consent of the Company and all Shareholders who are parties to this Agreement that the
Agreement be terminated,
(c) any transaction with any Person pursuant to which shares or other securities of such
Person are exchanged or substituted for all the Common Shares, provided that the shares or
securities of such Person issued to the Shareholders are registered under the Securities Act and
applicable U.S. state securities laws and listed on a U.S. national securities exchange or on
NASDAQ; provided, however, that the Shareholders receive freely tradable shares or
securities, other than any limits on transfer
29
arising from any Shareholder’s status as an affiliate (as such term is used in the Securities
Act and the rules thereunder), of such Person or the Company; and
provided further,
however, that all Shareholders that are subject to such limits on transfer described in the
preceding proviso receive registration rights entitling such Shareholders to request registration
of the shares or securities received,
(d) the liquidation or dissolution of the Company or
(e) the tenth anniversary of the date of this Agreement; provided,
however, that
(i) in the case of termination pursuant to clauses (a) or (b),
(A) the provisions of Section 3 (other than the proviso in Section 3(d)(xi) and
Section 3(e)) shall survive until the earlier of (x) the occurrence of an event
described in clause (d) above and (y) the tenth anniversary of the termination of this
Agreement, in each case to the extent that the rights under such provisions have not
theretofore been exercised;
(B) the last two sentences of Section 2(a) shall survive any Initial Public
Offering as set forth therein;
(C) the second sentence of Section 2(a) and the entirety of Section 2(b) shall
survive until the first anniversary of the initial closing of the Initial Public
Offering, and
(ii) in any case the proviso in Section 3(d)(xi) and the provisions of Sections
3(e), 5, 8(a), 9, 10, 1 l(b) and 12 through 22 shall survive the termination of this
Agreement indefinitely.
SECTION 11. Additional Matters.
(a) No Inconsistent Agreements. The Company shall not grant registration rights other
than those granted under this Agreement, with respect to the Common Shares or any other securities
of the Company, which are more favorable than the registration rights contained in this Agreement
without the prior written consent of Shareholders holding at least two-thirds of the outstanding
Common Shares then held by all of the Shareholders who are parties to this Agreement (assuming for
this purpose the exercise of all outstanding Warrants). Without limiting the generality of the
foregoing, in no event shall the holders of such other registration rights have priority over
Shareholders with respect to the inclusion of their securities in any registration or takedown (it
being understood that such other registration rights may be pari passu with the
registration rights granted under this Agreement with respect to registrations or takedowns).
(b) VCI Status. To the extent that any Shareholder is subject to such
regulations, the Company shall reasonably cooperate with such Shareholder to provide to
30
such Shareholder such rights of consultation as may be required pursuant to regulations,
advisory opinions or announcements issued after the date of this Agreement by the United States
Department of Labor or by a court of competent jurisdiction in order for such Shareholder’s
investment in the Company to continue to qualify as a “venture capital investment” for purposes of
the United States Department of Labor Regulation published at 29 C.F.R. Section
2510.3-101(d)(3)(i). Notwithstanding anything to the contrary in this Agreement, Section 7(b)
hereof shall survive any Initial Public Offering with respect to any Shareholder who is a party to
this Agreement as of the date hereof as long as such Shareholder holds any Common Shares purchased
under its Subscription Agreement, if and only to the extent that such Shareholder establishes, to
the reasonable satisfaction of the Company, that such survival is necessary in order for such
Shareholder’s investment in the Company to qualify as a “venture capital investment” for purposes
of the United States Department of Labor Regulation published at 29 C.F.R. Section
2510.3-101(d)(3)(i).
SECTION 12. Amendments. Neither this Agreement nor any provision hereof may be
amended except by an instrument in writing signed by the Company and Shareholders holding at least
two-thirds (or such higher percentage as may be required by any provision which is the subject of a
proposed amendment) of the outstanding Common Shares then held by all of the Shareholders who are
parties to this Agreement (assuming for this purpose the exercise of all outstanding Warrants). Any
amendment approved in the foregoing manner will be effective as to all Shareholders. For the
avoidance of doubt, the addition or deletion of any Person as a party hereto in accordance with the
terms hereof shall not constitute an amendment hereof.
SECTION 13. Waiver and Consent. No action taken pursuant to this Agreement,
including, without limitation, any investigation by or on behalf of any party, shall be deemed to
constitute a waiver by the party taking such action of compliance with any representations,
warranties, covenants or agreements contained herein. The waiver by any party hereto of a breach of
any provision of this Agreement shall not operate or be construed as a waiver of any preceding or
succeeding breach, and no failure by any party to exercise any right or privilege hereunder shall
be deemed a waiver of such party’s rights or privileges hereunder or shall be deemed a waiver of
such party’s rights to exercise the same at any subsequent time or times hereunder.
SECTION
14. Recapitalization, Exchanges, etc. Except as expressly provided otherwise
herein, the provisions of this Agreement shall apply to the full extent set forth herein with
respect to shares or other securities in the Company or any other Person that may be issued in
respect of, in exchange for, or in substitution of the Common Shares or the Warrants.
SECTION 15. Notices. All notices, requests, demands and other communications hereunder
shall be in writing and shall be deemed, unless otherwise specified herein, to have been duly given
if sent by hand, mail, courier service, cable, telex, facsimile or other mode of representing words
in a legible and non-transitory form (a) if to the Shareholders, at their respective addresses in
the Register of Shareholders of the Company or at such other address as any of the Shareholders may
have furnished to
31
the Company in writing, and (b) if to the Company, at 370 Church Street, Guilford, Connecticut
06437, Attention: Reid Campbell, Treasurer, Telephone: 203-458-2380, Facsimile: 203-458-0754, or
such other address as the Company may have furnished to the Shareholders in writing.
All such communications shall be deemed to have been given, delivered or received when so
received, if sent by hand, cable, telex, facsimile or similar mode, on the next Business Day after
sending if sent by Federal Express or other similar overnight delivery service, on the fifth
Business Day after mailing if sent by mail and otherwise on the
actual day of receipt.
SECTION
16. Specific Performance. Each of the parties hereto acknowledges and agrees that in
the event of any breach of this Agreement, the non-breaching parties would be irreparably harmed
and could not be made whole by monetary damages. Accordingly, each of the parties hereto agrees
that the other parties, in addition to any other remedy to which they may be entitled at law or in
equity, shall be entitled, subject to applicable law, to compel specific performance of this
Agreement.
SECTION 17. Entire Agreement. This Agreement (including any schedules, annexes or
other attachments hereto) and all Subscription Agreements and any other agreements delivered at the
Closing with respect to the subject matter hereof constitute the entire agreement between the
parties hereto and supersede all prior agreements and understandings, oral and written, between the
parties hereto with respect to the subject matter hereof.
SECTION 18. Severability. To the fullest extent permitted by applicable law, any
provision of this Agreement that is prohibited, unenforceable or not authorized in any jurisdiction
shall, as to such jurisdiction, be ineffective to the extent of such prohibition, unenforceability
or lack of authorization without invalidating the remaining provisions hereof or affecting the
validity, unenforceability or legality of such provision in any other jurisdiction.
SECTION
19. Binding Effect; Benefit. Except for Section 3(c)(i) hereof, which shall
be enforceable by the underwriters referred to therein, nothing in this Agreement, express or
implied, is intended to confer on any Person other than the parties hereto, and their respective
successors, legal representatives and permitted assigns, any rights, remedies, obligations or
liabilities under or by reason of this Agreement.
SECTION 20. Successors and Assigns. This Agreement shall inure to the benefit of and
be binding upon the parties hereto, and their respective successors, legal representatives and
permitted assigns. Neither this Agreement nor any rights or obligations hereunder shall be
assignable by any Shareholder except in connection with a Transfer of Common Shares or Warrants
permitted hereunder, in which case, subject to the next sentence, the rights and obligations
hereunder shall be transferred pro rata. No such assignment shall be effective unless the assignee
shall execute and deliver an agreement in form and substance reasonably satisfactory to the Company
agreeing to be bound by this Agreement (or the surviving provisions hereof).
32
SECTION 21. Interpretation. The Table of Contents and the Headings contained in this
Agreement are for convenience only and shall not affect the meaning or interpretation of this
Agreement. All references herein to Sections, subsections, clauses and Schedules shall be deemed
references to such parts of this Agreement, unless the context otherwise requires. All pronouns and
any variations thereof refer to the masculine, feminine or neuter, as the case may require. The
definitions of terms in this Agreement shall be applicable to both the singular and plural forms of
the terms defined where either such form is used in this Agreement. Whenever the words “include”,
“includes” and “including” are used in this Agreement, they shall be deemed to be followed by the
words “without limitation.” The words “herein”, “hereof, and “hereunder”, and other words of
similar import, refer to this Agreement as a whole and not to any particular Section, Subsection,
or clause.
SECTION 22. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original and all of which together shall be
deemed to be one and the same instrument.
SECTION 23. Applicable Law. The validity of this Agreement, its construction,
interpretation and enforcement, and the rights of the parties hereunder, shall be determined under,
governed by and construed in accordance with the laws of New York. Each party hereto agrees that
any suit, action or other proceeding arising out of this Agreement may be brought and litigated in
the appropriate Federal and state courts of the State of New York and each party hereto hereby
irrevocably consents to personal jurisdiction and venue in any such court and hereby waives any
claim it may have that such court is an inconvenient forum for the purposes of any such suit, action
or other proceeding. The Shareholders and the Company each hereby irrevocably designates and
appoints CT Corporation with offices on the date hereof at 111 Eighth Avenue, New York, NY 10011,
and its successors, as its agent to receive, accept or acknowledge for or on behalf of it, service
of any and all legal process, summonses, notices and documents that may be served in any such suit,
action or proceeding in any such court. Each Shareholder acknowledges that CT Corporation will
transmit services of any and all legal process, summonses, notices and documents that may be served
in any such suit, action or proceeding in any such court to such Shareholder’s address as shown in
the stock transfer books of the Company from time to time. Each Shareholder further irrevocably
consents to the service of any and all legal process, summonses, notices and documents by the
mailing of copies thereof by registered or certified air mail, postage prepaid, to such party at
the address of such party as shown in the stock transfer books of the Company from time to time.
33
IN WITNESS WHEREOF, the parties hereto have caused this Shareholders Agreement to be
executed as of the date first above written.
| OCCUM ACQUISITION CORP., | ||||||
| by | /s/ Kernan V. Oberting
|
|||||
| Title: President | ||||||
| Scion Value Fund, a Series of Scion Funds LLC. | ||||
| By | /s/ Michael J. Burry M.D. | |||
| Name: Michael J. Burry, M.D. | ||||
| Title:
Managing Member Scion Capital, LLC Managing Member Scion Value Fund, a Series of Scion Funds, LLC |
||||
[Signature Page to Shareholders Agreement]
33
IN WITNESS WHEREOF, the parties hereto have caused this Shareholders
Agreement to be executed as of the date first above written.
| OCCUM ACQUISITION CORP., | ||||||
| by | /s/ Kernan V. Oberting
|
|||||
| Title: President | ||||||
| Scion Qualified Value Fund, a Series of Scion Qualified Funds LLC, | ||||
| By | /s/ Michael J. Burry M.D. | |||
| Name: Michael J. Burry, M.D. | ||||
| Title:
Managing Member Scion Capital, LLC Managing Member Scion Qualified Value Fund, a Series of Scion Qualified Funds, LLC |
||||
[Signature Page to Shareholders Agreement]
Schedule 1
Signatories to Shareholders Agreement
Exhibit 10.3
GROUP SHORT TERM DISABILITY REINSURANCE AGREEMENT
THIS AGREEMENT is between SAFECO LIFE INSURANCE COMPANY of Seattle, Washington (hereinafter
“Insurer”) and DUNCANSON & HOLT SERVICES, INC., a Maine corporation, as Managing Agent (hereinafter
“Managing Agent”) for each of the participating reinsurers collectively referred to in this
Agreement as the American Disability Reinsurance Underwriters Syndicate (ADRUS) and listed in
Appendix A (hereinafter “Reinsurer”).
The Managing Agent represents and warrants that the Reinsurer has authorized the Managing Agent to
enter into, execute and deliver agreements of this sort on its behalf and to exercise all of its
rights and perform all of its obligations under such agreements on its behalf, including but not
limited to, underwriting of policies, collection of premiums, and management of claims in
accordance with the terms of such agreements. All performances required by and for the Reinsurer
under this Agreement shall be conducted through the Managing Agent.
In consideration of the mutual promises set forth below, the parties agree as follows:
ARTICLE I. GENERAL PROVISIONS
The
effective date of this Agreement is January 1, 1999. On and after this date, one hundred
percent (100%) (hereinafter referred to as the “Reinsured Percentage”) of the Insurer’s liability
(hereinafter referred to as “Underlying Risk”) for the group short term disability insurance
policies written on or after January 1, 1999 will be ceded to and reinsured by the Reinsurer. For
group short term disability policies effective prior to
January 1, 1999, the Reinsured Percentage
shall become one hundred percent (100%) as of that date.
Other terms and conditions of this Agreement are as follows:
| A) | For risks reinsured under this Agreement, the Insurer will use only those policy forms which have been approved by the appropriate regulatory authorities. After the Reinsurer has reviewed and approved copies of these forms, and insurance policies have been accepted by the Policyholder and administered in accordance with the terms of this Agreement, the Reinsurer will be liable to the Insurer for the Reinsured Percentage in accordance with the provisions of the policies reinsured. | |
| B) | The Insurer, by executing this Agreement, represents that it is licensed to do insurance business in every state, district or territory of the United States, or the District of Columbia, in which it does business; and that it is licensed to write the group health and disability insurance policies which are the subject of this Agreement. |
| C) | This Agreement represents an exclusive reinsurance arrangement between the parties for short term disability business. All business quoted using rates provided by the Reinsurer shall be reinsured under this Agreement. In the event the Reinsurer declines to accept any policy, the Insurer may reinsure such policy with another reinsurer. | |
| D) | Upon agreement of risk and benefits between Reinsurer and Insurer, any increase in benefit liability resulting from Insurer’s divergence from same shall be borne by the Insurer. The Reinsurer does not assume liability for any risk not agreed upon and which is incurred as a result of errors, intentional or otherwise, in the policy and/or certificate issued: |
ARTICLE II. UNDERWRITING
| A) | Any reinsurance under this Agreement will be effected only through the express written consent of the Reinsurer for each case submitted under any disability insurance policy covered by this Agreement. The Insurer will submit underwriting data to the Reinsurer and the Reinsurer will inform the Insurer of its decision to accept or reject liability. The Reinsurer will make available to the Insurer the underwriting data prepared and used in making its determination. The reinsurer agrees to reinsure all policies in force on January 1, 1999, without regard to any policy underwriting. | |
| The Reinsurer has the right to approve individuals insured under any policy as a condition of its acceptance of that policy. The Reinsurer may waive this right for some or all policies at any time. | ||
| B) | The Reinsurer shall keep and maintain appropriate records of evidence of insurability, including but not limited to the policy, applications, certificates of coverage, medical forms, and other evidence of insurability, for at least three (3) years. Upon termination of this Agreement, the Reinsurer will retain and Insurer shall have access to such information for the later of three (3) years from termination date or the date the last active claim ceases. | |
| C) | Either the Insurer or the Reinsurer may, at any reasonable time during normal working hours of the Insurer and upon provision of written notice fourteen (14) days in advance, review and audit the records of the other party relating to business reinsured under this Agreement. |
2
ARTICLE III. FINANCIAL RESPONSIBILITIES AND TRANSACTIONS
| A) | The Insurer shall remit premium for reinsured group short term disability policies to the Reinsurer by the tenth (10th) of each month. The monthly report provided will contain all of the cash activity reported to the Insurer in the previous month in addition to information mutually agreed to by the Insurer and the Reinsurer. | |
| The Insurer will follow all prudent procedures for premium collection and will notify the Reinsurer of all reinsured policies for which premium is overdue by thirty (30) days of the due date. The Reinsurer may assess an interest charge equal to the interpolated seven (7) year value of five (5) year and ten (10) year United States Treasury Bonds on premium overdue by more than thirty (30) days. | ||
| If the premium payment period for any policy comprising the Underlying Risk is other than monthly, the parties to this Agreement shall determine, by mutual consent, the proper method of reporting, accounting, and transferring of balances. | ||
| For past due premiums on all reinsured policies for which premiums remain due and unpaid for thirty (30) days following their due date, the Insurer shall take appropriate action to terminate all prospective liability in accordance with the policy provisions and shall institute its usual collection procedures. If the Insurer fails to take appropriate action to terminate all prospective liability, the Reinsurer reserves the right to terminate reinsurance of such ceded policies for which premiums remain unpaid for thirty (30) days past their due date. | ||
| B) | For any business sold under this Agreement, the Reinsurer will specify the percentage of premium to be paid to it for reinsurance of each policy at the time Reinsurer accepts liability under the terms of the Underwriting Article of this Agreement. | |
| C) | The liability of the Reinsurer shall begin simultaneously with the Reinsurer’s acceptance of reinsurance for a short term disability insurance policy, subject to the terms of this Agreement. | |
| D) | The Insurer is responsible for paying all premium taxes concerning any business covered by this Agreement | |
| E) | Upon provision of written notice fourteen (14) days in advance, each party shall have the right, at any reasonable time during normal working hours, to inspect, at the office of the other party, all non-proprietary, non-confidential and non-privileged books, records and documents relating to policies reinsured under this Agreement. |
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| F) | If the Insurer fails to pay the consideration described in this Article, the Reinsurer shall have the right to terminate, from the date up to which the policy premiums have been paid, its obligation for that portion of the Underlying Risk for which consideration is in arrears. | |
| G) | The Reinsurer will be bound by the consideration it specifies for a particular policy. However, on any date that the Insurer has the right to terminate a policy or change the premium for said policy, the Reinsurer may, with sixty (60) days advance notice, modify the rate of consideration or terminate reinsurance on the policy. The Insurer shall then be bound by the modification. | |
| H) | Reinstatement of the reinsurance on ceded policies which have been terminated under any provision of this Article shall be at the Reinsurer’s discretion. | |
| I) | Each party to this Agreement shall have the right to offset any balance(s), or any other amounts due relating to this or related agreements. In the event of the insolvency of a party to this Agreement, offsets shall only be allowed in accordance with the Insolvency Article of this Agreement. |
ARTICLE IV. CLAIMS
The Insurer shall promptly transmit to the Reinsurer all claims, proofs of loss and supplemental
statements of disability submitted on a policy reinsured hereunder. Upon receipt thereof the
Reinsurer will pay the claim and/or recommend other appropriate action. The Reinsurer will not be
liable for any claim received from the Insurer more than one year after this claim has been
received in the Insurer’s office. The Reinsurer may change the reinsurance rate, retroactive to the
last renewal date, if the receipt of a claim reported to the Reinsurer is more than one year after
receipt by the Insurer and if the timely receipt would have caused a different reinsurance rate to
be charged.
| A) | All services will be performed in accordance with Appendix B, the Claims Management Agreement. This Agreement includes administrative procedures particular to the claims management process and includes, but is not limited to: Authorization to Pay Claims, Claim Administration Guidelines, Claim Data; Payment of Benefits; Payment of Claim Expenses; Right to Audit; and is mutually agreed to by the parties of this Agreement. |
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| B) | The Reinsurer will undertake the defense of any suit, or portion of a suit, which is based or alleged to be based on claims for benefits under group disability policies covered by this Agreement where the claim is first commenced after the effective date of this Agreement, and the underlying policy is effective on or after the effective date of this Agreement. Except as otherwise provided in this Agreement, choice of counsel and management of any such suit, or portion of such suit, shall be agreed upon by the Insurer and the Reinsurer, which will have the exclusive right to settle any such suit, when in its informed and good faith opinion, it is appropriate to do so. The Insurer will cooperate with the Reinsurer in the defense of such suits. | |
| C) | The Insurer and the Reinsurer will notify each other promptly of any litigation brought against it with respect to the policies covered by this Agreement are. | |
| D) | Claims for Extra-Contractual Amounts. “Extra-Contractual Amounts” are amounts outside of contractual benefits which may include, but are not necessarily limited to: punitive, exemplary, compensatory or consequential damages or plaintiffs litigation-related costs and fees. |
| i) | If extra-contractual amounts are awarded against the Insurer solely as a result of the Reinsurer’s decision, action, delay or failure to act, the Reinsurer shall pay one hundred percent (100%) of all such amounts. | ||
| ii) | If extra-contractual amounts are awarded against the Insurer solely as a result of Insurer’s decision, action, delay, or failure to act, the Reinsurer shall have no (0%) percentage of liability for the payment of extra-contractual amounts. | ||
| iii) | When extra-contractual amounts are awarded against the Insurer as a result of both the Reinsurer’s and the Insurer’s decision, action, delay or failure to act, the parties agree to share in the payment of any extra-contractual amounts. | ||
| iv) | To expedite the resolution of certain claims, amounts other than policy benefits may be added to a claim settlement. | ||
| Allocation of responsibility for decisions, actions, delays, or failures to act shall be determined by the parties’ agreement subsequent to good faith negotiation. Said determination is solely for the purpose of efficient administration of this Agreement and for determining who shall assume the costs in certain instances. If agreement on such allocation cannot be reached, the matter shall be addressed in accordance with the Arbitration Article of this Agreement. | |||
| If any portion of this subsection (D) is deemed to be illegal under any law (decisional or statutory) or regulation of any Federal, State or local government, insofar as it applies to that area’s jurisdiction, then said portion is automatically terminated. |
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| E) | The Reinsurer hereby agrees to provide claim management services for all group short term disability claims of the Insurer with dates of disability prior to January 1, 1999. For an initial payment of $230 per claim, and monthly payment of $75 per claim thereafter for the duration of the claim, Reinsurer shall manage such claims in accordance with the practices and procedures outlined in the Claims Service Agreement. | |
| The Insurer agrees to prefund an account for claim payments sufficient to cover STD payments. The Insurer can prefund on a weekly basis. The Insurer will also pay a fee of $4,000 which will be refunded if the reinsured profit margin exceeds 7% for 1999. | ||
| F) | The Reinsurer will deposit federal and/or state income tax as requested by the claimant. In so doing, the Reinsurer does not act as the agent of the Insurer for IRS purposes. The Reinsurer shall deposit employee FICA on short term disability benefits paid. The Reinsurer will transfer the liability for the employer matching FICA and issuance of W-2 forms for short term disability benefits paid back to the employer of the disabled employee. |
ARTICLE V. DURATION, RECAPTURE AND TERMINATION
| A) | This Agreement shall govern the relationship of the parties until the liability of the Reinsurer with respect to all policies reinsured hereunder ceases. In accordance with the provisions of this Article, this Agreement can be terminated by either party with respect to all prospective acceptances. | |
| Any partial or complete prospective termination of this Agreement must be made in writing prior to October 1st of each year. Termination shall occur on the desired effective date of termination or ninety days from receipt of notice, whichever is later. | ||
| B) | After this Agreement has been inforce for one (1) year from the effective date, the Insurer may increase or decrease the Reinsured Percentage. The following schedule is the minimum Reinsured Percentage for each disability policy in effect at the anniversary date of this Agreement. |
Year 1 following notification |
75 | % | ||
Year 2 Following notification |
75 | % | ||
Year 3 following notification and thereafter |
50 | % |
Notification must be received by the Reinsurer not later than October 1 of the year
prior to the intended change. The Reinsured Percentage will remain at current Reinsured
Percentage absent any notification. The change in Reinsured Percentage will occur at the next
renewal date of the underlying reinsured policy occurring after the anniversary of the
change. Upon termination of this Agreement, the Insurer may reduce the Reinsured Percentage
to zero percent (0%) five (5) years from the effective date of the termination. Notification
must be provided 90 days in advance.
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| C) | The Reinsured Percentage governing any particular claim under a reinsured policy will be that Reinsured Percentage in effect as of the date of disability. | |
| D) | As of the date termination becomes effective Reinsurer will provide Insurer only with those necessary claims and financial services required to manage any reinsured business. | |
| E) | If Insurer becomes insolvent, as determined by the state regulatory agency, this Agreement will terminate automatically as of the date of insolvency as to all prospective acceptances by the Reinsurer. Liabilities already incurred by the Reinsurer will be administered in accordance with the Insolvency Article of this Agreement. |
ARTICLE
VI. NON-TRANSFERABILITY OF AGREEMENT
Neither the Insurer nor the Reinsurer shall, without prior consent of the other, which shall
not be unreasonably withheld, sell, assign, transfer, or otherwise dispose of this Agreement,
policies or policy liabilities covered by this Agreement, or any interest in such Agreement, by
voluntary or involuntary act, by assumption agreement or otherwise, and any attempt to dispose of
said interests, without said consent, shall be null and void.
Notwithstanding the foregoing,
Insurer or Reinsurer may arrange for a Third Party Administrator to perform some or all of the
obligations hereunder. So doing will not relieve the Insurer or Reinsurer from the obligations
hereunder, though, in the event that the Third Party Administrator does not perform the obligations
as stated herein.
ARTICLE VII. PARTIES TO THIS AGREEMENT
| A) | This is an agreement solely between the Insurer and the Reinsurer. The acceptance of reinsurance hereunder shall not create any right or legal relation whatever between the Reinsurer and any of Insurer’s policyholders, beneficiaries, representatives, sales representatives, employees or shareholders. | |
| B) | A failure or delay of either party to this Agreement to enforce any of the provisions of this Agreement, or to exercise any option which is herein provided, shall in no way be construed to be a waiver of such provision. |
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ARTICLE VIII. CONFIDENTIALITY
| A) | The Insurer and the Reinsurer may come into the possession or knowledge of confidential and proprietary information of the other in fulfilling obligations under this Agreement. Insurer and the Reinsurer agree to hold such confidential information in strictest confidence and to take all reasonable steps to ensure that such confidential information is not disclosed in any form by any means by each of them or by any of their employees or associates to third parties of any kind, except by advance authorization. “Confidential information” means any information which (1) is not generally available to the public, or (2) has not been lawfully obtained by the parties prior to the date of disclosure to it by the other, and includes but is not limited to: |
| i) | Information or knowledge about each party’s products, processes, services, finances, customers, research, computer programs, marketing and business plans, claims management practices, and reserving methodology; and | ||
| ii) | Any medical and other personal, individually identifiable information about people or business entities with whom the parties do business, including customers, prospective customers, vendors, suppliers, individuals covered by insurance plans, and each party’s producers and employees. |
| B) | The Insurer and its agents, employees and representatives will not represent themselves, in writing, as part of the Reinsurer, or refer, in writing, to the Reinsurer in any policy forms or promotional materials, without the prior written consent of the Reinsurer. |
ARTICLE IX. INSOLVENCY
The Reinsurer agrees that all reinsurance under this Agreement shall be payable by the Reinsurer on
the basis of the liability of the Insurer under each policy reinsured under this Agreement without
diminution because of the insolvency of the Insurer, and the Reinsurer assumes liability for such
reinsurance as of the effective dates of such policies. Any such payments by the Reinsurer shall be
made directly to the Insurer or to its liquidator, receiver, or statutory successor. In the event
of the insolvency of the Insurer, the liquidator, receiver or statutory successor of the Insurer
shall give written notice that a claim is pending against the Insurer with respect to policies
comprising the Underlying Risk within a reasonable time after such claim is filed in the insolvency
proceedings. While the claim is pending, the Reinsurer may investigate such claim and interpose, at
its own expense, in the proceeding where such claim is to be adjudicated any defense or defenses
which it may deem available to the Insurer or its liquidator or receiver or statutory successor.
The expense thus incurred by the Reinsurer shall be chargeable, subject to court approval, against
the Insurer as part of the expenses of liquidation to the extent of a proportionate share of the
benefit which may accrue to the Insurer solely as a result of the defense undertaken by the
Reinsurer.
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Where two or more reinsurers are involved and a majority of interest elect to defend a
claim, the expense will be apportioned in accordance with the terms of the reinsurance agreement as
if the expense had been incurred by the Insurer.
ARTICLE X. ARBITRATION
| A) | The parties explicitly agree that all differences, whether matters of fact, law or mixed fact and law, which arise out of the interpretation or execution of this Agreement, will be decided by arbitration except for those matters which are left to the sole discretion of the Reinsurer or the Insurer under the terms of this Agreement. The parties explicitly agree that arbitration shall be the sole and exclusive remedy for all such differences, and that the arbitrators will determine the interpretation of this Agreement in accordance with the usual business and reinsurance practices rather than strict technicalities. Three neutral arbitrators will decide any differences. They must be active or retired officers of life insurance companies other than the two parties to this Agreement or any of their subsidiaries. In addition, the officers may not be former employees of the two parties to this Agreement or any of their subsidiaries. One of the arbitrators is to be appointed by each party to this Agreement, and the two arbitrators will select a third. If the two are not able to agree on a third, the choice will be left to the President of the Society of Actuaries or its successor. The arbitration shall be in accordance with the Commercial Arbitration Rules of the American Arbitration Association, or its successor and will take place in Portland, Maine. This Agreement shall be deemed binding upon the arbitrators for matters expressly agreed to herein. The arbitrators’ decision shall be by majority vote, and no appeal shall be taken from it. The judgment rendered by the arbitrators may be entered in any court having proper jurisdiction. Expenses and fees for the arbitrators shall be shared by the Insurer and the Reinsurer in equal portions. | |
| B) | The arbitrators may award only contractual damages to either party. In no event may extra-contractual damages, including amounts available under any state or federal Racketeer Influenced and Corrupt Organization Act (RICO), be awarded to either party under this Agreement for breach of said agreement. However, the arbitrators may allocate responsibility for 1) any extra-contractual amounts awarded against the Insurer, or 2) any amounts representing extra-contractual damages in a settlement, between the Insurer and the Reinsurer as set forth in the Claims Article of this Agreement. | |
| C) | The procedures specified in this Article shall be the sole and exclusive procedures for the resolution of disputes between the parties arising out of or relating to this Agreement; provided, however, that a party may seek a preliminary injunction or other preliminary judicial relief if in its judgment such action is necessary to avoid irreparable damage. Despite such action the parties will continue to participate in good faith in the procedures specified in this Article. All applicable statutes of limitation shall be tolled while the procedures specified in this Article are pending. The parties will take such action, if any, required to effectuate such tolling. |
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| D) | Notwithstanding any other provision of this Article, in the event that either party seeks, consents to, or acquiesces in the appointment of, or otherwise becomes subject to, any trustee, receiver, liquidator, or conservator (including any state insurance regulatory agency acting in such a capacity), the other party shall not be obligated to resolve any claim, dispute, or cause of action under this Agreement by arbitration and may elect to bring any action with respect to such claim, dispute or cause of action in any court of competent jurisdiction. |
ARTICLE XI. YEAR 2000 COMPLIANCE
The Insurer and the Reinsurer each separately represents and warrants that it has
established a written project plan and budget to address Year 2000 issues, and that its plan
includes:
| i) | conducting an inventory and assessment of Year 2000 impacts to its telecommunications and information systems, related software and hardware, and its facilities (e.g., buildings and utilities); | ||
| ii) | conducting a review of the Year 2000 preparedness of its significant business partners and suppliers; | ||
| iii) | correcting its Year 2000 problems and testing and validating its conversion efforts, and | ||
| iv) | establishing contingency and avoidance plans. |
Each party represents and warrants that all of its telecommunications and information systems and
related software and hardware have been found to be Year 2000 compliant, or will be made so on or
before December 31, 1999. The Insurer agrees to cooperate in good faith with the Reinsurer with
respect to Year 2000 issues by sharing information with the Reinsurer about the status and progress
of the Insurer’s Year 2000 compliance work and with respect to testing and validation. Reinsurer
agrees to do the same. For purposes of this section, “Year 2000 compliant” means: manages and
manipulates data involving dates with full representation of year and century (i.e. YYYYMMDD)
both internally and externally to the Database, System or Application; follows standards for
acquisition, storage, presentation, and handling of dates including provisions for leap year and
leap centuries. This applies to data stored and retrieved, reports, screens, and data that is sent
or received.
ARTICLE XII. ERRORS AND OMISSIONS
Inadvertent and harmless delays, errors or omissions made in connection with this Agreement or any
transaction hereunder, except as otherwise stated in this Agreement,
shall not relieve either party
from any liability which would have attached had such delay, error or omission not occurred,
provided that the fault is rectified as soon as possible after discovery.
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ARTICLE XIII. APPLICABLE LAW
This Agreement is governed by the laws of the State of Maine,
ARTICLE XIV. MODIFICATION
| A) | This Agreement constitutes the entire understanding between the Reinsurer and the Insurer. Neither party shall be bound by any other representation made before or after the date of this Agreement, unless it is made in writing, signed by both parties and expresses by its terms an intention to modify this Agreement. | |
| B) | In the event that any one or more of the provisions of this Agreement shall, for any reason, be held to be invalid, illegal or unenforceable, the remaining provisions of this Agreement shall be unimpaired. |
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed in duplicate by
their respective officers duly authorized so to do as of the date set forth above.
| DUNCANSON & HOLT SERVICES, | SAFECO LIFE INSURANCE | |
| INC. (Managing Agent of Reinsurer) | COMPANY (Insurer) | |
By
/s/ Paul K.
Fields
|
By /s/ John P. Fenlason | |
Title
V P Finance
|
Title Sn V. P. | |
Date
8/30/99
|
Date 11/4/99 | |
/s/
Sharon Newton |
/s/ Joseph Allen Wymich | |
Witness
|
Witness |
11
APPENDIX A-20
AGREEMENT YEAR 1999
January 1, 1999 to December 31, 1999
Member Reinsurers who have contracted with Duncanson & Holt Services, Inc., as Managing
Agent of ADRUS and their levels of participation are as follows:
| DOLLAR | PERCENTAGE | |||||||
| MEMBER REINSURER | PARTICIPATION | PARTICIPATION | ||||||
Allianz Life Insurance Company of
North America |
30,000 | 100.00 | % | |||||
TOTAL AUTHORIZED PARTICIPATION |
$ | 30,000 | 100.00 | % | ||||
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Claims Management Agreement
Appendix B
Appendix B
I. Claims Management Services
In satisfaction of its obligations to assist the Insurer with the processing of claims arising
under policies reinsured in connection with the Group Short Term Disability Reinsurance Treaty
(“the Treaty”), the Reinsurer designates Claims Service International, Inc. (“CSI”) to perform
claims management services in connection with the Treaty as set forth herein. The Insurer shall not
be liable to CSI for the services rendered under the Claims Management Agreement and shall not bear
any of the expenses incurred by CSI in connection with CSI’s performance of services hereunder,
except as may be expressly set forth herein. The obligation of CSI to perform administrative
services in connection with the Treaty shall continue until such time as all reinsured claims have
been paid, unless other agreement is reached and becomes a written part of this Agreement.
II. Standard of Care
CSI will manage claims using the same standard of care, diligence and good faith which
Reinsurer exercises in the performance of its own business and shall be consistent with prudent
claim processing practices in the industry in compliance with applicable laws.
III.
Licenses
CSI will maintain all necessary licenses to perform the functions assigned to it in this Claims
Management Agreement. CSI shall execute any documents reasonably required by the Insurer in order
for the Insurer to comply with laws relating to the third party administration of claims.
IV. Claims Administration Guidelines/Claims Data
The Insurer will direct all policyholders that insured individuals and their assignees must
provide notices of all reinsured disability claims, proofs of loss and any supplemental statements
of disability directly to CSI for processing. CSI will communicate with all parties involved in
the claims management process using the identity of “Claims Advisory Agent” for the Insurer. CSI,
on behalf of the Reinsurer, will use Insurer STD claims forms,
13
as modified to name CSI as the Claims Advisory Agent.
CSI will provide the Insurer with copies of all responses to Department of Insurance (DOI)
complaints. The Insurer will not retain individual STD claim files except for copies of responses
to DOI complaints. CSI will retain all individual STD claims files and will store all such files
for a period of ten years after the closure of the file. CSI will destroy all claims files in a
manner to preserve confidentiality. Upon proper request, CSI shall provide access to the books and
records maintained by CSI for the purposes of examination, audit and inspection by any insurance
department which purports to exercise jurisdiction over the business which is subject to the
Treaty.
V. Payment of Claims/Authorization to Pay Claims
Upon receipt of claims, proofs of loss and/or supplemental statements of disability, CSI, on
behalf of the Reinsurer in accordance with Article IV of the Treaty, will pay the claim or will
take appropriate alternative action. The Insurer or the policyholder will provide to CSI all
necessary information to verify eligibility and premium requirements, where such information has
not already been provided to the Reinsurer. CSI shall be responsible for mailing all acknowledgment
letters and claims denial letters.
In the event that CSI determines that a claim should be denied, CSI will send to the claimant a
notice of denial within 10 business days of the determination. Any notice of denial will be sent
directly to claimant and will state the reason for denial. Procedures for appeals are to be included
in the letter to the claimant. A copy of the denial letter shall be forwarded to the policyholder
when applicable.
Beginning
January 1, 1999, CSI will process and pay all claims made against the policies reinsured
under this Treaty for the Insurer. In connection therewith, the Insurer will provide to CSI
signatory authority on a block of the Insurer drafts to be written against a the Insurer bank
account. CSI shall be responsible for mailing, at its expense, all communications that are required
to be mailed to claimants, including checks and EOBs.
CSI shall pay each claim under policies reinsured under the Treaty within the time period allowed
by the state in which the claimant resides. Before suspending any payments, CSI will send to
claimant a letter advising the claimant that benefits will be suspended unless the claimant sends
information which in the judgment of CSI supports the continued payment of benefits. A copy of this
letter shall be forwarded to the policyholder, when applicable.
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VI. Claims Expenses
All STD claims expenses will paid by the Reinsurer. Normal claim expenses include, but are not
limited to, the following: medical records; Independent Medical Exams; vendor costs; claim
investigation and rehabilitation. It does not include salaries of either the Insurer’s or
Reinsurer’s employees.
VII. Right to Audit
At its discretion the Insurer, or its designated representative, has the right to conduct
random audits of STD claims reinsured under the Treaty. Such audits shall be conducted by staff of
the Insurer, or its designated representative, at the expense of the Insurer and at the regular
locations of CSI and/or the Reinsurer during normal business hours. Access to all relevant policy
information and case data regarding reinsured claims shall be made available for audit proceedings.
The number of claims to be audited will be determined in the sole discretion of the Insurer.
Results of audits by the Insurer shall be communicated to the Reinsurer in a verbal summary
followed by written documentation of the findings, including any irregularities or problems
identified.
VIII. Information Relating to Fraudulent Claims
CSI will provide to the Insurer, upon the Insurer’s request, a list of measures that CSI uses
to detect fraudulent claims.
IX. Responsibility of Reinsurer for Act of CSI
Reinsurer shall be responsible for all acts of CSI as if the Reinsurer had itself performed
said acts.
The signatures below constitute acceptance of the Claims Management Agreement by all parties.
Nothing contained in the Claims Management Agreement shall vary, alter or affect any of the terms
or conditions of the Group Short term Disability Reinsurance Agreement. The Claims Management
Agreement may be revised only by changes agreed to by both parties and documented in writing.
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IN WITNESS WHEREOF, the parties have signed this Claims Management Agreement on the dates shown.
| DUNCANSON & HOLT SERVICES, | SAFECO LIFE INSURANCE | ||
| INC. (Managing Agent of Reinsurer) | COMPANY (Insurer) | ||
By /s/ Paul K. Fields
|
By /s/ John P. Fenlason | ||
Title
V P Finance
|
Title Sr. V.P. | ||
Date
8/30/99
|
Date 11/4/99 | ||
/s/ Sharon Newton |
/s/
Joseph Allen Wymich |
||
Witness
|
Witness | ||
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AMENDMENT NO. 1
TO THE
GROUP SHORT TERM DISABILITY REINSURANCE AGREEMENT
TO THE
GROUP SHORT TERM DISABILITY REINSURANCE AGREEMENT
This
Amendment No. 1 (the “Amendment”) is effective as of
July 1, 2006 and is hereby made a part
of and incorporated into the Group Short, Term Disability Reinsurance
Agreement effective January 1, 1999 (the “Agreement”) by
and between Symetra
Life Insurance Company (formerly Safeco Life
Insurance Company) (hereinafter the “Insurer”) of Bellevue, Washington and Reliance Standard Life
Insurance Company doing business as Custom Disability Solutions (successor to Integrated Disability
Resources, Inc., formerly Duncanson & Holt Services, Inc.), as Managing Agent (hereinafter the
“Managing Agent”) for each of the participating reinsurers collectively referred to in the
Reinsurance Agreement as the American Disability Reinsurance Underwriters Syndicate (“ADRUS”).
Capitalized terms not otherwise defined herein shall have the meaning ascribed to them in the
Agreement.
Intending
to be legally bound, Insurer and Managing Agent agree to amend the Agreement as follows:
| 1. | ARTICLE I. GENERAL PROVISIONS, Paragraph C is amended to read as follows: |
| C) | All new business proposals which are quoted using rates provided by the Reinsurer shall be reinsured under this Agreement, except for new business proposals produced: |
| i) | by Meridian Benefits in the states of North Carolina, South Carolina and Tennessee, or | ||
| ii) | from distribution channels and opportunities brought to insurer by other reinsurance outlets, where discussions concerning such opportunities are not initiated by the Insurer. |
Otherwise, this Agreement represents, an exclusive reinsurance arrangement between the
parties with respect to new business proposals.
This Agreement will continue to represent an exclusive reinsurance arrangement between
the parties with respect to renewals for Policies which are in force and reinsured with
Reinsurer as of July 1, 2006. In the event the Reinsurer declines to accept a renewal of
any such policy, the Insurer may reinsure such policy with another reinsurer.
| 2. | ARTICLE III. FINANCIAL RESPONSIBILITIES AND TRANSACTIONS, Section A), first two paragraphs are amended to read as follows: | |
| The Insurer shall remit premium for reinsured group short term disability policies to the Reinsurer within ninety (90) days from the date on which premium is due to the Insurer. |
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The
Insurer will follow all prudent procedures for premium collection and will notify the
Reinsurer of all reinsured policies for which premium is overdue by ninety (90) days of the due
date.
The third and fourth paragraphs under Section A) remain unchanged by this Amendment.
| 3. | ARTICLE V. DURATION, RECAPTURE AND TERMINATION is amended to read as follows: |
ARTICLE V. DURATION, TERMINATION AND RECAPTURE
| A) | Duration. This Agreement shall govern the relationship of the parties until the liability of the Reinsurer with respect to all policies reinsured under this Agreement ceases. | ||
| Insurer agrees to continue an ongoing active relationship with the Reinsurer for an initial period ending December 31, 2007. | |||
| B) | Termination. |
| (i) | Without Cause, Subject to Section A in this Article VI, either party may terminate this Agreement with respect to all prospective acceptances, at any time by providing ninety (90) days prior written notice to the other party. | ||
| (ii) | Insurer Insolvency. If Insurer becomes insolvent as determined by one or more state regulatory agencies, this Agreement will terminate automatically as of the date of insolvency as to all prospective acceptances. Liabilities already incurred by the Reinsurer will be administered in accordance with the Insolvency Article of this Agreement. | ||
| (iii) | Immediate Termination Rights Notwithstanding the above, Insurer may terminate this Agreement upon the occurrence of any of the following at any time by the giving of fifteen (15) days prior written notice to the Managing Agent: |
| a) | Either ADRUS or the Managing Agent ceases active underwriting operations; | ||
| b) | A State Insurance Department or other regulatory authority orders ADRUS, or any then-participating member of ADRUS, to cease writing business; | ||
| c) | ADRUS, any then-participating member of ADRUS, or the Managing Agent: 1) becomes insolvent, 2) is placed into liquidation or receivership, or 3) has instituted against it proceedings for the appointment of a supervisor, receiver, liquidator, rehabilitator, conservator or trustee in bankruptcy, or other agent known by whatever name, to take possession of its assets or control of its operations; |
2
| d) | ADRUS or the Managing Agent enters into a definitive written agreement to directly or indirectly assign its interests in this Agreement and liability for obligations under this Agreement to another party without the insurer prior written consent; | ||
| e) | The Managing Agent has entered into a definitive agreement to sell, substantially all of its assets without the Insurer’s prior written consent; or | ||
| f) | ADRUS or the Managing Agent, has engaged in any of the following: 1) a pattern or practice of failure by ADRUS or the Managing Agent to pay claims on a timely basis, 2) a pattern or practice of failure by ADRUS or the Managing Agent to abide by applicable federal or state laws, 3) a pattern or practice of acts of bad faith conduct by ADRUS or the Managing Agent, or 4) a pattern or practice of committing acts of negligent behavior by ADRUS or the Managing Agent, in discharging the Reinsurer’s duties under this Agreement. |
| C) | Recapture. | ||
| If the insurer terminates the Agreement effective on January 1, 2008 or some other date in 2008, the recapture period shall be three (3) years from the effective date of such termination. | |||
| If the Insurer terminates the Agreement effective on or after January 1, 2009, the recapture period shall be two (2) years from the effective date of such termination. | |||
| Recapture through any means will include 100% of the risk for the policies unless other terms are agreed to by the Insurer and Reinsurer. | |||
| D) | The Reinsured Percentage governing any claim under a reinsured policy will be that Reinsured Percentage in effect as of the date of disability. | ||
| E) | As of the date termination of the Agreement becomes effective, Reinsurer will provide Insurer only with those necessary claim and financial services required to manage any reinsured business Upon termination, Reinsurer will utilize renewal methods, tools and procedures which are consistent with those in use for renewals generally within Reinsurer’s overall block of business at the time Insurer’s policies are being renewed. |
| 4. | The Agreement is amended by the addition of the following Article, which is applicable to ADRUS members for all ADRUS agreement years effective on or after July 1, 2006. |
ARTICLE XV. COLLATERAL REQUIREMENTS
If
the amount of capital and surplus of any ADRUS member has been
reduced by 50% or more of the amount of capital and surplus as stated in such ADRUS member’s most recent
prior annual statutory statement filed with its state of domicile, such ADRUS member shall
deposite in trust with a trustee (which shall not be an affiliate of such ADRUS member), and
thereafter at all times maintain in such trust, assets at least equal in value to such ADRUS
member’s proportionate amount of the reserves required to be maintained from time to time
3
by ADRUS under sound actuarial principles and accepted statutory accounting
practices, with respect to reserves required for liabilities incurred by ADRUS
members under this Agreement on or after July 1, 2006.
Such ADRUS member may alternatively post a letter of credit to satisfy such obligations.
The trust or letter of credit arrangements, and all documentation relating thereto, must be
satisfactory in form and substance to Insurer in its good faith discretion. The trust shall
be terminated and the assets returned to the ADRUS member, or the letter of credit returned
for cancellation, if the ADRUS member’s amount of capital and surplus increases by 10% of
the amount of capital and surplus as stated in such ADRUS member’s most recent prior
annual statutory statement filed with its state of domicile.
The parties acknowledge that the collateral obligations under this provision predicated
upon a reduction in surplus shall not be applicable if the ADRUS member has already
provided collateral or taken other lawful actions that allow Insurer
to receive full reserve credit with respect to the reinsurance ceded under this Agreement.
All provisions of the Agreement not in conflict with the provisions of this Amendment
will continue unchanged.
IN WITNESS
WHEREOF the parties hereto have caused this Amendment to be executed in duplicate
by the signatures of their duly authorized representatives as indicated below.
CUSTOM DISABILITY SOLUTIONS.
|
SYMETRA LIFE INSURANCE COMPANY | |
Managing Agent of Reinsurer |
||
By: /s/ Paul K. Fields
|
By: /s/ Michael Fry | |
Name: Paul K. Fields
|
Name: Michael Fry | |
Title: CFO
|
Titles: VP | |
Date: 8/16/2006
|
Date: 8/17/2006 |
4
AMENDMENT NO. 2
TO THE
GROUP SHORT TERM DISABILITY REINSURANCE AGREEMENT
TO THE
GROUP SHORT TERM DISABILITY REINSURANCE AGREEMENT
This
Amendment no. 2 (“Amendment”) is hereby made a part of and incorporated into the
Group Short Term Disability Reinsurance Agreement which was effective
January 1, 1999
(“Agreement”) by and between Symetra Life Insurance Company (formerly Safeco Life
Insurance Company) (“Insurer”) of Bellevue, Washington and Reliance Standard Life Insurance
Company doing business as Custom Disability Solutions (successor to Integrated Disability
Resources, Inc., formerly Duncanson & Holt Services, Inc.), as
Managing Agent (“Managing
Agent”) for each of the participating reinsurers collectively
referred to in the Agreement as
the American Disability Reinsurance Underwriters Syndicate (“ADRUS”). Capitalized terms not
otherwise defined herein shall have the meaning ascribed to them in the Agreement.
Intending
to be legally bound, Insurer and Managing Agent agree to amend the Agreement as follows:
Effective
January 1, 1999, Appendix A-20 appearing in the Agreement is amended to read as follows:
APPENDIX A
AGREEMENT YEAR 1999
January 1,1999 to December 31,1999
Member Reinsurers who have contracted with Duncanson & Holt Services, Inc. as
Managing Agent of ADRUS and their levels of participation are as follows:
| DOLLAR | PERCENTAGE | ||||||||||
| MEMBER REINSURER[S] | PARTICIPATION | PARTICIPATION | |||||||||
UNUM Life Insurance Company of
America |
$ | 30,000 | 100 | % | |||||||
TOTAL AUTHORIZED PARTICIPATION |
$ | 30,000 | 100 | % | |||||||
1
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed in
duplicate by the signatures of their duly authorized representatives as indicated below.
| CUSTOM DISABILITY SOLUTIONS, | ||||||
| Managing Agent of Reinsurer | SYMETRA LIFE INSURANCE COMPANY | |||||
By:
|
/s/ Paul K. Fields | By: | /s/ David C. Fry | |||
Name:
|
Paul K. Field | Name: | David C. Fry | |||
| CFO | Title: | Senior Actuary & AVP | ||||
| 12/7/2006 | Date: | 12/8/2006 | ||||
2
APPENDIX A-l
AGREEMENT YEAR 2000
January 1, 2000 to December 31, 2000
Member Reinsurers who have contracted with Duncanson & Holt Services, Inc. as Managing Agent
of ADRUS and their levels of participation are as follows:
| DOLLAR | PERCENTAGE | |||||||
| MEMBER REINSURER | PARTICIPATION | PARTICIPATION | ||||||
UNUM Life
Insurance Company
of America |
$ | 30,000 | 100.0 | % | ||||
TOTAL
AUTHORIZED
PARTICIPATION |
$ | 30,000 | 100.0 | % | ||||
1
APPENDIX A-2
AGREEMENT YEAR 2001
January 1, 2001 to December 31, 2001
Member Reinsurers who have contracted with Duncanson & Holt Services, Inc. as Managing Agent
of ADRUS and their levels of participation are as follows:
| DOLLAR | PERCENTAGE | |||||||
| MEMBER REINSURER | PARTICIPATION | PARTICIPATION | ||||||
UNUM Life Insurance
Company of America |
$ | 30,000 | 100.0 | % | ||||
TOTAL AUTHORIZED
PARTICIPATION |
$ | 30,000 | 100.0 | % | ||||
2
APPENDIX A-3
AGREEMENT YEAR 2002
January 1, 2002 to December 31, 2002
Member
Reinsurers who have contracted with Integrated Disability Resources, Inc. as Managing
Agent of ADRUS and their levels of participation are as follows:
| DOLLAR | PERCENTAGE | |||||||
| MEMBER REINSURER | PARTICIPATION | PARTICIPATION | ||||||
UNUM Life Insurance
Company of America |
$ | 30,000 | 100.0 | % | ||||
TOTAL AUTHORIZED
PARTICIPATION |
$ | 30,000 | 100.0 | % | ||||
3
APPENDIX A-4
AGREEMENT YEAR 2003
January 1, 2003 to December 31, 2003
Member Reinsurers who have contracted with Integrated Disability Resources, Inc. as Managing Agent
of ADRUS and their levels of participation are as follows:
| DOLLAR | PERCENTAGE | |||||||
| MEMBER REINSURER | PARTICIPATION | PARTICIPATION | ||||||
UNUM Life
Insurance Company of
America |
$ | 30,000 | 100.0 | % | ||||
TOTAL AUTHORIZED
PARTICIPATION |
$ | 30,000 | 100.0 | % | ||||
4
APPENDIX A-5
AGREEMENT YEAR 2004
January 1, 2004 to December 31, 2004
Member Reinsurers who have contracted with Integrated Disability Resources, Inc. as Managing
Agent of ADRUS and their levels of participation are as follows:
| DOLLAR | PERCENTAGE | |||||||
| MEMBER REINSURER | PARTICIPATION | PARTICIPATION | ||||||
UNUM Life
Insurance Company of
America |
$ | 30,000 | 100.0 | % | ||||
TOTAL AUTHORIZED
PARTICIPATION |
$ | 30,000 | 100.0 | % | ||||
5
APPENDIX A-6
AGREEMENT YEAR 2005
January 1, 2005 to December 31, 2005
Member Reinsurers who have contracted with Integrated Disability Resources, Inc. as Managing
Agent of ADRUS and their levels of participation are as follows:
| DOLLAR | PERCENTAGE | |||||||
| MEMBER REINSURER | PARTICIPATION | PARTICIPATION | ||||||
UNUM Life Insurance
Company of America |
$ | 30,000 | 100.0 | % | ||||
TOTAL AUTHORIZED
PARTICIPATION |
$ | 30,000 | 100.0 | % | ||||
6
APPENDIX A-7
AGREEMENT YEAR 2006
January 1, 2006 to December 31, 2006
Member Reinsurers who have contracted with Custom Disability Solutions as Managing Agent of
ADRUS and their levels of participation are as follows:
| DOLLAR | PERCENTAGE | |||||||
| MEMBER REINSURER | PARTICIPATION | PARTICIPATION | ||||||
Reliance Standard Life
Insurance Company |
$ | 30,000 | 100.0 | % | ||||
TOTAL AUTHORIZED
PARTICIPATION |
$ | 30,000 | 100.0 | % | ||||
7
APPENDIX A-8
AGREEMENT YEAR 2007
January 1, 2007 to December 31, 2007
Member Reinsurers who have contracted with Custom Disability Solutions as Managing Agent of ADRUS
and their levels of participation are as follows:
| MEMBER | DOLLAR | PERCENTAGE | ||||||
| REINSURER | PARTICIPATION | PARTICIPATION | ||||||
Reliance Standard Life
Insurance Company |
$ | 30,000 | 100.0 | % | ||||
TOTAL AUTHORIZED
PARTICIPATION |
$ | 30,000 | 100.0 | % | ||||
8
APPENDIX A-9
AGREEMENT YEAR 2008
January 1, 2008 to December 31, 2008
Member Reinsurers who have contracted with Custom Disability Solutions as Managing Agent of ADRUS
and their levels of participation are as follows:
| MEMBER | DOLLAR | PERCENTAGE | ||||||
| REINSURER | PARTICIPATION | PARTICIPATION | ||||||
Reliance Standard Life
Insurance Company |
$ | 30,000 | 100.0 | % | ||||
TOTAL AUTHORIZED
PARTICIPATION |
$ | 30,000 | 100.0 | % | ||||
9
APPENDIX A-10
AGREEMENT YEAR 2009
January 1, 2009 to December 31, 2009
Member Reinsurers who have contracted with Custom Disability Solutions as Managing Agent of ADRUS
and their levels of participation are as follows:
| MEMBER | DOLLAR | PERCENTAGE | ||||||
| REINSURER | PARTICIPATION | PARTICIPATION | ||||||
Reliance Standard Life
Insurance Company |
$ | 30,000 | 100.0 | % | ||||
TOTAL AUTHORIZED
PARTICIPATION |
$ | 30,000 | 100.0 | % | ||||
10
Exhibit 10.4
GROUP LONG TERM DISABILITY REINSURANCE AGREEMENT
THIS AGREEMENT is between SAFECO LIFE INSURANCE COMPANY of Seattle, Washington
(hereinafter “Insurer”) and DUNCANSON & HOLT SERVICES,
INC., a Maine corporation, as
Managing Agent (hereinafter “Managing Agent”) for each of the participating reinsurers
collectively referred to in this Agreement as the American Disability Reinsurance
Underwriters Syndicate (ADRUS) and listed in Appendix A (hereinafter “Reinsurer”).
The Managing Agent represents and warrants that the Reinsurer has authorised the Managing
Agent to enter into, execute and deliver agreements of this sort on its behalf and to
exercise all of
its rights and platform all of its obligations under such agreements
of its behalf,
including but not
limited to, underwriting of policies, collection of premiums, and
management of claims in accordance with the terms of such agreements.
All performances required by and for the
Reinsurer under this Agreement shall be conducted through the Managing Agent.
In consideration of the mutual promises set forth below, the parties agree as follows:
ARTICLE
I. GENERAL PROVISIONS
The effective, date of this Agreement is January 1, 1999. On and after this date, one hundred
percent (100%) (hereinafter referred to as the “Reinsured Percentage”) of the Insurer’s
liability (hereinafter referred to as “Underlying Risk”) for the group long term disability
insurance policies written on or after January 1,1999 will be ceded to and reinsured by the
Reinsurer.
This Agreement replaces and supersedes Group Long Term Disability Monthly Income
Reinsurance Agreement which was effective April 1, 1979 between the Insurer and the
Reinsurer,
and all subsequent amendments thereto. With respect to in force policies, the Reinsured
Percentage for policies effective prior to January 1, 1999 and reinsured under the prior
Group
Long Term disability Monthly Income Reinsurance Agreement between the two parties shall be
one hundred percent(100%).
Other terms and, conditions of this Agreement are as follows:
| A) | For risks reinsured under this Agreement, the Insurer will use only those policy forms
which have been approved by the appropriate regulatory authorities. After the Reinsurer
has reviewed and approved copies of these forms, and insurance policies have been
accepted by the the Policyholder and administered in accordance with the terms of this
Agreement, the Reinsurer will be liable to the Insurer for the Reinsured Percentage in
accordance
with the provisions of the policies reinsured. |
| B) | The Insurer, by executing this Agreement, represents that it is licensed to do insurance business in every state, district or territory of the United States, or the District of Columbia, in which it does business; and that it is licensed to write the group health and disability insurance policies which are the subject of this Agreement. | |
| C) | This Agreement represents an exclusive reinsurance arrangement between the parties for long term disability business. All business quoted using rates provided by the Reinsurer shall be reinsured under this Agreement. In the event the Reinsurer declines to accept any policy, the Insurer may reinsure such policy with another reinsurer. | |
| D) | Upon agreement of risk and benefits between Reinsurer and Insurer, any increase in benefit liability resulting from Insurer’s divergence from same shall be borne by the Insurer. The Reinsurer does not assume liability for any risk not agreed upon and which is incurred as a result of errors, intentional or otherwise, in the policy and/or certificate issued. |
ARTICLE II. UNDERWRITING
| A) | Any reinsurance under this Agreement will be effected only through the express written consent of the Reinsurer for each case submitted under any disability insurance policy covered by this Agreement. The Insurer will submit underwriting data to the Reinsurer and the Reinsurer will inform the Insurer of its decision to accept or reject liability. The Reinsurer will make available to the Insurer the underwriting data prepared and used in making its determination. | |
| The Reinsurer has the right to approve individuals insured under any policy as a condition of its acceptance of that policy. The Reinsurer may waive this right for some or all policies at any time. | ||
| B) | The Reinsurer shall keep and maintain appropriate records of evidence of insurability, including but not limited to the policy, applications, certificates of coverage, medical forms, and other evidence of insurability, for at least three (3) years. Upon termination of this Agreement, the Reinsure, will retain and Insurer shall have access to such information for the later of three (3) years from termination date or the date the last active claim ceases. | |
| C) | Either the Insurer of the Reinsurer may, at any reasonable time during normal working hours of the Insurer and upon provision of written notice fourteen (14) days in advance, review and audit the records of the other party relating to business reinsured under this Agreement. |
2
ARTICLE
III. FINANCIAL RESPONSIBILITIES AND TRANSACTIONS
| A) | The Insurer shall remit premium for reinsured group long term disability policies to the Reinsurer within ninety (90) days from the date on which premium is due to the Insurer. The Insurer will follow all prudent procedures for premium collection and will notify the Reinsurer of all reinsured policies for which premium is overdue by ninety (90) days of the due date. The Reinsurer may assess an interest charge equal to the interpolated seven (7) year value of five (5) year and ten (10) year United States Treasury Bonds on premium overdue by more than ninety (90) days. | |
| The Insurer will follow all prudent procedures for premium collection and will notify the Reinsurer of all reinsured policies for which premium is overdue by thirty (30) days of the due date. The Reinsurer may assess an interest charge equal to the interpolated seven (7) year value of five (5) year and ten (10) year United States Treasury Bonds on premium overdue by more than thirty (30) days. | ||
| If the premium payment period for any policy comprising the Underlying Risk is other than monthly, the parties to this Agreement shall determine, by mutual consent the proper method of reporting, accounting, and transferring of balances. | ||
| For past due premiums on all reinsured policies for which premiums remain due and unpaid for thirty (30) days following their due date, the Insurer shall take appropriate action to terminate all prospective liability in accordance with the policy provisions and shall institute its usual collection procedures. If the Insurer fails to take appropriate action to terminate all prospective liability, the Reinsurer reserves the right to terminate reinsurance of such ceded policies for which premiums remain unpaid for thirty (30) days past their due date. | ||
| B) | For any business sold under this Agreement, the Reinsurer will specify the percentage of premium to be paid to it for reinsurance of each policy at the time Reinsurer accepts liability under the terms of the Underwriting Article of this Agreement. | |
| C) | The liability of the Reinsurer shall begin simultaneously with the Reinsurer’s acceptance of reinsurance for a long term disability insurance policy, subject to the terms of this Agreement. | |
| D) | The insurer is responsible for paying all premium taxes concerning any business covered by this Agreement. | |
| E) | Upon provision of written notice fourteen (14) days in advance, each party shall have the right, at any reasonable time during normal working hours, to inspect, at the office of the other party all non-proprietary, non-confidential and non-privileged books, records and documents relating to policies reinsured under this Agreement. |
3
| F) | If the Insurer fails to pay the consideration described in this Article, the
Reinsurer shall have the right to terminate, from the date up to which the policy premiums have been paid, its obligation for that portion of the Underlying Risk for which consideration is in arrears. |
|
| G) | The Reinsurer will be bound by the consideration it specifies for a particular policy. However, on any date that the Insurer has the right to terminate a policy or change the premium for said policy, the Reinsurer may, with sixty (60) days advance notice, modify the rate of consideration or terminate reinsurance on the policy. The Insurer shall then be bound by the modification. | |
| H) | Reinstatement of the reinsurance on ceded policies which have been terminated under any provision of this Article shall be at the Reinsurer’s discretion. | |
| I) | Each party to this Agreement shall have the right to offset any balance(s), or any other amounts due relating to this or related agreements. In the event of the insolvency of a party to this Agreement, offsets shall only be allowed in accordance with the Insolvency Article of this Agreement. |
ARTICLE IV. CLAIMS
The
Insurer shall promptly transmit to the Reinsurer all claims, proofs of loss and
supplemental statements of disability submitted on a policy reinsured
hereunder. Upon receipt thereof
the Reinsurer will pay the claim and/or recommend other appropriate action. The Reinsurer will
not be liable for any claim received from the Insurer more than one year after this claim has
been received in the Insurer’s office. The Reinsurer may change the reinsurance rate, retroactive
to the last renewal date, if the receipt of a claim reported to the Reinsurer is more than one year
after receipt by the Insurer and if the timely receipt would have
caused a different reinsurance rate to be
charged.
| A) | All services will be performed in accordance with Appendix B, the Claims Management Agreement. This Agreement includes administrative procedures particular to the claims management process and includes, but is not limited to. Authorization to Pay Claims, Claim Administration Guidelines, Claim Data; Payment of Benefits; Payment of Claim Expenses; Right to Audit; and is mutually agreed to by the parties of this Agreement. | |
| B) | The Reinsurer will undertake the defense of any suit, or portion of a suit, which is based or alleged to be based on claims for benefits under group disability policies covered by this Agreement where the claim is first commenced after the effective date of this Agreement, and the underlying policy is effective on or after the effective date of this Agreement. Except as otherwise provided in this Agreement, choice of counsel and management of any such suit, or portion of such suit, shall be agreed upon by the Insurer and the Reinsurer, which will have the exclusive right to settle any such suit, when in its informed and good faith opinion, it is appropriate to do so. The Insurer will cooperate with the Reinsurer in the defense of such suits. |
4
| C) | The Insurer and the Reinsurer will notify each other promptly of any litigation brought against it with respect to the policies covered by this Agreement. | |
| D) | Claims for Extra-Contractual Amounts. “Extra-Contractual Amounts” are amounts outside of contractual benefits which may include, but are not necessarily limited to: punitive, exemplary, compensatory or consequential damages or plaintiff’s litigation-related costs and fees. |
| i) | If extra-contractual amounts are awarded against the Insurer solely as a result of the Reinsurer’s decision, action, delay or failure to act, the Reinsurer shall pay one hundred percent (100%) of all such amounts. | ||
| ii) | If extra-contractual amounts are awarded against the Insurer solely as a result of Insurer’s decision, action, delay, or failure to act, the Reinsurer shall have no (0%) percentage of liability for the payment of extra-contractual amounts. | ||
| iii) | When extra-contractual amounts are awarded against the Insurer as a result of both the Reinsurer’s and the Insurer’s decision, action, delay or failure to act, the parties agree to share in the payment of any extra-contractual amounts. | ||
| iv) | To expedite the resolution of certain claims, amounts other than policy benefits may be added to a claim settlement. |
Allocation of responsibility for decisions, actions, delays, or failures to act shall be
determined by the parties’ agreement subsequent to good faith negotiation. Said
determination is solely for the purpose of efficient administration of this
Agreement and for determining who shall assume the costs in certain instances. If
agreement on such allocation cannot be reached, the matter shall be
addressed in
accordance with the Arbitration Article of this Agreement.
If any
portion of this subsection (D) is deemed to be illegal under
any law (decisional
or statutory) or regulation of any Federal, State or local government, insofar as it
applies to that area’s jurisdiction, then said portion is automatically terminated.
ARTICLE
V. RESERVE ADMINISTRATION
The
Reinsurer agrees to provide reserve reports on group long term disability
business under this Agreement to the Insurer in a form mutually acceptable to the
parties. Such reports shall be provided to Insurer within thirty (30) days after the end
of each calendar quarter.
ARTICLE
VI. DURATION, RECAPTURE AND TERMINATION
| A) | This Agreement shall govern the relationship of the parties until the liability of the Reinsurer with respect to all policies reinsured hereunder ceases. In accordance with the provisions of this Article, this Agreement can be terminated by either party with respect to all prospective |
5
| acceptances. Termination of the group long term disability insurance exclusively shall not occur when other lines of disability insurance are also written under this Agreement. | ||
| Any partial or complete prospective termination of this Agreement must be made in writing prior to October 1st of each year. Termination shall occur on the desired effective date of termination or ninety days from receipt of notice, whichever is later. | ||
| B) | After this Agreement has been inforce for more than one (1) year from the effective date, the Insurer may decrease the Reinsured Percentage. The following schedule is the minimum Reinsured Percentage for each disability policy in effect at the anniversary date of this Agreement. |
Year 1 following notification |
75 | % | ||
Year 2 Following notification |
75 | % | ||
Year 3 following notification and thereafter |
50 | % |
| Notification must be received by the Reinsurer not later than October 1 of the year prior to the intended change. The Reinsured Percentage will remain at current Reinsured Percentage absent any notification. The change in Reinsured Percentage will occur at the next renewal date of the underlying reinsured policy occurring after the anniversary of the change. Upon termination of this Agreement, the Insurer may reduce the Reinsured Percentage to zero percent (0%) five (5) years from the effective date of the termination. Notification must be provided 90 days in advance. | ||
| C) | The Reinsured Percentage governing any particular claim under a reinsured policy will be that Reinsured Percentage in effect as of the date of disability. | |
| D) | As of the date termination becomes effective Reinsurer will provide Insurer only with those necessary claims and financial services required to manage any reinsured business. | |
| F) | If Insurer becomes insolvent, as determined by the state regulatory agency, this Agreement will terminate automatically as of the date of insolvency as to all prospective acceptances by the Reinsurer. Liabilities already incurred by the Reinsurer will be administered in accordance with the Insolvency Article of this Agreement. |
ARTICLE VI. NON-TRANSFERABILITY OF AGREEMENT
Neither the Insurer nor the Reinsurer shall, without prior consent of the other, which shall not be
unreasonably withheld, sell, assign, transfer, or otherwise dispose of this Agreement, policies or
policy liabilities covered by this Agreement, or any interest in such Agreement, by voluntary or
involuntary act, by assumption agreement or otherwise, and any attempt to dispose of said
interests, without said consent, shall be null and void. Notwithstanding the foregoing, Insurer or
Reinsurer may arrange for a Third Party Administrator to perform some or all of the obligations
hereunder. So doing will not relieve the Insurer or Reinsurer from the obligations hereunder,
6
though, in the event that the Third
Party Administrator does not perform the obligations as stated
herein.
ARTICLE VII. PARTIES TO THIS AGREEMENT
| A) | This is an agreement solely between the Insurer and the Reinsurer. The acceptance of reinsurance hereunder shall not create any right or legal relation whatever between the Reinsurer and any of Insurer’s policyholders, beneficiaries, representatives, sales representatives, employees or shareholders. |
| B) | A failure or delay of either party to this Agreement to enforce any of the provisions of this Agreement, or to exercise any option which is herein provided, shall in no way be construed to be a waiver of such provision. |
ARTICLE VIII. CONFIDENTIALITY
| A) | The Insurer and the Reinsurer may come into the possession or knowledge of confidential and proprietary information of the other in fulfilling obligations under this Agreement. Insurer and the Reinsurer agree to hold such confidential information in strictest confidence and to take all reasonable steps to ensure that such confidential information is not disclosed in any form by any means by each of them or by any of their employees or associates to third parties of any kind, except by advance authorization. “Confidential information” means any information which (1) is not generally available to the public, or (2) has not been lawfully obtained by the parties prior to the date of disclosure to it by the other, and includes but is not limited to: |
| i) | Information or knowledge about each party’s products, processes, services, finances, customers, research, computer programs, marketing and business plans, claims management practices, and reserving methodology; and | ||
| ii) | Any medical and other personal, individually identifiable information about people or business entities with whom the parties do business, including customers, prospective customers, vendors, suppliers, individuals covered by insurance plans, and each party’s producers and employees. |
| B) | The Insurer and its agents, employees and representatives will not represent themselves, in writing, as part of the Reinsurer, or refer, in writing, to the Reinsurer in any policy forms or promotional materials, without the prior written consent of the Reinsurer. |
ARTICLE IX. INSOLVENCY
The Reinsurer agrees that all reinsurance under this Agreement shall be payable by the Reinsurer on
the basis of the liability of the Insurer under each policy reinsured under this Agreement.
7
without diminution because of the insolvency of the Insurer, and the Reinsurer assumes
liability for such reinsurance as of the effective dates of such policies. Any such payments by the
Reinsurer shall be made directly to the Insurer or to its liquidator, receiver, or statutory
successor. In the event of the insolvency of the Insurer, the liquidator, receiver or statutory
successor of the Insurer shall give written notice that a claim is pending against the Insurer
with respect to policies comprising the Underlying Risk within a reasonable time after such claim
is filed in the insolvency proceedings. While the claim is pending, the Reinsurer may investigate
such claim and interpose, at its own expense, in the proceeding where such claim is to be
adjudicated any defense or defenses which it may deem available to the Insurer or its liquidator
or receiver or statutory successor. The expense thus incurred by the Reinsurer shall be
chargeable, subject to court approval, against the Insurer as part of the expenses of liquidation
to the extent of a proportionate share of the benefit which may accrue to the Insurer solely as a
result of the defense undertaken by the Reinsurer.
Where two or more reinsurers are involved and a majority of interest elect to defend a claim, the
expense will be apportioned in accordance with the terms of the reinsurance agreement as if the
expense had been incurred by the Insurer.
ARTICLE X. ARBITRATION
| A) | The parties explicitly agree that all differences, whether matters of fact, law or mixed fact and law, which arise out of the interpretation or execution of this Agreement, will be decided by arbitration except for those matters which are left to the sole discretion of the Reinsurer or the Insurer under the terms of this Agreement. The parties explicitly agree that arbitration shall be the sole and exclusive remedy for all such differences, and that the arbitrators will determine the interpretation of this Agreement in accordance with the usual business and reinsurance practices rather than strict technicalities. Three neutral arbitrators will decide any differences. They must be active or retried officers of life insurance companies other than the two parties to this Agreement or any of their subsidiaries. In addition, the officers may not be former employees of the two parties to this Agreement or any of their subsidiaries. In addition, the officers may not be former employees of the two parties to this Agreement or any of their subsidiaries. One of the arbitrators is to be appointed by each party to this Agreement, and the two arbitrators will select a third. If the two are not able to agree on a third, the choice will be left to the President of the Society of Actuaries of its successor. The arbitration shall be in accordance with the Commercial Arbitration Rules of the American Arbitration Association, or its successor and will take place in Portland, Maine. This Agreement shall be deemed binding upon the arbitrators for matters expressly agreed to herein. The arbitrators’ decision shall be by majority vote, and no appeal shall be taken from it. The judgment rendered by the arbitrators may be entered in any court having proper jurisdiction. Expenses and fees for the arbitrators shall be shared by the Insurer and the Reinsurer in equal portions. |
| B) | The arbitrators may award only contractual damages to either party. In no event may extra contractual damages, including amounts available under any state or federal Racketeer Influenced and Corrupt Organization Act (RICO), be awarded to either party under this |
8
| Agreement for breach of said agreement. However, the arbitrators may allocate responsibility for 1) any extra-contractual amounts awarded against the Insurer, or 2) any amounts representing extra-contractual damages in a settlement, between the Insurer and the Reinsurer as set forth in the Claims Article of this Agreement. | ||
| C) | The procedures specified in this Article shall be the sole and exclusive procedures for the resolution of disputes between the parties arising out of or relating to this Agreement; provided, however, that a party may seek a preliminary injunction or other preliminary judicial relief if in its judgment such action is necessary to avoid irreparable damage. Despite such action the parties will continue to participate in good faith in the procedures specified in this Article. All applicable statutes of limitation shall be tolled while the procedures specified in this Article are pending. The parties will take such action, if any, required to effectuate such tolling. | |
| D) | Notwithstanding any other provision of this Article, in the event that either party seek, consents to, or acquiesces in the appointment of, or otherwise becomes subject to, any trustee, receiver, liquidator, or conservator (including any state insurance regulatory agency acting in such a capacity), the other party shall not be obligated to resolve any claim, dispute, or cause of action under this Agreement by arbitration and may elect to bring any action with respect to such claim, dispute or cause of action in any court of competent jurisdiction. |
ARTICLE XI. YEAR 2000 COMPLIANCE
The Insurer and the Reinsurer each separately represents and warrants that it has established a written
project plan and budget to address Year 2000 issues, and that its plan includes:
| i) | conducting an inventory and assessment of Year 2000 impacts to its telecommunications and information systems, related software and hardware, and its facilities (e.g., buildings and utilities); | ||
| ii) | conducting a review of the Year 2000 preparedness of its significant business partners and suppliers; | ||
| iii) | correcting its Year 2000 problems and testing and validating its conversion efforts, and | ||
| iv) | establishing contingency and avoidance plans. |
Each party represents and warrants that all of its telecommunications and information systems and
related software and hardware have been found to be Year 2000 compliant, or will be made so on or
before December 31, 1999. The Insurer agrees to cooperate in good faith with the Reinsurer with
respect to Year 2000 issues by sharing information with the Reinsurer about the status and progress
of the Insurer’s Year 2000 compliance work and with respect to testing and validation, Reinsurer
agrees to do the same. For purposes of this section, “Year 2000
compliant” means: manages and manipulates data involving dates with full representation of year and century (i.e.
9
YYYYMMDD) both internally and externally to the Database, System or Application; follows standards
for acquisition, storage, presentation, and handling of dates including provisions for leap year
and leap centuries. This applies to data stored and retrieved, reports, screens, and data that is
sent or received.
ARTICLE XII. ERRORS AND OMISSIONS
Inadvertent and harmless delays, errors or omissions made in connection with this Agreement or any
transaction hereunder, except as otherwise stated in this Agreement, shall not relieve either party
from any liability which would have attached had such delay, error or omission not occurred,
provided that the fault is rectified as soon as possible after discovery.
ARTICLE XIII. APPLICABLE LAW
This Agreement is governed by the laws of the State of Maine.
ARTICLE XIV. MODIFICATION
| A) | This Agreement constitutes the entire understanding between the Reinsurer and the Insurer. Neither party shall be bound by any other representation made before or after the date of this agreement, unless it is made in writing signed by both parties and expresses by its terms an intention to modify this Agreement. |
| B) | In the event that any one or more of this provisions of the Agreement shall, for any reason, be held to be invalid, illegal or unenforceable, the remaining provisions of this Agreement shall be unimpaired. |
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed in duplicate by their
respective officers duly authorized so to do as of the date set forth above
| DUNCANSON & HOLT SERVICES, | SAFECO LIFE INSURANCE | |||||||||
| INC. ( Managing Agent of Reinsurer) | COMPANY (Insurer) | |||||||||
By
|
/s/ Paul K. Fields
|
By | /s/ John P. Fenlason
|
|||||||
Title
|
VP Finance
|
Title | Sr. Vice President
|
|||||||
Date
|
8-30-99
|
Date | 8-17-99
|
|||||||
/s/ Sharon Newton |
/s/ Joseph Allen Wymich | |||||||||||||
Witness
|
Witness | |||||||||||||
10
APPENDIX A-20
AGREEMENT YEAR 1999
January 1,
1999 to December 31, 1999
Member
Reinsurers who have contracted with Duncanson & Holt Services, Inc., as Managing Agent
of ADRUS and their levels of participation are follows:
| DOLLAR | PERCENTAGE | |||||||
| MEMBER REINSURER | PARTICIPATION | PARTICIPATION | ||||||
Allianz Life Insurance Company
of North America |
$ | 30,000 | 100.00 | % | ||||
TOTAL AUTHORIZED PARTICIPATION |
$ | 30,000 | 100.00 | % | ||||
11
Claims Management Agreement
Appendix B
Appendix B
I. Claims Management Services
In
satisfaction of its obligations to assist the Insurer with the processing of claims arising
under Policies Reinsured in
connection with the Group Long Term Disability Reinsurance Treaty
(“the Treaty”), the Reinsurer designates Claims Service
International, Inc. (“CST”) to perform claims management
services in connection with the Treaty as set forth herein. The
Insurer shall not be liable to CSI for the services rendered under
the Claims Management Agreement and shall not bear any of the
expenses incurred by CSI in connection with CSI’ s performance of services hereunder, except as may be expressly set forth
herein. The obligation of CSI to perform administrative Service in
connection with
the Treaty shall continue until such time as all reinsured claims
have been paid,unless
other agreement is reached and becomes a written part of this Agreement.
II. Standard of Care
CSI will manage claims using the same standard of care, diligence and good faith which
Reinsurer exercises in the performance of its own business and shall be consistent with
prudent claim processing practices in the industry, in compliance with applicable laws.
III Licenses
CSI will maintain all necessary licenses to perform this Claims Management Agreement. CSI shall execute any documents
reasonably required by the Insurer in order for the Insurer to comply
with laws relating to the third party
administration of claims.
IV. Claims Administration Guidelines/Claims Data
The Insurer will direct all policyholders that insured individuals and their assignees must
provide notices of all reinsured disability claims, proofs of loss and any supplemental statements
of disability directly to CSI for processing. CSI will communicate with all parties involved in the claims
management process using the identity of “Claims Advisory
Agent” for the Insurer. CSI on behalf of the Reinsures, will use Insurer Long term
Disability (LTD)claims forms, as modified to name CSI as the Claims Advisory Agent.
12
CSI will provide the Insurer with copies of all responses to Department of Insurance (DOI)
complaints. The Insurer will not retain individual LTD claim files except for copies of
responses to DOI complaints. CSI will retain all individual LTD claims files and will store
all such files for a period of ten years after the closure of the file. CSI will destroy all
claims files in a manner to preserve confidentiality. Upon proper request, CSI shall provide
access to the books and records maintained by CSI for the purposes of examination, audit and
inspection by any insurance department which purports to exercise jurisdiction over the
business which is subject to the Treaty.
V.
Payment of Claims/Authorization to Pay Claims
Upon
receipt of claims, proofs of loss and/or supplemental statements of disability, CSI,
on behalf of the Reinsurer in accordance with Article IV of the Treaty, will pay the claim or
will take appropriate alternative action. The Insurer or the policyholder will provide to CSI
all necessary information to verify eligibility and premium
requirements, where such information has not already been provided to the
Reinsurer. CSI shall be responsible for mailing acknowledgment letters and claims denial
letters.
In the event that CSI determines that a claim should be denied, CSI will send to the claimant
a notice of denial within 10 business days of the determination. Any notice of denial will be
sent directly, to claimant and will state the reason for denial. Procedures for appeals are to
be. included in the letter to the claimant. A copy of the denial letter shall be forwarded to
the policyholder when applicable.
Beginning
January 1, 1999, CSI will process and pay all claims made against the
policies reinsured under this Treaty for the Insurer. In connection therewith, the Insurer
will provide to CSI signatory authority on a block of the Insurer drafts to be written
against a the Insurer bank account. CSI shall be responsible for mailing, at its expense, all
communications that are required to be mailed to claimants, including checks and EOBs.
Additionally Insurer.
CSI shall
pay each claim under polices reinsured under the Treaty within the
time period allowed by the state
in which the claimant resides. Before suspending any payments, CSI
Will send to claimant a letter, advising the claimant that
benefits will be suspended unless the claimant sends information which in the judgment of
CSI support the continued payment of benefits. A copy of this letter shall be forwarded to
the policyholder when applicable.
13
VI. Claims Expenses
All LTD claims expenses will paid by the Reinsurer. Normal claim expenses include, but are not
limited to, the following: medical records; Independent Medical Exams; vendor costs; claim
investigation and rehabilitation. It does not include salaries of either the Insurer’s or
Reinsurer’s employees.
VII. Right to Audit
At its discretion the Insurer, or its designated representative, has the right to conduct random
audits of LTD claims reinsured under the Treaty. Such audits shall be
conducted., by staff of
the Insurer, or its designated representative, at the expense of the Insurer and at the regular
locations of CSI and/or the Reinsurer during normal business hours. Access to all relevant. policy
information and case data regarding reinsured, claims shall be made available for audit
proceedings. The number of claims to be audited will be determined in the sole discretion of the
Insurer.
Results of audits by the Insurer shall be communicated to the Reinsurer in a verbal summary
followed by written documentation of the findings, including any irregularities or problems
identified.
VIII. Information Relating to Fraudulent Claims
CSI will provide to the Insurer, upon the Insurer’s request, a list of measures that CSI uses to
detect fraudulent claims.
IX. Responsibility of Reinsurer for Act of CSI.
Reinsure shall be responsible for all acts of CSI as if the Reinsure had itself performed said
acts.
The
signatures below constitute acceptance of the Claims Management Agreement by all
parties Nothing contained in the Claims Management Agreement shall
vary, alter or affect any of the terms or conditions of the Group
Long Term Disability Reinsurance Agreement.
The Claims Management Agreement may be revised only by changes agreed
to by both parties and documented in writing.
14
IN WITNESS WHEREOF, the parties have signed this Claims Management Agreement on the dates shown.
| DUNCANSON & HOLT SERVICES,
INC. (Managing Agent of Reinsurer) |
SAFECO LIFE INSURANCE
COMPANY (Insurer) |
|||||||||
By
|
/s/ Paul K. Fields | By | /s/ John P. Fenlason | |||||||
Title
|
V P Finance | Title | Sr. Vice President | |||||||
Date
|
8/30/99 | Date | 8/17/99 | |||||||
| /s/ Sharon Newton | /s/ Joseph Allen Wymich | |||||||||
| Witness | Witness | |||||||||
15
AMENDMENT NO. 1
TO THE
GROUP LONG TERM DISABILITY REINSURANCE TREATY
TO THE
GROUP LONG TERM DISABILITY REINSURANCE TREATY
Bearing Effective Date January 1, 1999
THE AGREEMENT by and between SAFECO Life Insurance Company of Seattle, Washington (Insurer)
and DUNCANSON & HOLT SERVICES, INC. (Managing Agent for American Disability Reinsurance
Underwriters Syndicate, Reinsurer), is hereby modified as follows:
Article IV(E):
The Insurer or the Reinsurer may engage a Third-Party Administrator (TPA)
to manage claims under this Agreement after the effective date of this Amendment. Any
TPA arrangement will require the approval of both the Insurer and Reinsurer.
The effective date of the change described above is January 1,2000 for all group long
term disability policies effective prior to or on that date.
The signatures affixed hereto constitute acceptance of this Amendment by both parties. Nothing
contained herein shall be held to vary, alter, or affect any of the terms and conditions of
said Treaty other than as herein stated.
IN WITNESS WHEREOF, the parties have signed this Amendment in duplicate on the dates shown
below:
| DUNCANSON & HOLT SERVICES,INC | SAFECO LIFE INSURANCE COMPANY | |||||||||
| (Managing Agent of Reinsurer) | (Insurer) | |||||||||
By:
|
/s/ Paul K. Fields | By: | /s/ Scott Taylor | |||||||
| (Signature) | (Signature) | |||||||||
| V P Finance | Sr. V. P. | |||||||||
| (Title) | (Title) | |||||||||
| 10/17/00 | 10/24/00 | |||||||||
| (Date) | (Date) | |||||||||
| /s/ Sonia D. Davis | /s/ Betty Amundson | |||||||||
| (Witness) | (Witness) | |||||||||
AMENDMENT
Amendment to the Group Long Term Disability Reinsurance Agreement between Symetra Life
Insurance Company (hereinafter the “Insurer”) of Redmond, Washington and Integrated
Disability Resources, Inc., a Connecticut corporation, as Managing Agent (hereinafter the
“managing agent”) for each of the participating reinsurers collectively referred to in
this Amendment as the American Disability Reinsurance Underwriters Syndicate (ADRUS):
Effective January 1, 2006, the parties hereby agree to amend the above-referenced
Reinsurance Agreement as follows:
Paragraph C) appearing in ARTICLE I. GENERAL PROVISIONS is amended to read as
follows:
| C) | All new pre-sale business which is quoted using rates provided by the Reinsurer shall be reinsured under this Agreement. For new pre-sale business, this Agreement represents a non-exclusive reinsurance arrangement between the parties. | ||
| This Agreement will continue to represent an exclusive reinsurance arrangement between the parties with respect to renewals for Policies which are in force and reinsured with Reinsurer as of January 1,2006. In the event the Reinsurer declines to accept a renewal of any such policy, the Insurer may reinsure such policy with another reinsurer. |
All provisions of the Reinsurance Agreement not in conflict with the provisions
of this Amendment will continue unchanged.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed in
duplicate by the signatures of their duly authorized representatives as indicated below.
| INTEGRATED DISABILITY RESOURCES, INC. | SYMETRA LIFE INSURANCE COMPANY | |||||||||
By:
|
/s/ Paul K. Fields | By: | /s/ Scott Taylor | |||||||
Name:
|
Paul K. Fields | Name: | Scott Taylor | |||||||
Title:
|
CFO | Title: | SR V.P. | |||||||
Date:
|
4/27/2006 | Date: | 12/19/05 | |||||||
CDS on
behalf of Reliance [ILLEGIBLE]
AMENDMENT NO. 3
TO THE
GROUP LONG TERM DISABILITY REINSURANCE AGREEMENT
TO THE
GROUP LONG TERM DISABILITY REINSURANCE AGREEMENT
This Amendment No. 3 (the “Amendment”) is effective as of July 1, 2006 and is hereby made a part of
and incorporated into the Group Long Term Disability Reinsurance Agreement effective January 1,
1999 (the “Agreement”) by and between Symetra Life Insurance Company (formerly Safeco Life
Insurance Company) (hereinafter the “Insurer”) of Bellevue Washington and Reliance Standard Life
Insurance Company doing business as Custom Disability Solutions (successor to Integrated Disability
Resources, Inc., formerly Duncanson & Holt Services, Inc.), as Managing Agent (hereinafter the
“Managing Agent”) for each of the participating reinsurers collectively referred to in the
Reinsurance Agreement as the American Disability Reinsurance Underwriters Syndicate (“ADRUS”).
Capitalized terms not otherwise defined herein shall have the meaning ascribed to them in the
Agreement.
The parties agree that this Amendment No. 3 supersedes the prior Amendment No. 3 that was executed
by the parties effective July 1, 2006.
Intending to be legally bound, Insurer and Managing Agent agree to amend the Agreement as follows:
| 1. | ARTICLE I. GENERAL PROVISIONS, Paragraph C is amended to read as follows: |
| C) | All new business proposals which are quoted using rates provided by the Reinsurer shall be reinsured under this Agreement, except for new business proposals produced: |
| i) | by Meridian Benefits in the states of North Carolina, South Carolina and Tennessee, or | ||
| ii) | from distribution channels and opportunities brought to Insurer by other reinsurance outlets, where discussions concerning such opportunities are not initiated by the Insurer. |
| Otherwise, this Agreement represents an exclusive reinsurance arrangement between the parties with respect to new business proposals. | |||
| This Agreement will continue to represent an exclusive reinsurance arrangement between the parties with respect to renewals for Policies which are in force and reinsured with Reinsurer as of July 1, 2006. In the event the Reinsurer declines to accept a renewal of any such policy, the Insurer may reinsure such policy with another reinsurer. |
| 2. | ARTICLE III. FINANCIAL RESPONSIBILITIES AND TRANSACTIONS, Section A), first two paragraphs are amended to read as follows: | |
| The Insurer shall remit premium for reinsured group long term disability policies to the Reinsurer within ninety (90) days from the date on which premium is due to the Insurer. |
1
| The Insurer will follow all prudent procedures for premium collection and will notify the Reinsurer of all reinsured policies for which premium is overdue by ninety (90) days of the due date. | ||
| The third and fourth paragraphs under Section A) remain unchanged by this Amendment. | ||
| 3. | ARTICLE VI. DURATION, RECAPTURE AND TERMINATION is amended to read as follows: |
ARTICLE VI. DURATION, TERMINATION AND RECAPTURE
| A) | Duration. This Agreement shall govern the relationship of the parties until the liability of the Reinsurer with respect to all policies reinsured under this Agreement ceases. | ||
| Insurer agrees to continue an ongoing active relationship with the Reinsurer for an initial period ending December 31, 2007. | |||
| B) | Termination. |
| (i) | Without Cause. Subject to Section A in this Article VI, either party may terminate this Agreement with respect to all prospective acceptances, at any time by providing ninety (90) days prior written notice to the other party. | ||
| (ii) | Insurer Insolvency. If Insurer becomes insolvent as determined by one or more state regulatory agencies, this Agreement will terminate automatically as of the date of insolvency as to all prospective acceptances. Liabilities already incurred by the Reinsurer will be administered in accordance with the Insolvency Article of this Agreement. | ||
| (iii) | Immediate Termination Rights. Notwithstanding the above, Insurer may terminate this Agreement upon the occurrence of any of the following at any time by the giving of fifteen (15) days prior written notice to the Managing Agent: |
| a) | Either ADRUS or the Managing Agent ceases active underwriting operations; | ||
| b) | A State Insurance Department or other regulatory authority orders ADRUS, or any then-participating member of ADRUS, to cease writing business; | ||
| c) | ADRUS, any then-participating member of ADRUS, or the Managing Agent: 1) becomes insolvent, 2) is placed into liquidation or receivership, or 3) has instituted against it proceedings for the appointment of a supervisor, receiver, liquidator, rehabilitator, conservator or trustee in bankruptcy, or other agent known by whatever name, to take possession of its assets or control of its operations; |
2
| d) | ADRUS or the Managing Agent enters into a definitive written agreement to directly or indirectly assign its interests in this Agreement and liability for obligations under this Agreement to another party without the Insurer’s prior written consent; | ||
| e) | The Managing Agent has entered into a definitive agreement to sell substantially all of its assets without the Insurer’s prior written consent; or | ||
| f) | ADRUS or the Managing Agent, has engaged in any of the following: 1) a pattern or practice of failure by ADRUS or the Managing Agent to pay claims on a timely basis, 2) a pattern or practice of failure by ADRUS or the Managing Agent to abide by applicable federal or state laws, 3) a pattern or practice of acts of bad faith conduct by ADRUS or the Managing Agent, or 4) a pattern or practice of committing acts of negligent behavior by ADRUS or the Managing Agent, in discharging the Reinsurer’s duties under this Agreement. |
| C) | Recapture. | ||
| If the Insurer terminates the Agreement effective on January 1, 2008 or some other date in 2008, the recapture period shall, be three (3) years from the effective date of such termination. | |||
| If the Insurer terminates the Agreement effective on or after January 1, 2009, the recapture period shall be two (2) years from the effective date of such termination. | |||
| Recapture through any means will include 100% of the risk for the policies unless other terms are agreed to by the Insurer and Reinsurer. | |||
| D) | The Reinsured Percentage governing any claim under a reinsured policy will be that Reinsured Percentage in effect as of the date of disability. | ||
| E) | As of the date termination of the Agreement becomes effective, Reinsurer will provide Insurer only with those necessary claim and financial services required to manage any reinsured business. Upon termination, Reinsurer will utilize renewal methods, tools and procedures which are consistent with those in use for renewals generally within Reinsurer’s overall block of business at the time Insurer’s policies are being renewed. |
| 4. The Agreement is amended by the addition of the following Article, which is applicable to ADRUS members for all ADRUS agreement years effective on or after July 1, 2006. |
ARTICLE XV. COLLATERAL REQUIREMENTS
| If the amount of capital and surplus of any ADRUS member has been reduced by 50% or more of the amount of capital and surplus as stated in such ADRUS member’s most recent prior annual statutory statement filed with its state of domicile, such ADRUS member shall deposit in trust with a trustee (which shall not be an affiliate of such ADRUS member), and thereafter at all times maintain in such trust, assets at least equal in value to such ADRUS member’s proportionate amount of the reserves required to be maintained from time to time |
3
by
ADRUS under sound actuarial principles and accepted statutory accounting practices,
with respect to reserves required for liabilities incurred by ADRUS members under this
Agreement on or after July 1, 2006.
Such ADRUS member may alternatively post a letter of credit to satisfy such obligations. The
trust or letter of credit arrangements, and all documentation relating thereto, must be
satisfactory in form and substance to Insurer in its good faith discretion. The trust shall be
terminated and the assets returned to the ADRUS member, or the letter of credit returned for
cancellation, if the ADRUS member’s amount of capital and surplus increases by 10% of the amount
of capital and surplus as stated in such ADRUS member’s most recent prior annual statutory
statement filed with its state of domicile.
The
parties acknowledge that the collateral obligations under this provision predicated upon a
reduction in surplus shall not be applicable if the ADRUS member has already provided collateral
or taken other lawful actions that allow Insurer to receive full reserve credit with respect to
the reinsurance ceded under this Agreement.
All provisions of the Agreement not in conflict with the provisions of this Amendment will
continue unchanged.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed in duplicate
by the signatures of their duly authorized representatives as indicated below.
| CUSTOM DISABILITY
SOLUTIONS, Managing Agent of Reinsurer |
SYMETRA LIFE INSURANCE COMPANY | |||||||||
By:
|
/s/ Paul K. Fields | By: | /s/ Michael Fry | |||||||
Name:
|
Paul K. Fields | Name: | Michael Fry | |||||||
Title:
|
CFO | Title: | V P | |||||||
Date:
|
8/16/2006 | Date: | 8/17/2006 | |||||||
4
AMENDMENT NO. 4
TO THE
GROUP LONG TERM DISABILITY REINSURANCE AGREEMENT
TO THE
GROUP LONG TERM DISABILITY REINSURANCE AGREEMENT
This Amendment No. 4 (“Amendment”) is hereby made a part of and incorporated into the Group
Long Term Disability Reinsurance Agreement which was effective January 1, 1999 (“Agreement”)
by and between Symetra Life Insurance Company (formerly Safeco Life Insurance Company)
(“Insurer”) of Bellevue, Washington and Reliance Standard Life Insurance Company doing
business as Custom Disability Solutions (successor to Integrated Disability Resources, Inc.,
formerly Duncanson & Holt Services, Inc.), as Managing Agent (“Managing Agent”) for each of
the participating reinsurers collectively referred to in the Agreement as the American
Disability Reinsurance Underwriters Syndicate (“ADRUS”). Capitalized terms not otherwise
defined herein shall have the meaning ascribed to them in the Agreement.
Intending to be legally bound, Insurer and Managing Agent agree to amend the Agreement as
follows:
Effective January 1, 1999, Appendix A-20 appearing in the Agreement is amended to read as
follows:
APPENDIX A
AGREEMENT YEAR 1999
January 1,
1999 to December 31, 1999
Member Reinsurers who have contracted with Duncanson & Holt Services, Inc. as Managing
Agent of ADRUS and their levels of participation are as follows:
| DOLLAR | PERCENTAGE | |||||||
| MEMBER REINSURER[S] | PARTICIPATION | PARTICIPATION | ||||||
UNUM Life Insurance Company of America |
$ | 30,000 | 100 | % | ||||
TOTAL AUTHORIZED PARTICIPATION |
$ | 30,000 | 100 | % | ||||
1
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed in duplicate
by the signatures of their duly authorized representatives as indicated below.
| CUSTOM DISABILITY
SOLUTIONS, Managing Agent of Reinsurer |
SYMETRA LIFE INSURANCE COMPANY | |||||||||
By:
|
/s/ Paul K. Fields | By: | /s/ David C. Fry | |||||||
Name:
|
Paul K. Fields | Name: | David C. Fry | |||||||
Title:
|
CFO | Title: | Senior Actuary & AVP | |||||||
Date:
|
12/7/2006 | Date: | 12/8/2006 | |||||||
2
AMENDMENT 5
This Amendment No. 5 (“Amendment”) is hereby made a part of and incorporated into the Group
Long Term Disability Reinsurance Agreement effective January 1, 1999 (“Agreement”) by and between
Symetra Life Insurance Company (hereinafter the “Insurer”) of Bellevue, Washington and Reliance
Standard Life Insurance Company doing business as Custom Disability Solutions, as Managing Agent
(hereinafter the “Managing Agent”) for each of the participating reinsurers collectively referred
to in the Reinsurance Agreement as the American Disability Reinsurance Underwriters Syndicate
(ADRUS). Capitalized terms not otherwise defined herein shall have the meaning ascribed to them in
the Agreement.
Effective September 1, 2008, Insurer and Managing Agent agree to amend the Agreement as
follows:
ARTICLE 1. GENERAL PROVISIONS, Paragraph C) is amended to read as follows:
| C) | All new pre-sale business which is quoted using rates provided by the Reinsurer shall be reinsured under this Agreement, except for new pre-sale business produced from distribution channels and opportunities brought to Insurer by other reinsurance outlets, where discussions concerning such opportunities are not initiated by the Insurer. | ||
| Otherwise, this Agreement represents an exclusive reinsurance arrangement between the parties with respect to new pre-sale business. | |||
| This Agreement will continue to represent an exclusive reinsurance arrangement between the parties with respect to renewals for Policies that are in force and reinsured with Reinsurer as of July 1, 2006. In the event the Reinsurer declines to accept a renewal of any such policy, the Insurer may reinsure such policy with another reinsurer. |
All provisions of the Agreement not in conflict with the provisions of this Amendment will
continue unchanged.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed in duplicate by
the signatures of their duly authorized representatives as indicated below.
| CUSTOM DISABILITY SOLUTIONS | SYMETRA LIFE INSURANCE COMPANY | |||||||
By:
|
/s/ Paul K. Fields | By: | /s/ Marcus Wright | |||||
Name:
|
Paul K. Fields | Name: | Marcus Wright | |||||
Title:
|
CFO | Title: | Group Operations Director, AVP | |||||
Date:
|
9/26/2008 | Date: | September 17, 2008 | |||||
APPENDIX A-l
AGREEMENT YEAR 2000
January 1, 2000 to December 31, 2000
Member Reinsurers who have contracted with Duncanson & Holt Services, Inc. as Managing Agent of
ADRUS and their levels of participation are as follows:
| DOLLAR | PERCENTAGE | |||||||
| MEMBER REINSURER | PARTICIPATION | PARTICIPATION | ||||||
UNUM Life Insurance Company of America |
$ | 30,000 | 100.0 | % | ||||
TOTAL AUTHORIZED
PARTICIPATION |
$ | 30,000 | 100.0 | % | ||||
1
APPENDIX A-2
AGREEMENT YEAR 2001
January 1, 2001 to December 31, 2001
Member Reinsurers who have contracted with Duncanson & Holt Services, Inc. as Managing Agent of
ADRUS and their levels of participation are as follows:
| DOLLAR | PERCENTAGE | |||||||
| MEMBER REINSURER | PARTICIPATION | PARTICIPATION | ||||||
UNUM Life
Insurance Company of America |
$ | 30,000 | 100.0 | % | ||||
TOTAL AUTHORIZED
PARTICIPATION |
$ | 30,000 | 100.0 | % | ||||
2
APPENDIX A-3
AGREEMENT YEAR 2002
January 1, 2002 to December 31, 2002
Member
Reinsurers who have contracted with Integrated Disability Resources, Inc. as Managing Agent
of ADRUS and their levels of participation are as follows:
| DOLLAR | PERCENTAGE | |||||||
| MEMBER REINSURER | PARTICIPATION | PARTICIPATION | ||||||
UNUM Life
Insurance Company of America |
$ | 30,000 | 100.0 | % | ||||
TOTAL AUTHORIZED
PARTICIPATION |
$ | 30,000 | 100.0 | % | ||||
3
APPENDIX A-4
AGREEMENT YEAR 2003
January 1, 2003 to December 31, 2003
Member Reinsurers who have contracted with Integrated Disability Resources, Inc. as Managing Agent
of ADRUS and their levels of participation are as follows:
| DOLLAR | PERCENTAGE | |||||||
| MEMBER REINSURER | PARTICIPATION | PARTICIPATION | ||||||
UNUM Life
Insurance Company of America |
$ | 30,000 | 100.0 | % | ||||
TOTAL AUTHORIZED
PARTICIPATION |
$ | 30,000 | 100.0 | % | ||||
4
APPENDIX A-5
AGREEMENT YEAR 2004
January 1, 2004 to December 31, 2004
Member Reinsurers who have contracted with Integrated Disability Resources, Inc. as Managing Agent
of ADRUS and their levels of participation are as follows:
| DOLLAR | PERCENTAGE | |||||||
| MEMBER REINSURER | PARTICIPATION | PARTICIPATION | ||||||
UNUM Life
Insurance Company of America |
$ | 30,000 | 100.0 | % | ||||
TOTAL AUTHORIZED
PARTICIPATION |
$ | 30,000 | 100.0 | % | ||||
5
APPENDIX A-6
AGREEMENT YEAR 2005
January 1, 2005 to December 31, 2005
Member Reinsurers who have contracted with Integrated Disability Resources, Inc. as Managing Agent
of ADRUS and their levels of participation are as follows:
| DOLLAR | PERCENTAGE | |||||||
| MEMBER REINSURER | PARTICIPATION | PARTICIPATION | ||||||
UNUM Life
Insurance Company of America |
$ | 30,000 | 100.0 | % | ||||
TOTAL AUTHORIZED
PARTICIPATION |
$ | 30,000 | 100.0 | % | ||||
6
APPENDIX A-7
AGREEMENT YEAR 2006
January 1, 2006 to December 31, 2006
Member Reinsurers who have contracted with Custom Disability Solutions as Managing Agent of ADRUS
and their levels of participation are as follows:
| DOLLAR | PERCENTAGE | |||||||
| MEMBER REINSURER | PARTICIPATION | PARTICIPATION | ||||||
Reliance
Standard Life Insurance Company |
$ | 30,000 | 100.0 | % | ||||
TOTAL AUTHORIZED
PARTICIPATION |
$ | 30,000 | 100.0 | % | ||||
7
APPENDIX A-8
AGREEMENT YEAR 2007
January 1, 2007 to December 31, 2007
Member Reinsurers who have contracted with Custom Disability Solutions as Managing Agent of ADRUS
and their levels of participation are as follows:
| MEMBER | DOLLAR | PERCENTAGE | ||||||
| REINSURER | PARTICIPATION | PARTICIPATION | ||||||
Reliance Standard Life
Insurance Company |
$ | 30,000 | 100.0 | % | ||||
TOTAL AUTHORIZED
PARTICIPATION |
$ | 30,000 | 100.0 | % | ||||
8
APPENDIX A-9
AGREEMENT YEAR 2008
January 1, 2008 to December 31, 2008
Member Reinsurers who have contracted with Custom Disability Solutions as Managing Agent of ADRUS
and their levels of participation are as follows:
| MEMBER | DOLLAR | PERCENTAGE | ||||||
| REINSURER | PARTICIPATION | PARTICIPATION | ||||||
Reliance Standard Life
Insurance Company |
$ | 30,000 | 100.0 | % | ||||
TOTAL AUTHORIZED
PARTICIPATION |
$ | 30,000 | 100.0 | % | ||||
9
APPENDIX A-10
AGREEMENT YEAR 2009
January 1, 2009 to December 31, 2009
Member Reinsurers who have contracted with Custom Disability Solutions as Managing Agent of ADRUS
and their levels of participation are as follows:
| MEMBER | DOLLAR | PERCENTAGE | ||||||
| REINSURER | PARTICIPATION | PARTICIPATION | ||||||
Reliance Standard Life
Insurance Company |
$ | 30,000 | 100.0 | % | ||||
TOTAL AUTHORIZED
PARTICIPATION |
$ | 30,000 | 100.0 | % | ||||
10
Exhibit 10.13
Symetra Financial Corporation
Performance Share Plan
2009-2011
Performance Share Plan
2009-2011
The Purpose of the Plan:
| 1. | The purpose of the Plan is to advance the interest of Symetra Financial Corporation (the “Company”) and its owners by providing executive incentives and by providing for a reasonable sharing of the financial performance of the enterprise. | ||
| 2. | Summary: From time to time the Board of Directors of the Company (the “Board”) may grant to an executive of the Company an award of Performance Shares. At the time of grant, each Performance Share shall have the financial value of $100.00. Thereafter, the unit will have the financial value of $100.00 x (1 + Aggregate Percentage Growth), conditioned upon attainment of a stated Performance Goal over the Award Period specified in the Grant. At the end of the Award Period the Board will determine the degree of attainment of the Performance Goal and will assign a Harvest Percentage based on that determination. The matured Performance Shares will then be exchanged for a cash payment equal to the then financial value of the shares multiplied by the Harvest Percentage. | ||
| 3. | Administration: The Plan shall be administered by the Board. The Board shall have the authority to select the executives who shall be participants (“Participants”), to determine the size and terms of an award, to modify the terms of any award that has been granted, to determine the time when awards will be made, to determine the Award Periods applicable to an award, to determine the Harvest Percentages applicable to an award, to determine the terms of a Participant’s grant agreement (which need not be identical or uniform), to establish Performance Goals in respect of such Award Periods, to certify whether such Performance Goals were attained and to make such other determinations that are not prohibited by this plan. The Board is authorized to interpret the plan to establish amend and rescind any rules and regulations relating to the plan and to make any other determinations that it deems necessary or desirable. Any decision of the Board in the interpretation and administration of the plan shall lie within its sole and absolute discretion and shall be final conclusive and binding on all parties concerned. Determinations made by the Board under the plan need not be uniform and may be made selectively among participants regardless of whether such Participants are similarly situated. The Board shall have the right to deduct from any payment made under the plan any taxes required by law to be withheld with respect to such payment. The Board may delegate its duties hereunder to its Compensation Committee. |
| May 2009 | -1- |
| 4. | Eligibility and Participation: The Board shall designate those executives who shall be Participants. Participants shall be selected from among the executives who are in a position to have a material impact on the financial results of the Company. The designation of the Participants may be made individually or by groups or classifications of executives, as the Board deems appropriate. Executives shall not have a right to be designated as Participants and the designation of an executive as a Participant shall not obligate the Board to continue such executive as a participant in subsequent periods. | ||
| 5. | Grants: |
(a) Grant: In each Grant the committee shall specify, among other matters, (i)
the number of Performance Shares awarded, (ii) the Award Period, (iii) the Performance
Goal(s) to be attained within the Award Period, (iv) the method for determining the Harvest
Percentage based upon the level of achievement of the Performance Goal(s), and (v) the
maximum Award Payment.
(b) Performance measures: The performance measures for any award shall be as
determined by the Board and as stated in the grant agreement. Normally the goal(s) will be
based on some reasonable measure of growth in economic value per share of the enterprise, or
on some similar measure of financial performance.
(c) Payment: As soon as practicable after the end of the Award Period, or such
earlier date as the Board in its sole discretion may designate, the Board shall determine
(i) whether the applicable Performance Goal(s) have been attained with respect to a given
award and (ii) the Harvest Percentage applied to a given award. At the end of the Award
Period the Board shall ascertain the actual value of the award. Unless otherwise determined
by the Board or otherwise set forth in a grant agreement the actual value of an award shall
be equal to the then financial value of the shares multiplied by the Harvest Percentage. A
Participant’s actual value will be settled through a cash payment to the Participant within
2 1/2 months after the end of the Award Period.
| 6. | Termination of Employment: Except as set forth in Section 7 or otherwise set forth in a grant agreement a Participant shall immediately forfeit all outstanding awards upon any termination of employment prior to the end of the applicable Award Period. The Board may at its discretion provide that if a Participant dies, retires, is disabled, or is granted a leave of absence, or if the Participant’s employment is otherwise terminated in a manner reasonably judged to be not seriously detrimental to the company, then all or a portion of the Participant’s award, as determined by the Board, may be paid to the Participant (or beneficiary) after the end of the Award Period or at such other time as determined by the Board. | ||
| 7. | Change of Control: (a) If a termination event occurs with respect to a Participant within 24 months after a Change of Control then each award held by such Participant that was granted prior to the Change of Control shall be cancelled and such Participant shall be entitled to receive in respect of each such canceled |
| May 2009 | -2- |
| award a payment equal to the product of (i) the then financial value of 100% of the Performance Shares and (ii) the applicable Harvest Percentage. The applicable Harvest Percentage will be determined based on the extent to which the Performance Goal has been achieved as of the last day of the calendar quarter ending prior to the date of the applicable termination event. (b) Notwithstanding anything herein to the contrary, if, following a change in control, a Participant’s employment remains continuous through the end of an Award Period then the Participant shall be paid with respect to those awards for which he would have been paid had there not been a change in control, and the actual value shall be determined in accordance with section 5 above. | |||
| 8. | Amendments or Termination: The Board may amend alter or discontinue the Plan, but no amendment, alteration or discontinuation shall be made which would impair any of the rights or obligations under any award theretofore granted to a Participant without such Participant’s consent; provided, however, that the Board may amend the plan in such manner as it deems necessary to permit the granting of awards meeting the requirements of the Internal Revenue Code of 1986, as amended, or any successor thereto, or other applicable laws. | ||
| 9. | No Right to Employment: Neither the Plan nor any action taken hereunder shall be construed as giving any Participant or other person any right to continue to be employed by, or to continue to perform services for, the Company or any subsidiary, and the right to terminate the employment of or performance of services by any Participant at any time and for any reason is specifically reserved to the Company and its subsidiaries. | ||
| 10. | Nontransferability of Awards: An award shall not be transferable or assignable by the Participant, other than as described in Section 17 of this Plan. | ||
| 11. | Reduction of Awards: Notwithstanding anything to the contrary herein, the Board, in its sole discretion (but subject to applicable law), may reduce any amounts payable to any Participant hereunder in order to satisfy any liabilities owed to the Company or any of its subsidiaries by the Participant. | ||
| 12. | Participation of Subsidiaries: If a subsidiary wishes to participate in the Plan and its participation shall have been approved by the Board, the Board of Directors of the subsidiary shall adopt a resolution in form and substance satisfactory to the Committee authorizing participation by the subsidiary in the Plan. A subsidiary that adopts the Plan in accordance with the Section shall be permitted to rename the Plan under the name of such subsidiary. A subsidiary may cease to participate in the Plan at any time by action of the Board or by action of the Board of Directors of such subsidiary, which latter action shall be effective not earlier than the date of delivery to the Secretary of the Company of a certified copy of a resolution of the subsidiary’s Board of Directors taking such action. Termination of participation in the Plan shall not relieve a subsidiary of any obligations theretofore incurred by it under the Plan. The Board in its discretion may waive compliance with any provisions in this section. |
| May 2009 | -3- |
| 13. | Claims Procedure: In general, any claim for benefits under the Plan shall be filed with the Board of Directors by a Participant or beneficiary. The Board will consider the claim promptly. | ||
| 14. | Miscellaneous Provisions: The Company is the sponsor and legal obligor under the Plan and shall make all payments hereunder, other than any payments to be made by any of the subsidiaries, as described below (in which case such payments shall be made by such subsidiary, as appropriate). If a subsidiary adopts the Plan in accordance with Section 12, the subsidiary shall be responsible for all payments made under the Plan for Awards granted by the Board of Directors of the subsidiary including expenses involved in administering the Plan at the subsidiary level. The Plan is unfunded. The Company shall not be required to establish any special or separate fund or to make any other segregation of assets to ensure the payment of any amounts under the Plan, and the Participant’s rights to any payment hereunder shall be no greater than the rights of the Company’s (or the applicable subsidiary’s) unsecured creditors. All references to Sections herein shall be deemed to be references to the specified sections of this Plan. | ||
| 15. | Taxes: The Company and its subsidiaries shall have the right to deduct from any payment made under the Plan any taxes required by law to be withheld with respect to such payment. | ||
| 16. | Choice of Law: The Plan shall be governed by and construed in accordance with the laws of Washington State. | ||
| 17. | Designation of Beneficiary by Participant: A Participant may name a beneficiary to receive any payment to which he/she may be entitled in respect to a Grant in the event of his/her death. A Participant may change his/her beneficiary from time to time. If the Participant has not designated a beneficiary, or if no designated beneficiary is living on the date on which any amount becomes payable, that amount shall be paid to the Participant’s estate. | ||
| 18. | Schedule of Definitions: The attached Schedule of Definitions shall be considered an integral part of this Plan. | ||
| 19. | Effective Date of the Plan: The Plan shall be effective as of January 1, 2009. |
IN WITNESS WHEREOF, Symetra Financial Corporation has caused this Plan to be executed this 14
day of May, 2009.
| Symetra Financial Corporation |
||||
| By | /s/ Christine A. Katzmar | |||
| Its Vice President | ||||
| May 2009 | -4- |
Symetra Financial Corporation
Performance Share Plan
2009-2011 Schedule of Definitions
Performance Share Plan
2009-2011 Schedule of Definitions
Terms used in the Plan or in a Grant shall have the following meanings:
Annualized Return on Equity: Symetra’s average Return on Equity over the Award Period.
Change of Control: shall mean the occurrence of the following event:
If any person or group (within the meaning of sections 13(d) or 14(d)2 of the Exchange Act) other
than White Mountains Insurance Group, Ltd or Berkshire Hathaway, Inc or any of their subsidiary or
affiliated companies, an underwriter temporarily holding securities of the Company in connection
with a public issuance thereof, or an employee benefit plan of the Company or its affiliates
becomes the beneficial owner (within the meaning of rule 13d-3 under the Exchange Act) of
thirty-five percent or more of the then outstanding common stock of the Company.
Discretionary Harvest Percentage Adjustment: shall be determined by the Board by either adding or
subtracting up to 10% to the Harvest Percentage.
Grant: shall mean an offer by the Board to an executive to participate in the Performance Share
Plan. Such Grant will specify the number of Performance Shares being granted, the Performance
Goal(s), the Award Period, the method for judging attainment of the goal(s) and for setting the
Harvest Percentage, a maximum award value if any, and other relevant terms.
Harvest Percentage: shall be determined by the Board at the end of the Award Period specified in
the Grant, and will represent the Board’s judgment of the degree to which the Company’s actual
financial performance has met the Performance Goal(s) specified in the Grant. Normally the Harvest
Percentage will range from 0% thru 200% according to a scale specified in the Grant. This Harvest
Percentage will then be multiplied by the financial value of the Performance Shares granted, to
produce the actual cash value of the Grant.
Minimum Threshold: shall be the average of the 10 Year Treasury over 3 years (according to
Bloomberg GT10 index).
Modified Operating Income: shall be determined by calculating net income minus realized
gains/(losses) minus hedge fund investment income plus 30 year ‘A’ Bond investment income
(according to Bloomberg C00730 index) substituted for equities/hedge fund performance (valued
quarterly). All calculations are after tax.
Modified Operating Return on Equity: shall mean Modified Operating Income divided by beginning of
year GAAP Book Value.
May 2009
-1-
Performance Share: a unit granted to an executive under the Performance Share Plan. The unit will
have the financial value of $100.00 at the time of grant. Thereafter, the unit will have the
financial value of $100.00 x (1 + Aggregate Percentage Growth), conditioned upon the attainment of
a specified Performance Goal(s) over a specified Award Period.
Related Employment: shall mean the employment of a participant by an employer who is not the
Company or an affiliate of the Company, provided (i) such employment is undertaken by the
participant and continued at the request of the Company; (ii) immediately prior to undertaking such
employment the participant was an employee of the Company, or any of its affiliates or was engaged
in related employment; and (iii) such employment is recognized by the Board, in its sole
discretion, as related employment.
Return on Equity: Symetra’s growth in beginning of year GAAP Book Value.
Termination event: shall be considered for this plan to be a Termination Without Cause or to be a
Constructive Termination.
| a. | Termination Without Cause: A termination of the Participant’s employment with the Company or a subsidiary by the Company or the subsidiary other than (i) due to the Participant’s death or disability as defined in the Performance Plan Grant, or (ii) for Cause. A transfer of a Participant’s employment to an affiliate of the Company shall not, by itself, be considered a Termination without Cause hereunder. For this purpose, “Cause” shall mean (a) an act or omission by the Participant that constitutes a felony, (b) willful gross negligence or willful gross misconduct by the Participant in connection with his employment by the Company or by a subsidiary which causes, or is likely to cause, material loss or damage to the Company. Notwithstanding anything herein to the contrary, a termination of a Participant’s employment with the Company or one of its subsidiaries due solely to the consummation of a corporate transaction described in clause (i) of the definition of Change in Control shall not be deemed to be a “Termination Without Cause” if the Participant is employed by the acquiror or one of its affiliates and the acquiror or one of its affiliates formally assumes the Company’s obligations under this Plan or places the Participant in a similar or like plan with no diminution of the value of the awards granted. |
| b. | Constructive Termination. A termination of employment with the Company and its affiliates at the initiative of the Participant that the Participant declares, by prior written notice delivered to the Secretary of the Company, to be a Constructive Termination by the Company or an affiliate and which follows (i) a material decrease in his/her salary or (ii) a material diminution in the authority, duties or responsibilities of his/her position as a result of which the Participant determines in good faith that he/she cannot continue to carry out his/her job in substantially the same manner as it was intended to be carried out immediately before such diminution. Notwithstanding anything herein to the contrary, a Constructive Termination shall not occur until and unless 30 days have elapsed from the date the Company receives such written notice from the Participant and, during that period, the Company fails to cure, or cause to be cured, the circumstance serving as the basis on which the declaration of Constructive Termination is given. |
May 2009
-2-
Symetra Financial Corporation
Performance Share Plan
2009-2011 Grant
Performance Share Plan
2009-2011 Grant
THIS GRANT (this “Grant”) is made, effective as of the 1st of January, 2009, between
Symetra Financial Corporation (the “Company”) and NAME (the “Participant”).
RECITALS:
WHEREAS, the Company has adopted the Performance Share Plan (“Plan”), which Plan is
incorporated herein by reference and made part of this Grant; and
WHEREAS, the Board has determined that it would be in the best interest of the Company
and its owners to grant the award provided for herein to the Participant pursuant to the
Plan and the terms set forth herein.
NOW THEREFORE, in consideration of mutual covenants the parties hereto agree as
follows:
1. Grant: Subject to the terms and conditions of the Plan and the additional terms and conditions
set forth in this Grant, the Company hereby grants to the Participant a Performance Share Award of ______ shares.
2. Award Period: The Award Period shall be January 1, 2009 through December 31, 2011.
3. Performance Goal: The Performance Goal shall be a 13% Modified Operating Return on Equity
averaged over the Award Period which shall be measured by Modified Operating Income divided by
beginning of year GAAP Book Value. Modified Operating Income equals net income minus realized
gains/(losses) minus hedge funds investment income plus 30 year ‘A’ Bond investment income
substituted for equities/hedge fund performance (valued quarterly).
4. Harvest Percentage: Shall be dependent on the extent to which the Performance Goal is attained,
and shall be determined as follows:
| Performance Goal | Harvest Percentage | |
| 8% or lower | 0% | |
| 13% | 100% | |
| 18% or higher | 200% |
For annualized percentage growth between 8% and 18%, the Harvest Percentage will be determined on
the basis of straight line interpolation.
August 2009
-1-
A Minimum Threshold must be met before a Harvest Percentage is assigned. That minimum shall be the
average of the 10 year Treasury over the Award Period compared to the Company’s Annualized Return on Equity over the Award Period.
At the Board’s discretion, a Discretionary Harvest Percentage Adjustment may be added or subtracted
to the Harvest Percentage by up to 10% based on factors determined by the Board.
5. Award Payment: Subject to all terms and conditions of the Plan, the Participant’s actual value
at the end of the Award Period will be settled through a cash payment to the Participant. Unless
otherwise determined by the Board or otherwise set forth in a Grant, a Participant’s actual value
with respect to an Award shall be equal to the then financial value of the shares multiplied by the
Harvest Percentage.
6. Termination of Employment: Except as provided in Section 6 or Section 7 of the Plan, this Award
shall be canceled, and no payment shall be payable hereunder, if the Participant’s continuous
employment or Related Employment with the Company shall terminate for any reason prior to the end
of the Award Period.
7. Successor Requirement: This Grant shall inure to the benefit of and be binding upon the Company
and its successors and assigns. The Company shall request any purchaser of a business unit in
which the Participant is employed (a “Purchaser”), to fully assume the obligations of the Company
under this Grant. If a Purchaser declines to assume such obligations, the Company shall remain
obligated under the terms of this Grant and the Board, in its sole discretion, may elect to cancel
the Grant and to make an Award Payment based on the applicable measures at the time of purchase or
in accordance with Section 7 of the Plan, if the Plan’s Change in Control provisions are
applicable.
8. Definitions: All terms not otherwise defined herein shall have the same meaning as in the Plan.
9. Withholding: The Participant agrees to make appropriate arrangements with the Company for
satisfaction of any applicable income tax withholding requirements, including the payment to the
Company, at the termination of the Award Period (or such earlier or later date as may be applicable
under the Code), of all such taxes and other amounts, and the Company shall be authorized to take
such action as may be necessary, in the opinion of the company’s counsel (including, without
limitation, withholding amounts from any compensation or other amount owing from the Company to the
Participant), to satisfy all obligations for the payment of such taxes and other amounts.
10. Reduction of the Award: Notwithstanding anything to the contrary herein, the Board, in its
sole discretion (but subject to applicable law), may reduce any amounts payable to the Participant
in order to satisfy any liabilities owed to the Company by the Participant.
August 2009
-2-
11. No Right to Continued Employment: Neither the Plan nor this Grant shall be construed as giving
the Participant the right to be retained in the employ of, or in any consulting relationship to,
the Company or any of its subsidiaries. Further, the Company may at any time dismiss the
Participant or discontinue any consulting relationship, free from any liability or any claim under
the Plan or this Grant, except as otherwise expressly provided in the Plan and in this Grant. In
addition, nothing herein shall obligate the Company to make future Grants to the Participant.
12. Award Subject to Plan: By entering in this Grant the Participant agrees and acknowledges that
the Participant has received and read a copy of the Plan and that this Award is subject to all of
the terms and provisions set forth in the Plan and in this Grant. In the event of a conflict
between any term or provision contained in this Grant and a terms or provision of the Plan, the
applicable terms and provisions of the Plan will govern and prevail.
13. Designation of Beneficiary by Participant: A Participant may name a beneficiary to receive any
payment to which he/she may be entitled in respect of this Award in the event of his/her death, by
notifying the Company. A Participant may change his/her beneficiary from time to time in the same
manner. If the Participant has not designated a beneficiary or if no designated beneficiary is
living on the date on which any amount becomes payable to a Participant’s beneficiary, that amount
shall be paid to the Participant’s estate.
14. Notices: Any notice necessary under this Grant shall be addressed to the Company and to the
Participant at the address appearing in the personnel records of the Company for such Participant
or to either party at such other address as such party hereto may hereafter designate in writing to
the other. Any such notice shall be deemed effective upon receipt thereof by the addressee.
15. Signature in Counterparts: This Grant may be signed in counterparts, each of which shall be an
original, with the same effect as if the signatures thereto and hereto were upon the same
instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Grant as of the date(s) listed
below.
| Participant | Symetra Financial Corporation |
|||||
| By | ||||||
| Name | Date | Randall H. Talbot, President & CEO | ||||
August 2009
-3-
Exhibit 10.19
[FORM OF]
RESTRICTED STOCK AGREEMENT
PURSUANT TO THE
SYMETRA FINANCIAL CORPORATION EQUITY PLAN
PURSUANT TO THE
SYMETRA FINANCIAL CORPORATION EQUITY PLAN
THIS AGREEMENT (this “Agreement”) made as of the ___ day of
___, 20___ by and between Symetra Financial Corporation, a Delaware
corporation (the “Company”), and ___ (the
“Executive”).
WHEREAS,
on the date hereof the Executive has been granted an award of Shares that
are subject to certain restrictions on transfer and risks of forfeiture (the “Restricted
Stock”) pursuant to the Symetra Financial Corporation Equity Plan (the “Plan”) on the
terms and subject to the conditions set forth in this Agreement;
WHEREAS, for the purposes of the vesting schedule of the Restricted Stock the grant is being
given effect as of
, 20 (the “Grant Date”);
NOW, THEREFORE, in consideration of the premises and of the mutual agreements contained in
this Agreement, the parties hereto agree as follows:
SECTION 1. Definitions. Capitalized terms used but not defined in this Agreement
have the meanings given such terms in the Plan. As used in this Agreement, the following terms
shall have the meanings set forth below:
“Restrictions” means restrictions on sale or other transfer set forth in Section 5 and
the risks of forfeiture set forth in Section 2.
“Shareholders Agreement” means the Shareholders’ Agreement, dated as of ,
20
among Symetra Financial Corporation and certain persons, as amended from time to time.
SECTION 2. Vesting and Delivery. (a) Vesting. The Executive’s rights with
respect to the Restricted Stock shall become vested, and the Restrictions with respect to such
Restricted Stock shall lapse, on , 20 ; provided that the Executive must be
employed by the Company or an Affiliate thereof on such date in order for the Executive’s rights
with respect to the Restricted Stock to become vested, except as otherwise determined by the Board
in its sole discretion or as otherwise provided in Section 2(b) below. Except as provided in
Section 2(b) below, all unvested Restricted Stock shall be forfeited by the Executive upon a
termination of the Executive’s employment for any reason.
(b) Upon a termination of the Executive’s employment by the Company without Cause or due to
the Executive’s death or Disability, the Executive’s rights with respect to the following amounts
of Restricted Stock shall become vested and the Restrictions with respect to such amounts of
Restricted Stock shall lapse:
| (i) | If such termination is on or after , 20 but prior to , 20 , the Restrictions with respect to [percentage] of the Restricted Stock shall lapse. | ||
| (ii) | If such termination is on or after , 20 but prior to , 20 , the Restrictions with respect to [percentage] of the Restricted Stock shall lapse. |
(c) Delivery of Shares. On and following the date of this Agreement, Restricted Stock
may be evidenced in such manner as the Company may determine. If certificates representing
Restricted Stock are registered in the Executive’s name, such certificates must bear an appropriate
legend referring to the terms, conditions and restrictions (including the Restrictions) applicable
to such Restricted Stock, until such time, if any, as the Executive’s rights with respect to such
Restricted Stock become vested and the Restrictions with respect to such Restricted Stock lapse.
Upon the vesting of the Executive’s rights with respect to such Restricted Stock, the Company or
other custodian, as applicable, shall deliver such certificates to the Executive or the Executive’s
legal representative.
SECTION 3. Withholding, Consents and Legends. (a) Withholding. The Company
shall be entitled to require, as a condition to the release of Restricted Stock that vests pursuant
to this Agreement, that the Executive remit an amount in cash sufficient to satisfy all applicable
withholding taxes relating thereto; provided that, the Executive may elect to satisfy the
obligation to pay any withholding tax, in whole or in part, (i) by having the Company retain Share
certificates that the Executive would have otherwise received upon vesting of the Executive’s
rights with respect to such Shares (valued as of the day immediately prior to the date of delivery
of such Share certificates or, on the date of an IPO, valued at the price per Share paid by the
initial purchasers) to cover the amount of such withholding tax or (ii) by delivery to the Company
by the Executive of any previously owned and unrestricted Shares. In addition, the Company and
each of its Affiliates shall have the right and are hereby authorized to withhold from delivery of
Shares issuable hereunder, or from any compensation or other amount owing to the Executive, the
amount (in cash or, in the discretion of the Board, Shares, other securities, other awards or other
property) of any applicable withholding taxes in respect of the Restricted Stock and to take such
other action as may be necessary in the discretion of the Board to satisfy all obligations for the
payment of such taxes.
(b) Consents. The Executive’s rights in respect of the Restricted Stock are
conditioned on the receipt to the full satisfaction of the Board of any required consents that the
Board may determine to be necessary or advisable (including, without limitation, the Executive
consenting to the Company’s supplying to any third-party recordkeeper of the Plan such personal
information as the Board deems advisable to administer the Plan).
(c) Legends. The Company may affix to certificates for Shares issued pursuant to
this Agreement any legend that the Board determines to be necessary or advisable (including to
reflect any restrictions to which the Executive may be subject
2
under any applicable securities laws or under the Shareholders Agreement). The Company may
advise the transfer agent to place a stop order against any legended Shares.
(d) Shareholders Agreement.
| (i) | Notwithstanding any provision of this Agreement to the contrary, it is a condition of delivery of any Shares issuable pursuant to this Agreement that the Executive execute the Shareholders Agreement (unless previously executed by the Executive). | ||
| (ii) | Notwithstanding any provision of the Shareholders Agreement to the contrary, in the event of the termination of the Executive’s employment due to the Executive’s death or Disability, the Executive or the Executive’s executor or administrator, as applicable, shall have the right, but not the obligation, to require the Company to purchase from the Executive or the Executive’s estate, as applicable, and if the Executive or the Executive’s executor or administrator exercises such right, the Company shall purchase, upon the terms and conditions of this Section 3(d)(ii), the vested Shares delivered to the Executive as of immediately prior to or upon such termination of employment (such right, the “Put Right”). The Put Right may only be exercised during the 90 day period beginning the 30th day after such termination of employment by delivery, prior to such 90th day, to the Company of an irrevocable notice specifying that the Executive or the Executive’s executor or administrator wishes to so exercise. The Company may establish, as a condition to its obligations upon the Put Right, any reasonable requirements necessary to satisfy applicable securities, tax, corporate and other laws, including making the delivery of stock certificates and stock powers. The purchase price payable by the Company shall be equal to the Fair Market Value of the applicable Shares, less applicable tax withholding (if any), and shall be paid in a single lump-sum in cash at the time such Shares are delivered to the Company and any other applicable requirements are satisfied. For the avoidance of doubt, the right to exercise the Put Right shall not be transferred or assigned and any attempt by the Executive or the Executive’s executor or administrator to the contrary shall be null and void. Notwithstanding the foregoing, the Company shall have no obligation with respect to the Put Right if the Shareholders Agreement is not in effect at the time of the Executive’s termination of employment due to the Executive’s death or Disability. |
(e) Registration. Notwithstanding any provision of this Agreement to the contrary,
if at any time the Board determines, in its sole discretion, that the listing,
3
registration or qualification of Shares issuable under this Agreement under any state or
Federal law or on any securities exchange on which the Shares are traded or inter-dealer quotation
system on which the Shares are quoted or the consent or approval of any governmental regulatory
body is necessary as a condition of, or in connection with, delivery of Shares issuable under this
Agreement, such Shares may not be delivered in whole or in part (and any attempt to deliver or to
transfer any vested Shares to the Executive shall be null and void) unless such listing,
registration, qualification, consent or approval has been effected or obtained free of any
conditions not acceptable to the Board.
SECTION 4. Voting Rights; Dividend Equivalents. Prior to the date on which the
Executive’s rights with respect to a Restricted Share have become vested, the Executive shall be
entitled to exercise voting rights with respect to such Restricted Share (subject to the provisions
of the Shareholders Agreement) and shall be entitled to receive dividends or other distributions
with respect thereto; provided that any such dividends or distributions shall accumulate
and be paid to the Executive upon the vesting of such Restricted Share.
SECTION 5. Non-Transferability of Restricted Stock. Unless otherwise provided by the
Board in its discretion, Restricted Stock may not be sold, assigned, alienated, transferred,
pledged, attached or otherwise encumbered, except as provided in Section 20(b) of the Plan. Any
purported sale, assignment, alienation, transfer, pledge, attachment or other encumbrance of a
Restricted Share in violation of the provisions of this Section 5 and Section 20(b) of the Plan and
the provisions of the Shareholders Agreement shall be null and void.
SECTION 6. Rights of the Executive. None of the Restricted Stock, the execution of
this Agreement and the delivery of any vested Shares shall confer upon the Executive any right to,
or guarantee of, continued employment by the Company or any of its Affiliates, or in any way limit
the right of the Company or any of its Affiliates to terminate the employment of the Executive at
any time, subject to the terms of any written employment or similar agreement between the Company
or any of its Affiliates and the Executive. The Restricted Stock shall not be treated as
compensation for purposes of calculating the Executive’s rights under any employee benefit plan,
except to the extent expressly provided in any such plan.
SECTION 7. Relation to Plan. The Restricted Stock hereby granted are subject to, and
the Company and the Executive agree to be bound by, all of the terms and conditions of the Plan, as
the same may be amended from time to time in accordance with the terms thereof, but no such
amendment shall be effective as to the Restricted Stock without the Executive’s consent insofar as
it may materially and adversely affect the Executive’s rights under this Agreement. Except as
otherwise provided herein, the Board shall have sole discretion to determine whether the events or
conditions described in this Agreement have been satisfied and to make all other interpretations,
constructions and determinations required under this Agreement and all such determinations by the
Board shall be final, binding and conclusive. In the event of any conflict between any term or
provision contained in this Agreement and a term or provision of the Plan, the applicable
4
terms and provisions of the Plan shall govern and prevail, and the Agreement shall be deemed
to be modified accordingly.
SECTION 8. Notices. All notices and other communications hereunder shall be in
writing and shall be deemed given when delivered personally or when telecopied (with confirmation
of transmission received by the sender), three business days after being sent by certified mail,
postage prepaid, return receipt requested or one business day after being delivered to a nationally
recognized overnight courier with next day delivery specified to the parties at the following
addresses (or at such other address for a party as shall be specified by like notice):
If to the Company, to:
Vice President, Human Resources
Symetra Financial Corporation
777 108th Ave NE Suite 1200
Bellevue, Washington 98004
Symetra Financial Corporation
777 108th Ave NE Suite 1200
Bellevue, Washington 98004
with a copy to:
General Counsel
Symetra Financial Corporation
777 108th Ave NE Suite 1200
Bellevue, Washington 98004
Symetra Financial Corporation
777 108th Ave NE Suite 1200
Bellevue, Washington 98004
If to the Executive, to the address on file with the Company or any of its Affiliates.
Notices sent by email or other electronic means not specifically authorized by this Agreement shall
not be effective for any purpose of this Agreement.
SECTION 9. Waiver of Breach. The waiver by either party of a breach of any provision
of this Agreement must be in writing and shall not operate or be construed as a waiver of any other
or subsequent breach.
SECTION 10. Executive’s Undertaking. The Executive hereby agrees to take whatever
additional actions and execute whatever additional documents the Company may in its reasonable
judgment deem necessary or advisable in order to carry out or effect one or more of the obligations
or restrictions imposed on the Executive pursuant to the provisions of this Agreement.
SECTION 11. Compliance with Law. The Company and the Executive agree and acknowledge
that the Restricted Stock is being issued, and prior to an IPO any Shares issuable pursuant to this
Agreement will be issued, pursuant to a private sale exemption from registration under the
Securities Act of 1933, as amended (the “Securities Act”). The Executive represents and
warrants that the Executive is receiving the Restricted Stock, and, upon the vesting and lapse of
restrictions applicable thereto, will receive Shares pursuant to this Agreement, for investment and
not with a view to resale or distribution in violation of the Securities Act. The Executive
acknowledges that
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the Restricted Stock and any Shares issuable pursuant to this Agreement have not been
registered under the Securities Act and may not be sold, transferred, assigned or pledged to any
person in the United States except pursuant to an effective registration statement filed with the
Securities and Exchange Commission or pursuant to an applicable exemption from the registration
requirements of the Securities Act. The Executive further agrees to comply with all applicable
laws and regulations in each jurisdiction in which the Executive acquires, offers, sells or
delivers the Restricted Stock or Shares issuable pursuant to this Agreement, in all cases at the
Executive’s own expense. Upon the acquisition of any Shares pursuant to this Agreement, the
Executive will make or enter into such written representations, warranties and agreements as the
Company may reasonably request in order to comply with applicable securities laws or this
Agreement.
SECTION 12. Amendment. This Agreement may not be amended, terminated, suspended or
otherwise modified except in a written instrument, duly executed by both parties.
SECTION 13. Professional Advice. The acceptance and delivery of Shares under this
Agreement may have consequences under Federal and state tax and securities laws that may vary
depending upon the individual circumstances of the Executive. Accordingly, the Executive
acknowledges that the Executive has been advised to consult his personal legal and tax advisor in
connection with this Agreement and the Restricted Stock.
SECTION 14. Governing Law. This Agreement shall be governed by, and construed in
accordance with, the laws of New York without regard to its conflict of laws principles, and shall
bind and inure to the benefit of the heirs, executors, personal representatives, successors and
assigns of the parties hereto.
SECTION 15. Counterparts. This Agreement may be executed in one or more
counterparts, and each such counterpart shall be deemed to be an original, but all such
counterparts together shall constitute but one agreement.
SECTION 16. Entire Agreement. This Agreement and the other writings incorporated by
reference herein constitute the entire agreement between the parties with respect to the subject
matter hereof and supersede all prior written or oral negotiations, commitments, representations
and agreements with respect thereto.
SECTION 17. Severability. The invalidity or unenforceability of any provision of
this Agreement shall not affect the validity or enforceability of any other provisions of this
Agreement, which shall remain in full force and effect to the fullest extent permitted by law. The
Executive agrees that in the event that any court of competent jurisdiction shall finally hold that
any provision of this Agreement (whether in whole or in part) is void or constitutes an
unreasonable restriction against the Executive, such provision shall not be rendered void but shall
be deemed to be modified to the minimum extent necessary to make such provision enforceable for the
longest duration and the greatest scope as such court may determine constitutes a reasonable
restriction under the circumstances.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first
written above.
| SYMETRA FINANCIAL CORPORATION, | ||||
| By | ||||
| EXECUTIVE | ||||
Restricted Share Agreement
Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
We consent to the reference to our firm under the caption “Experts” and to the use of
our reports dated March 6, 2009, in Amendment No. 2 to the
Registration Statement (Form S-1 No. 333-162344) and related
Prospectus of Symetra Financial Corporation dated November 9, 2009.
/s/ Ernst & Young LLP
Seattle, Washington
November 9, 2009
November 9, 2009