-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, C3t5tH8hhy2KCPXMRrNApo5aDTy9svUixeeywAoz8FWPt9xHySB9pIttgXzUyLfc 9I+MHJ7Mur1sjLhoCJf16w== 0000950115-97-000989.txt : 19971103 0000950115-97-000989.hdr.sgml : 19971103 ACCESSION NUMBER: 0000950115-97-000989 CONFORMED SUBMISSION TYPE: 10-12G PUBLIC DOCUMENT COUNT: 21 FILED AS OF DATE: 19970626 DATE AS OF CHANGE: 19971030 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PENNSYLVANIA MANUFACTURERS CORP CENTRAL INDEX KEY: 0001041665 STANDARD INDUSTRIAL CLASSIFICATION: IRS NUMBER: 232217932 FILING VALUES: FORM TYPE: 10-12G SEC ACT: SEC FILE NUMBER: 000-22761 FILM NUMBER: 97630730 BUSINESS ADDRESS: STREET 1: THE PMA BLDG STREET 2: 380 SENTRY PKWY CITY: BLUE BELL STATE: PA ZIP: 19422-2328 BUSINESS PHONE: 2156655046 MAIL ADDRESS: STREET 1: THE PMA BLDG STREET 2: 380 SENTRY PARKWAY CITY: BLUE BELL STATE: PA ZIP: 19422-2328 10-12G 1 FORM 10 As filed with the Securities and Exchange Commission on June 26, 1997 FORM 10 General Form for Registration of Securities Pursuant to Section 12(b) or (g) of the Securities Exchange Act of 1934 Pennsylvania Manufacturers Corporation ----------------------------------------------------- (Exact name of registrant as specified in its charter) Pennsylvania 23-2217932 ------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) The PMA Building 380 Sentry Parkway Blue Bell, Pennsylvania 19422-2328 ---------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (215) 665-5046 Securities to be registered pursuant to Section 12(b): None Securities to be registered pursuant to Section 12(g) of the Act: Class A Common Stock, par value $5.00 per share ----------------------------------------------- (Title of Class) Introductory Note This Form 10 Registration Statement contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and the Securities Act of 1933 (the "Securities Act") that involve risks and uncertainties. Such statements can be identified by the use of forward-looking terminology such as "may," "will," "should," "expect," "anticipate," "believe," "estimate" or "continue," or the negative thereof or other variations thereon or comparable terminology. The Company's actual results could differ materially from those projected in the forward-looking statements as a result of certain of the factors set forth elsewhere in this Registration Statement, including, but not limited to "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in Item 2 of this registration statement. The factors that could cause actual results to vary materially include, but are not limited to, the following: changes in general economic conditions, including the performance of financial markets and interest rates; regulatory or tax changes, including changes in risk-based capital or other regulatory standards that affect the ability of the Company to conduct its business; competitive or regulatory changes that affect the cost of or demand for the Company's products; the effect of changes in workers' compensation statutes and the administration thereof; the Company's ability to predict and effectively manage claims related to insurance and reinsurance policies; reliance on key management; adequacy of claim liabilities; adequacy and collectibility of reinsurance purchased by the Company; and natural disasters. Investors should not place undue reliance on any such forward-looking statements. Item 1. Business Company Overview Pennsylvania Manufacturers Corporation (the "Company" or "PMC"), headquartered in Blue Bell, Pennsylvania, is a Pennsylvania insurance holding company. The Company operates in two principal segments, property and casualty primary insurance through Pennsylvania Manufacturers' Association Insurance Company ("PMAIC") and other affiliated insurance companies (the "Property and Casualty Group"), featuring workers' compensation coverages and related services, and property and casualty reinsurance through PMA Reinsurance Corporation ("PMA Re"). The Property and Casualty Group writes workers' compensation and certain other lines of commercial insurance primarily in nine contiguous jurisdictions in the Mid-Atlantic and Southern regions, utilizing the PMA Group trade name. The domestic insurance subsidiaries through which the Property and Casualty Group writes its insurance products and who share results through an intercompany pooling agreement are referred to herein as the "Pooled Companies." PMA Re emphasizes risk-exposed, excess of loss reinsurance and operates in the domestic brokered market. The Property and Casualty Group and PMA Re are sometimes collectively referred to herein as the "Insurance Subsidiaries." A.M. Best & Company ("A.M. Best") has currently assigned an "A- (Excellent)" rating to the Pooled Companies and an "A+ (Superior)" rating to PMA Re. At December 31, 1996, the Company had total assets of $3.1 billion and shareholders' equity of $425.8 million. Unless otherwise specified in this registration statement, dollar amounts set forth herein with respect to the Company are presented in accordance with generally accepted accounting principles ("GAAP"). After a period of rapid growth in the late 1980's, the Company's consolidated total net premiums written declined from $705.8 million in 1991 to $443.5 million in 1996. During this period, the market for the products written by the Property and Casualty Group was very competitive. The Property and Casualty Group restricted its premium volume, rather than write business at rates that were not commensurate with the risks assumed, and introduced loss-sensitive coverages and large-deductible programs, under which insureds pay less premium but bear a greater portion of loss exposure. Beginning in 1992, premiums written were also reduced as a result of the -1- Property and Casualty Group's re-underwriting of its book of business and, commencing in 1993, rate reductions asociated with workers' compensation benefit reform laws. Management believes that recent initiatives it has taken and workers' compensation reforms enacted in recent years afford the Property and Casualty Group an opportunity to increase its core business, workers' compensation insurance, on terms acceptable to it. See "The Property and Casualty Group -- Background and Recent Developments" below. Between 1992 and 1996, PMA Re's premium volume expanded as a result of the increased demand for reinsurance in the markets in which PMA Re participates as well as trends towards ceding companies restricting the number of reinsurers with which they will do business. Those trends have facilitated PMA Re's increased participation on reinsurance treaties with its existing clients, the writing of additional layers and programs with existing clients, and to a lesser extent, the addition of business from new ceding companies. The composition of the Company's statutory net premiums written for 1996 was as follows: (dollar amounts in thousands) Net premiums written % of total -------- ---------- Workers' compensation ............ $198,198 44.3% Other commercial lines ........... 84,781 19.0% -------- ----- The Property and Casualty Group... 282,979 63.3% PMA Re ........................... 164,053 36.7% -------- ----- Total ....................... $447,032 100.0% ======== ===== The Company is in the process of establishing a separate excess and surplus lines company and has hired an experienced executive in the excess and surplus lines business to be president of that company. Management anticipates that the excess and surplus lines company will primarily write multi-line business consisting of primary and excess commercial general liability, professional liability, excess automobile and certain property exposures. The Property and Casualty Group Background and Recent Developments The Property and Casualty Group provides workers' compensation insurance, other commercial property and casualty insurance coverages, and related services to entities located primarily in nine contiguous jurisdictions in the Mid-Atlantic and Southern regions. As a result primarily of the Property and Casualty Group's underwriting decisions, the introduction of loss-sensitive coverages and large deductible programs, competition and the impact of workers' compensation benefit reform laws, the Property and Casualty Group's statutory net premiums written declined from $456.4 million in 1992 to $283.0 million in 1996. In 1996, the Property and Casualty Group strengthened its loss reserves by $191.4 million. Of this amount, $110.0 million related to workers' compensation, $60.4 million related to asbestos and environmental claims, and $21.0 million related to other lines and loss adjustment expenses ("LAE"). The adverse development arising from workers' compensation had reduced earnings by a cumulative $251.6 million between 1992 and 1995. Such adverse development mainly related to Pennsylvania workers' compensation business from accident years 1987 through 1991. As the claims data from these accident years -2- have matured, the impact of the disability and medical benefits available to claimants before the passage of reform legislation in 1993 and 1996, coupled with the economic conditions that had existed during the disability periods, has become more apparent. As a result, the developed losses have exceeded management's prior estimates. The reform legislation enacted in 1993 and 1996 has introduced various controls and limitations on disability and medical benefits. Management believes that the reforms and more stringent underwriting standards adopted since 1991 have had and continue to have a beneficial effect on the Company's accident year loss ratios. The strengthening recorded for asbestos and environmental claims is based upon a detailed loss analysis that examined data on an account-by-account and site-by-site basis for asbestos, and an actuarial calendar year loss development technique for environmental claims. After strengthening the asbestos and environmental reserves, the Property and Casualty Group's survival ratio is 8.8 years. See "Loss Reserves" below. The impact of the loss reserve strengthening and restructuring charges taken for the expense initiatives discussed below reduced the Pooled Companies' statutory capital and surplus to $250.4 million at December 31, 1996. In late 1996, the Property and Casualty Group began a commutation program designed to reduce the outstanding Pennsylvania workers' compensation claims from accident years 1991 and prior. Commutations are agreements with claimants whereby the claimants, in exchange for a lump sum payment, release their rights to future indemnity payments from the Property and Casualty Group. Under Pennsylvania law, all such commutation agreements must be approved by the individual claimant and the Pennsylvania Workers' Compensation Board. The number of open claims for accident years 1991 and prior are expected to decline as a result of this program. Management believes that the commutation program should reduce the possibility of further adverse development on accident year 1991 and prior reserves, although there can be no assurance that the level of commutations will have a significant impact on the future development of the recorded reserves. In late 1996 and early 1997, the Property and Casualty Group initiated several expense reduction programs. A voluntary early retirement program ("VERIP") was offered in December 1996. Of the 84 employees eligible to participate in the VERIP program, 49 opted to participate. Additionally, the Property and Casualty Group announced a plan to consolidate field operations, which are presently conducted in seven full-service branch offices located in Pennsylvania, New Jersey, Maryland, North Carolina and Virginia. After such consolidation is completed, there will be three regional service centers located in Valley Forge, Pennsylvania, Harrisburg, Pennsylvania and Richmond, Virginia, which will encompass staff underwriting functions, certain processing activities and claims adjusting. The other offices will be converted into satellite offices that will mainly have a marketing presence as well as line underwriting functions. In conjunction with these expense initiatives, as well as the write-off of certain accounts receivable, the Property and Casualty Group has recorded $29.9 million of non-cash restructuring charges in 1996. See "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations." The Property and Casualty Group is presently renewing its emphasis on its traditional core business, workers' compensation. Management believes that it can capitalize on the recent regulatory reforms, attract additional business based upon the Property and Casualty Group's expertise in workers' compensation and reduce expenses, because acquisition costs are lower for workers' compensation than other lines of commercial insurance. In Pennsylvania, the Property and Casualty Group will seek to expand and retain more of its premium base in territories which meet the Property and Casualty Group's underwriting and actuarial criteria. Recent regulatory reforms in Pennsylvania (Acts 44 and 57) have made workers' compensation business more attractive from an underwriting perspective than it had been in the early 1990's. The workers' compensation system in certain other existing marketing territories (specifically, North Carolina and Virginia) has also improved in recent years. In addition, the Property and Casualty Group intends to expand into certain new territories. In 1996, the Property and Casualty Group began writing -3- business in New York and South Carolina. In all new territories, the Property and Casualty Group will undertake a target marketing effort by identifying profiles of entities that it desires to insure. These profiles will be communicated to the key producers in the territories. It is also contemplated that the Property and Casualty Group will seek to expand its relationships with larger national and regional brokerage operations in both its existing and new territories. However, no assurance can be given that the Property and Casualty Group will be able to accomplish the above marketing plan. The Property and Casualty Group intends to continue writing other lines of property and casualty insurance, but generally only if such writings are supported by its core workers' compensation business. Effective January 1, 1997, the Property and Casualty Group has reduced its retention on commercial casualty lines of business to $175,000 from $500,000. The Property and Casualty Group has established two internal run-off operations to reinsure certain obligations associated with workers' compensation claims for the years 1991 and prior of the Pooled Companies for statutory accounting purposes. The results of the internal run-off operations are included in the GAAP financial results of the Property and Casualty Group. See "PMA Insurance, Cayman Ltd." and "MASCCO" below. Business Written The following table sets forth certain information on the Property and Casualty Group's statutory net premiums written for the years indicated: Years Ended December 31, (dollar amounts in thousands)
1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- Workers' Compensation................... $198,198 $236,742 $267,033 $342,184 $373,261 Commercial Auto......................... 35,224 39,834 38,984 48,108 49,065 Commercial Multi-Peril.................. 35,108 40,659 31,123 27,306 20,805 General Liability & Umbrella............ 8,204 11,370 12,691 16,788 12,799 Property & Other........................ 6,245 8,511 3,320 324 420 -------- -------- -------- -------- -------- Total.............................. $282,979 $337,116 $353,151 $434,710 $456,350 ======== ======== ======== ======== ========
Workers' Compensation Insurance Workers' compensation is a statutory system that requires employers to provide workers' compensation benefits to their employees and their employees' dependents for injuries and occupational diseases arising out of employment, regardless of whether such injuries result from the employer's or the employee's negligence. Employers may insure their workers' compensation obligations or, subject to regulatory approval, self-insure such liabilities. State workers' compensation statutes require that a policy cover three types of benefits: medical expenses, disability (indemnity) benefits and death benefits. The amounts of disability and death benefits payable for various types of claims are established by statute, but no maximum dollar limitation exists for medical benefits. Workers' compensation benefits vary among states, and insurance rates are subject to differing forms of state regulation. Based upon direct written premium information published by A.M. Best for the most recently available year (1995), the Property and Casualty Group is the second largest private writer of workers' compensation insurance in Pennsylvania and between the fourth and twelfth largest writer of -4- workers' compensation insurance in the remaining named jurisdictions listed in the table below. The Property and Casualty Group has focused on these jurisdictions based upon its knowledge of their workers' compensation systems and the Property and Casualty Group's assessment of their business, economic and regulatory climates. Rate adequacy, regulatory climate, economic conditions and other factors in each state are closely monitored and taken into consideration in the underwriting process. Management intends to employ similar analyses in determining whether and to what extent the Property and Casualty Group will sell its products in additional jurisdictions. See "Underwriting" below. The following table sets forth certain information with respect to the statutory direct workers' compensation business written by jurisdiction for the years indicated: Years Ended December 31, (dollar amounts in thousands)
1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- Pennsylvania................... $134,171 $142,234 $169,448 $224,067 $230,504 New Jersey..................... 17,995 24,388 31,287 47,745 55,132 Virginia....................... 17,449 26,395 29,938 31,545 28,112 Maryland....................... 11,406 17,993 14,391 15,318 19,878 North Carolina................. 8,195 14,035 11,649 21,216 22,313 Delaware....................... 7,545 5,763 4,831 4,274 3,481 Other.......................... 5,403 7,889 4,864 7,165 8,830 -------- -------- -------- -------- -------- Total.......................... $202,164 $238,697 $266,408 $351,330 $368,250 ======== ======== ======== ======== ========
Management of the Property and Casualty Group believes that conditions in the workers' compensation market have been improving in the last several years. In addition, several states, including Pennsylvania, have enacted reforms to the workers' compensation benefit system. In 1993, Pennsylvania enacted Act 44, which introduced medical cost containment measures to the workers' compensation benefit system and expanded the period of time during which the insurer may require an employee to accept medical treatment from the employer's list of designated health care providers. The law also reduced the minimum wage replacement benefit to injured workers, introduced a credit for unemployment compensation benefits, restored the right of subrogation against tort recoveries in work- related automobile accidents and created new anti-fraud measures. In June 1996, Pennsylvania enacted Act 57, which further reformed the workers' compensation system in the state. Among its provisions, Act 57: (i) imposes application of American Medical Association Impairment Guidelines for the assessment of permanent and total claims after the first two years of total disability compensation payments and limits indemnity benefits to an additional 500 weeks for workers who are not at least 50% disabled (as measured by those guidelines); (ii) contains certain Social Security and pension benefit offsets; (iii) further increases the time frame for directed medical treatment; (iv) addresses certain inequities in the average weekly wage calculation; and (v) increases the ability of employers to demonstrate that injured workers have earning capacity. To date, Act 44 has had a favorable impact on medical loss costs in Pennsylvania and Act 57 is expected to have a positive impact on indemnity loss costs. In recognition of these developments, in the respective first years following the enactment of Act 44 and Act 57, the average manual rate level in Pennsylvania decreased approximately 10% in 1994 and approximately 25% in 1997. The benefit reforms, management's re-underwriting of the Property and Casualty Group's book of business and the use of loss-sensitive and alternative market products have had a favorable impact on the Property and Casualty Group's accident year loss ratios, which have declined as follows: -5- Accident Estimated Undiscounted Year Pure Loss Ratio ---- --------------- 1990 100% 1991 86% 1992 80% 1993 64% 1994 64% 1995 63% 1996 63% Workers' Compensation Products The Property and Casualty Group offers a variety of workers' compensation products to its customers. Certain of these products are based on rates filed and approved by state insurance departments ("rate-sensitive products"), while others are priced to a certain extent on the basis of the insured's own loss experience ("loss-sensitive products"). In the last five years, the Property and Casualty Group has also developed and sold large deductible products and other programs and services to customers who agree to assume an even greater exposure to loss than under more traditional loss-sensitive products ("alternative market products"). The Property and Casualty Group decides which type of product to offer a customer based upon the customer's needs and the underwriting review. See "Underwriting" below. Set forth below is percentage information on the voluntary workers' compensation direct premiums written by product type for the policy years indicated:
1996 1995 1994 1993 1992 1991 1990 1989 ---- ---- ---- ---- ---- ---- ---- ---- Rate-sensitive products ....... 57% 52% 50% 54% 53% 54% 60% 73% Loss-sensitive products ....... 30% 34% 39% 40% 46% 46% 40% 27% Alternative market products ... 13% 14% 11% 6% 1% 0% 0% 0% --- --- --- --- --- --- --- --- Total ..................... 100% 100% 100% 100% 100% 100% 100% 100% === === === === === === === ===
Rate-Sensitive Workers' Compensation Products Rate-sensitive products include fixed-cost policies and dividend paying policies. The premium charged on a fixed-cost policy is based upon the manual rates filed with and approved by the state insurance department and does not increase or decrease based upon the losses incurred during the policy period. Under policies that are subject to dividend plans, the customer may receive a dividend based upon loss experience during the policy period. Since the late 1980s, the Property and Casualty Group has reduced its proportion of rate-sensitive products from over 70% to approximately 57%. With the enactment of regulatory reform in several jurisdictions in the Property and Casualty Group's marketing territory, the Property and Casualty Group is more interested in this type of business and may write more rate-sensitive accounts in such jurisdictions in the future. Loss-Sensitive Workers' Compensation Products The Property and Casualty Group's loss-sensitive products adjust the amount of the insured's premiums after the policy period expires based upon the insured's actual losses incurred during the policy period. These loss-sensitive products are generally subject to less price regulation than rate-sensitive products and reduce, but do not eliminate, risk to the insurer. Under these types of policies, claims professionals and actuaries periodically evaluate the reserves on losses after the policy period expires to -6- determine whether additional premiums or refunds are owed under the policy. Such policies are typically open for adjustments for an average of five years after policy expiration. The Property and Casualty Group generally restricts such loss-sensitive products to accounts developing annual minimum premiums in excess of $100,000. Alternative Market Workers' Compensation Products Since 1992, the Property and Casualty Group has developed a variety of alternative market products for larger accounts, including large deductible policies and off-shore captive programs. Typically, the Property and Casualty Group receives a lower up-front premium for these types of alternative market product plans. However, under this type of business, the insured retains a greater share of the underwriting risk than under rate-sensitive or loss-sensitive products, which reduces the potential for unfavorable claim activity on the accounts and encourages loss control on the part of the insured. For example, under a large deductible policy, the customer is responsible for paying its own losses up to the amount of the deductible for each occurrence. The deductibles under such policies generally range from $250,000 to $1.0 million. Workers' Compensation Residual Market Business Workers' compensation insurers doing business in certain states are required to provide insurance for risks which are not otherwise written on a voluntary basis by the private market ("residual market business"). This system exists in all of the Property and Casualty Group's current marketing jurisdictions, except Pennsylvania and Maryland. In these two states, separate governmental entities write all of the workers' compensation residual market business. In 1996, the Property and Casualty Group wrote $8.3 million of residual market business, which constituted approximately 4% of its voluntary net workers' compensation premiums written. Based upon data for policy year 1996 reported by the National Council on Compensation Insurance, the percentage for the industry as a whole was 16%. Commercial Lines The Property and Casualty Group writes property and liability coverages for larger and middle market accounts which satisfy its underwriting standards. See "Underwriting" below. These coverages feature package, umbrella and commercial automobile business. During the present soft market, prices for commercial coverages have been particularly competitive. The Property and Casualty Group intends to continue offering these products, but generally only if they support the core workers' compensation business. In addition, effective January 1, 1997, the Property and Casualty Group has reduced its retention on commercial casualty lines of business to $175,000 from $500,000. See "The Company's Reinsurance Ceded" below. Home Office and Field Operations As of March 31, 1997, 234 employees worked in the home office located in Blue Bell, Pennsylvania, and 628 employees were assigned to field offices located throughout the Property and Casualty Group's marketing territory. Senior executives, financial operations, management information systems, human resources, actuarial services and long-range planning teams are headquartered in the home office. The definition of overall underwriting standards and major account and alternative market underwriting support also take place in the home office. The home office works in conjunction with senior managers from the field to establish -7- the Property and Casualty Group's business plan and underwriting standards, which are then implemented by the field organization. The field organization currently consists of three branch offices in the major marketing areas in Pennsylvania and branch offices in each of Maryland, New Jersey, Virginia and North Carolina as well as smaller satellite offices in Ohio and New York. The branch offices deliver a full range of services directly to customers located in their service territory, and the satellite offices offer primarily underwriting and claim adjustment services. The Property and Casualty Group is in the process of reorganizing the field office functions. The seven branch offices will be consolidated into three regional service centers located in Valley Forge, Pennsylvania, Harrisburg, Pennsylvania and Richmond, Virginia, which will encompass staff underwriting functions, certain processing activities, and claims adjusting. The other offices will be converted into satellite offices. Distribution The Property and Casualty Group distributes its products through approximately 20 employees and approximately 240 independent brokers and agents. The employees are generally responsible for certain business located in Pennsylvania. For the year ended December 31, 1996, these employees produced $51.6 million in direct premiums written, constituting 17% of the Property and Casualty Group's direct business. The brokers and agents write business throughout the marketing territory. In 1996, the top ten brokers and agents accounted for 20% of the Property and Casualty Group's business, the largest of which accounted for not more than 4% of its business. All brokers and agents are required to submit business to the Property and Casualty Group's underwriting process before business may be accepted. During the last several years, the Property and Casualty Group has analyzed the business produced by the brokers and agents. Based upon this review, the Property and Casualty Group reduced the broker and agent force from approximately 370 in 1989 to approximately 240 currently. The Property and Casualty Group monitors several statistics with respect to its producer force, including the number of years the producer has been associated with the Property and Casualty Group, the percentage of the producer's business that is underwritten by the Property and Casualty Group, the ranking of the Property and Casualty Group within the producer's business, and the profitability of the producer's business. The relationships with former brokers and agents were terminated for a variety of reasons, including lack of profitability of a terminated producer's book of business, absence of the types of accounts that the Property and Casualty Group wants to write and lack of commitment by the producer to the Property and Casualty Group's customer service program. The current distribution network generally consists of large regional brokers that specialize in larger to middle market accounts that require the variety of workers' compensation, commercial lines and alternative market products offered by the Property and Casualty Group. Underwriting Home office underwriters, in consultation with casualty actuaries, determine the general types of business to be written using a number of criteria, including past performance, relative exposure to hazard, premium size, type of business and other indicators of potential loss. The home office underwriting team also establishes classes of business that the Property and Casualty Group generally will not write, such as most coastal property exposures, certain hazardous products and activities and certain environmental coverages. The home office establishes the overall business goals and the underwriting authority for each branch office. It also identifies specific types of business that must be referred to home office underwriting specialists and actuaries for individual pricing, including large accounts over a specified dollar limit and alternative market workers' compensation products. Underwriters and risk-control professionals in the field -8- work as a team with the marketing force to identify business that meets prescribed underwriting standards and to develop specific strategies to write the desired business. In performing this assessment, the field office professionals also consult with actuaries who have been assigned to the specific field office regarding loss trends and pricing and utilize actuarial loss rating models to assess the projected underwriting results of accounts. The Property and Casualty Group also employs credit analysts. These employees review the financial strength and stability of customers whose business is written on loss-sensitive and alternative market products and specify the type and amount of collateral that customers must provide under these arrangements. Rehabilitation and Managed Care The Property and Casualty Group uses a variety of managed care techniques to reduce costs and losses. Disability management coordinators and point-of-service case managers, all of whom are registered nurses, work together with claims professionals to provide expeditious medical and disability management to injured workers and to investigate injuries. The case managers and professionals also help employers identify opportunities that allow injured employees to make a gradual transition to full-time, full-duty jobs. The Property and Casualty Group also has contracts with preferred provider networks consisting of medical practitioners selected for their expertise in treating injured workers. Specialties include occupational medicine, physical medicine, orthopedics and neurology. There are also preferred pharmacy networks to reduce the cost of medication. Finally, an automated program is used to check medical bills for accuracy, duplication, unrelated charges and overcharges. Questionable bills are forwarded to the Cost Containment Unit, which is staffed by registered nurses and resolves disputed or suspect charges. Claims Administration Claims services are delivered to customers primarily through employees in the field offices. Certain specialized matters, such as asbestos and environmental claims, are referred to a special unit in the home office. The Property and Casualty Group also employs in-house attorneys who represent customers in workers' compensation cases and other insurance matters. The Property and Casualty Group has a separate formal anti-fraud unit. The anti-fraud unit investigates suspected false claims and other irregularities and cooperates with regulatory and law enforcement officials in prosecuting violators. PMA Management Corp. PMA Management Corp. offers claims, risk management and related services primarily to self-insureds on an unbundled basis. In addition, PMA Management Corp. offers and administers rent-a-captive programs written through offshore insurance subsidiaries of the Company. Chestnut Insurance Company, Limited Chestnut Insurance Company, Limited ("Chestnut") is a Bermuda insurance company that was formed in 1982 as a wholly owned subsidiary of the Company. From 1992 to 1995, the Pooled Companies entered into aggregate excess reinsurance arrangements with Chestnut that reduced the statutory discount on loss reserves for the Pooled Companies. Chestnut is included in the Property and Casualty Group's GAAP results. -9- Effective as of December 31, 1996, PMA Insurance, Cayman Ltd. assumed all of Chestnut's liabilities, and $314.5 million of cash and other assets were transferred from Chestnut to PMA Insurance, Cayman Ltd. Chestnut is currently an inactive company. PMA Insurance, Cayman Ltd. PMA Insurance, Cayman Ltd. ("PMA Cayman"), a wholly owned subsidiary of the Company, was incorporated in Grand Cayman, and had no material operations until 1996. Following the assumption of the business formerly written by Chestnut, as well as reserves under a stop-loss reinsurance agreement with the Pooled Companies, PMA Cayman has $335.4 million in total assets and $334.4 million in total reserves at year end 1996. Substantially all of PMA Cayman's assets are held in trust for the benefit of the Pooled Companies. PMA Cayman is included in the Property and Casualty Group's GAAP results. Mid-Atlantic States Casualty Company Mid-Atlantic States Casualty Company ("MASCCO") is a Pennsylvania insurance company and a wholly owned subsidiary of the Company. Prior to 1997, MASCCO was a party to a pooling agreement with the Pooled Companies. Effective December 31, 1996, and with the approval of the Pennsylvania Insurance Commissioner (the "Commissioner"), MASCCO withdrew from the pool and ceased writing any new business. The Pooled Companies also ceded to MASCCO the indemnity portion of Pennsylvania workers' compensation claims for accident years 1991 and prior. Pursuant to this agreement, the Pooled Companies transferred to MASCCO $131.3 million of loss reserves for known claims for death or permanent injury, which reserves were supported by $131.3 million of investment grade United States Government and corporate obligations. Additionally, an $11.0 million capital contribution was made to MASCCO. MASCCO is included in the Property and Casualty Group's GAAP results. Pursuant to a surplus maintenance agreement between PMC and the Commissioner, MASCCO is required to discount its reserves at no more than 5%, maintain a maximum reserve to surplus ratio of 8:1 and continue to invest its assets only in investment grade securities. PMA Re Background PMA Re is primarily a treaty reinsurer of domestic property and casualty business that operates in the brokered market. The Reinsurance Association of America (the "RAA") reported that as of December 31, 1996, PMA Re was the seventeenth largest professional reinsurer in the brokered market and the twenty- third largest professional reinsurer in the United States market based upon statutory capital and surplus. In the five-year period ended December 31, 1996, PMA Re has expanded its premium base without changing its underwriting standards. From 1992 to 1996, PMA Re reported premium volume growth which exceeded that of the overall reinsurance industry. During such period, PMA Re's net premiums written have increased 71.4%, while it is estimated that the reinsurance industry grew 54.6% in the same period based upon information published by the RAA. Management believes that the expansion of PMA Re's premium base has been attributable to several factors. First, PMA Re's volume has been impacted by industry trends that have tended to increase the demand for reinsurance. Specifically, much of the growth that has occurred in the primary insurance market in recent years has been attributable to regional and niche companies. Typically, these companies demand more reinsurance than their larger counterparts. Second, there has been growth in primary industry segments in which PMA Re specializes, such as excess and surplus lines. Third, -10- management believes that PMA Re has benefited from the greater selectivity by ceding companies which have restricted the number of reinsurers with which they will transact business. PMA Re's premium volume increases have largely taken the form of increased participation levels on clients' existing programs, as well as writing of additional layers and programs with current clients. To a lesser extent, volume growth has been attributable to business written with new ceding company clients. Reinsurance Products The following table indicates PMA Re's gross and net premiums written by major category of business: (dollar amounts in thousands)
1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- Gross Premiums Written (1) Property................................ $ 63,325 $ 63,693 $ 36,592 $ 28,217 $ 20,477 Casualty................................ 143,991 128,736 107,001 94,482 93,965 Other Lines............................. 842 (63) 837 1,854 1,118 -------------- ------------- ------------- ------------- ------------- Total................................... $ 208,158 $ 192,366 $ 144,430 $ 124,553 $ 115,560 ============== ============= ============= ============= ============= Net Premiums Written (2) Property................................ $ 41,240 $ 45,440 $ 23,929 $ 18,407 $ 10,676 Casualty................................ 122,008 107,382 88,585 82,016 83,894 Other Lines............................. 805 (62) 837 1,854 1,118 -------------- ------------- ------------- ------------- ------------- Total................................... $ 164,053 $ 152,760 $ 113,351 $ 102,277 $ 95,688 ============== ============= ============= ============= =============
- - - ----------------------- (1) In 1996, gross premiums written include $3.5 million of facultative reinsurance, comprised of the following: property, $1.1 million; casualty, $2.3 million; and other lines, $0.1 million. (2) In 1996, net premiums written include $1.1 million of facultative reinsurance, broken down as follows: property, $0.5 million; casualty, $0.6 million; and other lines, less than $0.1 million. Casualty Business In terms of net premiums written, casualty business has increased at a compound annual growth rate of 9.1% in the five-year period ended December 31, 1996, and casualty business accounted for 74.4% of net premiums written in 1996. The following table indicates the mix of casualty business by class on the basis of net premiums written: -11- (dollar amounts in thousands)
1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- Other Liability.................................. $ 97,755 $ 87,938 $ 71,477 $ 59,049 $ 60,275 Auto Liability................................... 17,608 13,032 10,134 12,616 11,439 Workers' Compensation............................ 6,645 6,412 6,974 10,351 12,180 -------------- ------------- ------------- ------------- ------------- Total........................................ $ 122,008 $ 107,382 $ 88,585 $ 82,016 $ 83,894 ============== ============= ============= ============= =============
Due to the competitive conditions in the casualty market, management has maintained a relatively conservative growth posture for casualty business in the five-year period. PMA Re has generally focused on other liability coverages (which include general liability, products liability, professional liability and other more specialized liability coverages), while maintaining a relatively stable level of auto liability premiums, and de-emphasizing workers' compensation coverages. In 1994, the growth in other liability was mainly attributable to excess and umbrella business, as PMA Re added several significant programs. In 1995 and 1996, PMA Re began to decrease the amount of its excess and umbrella business, as rates and terms for this type of business were no longer as attractive as they had been. Much of the growth in 1995 and 1996 related to the expansion and addition of several programs covering specialty business (which includes professional liability, directors' and officers' liability, environmental impairment liability, employment practices liability and other miscellaneous specialized coverages). Such specialty business now accounts for approximately 38% of in force casualty treaty business. Property Business Property business has increased at a compound annual growth rate of 30.4% in the five-year period ended December 31, 1996, and accounted for 25.1% of net premiums written in 1996. Much of PMA Re's growth in property business occurred in 1995 and 1994, with increases in net premiums written of 89.9% and 30.0%, respectively. Such growth was attributable to the expansion of several programs covering auto physical damage, inland marine risks and certain specialty property coverages written on a surplus lines basis. PMA Re's net property writings declined in 1996 by 9.2% as a result of PMA Re's purchase of more retrocessional protection and increased ceding company retentions for certain coverages. PMA Re has generally de-emphasized catastrophe coverages. As of December 31, 1996, catastrophe business accounted for approximately 6.8% of property premiums in force. Typically, PMA Re requires that property programs contain per occurrence limits and/or have limited catastrophe exposure due to the location of the insured values or the nature of the underlying exposures. As of January 1, 1997, PMA Re maintained catastrophe retrocessional protection of $46.0 million excess of $2.0 million. Management believes that its catastrophe retrocessional coverage is adequate to protect PMA Re against its probable maximum loss from a significant catastrophe. See "Underwriting" and "The Company's Reinsurance Ceded" below. Facultative Reinsurance In November 1995, PMA Re commenced writing facultative reinsurance. Although the amount of net premiums written from facultative business has been relatively insignificant through 1996, it is anticipated that facultative reinsurance will be a source of premium growth in the future. PMA Re will offer facultative products as a complement to existing treaty business, as well as offering such products to companies with whom PMA Re does not presently have a relationship. The products offered include -12- traditional facultative certificates and automatic or semi-automatic programs for both property and casualty exposures. Marketing PMA Re operates primarily through the domestic brokered reinsurance market in which it has developed relationships with major reinsurance brokers enabling it to gain access to a wide range of ceding companies with varying reinsurance and related service needs. PMA Re's brokers that accounted for more than 10% of the gross premiums in force as of December 31, 1996 were as follows: (dollar amounts in thousands)
Broker Gross Premiums in Force Percentage of Total - - - ------ ----------------------- ------------------- Aon Reinsurance........................ $50,501 22.7% E. W. Blanch........................... 42,714 19.2% Guy Carpenter & Company................ 34,942 15.7% Sedgwick Re............................ 22,731 10.2%
The above brokers are among the largest brokers in the reinsurance industry. Beginning in 1996, PMA Re began a target marketing program designed to identify companies in the smaller and medium company segments with whom PMA Re presently has either no or an insignificant relationship, but meet desired risk profiles. After such identification, marketing and underwriting personnel work with the ceding company's broker to enable PMA Re to have an opportunity to participate in the reinsurance coverage. As of December 31, 1996, PMA Re had 157 unaffiliated clients, with no individual client accounting for more than 8% of gross premiums in force. Underwriting PMA Re's underwriting process has two principal aspects: underwriting the specific program to be reinsured and underwriting the ceding company. Underwriting the specific program to be reinsured involves, in addition to pricing, a review of the type of program, the total risk and the ceding company's policy forms. Underwriting the ceding company involves an evaluation of the expected future performance of the ceding company through an examination of that company's management, financial strength, claims handling and underwriting abilities. PMA Re generally conducts underwriting and claim reviews at the offices of prospective ceding companies before entering into a major treaty, as well as throughout the life of the reinsurance contract. In underwriting excess-of-loss business, PMA Re has typically sought to write treaties that are exposed to loss on a per occurrence basis within the original policy limits of the ceding company. Management believes these layers in general lend themselves more effectively to actuarial pricing techniques. PMA Re's underwriters and actuaries work closely together to evaluate the particular reinsurance program. Using the information provided by the broker, the actuaries employ pricing models to estimate the ultimate exposure to the treaty. The pricing models that are utilized employ various experience rating and exposure rating techniques and are tailored in each case to the risk exposures underlying each treaty. The -13- underwriters then weigh the results of the pricing models with the terms and conditions being offered to determine PMA Re's selected price. As noted above, PMA Re typically requires occurrence limits for property coverages and requires that the underlying insured values not be catastrophe exposed. Also, PMA Re does not emphasize catastrophe reinsurance coverages and has historically maintained sufficient retrocessional protection. Recent natural catastrophes did not have a significant adverse impact on PMA Re's combined ratio and earnings inasmuch as PMA Re has not focused on assuming catastrophe reinsurance business or catastrophe-exposed coverages and it has had sufficient retrocessional arrangements. The following table indicates PMA Re's gross, ceded and net losses from recent catastrophes as of December 31, 1996: (dollar amounts in thousands)
Insured PMA Re PMA Re PMA Re Catastrophe Year Loss(1) Gross Loss Ceded Loss Net Loss - - - ----------- ---- ------- ---------- ---------- -------- Hurricane Hugo........................ 1989 $ 4,200,000 $ 13,200 $ 11,400 $ 1,800 San Francisco Earthquake.............. 1989 1,000,000 2,300 1,000 1,300 Oakland Fires......................... 1991 1,700,000 2,700 1,400 1,300 Hurricane Andrew...................... 1992 15,500,000 22,800 20,700 2,100 Hurricane Iniki....................... 1992 1,600,000 4,100 2,900 1,200 Northridge, CA Earthquake............. 1994 12,500,000 17,600 11,700 5,900 Hurricane Fran........................ 1996 1,500,000 1,300 900 400
- - - ------------------ (1) Source: Property Claims Services. PMA Re has no significant obligations to its reinsurers as a result of the above catastrophes. -14- Claims Administration PMA Re's claims department evaluates loss exposures, establishes individual claim reserves, pays claims, provides claims-related services to PMA Re's clients, audits the claims activities of current clients and assists in the underwriting process by evaluating the claims departments of prospective clients. PMA Re's claims department's evaluation of loss exposure includes reviewing loss reports received from ceding companies to confirm that claims are covered under the terms of the relevant reinsurance contract, establishing reserves on an individual case basis and monitoring the adequacy of those reserves. The claims department monitors the progress and ultimate outcome of the claims to determine that subrogation, salvage and other cost recovery opportunities have been adequately explored. The claims department performs these functions in coordination with PMA Re's actuarial and underwriting departments. In addition to evaluating and adjusting claims, the claims department conducts claims audits at the offices of prospective ceding companies. Satisfactory audit results are required in order for reinsurance coverage to be written by PMA Re. Also, the claims department conducts annual claims audits for many current and former client ceding companies. The Company's Reinsurance Ceded The Company follows the customary insurance practice of reinsuring with other insurance companies a portion of the risks under the policies written by the Insurance Subsidiaries. This reinsurance is maintained to protect the Insurance Subsidiaries against the severity of losses on individual claims and unusually serious occurrences in which a number of claims produce an aggregate extraordinary loss. Although reinsurance does not discharge the Insurance Subsidiaries from their primary maximum liabilities to their policyholders for the full amount of the losses insured under the insurance policies, it does make the assuming reinsurer liable to the Insurance Subsidiaries for the reinsured portion of the risk. The Insurance Subsidiaries' reinsurance ceded agreements generally may be terminated at their annual anniversary by either party upon 30 to 90 days' notice. In general, the reinsurance agreements are of the treaty variety, which cover all underwritten risks of the types specified in the treaties. Presently, the Property and Casualty Group carries excess-of-loss per occurrence reinsurance for: $103.5 million over a net retention of $1.5 million on workers' compensation and $49.5 million over a net retention of $175,000 on other casualty lines; $2.0 million per occurrence on automobile physical damage and $19.5 million per risk ($28.5 million per occurrence) on property claims over its combined net retention of $500,000. A property catastrophe program with a per occurrence limit of $15.0 million in excess of an $850,000 retention is maintained to provide protection for multiple property losses involved in one occurrence. The Property and Casualty Group also maintains reinsurance protection for its umbrella risks at $9.5 million over a net retention of $500,000 and purchases facultative reinsurance for certain other risks. PMA Re has its own ceded reinsurance program. The maximum gross lines that PMA Re will write are $2.0 million for property covers and $7.5 million for casualty covers. Net retentions on any one claim are $500,000 for property covers and $1.5 million for casualty covers. PMA Re maintains property catastrophe retrocession programs in an aggregate amount of $46.0 million in excess of $2.0 million for multiple claims arising from two or more risks in a single occurrence or event. PMA Re also maintains casualty retrocession programs. PMA Re has a casualty retrocession contract, written on a funds withheld basis, which covers individual casualty losses and provides low-layer -15- clash protection. For individual losses, the contract covers $6.0 million in excess of $1.5 million on a per occurrence basis. The contract has clash limits for losses arising from two or more risks of $1.25 million in excess of $1.5 million. The term of the contract is three years, and the term aggregate limit is $25.0 million plus the amount of funds withheld. In addition to the above programs, PMA Re maintains casualty clash protection of $12.5 million in excess of $2.75 million per occurrence and a workers' compensation retrocession program with limits of $53.0 million in excess of $2.0 million per occurrence. Also, PMA Re maintains aggregate protection up to $22.3 million in excess of $190.0 million for the current accident year. The Company performs extensive credit reviews on its reinsurers, focusing on, among other things, financial capacity, stability, trends, and commitment to the reinsurance business. Prospective and existing reinsurers failing to meet the Company's standards are excluded from the Company's reinsurance programs. In addition, the Company requires letters of credit to support balances due from reinsurers not authorized to transact business in Pennsylvania. Loss Reserves In many cases significant periods of time, ranging up to several years or more, may elapse between the occurrence of an insured loss, the reporting of the loss to the insurer and the insurer's payment of that loss. Liabilities for reinsurers generally become known more slowly than for primary insurers and are generally subject to more unforeseen development. To recognize liabilities for unpaid losses, insurers establish reserves, which are balance sheet liabilities representing estimates of future amounts needed to pay claims with respect to insured events which have occurred, including events that have not been reported to the insurer. Reserves are also established for LAE representing the estimated expenses of settling claims, including legal and other fees, and general expenses of administering the claims adjustment process. When a claim is reported, claims personnel establish a case reserve for the estimated amount of the ultimate payment. The estimate reflects the informed judgment of such personnel, based on general corporate reserving practices and the experience and knowledge of such personnel regarding the nature and value of the specific type of claim. Reserves are also established on an aggregate basis to provide for losses incurred but not yet reported to the insurer, for the overall adequacy of case reserves and the estimated expenses of settling claims. Such reserves are estimated using various generally accepted actuarial techniques. As part of the reserving process, historical data is reviewed and consideration is given to the anticipated impact of various factors such as legal developments, changes in social attitudes and economic conditions, including the effects of inflation. This process relies on the basic assumption that past experience, adjusted for the effect of current developments and likely trends, is an appropriate basis for predicting future events. The reserving process provides implicit recognition of the impact of inflation and other factors affecting claims payments by taking into account changes in historic payment patterns and perceived probable trends. There is generally no precise method, however, for subsequently evaluating the adequacy of the consideration given to inflation or to any other specific factor, since the eventual deficiency or redundancy of reserves is affected by many factors, some of which are interdependent. -16- The Company's losses and LAE have been impacted by significant loss reserve strengthening for the Property and Casualty Group, partially offset by favorable development for PMA Re. The components of the Company's incurred losses and LAE for prior accident years are as follows: (dollar amounts in millions)
1996 1995 1994 ---- ---- ---- The Property and Casualty Group: Workers' compensation................................... $110.0 $54.7 $13.2 Asbestos and environmental.............................. 60.4 23.4 4.6 Other losses and LAE.................................... 21.0 (11.6) 0.8 ------ ----- ----- Total.................................................... 191.4 66.5 18.6 PMA Re....................................................... (28.6) (15.0) (15.0) Other........................................................ (6.7) -- (3.2) ------ ----- ----- $156.1 $51.5 $0.4 ====== ===== =====
The following table shows the composition of changes in the reserves for losses and LAE for the past three years: Years Ended December 31, (dollar amounts in thousands)
1996 1995 1994 ---- ---- ---- Balance at January 1.................................... $2,069,986 $2,103,714 $2,150,665 Less: reinsurance recoverable on unpaid losses and LAE...................................... 261,492 247,856 218,695 ---------- ---------- ---------- Net balance at January 1................. 1,808,494 1,855,858 1,931,970 ---------- ---------- ---------- Losses and LAE incurred, net: Current year.......................................... 323,069 357,787 352,025 Prior years........................................... 156,074 51,491 366 Accretion of discount (includes ($35,000) effect of the change in the discount rate for the Property and Casualty Group's workers' compensation unpaid losses from 4% to 5% in 1995)................................................. 57,480 13,300 50,478 ---------- ---------- ---------- Total losses and LAE incurred, net...................... 536,623 422,578 402,869 ---------- ---------- ---------- Losses and LAE paid, net: Current year......................................... (72,194) (71,126) (71,965) Prior years.......................................... (438,427) (398,816) (407,016) ---------- ---------- ---------- Total losses and LAE paid, net.......................... (510,621) (469,942) (478,981) ---------- ---------- ---------- Net balance at December 31.............................. 1,834,496 1,808,494 1,855,858 Reinsurance recoverable on unpaid losses and LAE........ 256,576 261,492 247,856 ---------- ---------- ---------- Balance at December 31.................................. $2,091,072 $2,069,986 $2,103,714 ========== ========== ==========
-17- The following table shows how the Company's losses have been paid and reserves re-estimated over time, compared to the liability initially estimated: Consolidated Loss and Loss Adjustment Expense Development (dollar amounts in millions)
1986 1987 1988 1989 1990 1991 1992 1993 ---- ---- ---- ---- ---- ---- ---- ---- I. Initial estimated liability for unpaid losses and LAE net of reinsurance recoverables: 995.0 1,246.1 1,457.4 1,632.2 1,734.6 1,824.3 1,941.0 1,932.0 II. Amount of reserve paid, net of reinsurance through: - one year later............. 238.2 305.2 322.3 444.6 470.8 490.5 442.4 407.8 - two years later ........... 415.5 504.4 601.1 771.5 842.0 848.8 779.1 746.1 - three years later.......... 551.2 691.8 825.9 1,042.6 1,133.8 1,127.0 1,066.8 1,055.9 - four years later........... 674.5 834.0 1,011.4 1,258.0 1,353.1 1,364.9 1,329.2 - five years later........... 788.5 955.8 1,165.8 1,421.4 1,539.4 1,585.4 - six years later............ 844.3 1,063.1 1,283.8 1,553.1 1,715.1 - seven years later.......... 917.6 1,143.3 1,380.1 1,684.6 - eight years later.......... 977.7 1,214.0 1,478.9 - nine years later........... 1,030.7 1,288.2 - ten years later............ 1,090.5 1994 1995 1996 ---- ---- ---- I. Initial estimated liability for unpaid losses and LAE net of reinsurance recoverables: 1,855.9 1,808.5 1,834.5 II. Amount of reserve paid, net of reinsurance through: - one year later............. 398.9 437.6 -- - two years later ........... 763.7 - three years later.......... - four years later........... - five years later........... - six years later............ - seven years later.......... - eight years later.......... - nine years later........... - ten years later............ III. Re-estimated liability, net of reinsurance as of: 1986 1987 1988 1989 1990 1991 1992 1993 ---- ---- ---- ---- ---- ---- ---- ---- - one year later............. 1,034.8 1,280.1 1,468.3 1,696.0 1,795.3 1,966.8 1,998.1 1,932.3 - two years later............ 1,079.5 1,303.9 1,511.9 1,742.5 1,949.9 2,067.5 2,006.5 1,982.5 - three years later.......... 1,080.9 1,339.1 1,553.3 1,876.0 2,034.1 2,081.5 2,060.6 2,163.9 - four years later........... 1,102.3 1,358.5 1,607.3 1,938.2 2,040.8 2,134.8 2,258.2 - five years later........... 1,119.4 1,368.4 1,651.5 1,935.1 2,123.0 2,302.0 - six years later............ 1,123.5 1,391.1 1,648.7 1,985.3 2,273.3 - seven years later.......... 1,141.5 1,392.8 1,684.2 2,098.2 - eight years later.......... 1,148.1 1,425.4 1,783.6 - nine years later........... 1,167.4 1,503.9 - ten years later............ 1,254.0 1994 1995 1996 ---- ---- ---- - one year later............. 1,907.4 1,964.6 -- - two years later............ 2,073.4 - three years later.......... - four years later........... - five years later........... - six years later............ - seven years later.......... - eight years later.......... - nine years later........... - ten years later............ 1986 1987 1988 1989 1990 1991 1992 1993 ---- ---- ---- ---- ---- ---- ---- ---- IV. Indicated deficiency: 259.0 257.8 326.2 466.0 538.7 477.7 317.2 231.9 V. Net liability - December 31, 1,932.0 Reinsurance recoverables 218.7 Gross Liability - December 31, 2,150.7 VI. Re-estimated Net Liability 2,163.9 Re-estimated reinsurance recoverables 188.4 Re-estimated Gross Liability 2,352.3 1994 1995 1996 ---- ---- ---- IV. Indicated deficiency: 217.5 156.1 -- V. Net liability - December 31, 1,855.9 1,808.5 1,834.5 Reinsurance recoverables 247.9 261.5 256.6 Gross Liability - December 31, 2,103.8 2,070.0 2,091.1 VI. Re-estimated Net Liability 2,073.4 1,964.6 1,834.5 Re-estimated reinsurance recoverables 232.8 265.4 256.6 Re-estimated Gross Liability 2,306.2 2,230.0 2,091.1
The columns in the above exhibit are not mutually exclusive. For example, if a reserve established in 1986 for a claim incurred during that year had been re-estimated during 1988, the re-estimate would be reflected in the table for each of the statement years from 1986 and 1987 during calendar years 1988 through 1996. Conditions and trends that have affected the reserve development reflected in the table may change and care should be exercised in making conclusions about the relative adequacy of reserves from such development. -18- The adverse development in workers' compensation loss and LAE reserves during this period primarily related to Pennsylvania workers' compensation claims from accident years 1987 through 1991. As claims data from these accident years have matured, the impact of disability and medical benefits available to claimants in Pennsylvania before the passage of reform legislation in 1993 and 1996, coupled with the economic conditions that have existed during the disability periods, has become more apparent. As such, the developed losses have exceeded management's prior estimates. The reform legislation enacted in 1993 and 1996 has introduced various controls and limitations on disability and medical benefits which management believes have had, and will continue to have, a beneficial effect on the loss ratio. In 1993, Pennsylvania enacted Act 44, which introduced medical cost containment measures and provided for the expansion of the period of time during which the insurer may require an employee to accept medical treatment from the employer's list of designated health care providers. As previously noted, in 1996, Pennsylvania enacted Act 57, which included various additional controls and limitations on disability and medical benefits in Pennsylvania. In addition to regulatory reforms and management's reunderwriting of the book of business, the loss ratios have been favorably impacted by the shift to loss-sensitive and alternative market products. Such impact is reflected in the improvement since 1990 in the workers' compensation accident year loss ratios (losses recorded for the year the event occurred expressed as a percentage of the premiums earned for that year), as the following chart indicates: Workers' Compensation Undiscounted Accident Year Pure Loss Ratios as of December 31, 1996 Accident Years Loss Ratio -------------- ---------- 1990 100% 1991 86% 1992 80% 1993 64% 1994 64% 1995 63% 1996 63% In addition, management is taking several steps to reduce the outstanding claims associated with the Pennsylvania workers' compensation business written through 1991. A commutation program was initiated in the fourth quarter 1996 and is expected to continue into late 1997. Commutations are agreements with claimants whereby the claimants, in exchange for a lump sum payment, will forego their rights to future indemnity payments from the Property and Casualty Group. Under Pennsylvania workers' compensation laws, all such commutation arrangements must be approved by the claimant and the Pennsylvania Workers' Compensation Board. As result of the commutation program, it is expected that investment income for the Property and Casualty Group will be less in 1997 than in 1996, as the cash flow associated with the commutation payments should reduce the Property and Casualty Group's average assets available for investment. It is also expected that the number of open claims for accident years 1991 and prior should decline as a result of this program. This reduction in open claims should reduce the possibility of further adverse development on such reserves, although there can be no assurances that the level of commutations will have a significant impact on the future development of the recorded reserves. -19- The adverse development in reserves associated with asbestos and environmental claims is the result of a detailed analysis of loss and LAE reserves associated with asbestos and environmental liability claims completed in 1996. The analysis of asbestos loss and LAE reserves involved a ground-up review and projection on an account-by-account basis. The analysis of environmental loss and LAE reserves involved an actuarial calendar year loss development technique. Estimation of obligations for asbestos and environmental exposures continues to be more difficult than for other loss reserves because of several factors, including: (i) evolving methodologies for the estimation of the liabilities; (ii) lack of reliable historical claim data; (iii) uncertainties with respect to insurance and reinsurance coverage related to these obligations; (iv) changing judicial interpretations; and (v) changing government standards. The Company's asbestos-related losses were as follows: Years Ended December 31, (dollar amounts in thousands)
1996 1995 1994 ---- ---- ---- Gross of reinsurance: Beginning reserves.................................... $ 27,611 $ 13,969 $ 12,913 Incurred losses and LAE............................... 62,854 22,482 6,424 Calendar year payments for losses and LAE............. (10,410) (8,840) (5,368) -------- -------- -------- Ending reserves....................................... $ 80,055 $ 27,611 $ 13,969 ======== ======== ======== Net of reinsurance: Beginning reserves.................................... $ 23,443 $ 8,168 $ 7,700 Incurred losses and LAE............................... 39,427 21,826 5,834 Calendar year payments for losses and LAE............. (9,570) (6,551) (5,366) -------- -------- -------- Ending reserves $ 53,300 $ 23,443 $ 8,168 ======== ======== ========
The Company's environmental-related losses were as follows: Years Ended December 31, (dollar amounts in thousands)
For the years ended December 31, 1996 1995 1994 ---- ---- ---- Gross of reinsurance: Beginning reserves.................................... $ 20,134 $ 20,952 $ 26,129 Incurred losses and LAE............................... 22,143 3,516 (2,150) Calendar year payments for losses and LAE............. (6,651) (4,334) (3,027) -------- -------- -------- Ending reserves....................................... $ 35,626 $ 20,134 $ 20,952 ======== ======== ======== Net of reinsurance: Beginning reserves.................................... $ 20,134 $ 20,952 $ 26,129 Incurred losses and LAE............................... 21,109 3,516 (2,150) Calendar year payments for losses and LAE............. (6,651) (4,334) (3,027) -------- -------- -------- Ending reserves....................................... $ 34,592 $ 20,134 $ 20,952 ======== ======== ========
-20- Of the total net asbestos and environmental reserves, $19.3 million were for established claims reserves at December 31, 1996 ($17.1 million at December 31, 1995) and $68.6 million were for incurred but not reported losses ($26.5 million at December 31, 1995). Management believes that its reserves for asbestos and environmental claims are appropriately established based upon known facts, existing case law and generally accepted actuarial methodologies. However, due to changing interpretations by courts involving coverage issues, the potential for changes in federal and state standards for clean-up and liability and other factors, the ultimate exposure to the Company for these claims may vary significantly from the amounts currently recorded, resulting in a potential adjustment in the claims reserves recorded. Additionally, issues involving policy provisions, allocation of liability among participating insurers, proof of coverage and other factors make quantification of liabilities exceptionally difficult and subject to adjustment based upon newly available data. See Note 3 to the Consolidated Financial Statements for additional detail on asbestos and environmental loss reserves. In 1996, the Property and Casualty Group's other commercial lines experienced reserve strengthening of $21.0 million, as compared to a reserve release of $11.6 million in 1995. The reserve strengthening was principally due to a re-estimation of LAE associated with general liability claims. The Property and Casualty Group expects that the average period that such claims are open to increase, and has increased the cost of adjusting such claims accordingly. The release of reserves in 1995 was primarily due to favorable loss experience in commercial automobile business. In addition to loss and LAE reserve adverse development, the 1996 calendar year loss ratio was impacted by a net $15.1 million accretion of discount on workers' compensation loss reserves. In 1995, losses and LAE incurred were impacted by a $35.0 million reduction of unpaid losses and LAE related to changing the rate at which workers' compensation unpaid losses are discounted for both SAP and GAAP. The Property and Casualty Group's Pennsylvania-domiciled insurance subsidiaries increased such discount rate from 4.0% to 5.0% in 1995, which was permitted and approved by the Pennsylvania Insurance Department. Loss reserves on other lines of business as well as LAE reserves for all lines of business are not discounted. PMA Re has reported favorable development of unpaid losses and LAE of $28.6 million in 1996 and $15.0 million in each of 1995 and 1994. Such favorable development is attributable to losses emerging at a lower rate than was anticipated when the initial accident year reserves were established. Investments The Company's investment policy objectives are to (i) seek competitive after-tax investment income and total return, (ii) maintain very high-grade asset quality and marketability on all investments, (iii) maintain a maturity distribution commensurate with the Company's business objectives, (iv) provide portfolio flexibility for changing business and investment climates and (v) provide liquidity to meet operating objectives. The Company has established strategies, asset quality standards, asset allocations and other relevant criteria for its fixed maturity and equity portfolios. In addition, maturities are structured after projecting liability cash flows with actuarial models. The Company also does not invest in various types of investments, including speculative derivatives and non-investment grade fixed-maturity investments. The Company's portfolio does not contain any significant concentrations in single issuers (other than U.S. Treasury obligations), industry segments or geographic regions. -21- The Company's Board of Directors is responsible for the Company's investments and investment policy objectives. The Company retains outside investment advisers to provide investment advice and guidance, supervise the Company's portfolio and arrange securities transactions through brokers and dealers. The Company's Executive and Finance Committees of the Board of Directors meet periodically with the investment advisers to review the performance of the investment portfolio and to determine what actions should be taken with respect to the Company's investments. Investments by the Pooled Companies, MASCCO and PMA Re must comply with the insurance laws and regulations of the Commonwealth of Pennsylvania. The Company's capital not allocated to the Pooled Companies, MASCCO and PMA Re may be invested in securities and other investments that are not subject to such insurance laws, but nonetheless conform to the Company's investment policy. The following table summarizes the Company's investments by carrying value as of December 31, 1996, 1995 and 1994:
(dollar amounts in millions) 1996 1995 1994 ---- ---- ---- Carrying Carrying Carrying Investment Value Percent Value Percent Value Percent - - - ---------- ----- ------- ----- ------- ----- ------- U.S. Treasury securities and obligations of U.S. Government agencies............. $1,602.8 70.8% $1,666.3 67.9% $1,050.8 45.4% Obligations of states and political subdivisions.......... 76.5 3.4% 435.9 17.8% 841.8 36.4% Corporate debt securities............ 372.8 16.5% 128.8 5.2% 45.6 2.0% Mortgage backed securities........... 74.0 3.3% -- -- 179.2 7.7% Equity securities.................... 0.3 -- 10.9 0.4% 17.5 0.8% Short-term investments............... 135.0 6.0% 214.1 8.7% 178.4 7.7% -------- ------ -------- ------ -------- ------ Total (1)....................... $2,261.4 100.0% $2,456.0 100.0% $2,313.3 100.0% ======== ====== ======== ====== ======== ======
- - - ----------- (1) As of December 31, 1996, the market value of the Company's total investments was $2,261.4 million. The following table indicates the composition of the Company's fixed maturities portfolio at carrying value, excluding short-term investments by rating as of December 31, 1996, 1995 and 1994:
(dollar amounts in millions) 1996 1995 1994 ---- ---- ---- Carrying Carrying Carrying Ratings (1) Value Percent Value Percent Value Percent - - - ----------- ----- ------- ----- ------- ----- ------- U.S. Treasury securities and AAA............................ $1,882.4 88.5% $2,025.5 90.8% $1,749.2 82.6% AA................................... 95.8 4.5% 174.1 7.8% 329.3 15.6% A.................................... 147.9 7.0% 31.4 1.4% 38.9 1.8% -------- ------ -------- ------ -------- ------ Total................................ $2,126.1 100.0% $2,231.0 100.0% $2,117.4 100.0% ======== ====== ======== ====== ======== ======
- - - ----------- (1) Ratings as assigned by Standard and Poor's. Such ratings are generally assigned at the issuance of the securities, subject to revision on the basis of ongoing evaluations. Ratings in the table are as of December 31 of the years indicated. -22- The following table sets forth scheduled maturities for the Company's investments in fixed maturities, excluding short-term investments, based on stated maturity dates as of December 31, 1996. Expected maturities will differ from contractual maturities because the issuers may have the right to call or prepay obligations with or without call or prepayment penalties: (dollar amounts in millions) Carrying Value Percent -------------- ------- 1 year or less........................ $ 110.8 5.2% Over 1 year through 5 years........... 525.5 24.7% Over 5 years through 10 years......... 661.2 31.1% Over 10 years......................... 754.6 35.5% Mortgage backed securities............ 74.0 3.5% -------- ------ Total............................ $2,126.1 100.0% ======== ====== The following table reflects the Company's investment results for each year in the three-year period ended December 31, 1996: (dollar amounts in millions)
1996 1995 1994 ---- ---- ---- Average invested assets (1)................. $2,366.8 $2,395.8 $2,350.9 Net investment income (2)................... $ 133.9 $ 139.4 $ 138.7 Net effective yield (3)..................... 5.66% 5.82% 5.90% Net realized investment gains............... $ 3.0 $ 31.9 $ 47.5
- - - ----------- (1) Average of beginning and ending amounts of cash and investments for the period at carrying value. (2) After investment expenses, excluding net realized investment gains. (3) Net investment income for the period divided by average invested assets for the same period. As of December 31, 1996, the duration of the Company's investments was approximately 5.6 years and the duration of its liabilities was approximately 4.9 years. Competition The domestic property-casualty insurance industry consists of many companies, with no one company dominating the market. In addition, the degree and nature of competition varies from state to state for a variety of reasons, including the regulatory climate and other market participants in each state. PMA Re competes with other reinsurers in the brokered market as well as reinsurers that directly underwrite reinsurance business. Many of the Company's competitors are larger and have greater financial resources than the Company. Management believes that the ratings assigned by independent rating agencies, particularly A.M. Best, are material to the Company's operations. A.M. Best has currently assigned an "A- (Excellent)" rating to the Pooled Companies and an "A+ (Superior)" rating to PMA Re. According to A.M. Best, its ratings are based on an analysis of the financial condition and operating performance of an insurance company as they relate to the industry in general. These ratings -23- represent an independent opinion of a company's financial strength and ability to meet its obligations to policyholders. These ratings are not shareholder ratings, however, and do not represent an opinion as to the value of the Company's stock. No assurance can be given that these ratings can be maintained by the Pooled Companies and PMA Re. The Property and Casualty Group's insurance products face competition from certain self-insurance, group insurance and captive insurance programs. The Property and Casualty Group has developed coverages and services in these alternative markets. See "Workers' Compensation Products" and "PMA Management Corp." above. Regulatory Matters General The Pooled Companies are licensed to transact insurance business in, and are subject to regulation and supervision by 45 states and the District of Columbia. PMA Re is licensed or accredited to transact its reinsurance business in, and is subject to regulation and supervision by 50 states and the District of Columbia. The Insurance Subsidiaries are authorized and regulated in all jurisdictions where they conduct insurance business. Inasmuch as the Pooled Companies and PMA Re are domiciled in Pennsylvania, however, the Pennsylvania Insurance Department exercises principal regulatory jurisdiction over them. The extent of regulation by the states varies, but in general, most jurisdictions have laws and regulations governing standards of solvency, adequacy of reserves, reinsurance, capital adequacy and standards of business conduct. In addition, statutes and regulations usually require the licensing of insurers and their agents, the approval of policy forms and related material and, for certain lines of insurance, the approval of rates. Property and casualty reinsurers are generally not subject to filing or other regulatory requirements applicable to primary insurers with respect to rates, policy forms or contract wording. The form and content of statutory financial statements are regulated. State insurance departments in jurisdictions in which the Insurance Subsidiaries do business also conduct periodic examinations of their respective operations and accounts and require the filing of annual and other reports relating to their financial condition. In supervising and regulating insurance companies, including reinsurers, state insurance departments, charged primarily with protecting policyholders and the public rather than investors, enjoy broad authority and discretion in applying applicable insurance laws and regulations for the protection of policyholders and the public. Insurance Holding Company Regulation The Company and the Insurance Subsidiaries are subject to regulation pursuant to the insurance holding company laws of Pennsylvania. The Pennsylvania insurance holding company laws generally require an insurance holding company and insurers and reinsurers that are members of such insurance holding company's system to register with the state regulatory authorities, to file with those authorities certain reports disclosing information including their capital structure, ownership, management, financial condition, certain intercompany transactions including material transfers of assets and intercompany business agreements, and to report material changes in such information. Such laws also require that intercompany transactions be fair and reasonable and that an insurer's surplus as regards policyholders following any dividends or distributions to shareholder affiliates be reasonable in relation to the insurer's outstanding liabilities and adequate for its financial needs. Under Pennsylvania law, no person may acquire, directly or indirectly, a controlling interest in the capital stock of the Company unless such person, corporation or other entity has obtained prior approval from the Commissioner -24- for such acquisition of control. Pursuant to the Pennsylvania law, any person acquiring, controlling or holding with the power to vote, directly or indirectly, ten percent or more of the voting securities of an insurance company, is presumed to have "control" of such company. This presumption may be rebutted by a showing that control does not exist in fact. The Commissioner, however, may find that "control" exists in circumstances in which a person owns or controls a smaller amount of voting securities. To obtain approval from the Commissioner of any acquisition of control of an insurance company, the proposed acquirer must file with the Commissioner an application containing information regarding the identity and background of the acquirer and its affiliates, the nature, source and amount of funds to be used to effect the acquisition, the financial statements of the acquirer and its affiliates, any potential plans for disposition of the securities or business of the insurer, the number and type of securities to be acquired, any contracts with respect to the securities to be acquired, any agreements with broker-dealers and other matters. Other jurisdictions in which the Insurance Subsidiaries are licensed to transact business may have requirements for prior approval of any acquisition of control of an insurance or reinsurance company licensed or authorized to transact business in such jurisdictions. Additional requirements in such jurisdictions may include re-licensing or subsequent approval for renewal of existing licenses upon an acquisition of control. As further described below, laws also govern the holding company structure payment of dividends by the Insurance Subsidiaries to the Company. Restrictions on Insurance Subsidiaries Dividends The principal source of funds for servicing debt of the Company and paying dividends to shareholders of the Company is derived from receipt of dividends from the subsidiaries. Under the Pennsylvania insurance laws, the Pooled Companies and PMA Re may pay dividends only from unassigned funds (surplus), as reported in the statutory financial statement filed by them with the Insurance Department for the most recent annual period. As of December 31, 1996, the Pooled Companies and PMA Re reported unassigned funds (surplus) in the amount of $272.7 million. Subject to such constraints, any of the Pooled Companies and PMA Re may declare and pay non-extraordinary dividends subject to certain notice requirements to the Commissioner and extraordinary dividends to stockholders subject to certain notice and approval requirements by the Commissioner. Under Pennsylvania law, an "extraordinary" dividend is any dividend or other distribution which, together with other dividends and distributions made within the preceding twelve months, exceeds the greater of (i) 10% of such insurer's surplus as regards policyholders as shown on its last annual statement on file with the Commissioner; or (ii) statutory net income for the previous year. Payment of extraordinary dividends is permissible only if the Commissioner has approved the payment of such extraordinary dividends, or if the Commissioner has not disapproved the payment of such extraordinary dividend within thirty days from the date the Commissioner receives notice of the declaration of such dividend. In addition to the foregoing standards, following the payment of any dividends, the policyholders' surplus of the insurance company must be reasonable in relation to its outstanding liabilities and adequate for its financial needs. The Commissioner may bring an action to enjoin or rescind the payment of a dividend or distribution by any insurance company that would cause its statutory surplus to be unreasonable or inadequate under this standard. For the years ended December 31, 1996, 1995 and 1994, the aggregate cash dividends paid by the Pooled Companies and PMA Re were $53.6 million, $71.5 million, and $34.0 million, respectively. None of the dividends paid was "extraordinary" for purposes of the Pennsylvania insurance laws. For 1997, the Pooled Companies and PMA Re collectively are permitted to declare and pay dividends to the Company in the aggregate amount of $51.9 million, subject to the notice requirements on dividend declarations and payments. In accordance -25- with its plan of operation filed with the Pennsylvania Insurance Department, MASCCO must maintain a ratio of unpaid losses and LAE to policyholders' surplus of no more than 8:1. As of December 31, 1996, MASCCO was in compliance with such requirements. Risk-Based Capital The National Association of Insurance Commissioners (the "NAIC") has adopted risk-based capital ("RBC") requirements for property/casualty insurance companies to evaluate the adequacy of statutory capital and surplus in relation to investment and insurance risks such as asset quality, asset and liability matching, loss reserve adequacy and other business factors. Under RBC requirements, regulatory compliance is determined by the ratio of a Company's total adjusted capital, as defined by the NAIC, to its authorized control level, also as defined by the NAIC. Companies below prescribed trigger points in terms of such ratio are classified as follows: Company action level.............200% Regulatory action level..........150% Authorized control level.........100% Mandatory control level.......... 70% PMA Re and each of the Pooled Companies had ratios in excess of 200% as of December 31, 1996. As a result of the Property and Casualty Group's 1996 loss reserve strengthening (see "Loss Reserves" above), the ratios for the individual Pooled Companies range from 230% to 210%. RBC requirements for property/casualty insurance companies allow a discount for workers' compensation reserves to be included in the adjusted surplus calculation. However, the calculation for RBC requires the phase-out of non-tabular reserve discounts previously taken for workers' compensation reserves. The discount phase-out has increased by 20% in each year since 1994, ultimately phasing out 100% of such discount by 1998. As a result, this phase-out negatively impacts the RBC ratios of companies which write workers' compensation insurance and discount such reserves on a non-tabular basis relative to companies which write other types of property/casualty insurance. Management believes that it will be able to maintain the Pooled Companies' RBC in excess of regulatory requirements through prudent underwriting and claims handling, investing and capital management. However, no assurances can be given that developments affecting the Property and Casualty Group, many of which could be outside of management's control, including but not limited to changes in the regulatory environment, economic conditions and competitive conditions in the jurisdictions in which the Property and Casualty Group writes business, will cause the Pooled Companies' RBC to fall below required levels resulting in a corresponding regulatory response. Employees As of March 31, 1997, the Company had approximately 990 full-time employees. None of the employees of the Company is represented by a labor union and the Company is not a party to any collective bargaining agreements. The Company considers its employee relations to be good. -26- Item 2. Financial Information
(dollars in thousands, except share and per share data 1996(1) 1995 1994 1993 1992 - - - ----------------------------------------------------------------------------------------------------------------------------------- Consolidated Results Net premiums written....................... $ 443,475 $ 489,876 $ 466,502 $ 536,987 $ 552,038 =============== =============== =============== ============== ============== Net premiums earned........................ 420,575 484,952 466,534 547,407 700,207 Net investment income...................... 133,936 139,355 138,719 153,842 164,302 Net realized investment gains.............. 2,984 31,923 47,521 69,798 70,633 Service revenues........................... 9,189 5,106 3,380 1,321 305 --------------- --------------- --------------- ------------- -------------- Total revenues....................... $ 566,684 $ 661,336 $ 656,154 $ 772,368 $ 935,447 =============== =============== =============== ============= ============== - - - ----------------------------------------------------------------------------------------------------------------------------------- Components of Net Income Pre-tax operating (loss) income (6): The Property and Casualty Group...... $ (219,619) $ (4,305) $ 3,893 $ (1,153) $ (51,995) PMA Re............................... 42,783 39,443 33,703 33,511 35,190 Corporate operations................. (490) (13,414) (6,686) (885) (1,191) --------------- --------------- --------------- ------------- -------------- Total pre-tax operating (loss) income before interest expense..................... (177,326) 21,724 30,910 31,473 (17,996) Net realized investment gains.............. 2,984 31,923 47,521 69,798 70,633 Interest expense........................... 17,052 18,734 13,051 11,650 12,542 --------------- --------------- --------------- ------------- -------------- (Loss) income before income taxes and cumulative effect of accounting changes (191,394) 34,913 65,380 89,621 40,095 (Benefit) provision for income taxes....... (56,060) 10,783 8,130 21,324 (671) --------------- --------------- --------------- ------------- -------------- (Loss) income before cumulative effect of accounting changes................... (135,334) 24,130 57,250 68,297 40,766 Cumulative effect of accounting changes, net of related tax effects (2)....... -- -- -- 14,119 -- --------------- --------------- --------------- ------------- -------------- Net (loss) income.......................... $ (135,334) $ 24,130 $ 57,250 $ 82,416 $ 40,766 =============== =============== =============== ============== ============== - - - ----------------------------------------------------------------------------------------------------------------------------------- Per Share Data Weighted average shares: Primary (3).......................... 23,800,791 24,709,031 24,650,741 24,470,024 24,406,445 Fully-diluted (3).................... 23,800,791 24,934,579 24,650,741 24,470,024 24,406,445 (Loss) income before cumulative effect of accounting changes, net of related tax effects: Primary (3).......................... $ (5.68) $ 0.98 $ 2.32 $ 2.79 $ 1.67 Fully-diluted (3).................... (5.68) 0.97 2.32 2.79 1.67 Net (loss) income per share: Primary (3).......................... (5.68) 0.98 2.32 3.37 1.67 Fully-diluted (3).................... (5.68) 0.97 2.32 3.37 1.67 Dividends paid per common share............ 0.32 0.32 0.32 0.28 0.24 Dividends paid per Class A common share.... 0.36 0.36 0.36 0.32 0.28 Shareholders' equity per share (4)......... 17.86 25.53 22.10 22.23 19.34 - - - ----------------------------------------------------------------------------------------------------------------------------------- Financial Position Total investments.......................... $ 2,261,353 $ 2,455,949 $ 2,313,261 $ 2,374,208 $ 2,329,242 Total assets (5)........................... 3,117,516 3,258,572 3,181,979 3,197,909 3,142,821 Reserves for unpaid losses and LAE (5)..... 2,091,072 2,069,986 2,103,714 2,150,665 2,163,181 Long-term debt (7)......................... 204,699 203,848 203,975 194,836 185,684 Shareholders' equity (4)................... 425,828 609,668 524,862 534,383 468,105 - - - ----------------------------------------------------------------------------------------------------------------------------------- GAAP Ratios for Insurance Subsidiaries The Property and Casualty Group: Loss ratio........................... 158.2% 92.5% 90.1% 96.3% 113.8% Expense ratio........................ 51.6% 32.1% 32.0% 25.1% 19.4% Policyholder dividend ratio.......... 6.1% 4.8% 4.6% 3.5% 4.3% --------------- --------------- --------------- -------------- -------------- Combined ratio....................... 215.9% 129.4% 126.7% 124.9% 137.5% =============== =============== =============== ============== ============== PMA Re Loss ratio........................... 73.7% 74.6% 74.7% 80.6% 78.6% Expense ratio........................ 30.2% 29.5% 33.3% 29.4% 27.8% --------------- --------------- --------------- --------------- -------------- Combined ratio....................... 103.9% 104.1% 108.0% 110.0% 106.4% =============== =============== =============== =============== ============== - - - -----------------------------------------------------------------------------------------------------------------------------------
-27-
Unaudited Interim Periods Ending March 31, (dollars in thousands, except share and per share data) 1997 1996 - - - ----------------------------------------------------------------------------------------------------------------------------- Consolidated Results Net premiums written................................................... $ 149,882 $ 147,444 ============= ============= Net premiums earned.................................................... 107,950 117,937 Net investment income.................................................. 35,847 33,420 Net realized investment (losses) gains................................. (1,251) 943 Service revenues....................................................... 2,548 1,748 ------------- ------------- Total revenues................................................... $ 145,094 $ 154,048 ============ ============ - - - ----------------------------------------------------------------------------------------------------------------------------- Components of Net Income Pre-tax operating (loss) income (6): The Property and Casualty Group.................................. $ 291 $ 3,711 PMA Re........................................................... 12,820 9,058 Corporate operations............................................. (208) (1,039) ------------- ------------- Total pre-tax operating (loss) income before interest expense.......... 12,903 11,730 Net realized investment (losses) gains................................. (1,251) 943 Interest expense....................................................... 4,334 4,472 ------------- ------------- (Loss) income before income taxes and extraordinary item............... 7,318 8,201 (Benefit) provision for income taxes................................... 2,561 2,572 ------------- ------------- (Loss) income before extraordinary item................................ 4,757 5,629 Extraordinary item, net of related tax effects (7)..................... (4,734) -- ------------- ------------- Net income............................................................. $ 23 $ 5,629 ============ ============ - - - ----------------------------------------------------------------------------------------------------------------------------- Per Share Data Weighted average shares: Primary.......................................................... 24,546,291 25,081,971 Fully-diluted.................................................... 24,546,291 25,081,971 (Loss) income before extraordinary item, net of related tax effects: Primary.......................................................... $ 0.19 $ 0.22 Fully-diluted.................................................... 0.19 0.22 Net (loss) income per share: Primary.......................................................... 0.00 0.22 Fully-diluted.................................................... 0.00 0.22 Dividends paid per common share........................................ 0.08 0.08 Dividends paid per Class A common share................................ 0.09 0.09 Shareholders' equity per share ........................................ 16.15 23.50 - - - ----------------------------------------------------------------------------------------------------------------------------- Financial Position Total investments...................................................... $ 2,143,426 $ 2,338,135 Total assets........................................................... 3,114,205 3,222,007 Reserves for unpaid losses and LAE..................................... 2,085,732 2,046,075 Long-term debt (7)..................................................... 203,232 203,811 Shareholders' equity................................................... 384,966 561,162 - - - ----------------------------------------------------------------------------------------------------------------------------- GAAP Ratios for Insurance Subsidiaries The Property and Casualty Group: Loss ratio....................................................... 94.8% 88.0% Expense ratio.................................................... 36.0% 34.4% Policyholder dividend ratio...................................... 4.7% 4.1% ------------ ------------- Combined ratio................................................... 135.5% 126.5% ============ ============= PMA Re Loss ratio....................................................... 75.9% 78.9% Expense ratio.................................................... 24.9% 26.1% ------------ ------------- Combined ratio................................................... 100.8% 105.0% ============ ============= - - - -----------------------------------------------------------------------------------------------------------------------------
-28- - - - ---------- (1) Operating results in 1996 were impacted by approximately $221,300,000 of special charges related to reserve strengthening and expense initiatives for the Property and Casualty Group. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" below. (2) In 1993, the Company recognized an after-tax net benefit of $14,119,000 resulting from the adoption of SFAS No. 109, "Accounting for Income Taxes," ($21,500,000 benefit), and SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," ($7,381,000 after-tax charge). (3) For the year ended December 31, 1996, common stock equivalents were not taken into consideration in the computation of weighted-average shares as these common stock equivalents would have an anti-dilutive effect on the net loss per share. (4) In 1994, shareholders' equity was increased $45,343,000 related to the adoption of SFAS No. 115, "Accounting for Certain Investments and Debt and Equity Securities." See "Management's Discussion and Analysis of Financial Condition and Results of Operations" below. (5) Total assets and unpaid losses and LAE have been restated for 1992, reflecting the adoption of SFAS No. 113, "Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts," and the resultant reclassification of reinsurance recoverables on unpaid losses and LAE as assets. (6) Pre-tax operating income (loss) excludes net realized investment gains. (7) In March 1997, the Company refinanced substantially all of its long-term debt which resulted in a $4,734,000 extraordinary loss, which was recorded in the first quarter of 1997. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" below. Management's Discussion and Analysis of Financial Condition and Results of Operations Years Ended December 31, 1996, 1995 and 1994 The following section provides a discussion of the financial results and material changes in financial position for the Company for the years ended December 31, 1996, 1995 and 1994. The balance sheet information presented below is as of December 31 for each year indicated. The statement of income information is for the years ended December 31 for each year shown. The term "SAP" refers to the statutory accounting practices prescribed or permitted by the Pennsylvania Insurance Department, and the term "GAAP" refers to generally accepted accounting principles. Results of Operations The Company consists of PMC, an insurance holding company, and its subsidiaries. PMC operates in two principal segments, property and casualty primary insurance and property and casualty reinsurance. The Property and Casualty Group writes workers' compensation and other lines of commercial insurance primarily in the Mid-Atlantic and Southern regions of the United States, utilizing The PMA Group trade name. PMC's reinsurance business conducted through PMA Re, which emphasizes risk-exposed treaty reinsurance, operates in the domestic brokered market. -29- In the discussion below, pre-tax operating (loss) income is defined as (loss) income from continuing operations before income taxes, but excluding net realized investment gains. Operating revenues consist of all of the Company's revenues, except net realized investment gains. Consolidated Results The table below presents the major components of net (loss) income: (dollar amounts in thousands, except per share data)
1996 1995 1994 ---- ---- ---- Pre-tax operating (loss) income........................ $ (194,378) $ 2,990 $ 17,859 Net realized investment gains.......................... 2,984 31,923 47,521 ----------- ---------- ---------- (Loss) income before income taxes...................... (191,394) 34,913 65,380 (Benefit) provision for income taxes................... (56,060) 10,783 8,130 ----------- ---------- ---------- Net (loss) income ..................................... $ (135,334) $ 24,130 $ 57,250 =========== ========== ========== Per Primary Share: Net (loss) income...................................... $ (5.68) $ .98 $ 2.32 =========== ========== ========== Per Fully-Diluted Share: Net (loss) income...................................... $ (5.68) $ .97 $ 2.32 =========== ========== ==========
The following table indicates the Company's pre-tax operating (loss) income by principal business segment: (dollar amounts in thousands)
1996 1995 1994 ---- ---- ---- The Property and Casualty Group .................................. $(219,619) $ (4,305) $ 3,893 PMA Re ........................................................... 42,783 39,443 33,703 Corporate operations ............................................. (490) (13,414) (6,686) --------- --------- --------- Pre-tax operating (loss) income before interest expense ............................................. (177,326) 21,724 30,910 Interest expense ................................................. 17,052 18,734 13,051 --------- --------- --------- Pre-tax operating (loss) income .................................. $(194,378) $ 2,990 $ 17,859 ========= ========= =========
In 1996, the Company's operating results were impacted by a pre-tax charge of $221.3 million ($143.8 million after tax), or $9.30 per share ($6.04 per share after tax), recorded by the Property and Casualty Group in order to strengthen its loss and LAE reserves, to recognize restructuring costs in connection with staff reductions and to write off certain accounts receivable. The charge consists of the following: -30- (dollar amounts in millions) Strengthening of unpaid losses and LAE: Pre-1992 workers' compensation ................................ $ 110.0 Asbestos and environmental .................................... 60.4 Other lines of business ....................................... 21.0 -------- Total reserve strengthening ................................... 191.4 Premium balances written off and increase in allowance for doubtful accounts ............................... 17.5 Change in depreciable lives for computer equipment ................. 4.8 Accrual of costs related to early retirement plan .................. 7.6 -------- Total pre-tax charge ............................................... $ 221.3 ======== On a consolidated basis, in 1996, the Company reported a pre-tax operating loss of $194.4 million ($8.17 per share) versus pre-tax operating income of $3.0 million ($0.12 per fully-diluted share) in 1995. As a result of the aforementioned charge, the Property and Casualty Group reported a pre-tax operating loss of $219.6 million in 1996, as compared to a pre-tax operating loss of $4.3 million in 1995. Such operating loss in 1996 was partially offset by pre-tax operating income reported by PMA Re of $42.8 million as compared to 1995 when PMA Re reported pre-tax operating income of $39.4 million. The increase in PMA Re's pre-tax operating income reflects higher premium volume, improved underwriting results and higher investment income. Corporate operations reported a pre-tax operating loss of $0.5 million in 1996 versus a $13.4 million pre-tax operating loss in 1995. The improvement in the operating results of corporate operations is due mainly to the fact that 1995 was impacted by an $8.4 million write-down of certain real estate properties owned by the Company as well as higher overhead expenses. Interest expense decreased in 1996 by approximately $1.7 million, mainly reflecting lower average debt balances and the pay-down of higher coupon debt. In 1995, pre-tax operating income decreased from $17.9 million ($0.72 per share) in 1994 to $3.0 million ($0.12 per fully-diluted share). Such reduction related mainly to an operating loss of $4.3 million recorded by the Property and Casualty Group, resulting primarily from loss reserve strengthening of $66.5 million, partially offset by a $35.0 million impact of increasing the discount rate on workers' compensation reserves from approximately 4.0% to 5.0%. In addition, corporate operations were impacted by the aforementioned $8.4 million write-down of certain properties owned by the Company. Interest expense was $5.7 million higher in 1995 versus 1994, mainly due to higher average debt balances and higher interest rates. Net realized investment gains were $3.0 million, $31.9 million, and $47.5 million in 1996, 1995, and 1994, respectively. The declining levels of net realized gains reflected lower levels of realized gains on sales of equity securities, as the Company has reduced its investments in equity securities in the last three years. In addition, the fluctuating interest rate environment has generally lowered realized gain activity in the three-year period ending December 31, 1996. The Property and Casualty Group Results of Operations In 1996, the Property and Casualty Group accounted for 63.9% of the Company's operating revenues. Summarized financial results of this segment are as follows: -31- (dollar amounts in thousands)
1996 1995 1994 ---- ---- ---- Net premiums written ........................................ $ 279,422 $ 337,116 $ 353,151 ========= ========= ========= Net premiums earned ......................................... $ 268,601 $ 345,607 $ 361,124 Net investment income ....................................... 82,455 92,275 96,683 Service revenues ............................................ 9,189 5,106 3,380 --------- --------- --------- Operating revenues .......................................... 360,245 442,988 461,187 --------- --------- --------- Losses and LAE incurred ..................................... 424,900 319,644 325,211 Acquisition and operating expenses .......................... 138,709 110,906 115,404 Policyholder dividends ...................................... 16,255 16,743 16,679 --------- --------- --------- Total losses and expenses ................................... 579,864 447,293 457,294 --------- --------- --------- Pre-tax operating (loss) income ............................. $(219,619) $ (4,305) $ 3,893 ========= ========= ========= GAAP loss ratio ............................................. 158.2% 92.5% 90.1% GAAP combined ratio ......................................... 215.9% 129.4% 126.7% SAP loss ratio .............................................. 125.7% 77.3% 85.5% SAP combined ratio .......................................... 175.6% 115.1% 120.1%
Premium Revenues Premiums for the Property and Casualty Group have decreased in recent years. Between 1996 and 1995, net premiums written decreased 17.1%, and between 1995 and 1994, net premiums written decreased 4.5%. Direct premiums written for workers' compensation decreased $36.5 million and $27.7 million in 1996 and 1995, respectively. Direct premiums written for the other commercial property and casualty lines decreased $9.3 million in 1996 relative to 1995 and increased $10.4 million in 1995 relative to 1994. Reinsurance premiums assumed increased $0.8 million between 1996 and 1995 and decreased $1.7 million between 1995 and 1994. Reinsurance premiums ceded decreased $10.4 million in 1996 relative to 1995 and $2.3 million in 1995 relative to 1994. The decline in premiums from 1994 to 1996 is due to a number of factors discussed below, including the Property and Casualty Group's underwriting decisions, competition, and the impact of workers' compensation benefit reform laws. During the past three years, the Property and Casualty Group reduced workers' compensation premium volume in those states in the Property and Casualty Group's marketing territory that generally have had unfavorable regulatory environments in terms of rates and benefits. As a result, the Property and Casualty Group did not renew certain accounts due to inadequate profit potential. In addition, competition and manual rate levels affected workers' compensation premium volume. Intense competition caused rates for certain accounts to be unattractive relative to the risks assumed. Rather than match the price merely to retain the volume, the Property and Casualty Group declined to write the accounts. In terms of manual rates, average rate levels declined 7.0%, 3.0%, and 10.0% in 1996, 1995, and 1994, respectively. The rate decreases had a substantially lower proportional impact on premiums written, as the Property and Casualty Group had reduced its dependence on rate-sensitive business during 1995 and 1994. -32- Workers' compensation premiums also declined during the three-year period as a result of the enactment of workers' compensation benefit reform laws. These benefit reform laws also have had a favorable impact on loss and LAE reserves for business written on policies subject to such reform laws. See "Losses and Expenses" below. The Property and Casualty Group anticipates further impact on premiums, losses and expenses from Act 57 (passed in July 1996), which reduced Pennsylvania workers' compensation rates by 25% on average effective in February 1997. Since the passage of Act 57 and reform laws in other states, the Property and Casualty Group has increased its focus on rate-sensitive and small account business based upon its belief that such legislation makes the potential loss experience on such business more favorable and less volatile than it had previously been. Direct workers' compensation premiums were also impacted by changes in the level of premium adjustments, primarily related to audit premiums and retrospective policies. In 1996, such adjustments reduced gross premiums written by $6.1 million, while in 1995, such adjustments increased premiums written by $6.6 million. This decrease in premium adjustments billed in 1996 relative to 1995 is primarily due to two factors: (i) the lower amount of billed audit premiums, which is attributable to more adequate estimation of risk exposures and resultant estimated premium at the inception of the policies; and (ii) the increase in retrospectively rated premiums returned to insureds, resulting from the favorable loss experience in more recent accident years in workers' compensation. The increase in 1995 relative to 1994 relates mainly to the fact that, as loss data matured on retrospective policies for previous accident years, the Property and Casualty Group was able to recover additional premiums from such policyholders. As the Property and Casualty Group has expanded this type of business since 1989, proportionately more policies have mature loss data, resulting in more premium adjustments. This increase was partially offset by lower audit premium adjustments relating to generally lower premium volume. Companies writing workers' compensation in certain states generally must share in the risk of insuring entities that cannot obtain insurance in the voluntary market. Typically, an insurer's share of this residual market is dependent upon its market share in the voluntary market, and the assignments are accomplished either by direct assignment or by assumption from pools. In 1996, the Property and Casualty Group's direct assignments, which are included in direct written premiums, decreased $15.3 million relative to 1995, and decreased $8.7 million in 1995 as compared to 1994, reflecting generally lower premium volume in workers' compensation for the Property and Casualty Group, as well as conditions in the voluntary market. Since 1992, the Property and Casualty Group has developed a variety of alternative market products for larger accounts, including large deductible policies and offshore captive programs. Typically, the Property and Casualty Group receives a lower up-front premium for these types of alternative market product plans. However, under of this type of business, the insured retains a greater share of the underwriting risk than under rate-sensitive or loss-sensitive products, which reduces the potential for unfavorable claim activity on the accounts and encourages loss control on the part of the insured. For example, under a large deductible policy, the customer is responsible for paying its own losses up to the amount of the deductible for each occurrence. The deductibles under such policies generally range from $250,000 to $1.0 million. During 1995 and 1994, the Property and Casualty Group expanded writings of commercial lines of business other than workers' compensation, such as commercial auto, general liability, umbrella, multi-peril and commercial property lines (collectively, "Commercial Lines"). Direct premiums for Commercial Lines increased $10.4 million in 1995 to $114.2 million. While the Property and Casualty Group expanded these lines in 1995 and 1994, the growth had been less than management anticipated. Market conditions have been extremely competitive in these lines, and management has refused to compromise underwriting standards merely to increase volume during the three-year period. Due to these competitive conditions, in 1996, -33- premium volume in Commercial Lines declined $9.3 million relative to 1995, to $104.9 million. On a going-forward basis, it is anticipated that Commercial Lines premiums will decline on a net basis due to a lower net retention for such lines, as well as the Property and Casualty Group's planned emphasis on workers' compensation products. Ceded premiums decreased $10.4 million in 1996 as compared to 1995 and $2.3 million in 1995 as compared to 1994. In 1996, the rate of decrease in ceded premiums was less than the decrease in direct premiums due to the increased use of facultative reinsurance for specific uses in Commercial Lines. In 1995, the rate of decrease in ceded premiums was less than the rate of decrease in direct premiums, mainly due to the expansion of Commercial Lines. Typically, the Property and Casualty Group buys more reinsurance covering these lines than the workers' compensation line. In addition to the impact of fluctuation in premiums written, premiums earned were also impacted by the change in accrued retrospective premiums, which arise from projected losses on retrospectively rated policies. Premiums written were not impacted by such changes. In 1996, 1995 and 1994, the Property and Casualty Group reduced accrued retrospective premiums by $10.5 million, $4.0 million and $1.0 million respectively. The 1996 reduction reflects improved loss reserve development in the prior three accident years. This improvement in loss experience reduced the estimated amounts of premium that will be billed for the retrospectively rated policies written during these years. The decrease in 1995 as compared to 1994 was due to overall reduction in premium volume and to the increased amounts of retrospective premium billed in the period. Losses and Expenses The following table reflects the components of the Property and Casualty Group's combined ratios, as computed under GAAP (1):
1996 1995 1994 ----------- ----------- ----------- Loss ratio............................................ 158.2% 92.5% 90.1% ----------- ----------- ----------- Expense ratio: Amortization of deferred acquisition costs.......... 19.7% 15.5% 15.3% Operating expenses.................................. 31.9% 16.6% 16.7% ----------- ----------- ----------- Total expense ratio.......................... 51.6% 32.1% 32.0% ----------- ----------- ----------- Policyholders' dividend............................... 6.1% 4.8% 4.6% ----------- ----------- ----------- Combined ratio-GAAP................................... 215.9% 129.4% 126.7% =========== =========== ===========
- - - ---------- (1) The combined ratio computed on a GAAP basis is equal to losses and LAE, plus amortization of deferred acquisition costs, plus operating expenses, plus policyholders' dividends, all divided by net premiums earned. In 1996, the Property and Casualty Group's loss ratio was impacted by $191.4 million of reserve strengthening for unpaid losses and LAE of prior accident years as compared to loss and LAE reserve strengthening of $66.5 million in 1995 and $18.6 million in 1994. The loss and LAE reserve strengthening was associated with the following lines of business: -34- (dollar amounts in millions)
1996 1995 1994 ---- ---- ---- Pre-1992 workers' compensation ................................. $ 110.0 $ 54.7 $ 13.2 Asbestos and environmental ..................................... 60.4 23.4 4.6 Other lines of business ........................................ 21.0 (11.6) 0.8 -------- ------- ------- Total reserve strengthening .................................... $ 191.4 $ 66.5 $ 18.6 ======== ======= =======
The adverse development in workers' compensation loss and LAE reserves during this period primarily related to Pennsylvania workers' compensation claims from accident years 1987 through 1991. As claims data from these accident years have matured, the impact of disability and medical benefits available to claimants in Pennsylvania before the passage of reform legislation in 1993 and 1996, coupled with the economic conditions that have existed during the disability periods, has become more apparent. As such, the developed losses have exceeded management's prior estimates. The reform legislation enacted in 1993 and 1996 has introduced various controls and limitations on disability and medical benefits which management believes have had, and will continue to have, a beneficial effect on the loss ratio. In 1993, Pennsylvania enacted Act 44, which introduced medical cost containment measures and provided for the expansion of the period of time during which the insurer may require an employee to accept medical treatment from the employer's list of designated health care providers. As previously noted, in 1996, Pennsylvania enacted Act 57, which included various additional controls and limitations on disability and medical benefits in Pennsylvania. In addition to regulatory reforms and management's reunderwriting of the book of business, the loss ratios have been favorably impacted by the shift to loss-sensitive and alternative market products since 1990. Such impact is reflected in the improvement since 1990 in the workers' compensation accident year loss ratios (losses recorded for the year the event occurred expressed as a percentage of the premiums earned for that year), as the following chart indicates: Workers' Compensation Undiscounted Accident Year Pure Loss Ratios as of December 31, 1996 Accident Years Loss Ratio -------------- ---------- 1990 100% 1991 86% 1992 80% 1993 64% 1994 64% 1995 63% 1996 63% In addition, management is taking several steps to reduce the outstanding claims associated with the Pennsylvania workers' compensation business written through 1991. A commutation program was initiated in the fourth quarter 1996 and is expected to continue into late 1997. Commutations are agreements with claimants whereby the claimants, in exchange for a lump sum payment, will forego their rights to future indemnity payments from the Property and Casualty Group. Under Pennsylvania workers' compensation laws, all such commutation arrangements must be approved by the claimant and the Pennsylvania Workers' Compensation Board. As result of the commutation program, it is expected that investment income for the Property and Casualty Group will be less in 1997 than in 1996, as the cash flow associated with the -35- commutation payments should reduce the Property and Casualty Group's average assets available for investment. It is also expected that the number of open claims for accident years 1991 and prior should decline as a result of this program. This reduction in open claims should reduce the possibility of further adverse development on the recorded reserves, although there can be no assurances that the level of commutations will have a significant impact on the future development on such reserves. The adverse development in reserves associated with asbestos and environmental claims is the result of a detailed analysis of loss and LAE reserves associated with asbestos and environmental liability claims completed in 1996. The analysis of asbestos loss and LAE reserves involved a ground-up review and projection on an account-by-account basis. The analysis of environmental loss and LAE reserves involved an actuarial calendar year loss development technique. Estimation of obligations for asbestos and environmental exposures continues to be more difficult than for other loss reserves because of several factors, including: (i) evolving methodologies for the estimation of the liabilities; (ii) lack of reliable historical claim data; (iii) uncertainties with respect to insurance and reinsurance coverage related to these obligations; (iv) changing judicial interpretations; and (v) changing government standards. The Company's asbestos-related losses were as follows: Years Ended December 31, (dollar amounts in thousands) 1996 1995 1994 -------- -------- -------- Gross of reinsurance: Beginning reserves ......................... $ 27,611 $ 13,969 $ 12,913 Incurred losses and LAE .................... 62,854 22,482 6,424 Calendar year payments for losses and LAE .. (10,410) (8,840) (5,368) -------- -------- -------- Ending reserves ............................ $ 80,055 $ 27,611 $ 13,969 ======== ======== ======== Net of reinsurance: Beginning reserves ......................... $ 23,443 $ 8,168 $ 7,700 Incurred losses and LAE .................... 39,427 21,826 5,834 Calendar year payments for losses and LAE .. (9,570) (6,551) (5,366) -------- -------- -------- Ending reserves ............................ $ 53,300 $ 23,443 $ 8,168 ======== ======== ======== (Included in such reserves are reserves for PMA Re of $311,000, $589,000 and $333,000 (net) at December 31, 1996, 1995 and 1994, respectively.) The Company's environmental-related losses were as follows: -36- Years Ended December 31, (dollar amounts in thousands) 1996 1995 1994 ---- ---- ---- Gross of reinsurance: Beginning reserves ......................... $ 20,134 $ 20,952 $ 26,129 Incurred losses and LAE .................... 22,143 3,516 (2,150) Calendar year payments for losses and LAE .. (6,651) (4,334) (3,027) -------- -------- -------- Ending reserves ............................ $ 35,626 $ 20,134 $ 20,952 ======== ======== ======== Net of reinsurance: Beginning reserves ......................... $ 20,134 $ 20,952 $ 26,129 Incurred losses and LAE .................... 21,109 3,516 (2,150) Calendar year payments for losses and LAE .. (6,651) (4,334) (3,027) -------- -------- -------- Ending reserves ............................ $ 34,592 $ 20,134 $ 20,952 ======== ======== ======== (Included in such reserves are reserves for PMA Re of $2,907,000, $2,635,000 and $1,056,000 (net) at December 31, 1996, 1995 and 1994, respectively.) Of the total net asbestos and environmental reserves, $19.3 million were for established claims reserves at December 31, 1996 ($17.1 million at December 31, 1995) and $68.6 million were for incurred but not reported losses ($26.5 million at December 31, 1995). Management believes that its reserves for asbestos and environmental claims are appropriately established based upon known facts, existing case law, and generally accepted actuarial methodologies. However, due to changing interpretations by courts involving coverage issues, the potential for changes in federal and state standards for clean-up and liability and other factors, the ultimate exposure to the Property and Casualty Group for these claims may vary significantly from the amounts currently recorded, resulting in a potential adjustment in the claims reserves recorded. Additionally, issues involving policy provisions, allocation of liability among participating insurers, proof of coverage, and other factors make quantification of liabilities exceptionally difficult and subject to adjustment based upon newly available data. See Note 3 to the Consolidated Financial Statements for additional detail on asbestos and environmental loss reserves. In 1996, other commercial lines experienced reserve strengthening of $21.0 million, as compared to a reserve release of $11.6 million in 1995. The reserve strengthening was principally due to a reestimation of LAE associated with general liability claims. The Property and Casualty Group expects that the average period that such claims are open to increase, and has increased the cost of adjusting such claims accordingly. The release of reserves in 1995 was primarily due to favorable loss experience in commercial automobile business. In addition to loss and LAE reserve adverse development, the 1996 calendar year loss ratio was impacted by a net $15.1 million accretion of discount on workers' compensation loss reserves. In 1995, losses and LAE incurred were impacted by a $35.0 million reduction of unpaid losses and LAE related to changing the rate at which workers' compensation unpaid losses are discounted for both SAP and GAAP. -37- The Property and Casualty Group's Pennsylvania-domiciled insurance subsidiaries increased such discount rate from 4.0% to 5.0% in 1995, which was permitted and approved by the Pennsylvania Insurance Department. Loss reserves on other lines of business as well as LAE reserves for all lines of business are not discounted. As premium volume has been reduced in recent years, the accretion of the discount has had a more significant impact on the calendar year loss ratios recorded, as there is a lower premium base over which to spread the effect of the accretion. The 1996 expense ratio was adversely impacted by several factors that occurred in 1996. There was a $22.5 million increase in write-downs and valuation adjustments for the Property and Casualty Group, including: (dollar amounts in millions)
Accrual of costs for voluntary early retirement program ................ $ 7.6 Change in depreciable lives for computer equipment ..................... 4.8 Premium balances written off and increase in allowance for doubtful accounts (excluding $5.0 million of retrospective premium write-offs) 10.1 ------- $ 22.5 =======
In connection with a plan to reduce its overall level of indirect underwriting expenses in 1997 and beyond, the Property and Casualty Group initiated a Voluntary Early Retirement Program ("VERIP") in December 1996. Eligibility to participate in the VERIP was contingent upon the employees' ages and years of service with the Company. Of the 84 employees eligible to participate in the VERIP, 49 employees opted to participate. The accrual at December 31, 1996 is primarily comprised of additional pension and medical accruals and severance pay in connection with the VERIP. The Property and Casualty Group also reassessed its estimate of useful lives for its mainframe computer equipment, and changed the depreciable lives of such assets from five years to three years. The effect of this adjustment was to increase 1996 depreciation expense by $4.8 million. As part of its ongoing review of premium balances due from agents and insureds, the Property and Casualty Group wrote off, and reserved for, $17.5 million in premium balances receivable in 1996, an increase of $15.1 million as compared to 1995. The increase in this write-off is mainly due to a change in the collection assumptions on accounts that have been referred to attorneys. As a result of the aforementioned charges, the GAAP expense ratio increased by 8.4 points in 1996 as compared to 1995. The GAAP expense ratio also increased by 2.6 points due to the increase in sales of alternative market products, which have much lower, if any, net premium, and due to loss-based assessments, which do not vary with earned premium. The other 8.5 points increase in the GAAP expense ratio is primarily due to operating expenses not decreasing commensurately with the decrease in net premiums earned. The GAAP expense ratios remained fairly stable between 1995 and 1994; the expense ratios recorded were 32.1% and 32.0% in 1995 and 1994, respectively. While total expenses decreased from 1994 to 1995, the decrease in premium volume more than offset the expense reduction. In addition, the change in the mix of business toward alternative market products and self-insured services, which have much lower, if any, net premium caused expenses to represent a larger proportion of net premiums earned. -38- The policyholder dividend ratios were 6.1%, 4.8% and 4.6% for the years ended December 31, 1996, 1995 and 1994, respectively. The ratios have increased over the three-year-period, mainly because of sliding-scale dividend plans. Under such plans, the insured receives a dividend based upon the collective loss experience of the plan. As the loss experience of the most recent three underwriting years has improved relative to the years prior to this period, the Property and Casualty Group has incurred higher policyholder dividends. Net Investment Income Net investment income decreased 10.6% and 4.6% in 1996 and 1995, respectively. The reductions were attributable mainly to lower average investment balances, resulting from the pay-down of loss reserves from prior accident years and decreasing premium volume. In addition, the planned acceleration of paid losses in 1997 associated with the Property and Casualty Group's commutation strategy has caused the overall maturity of the investment portfolio to decrease, resulting in a lower average interest rate for invested assets at the end of 1996 related to 1995. The aforementioned commutation strategy is expected to lower investment income in 1997 related to 1996, as average invested asset balances are expected to be in lower in 1997. Comparison of SAP and GAAP Results The results presented under SAP are those of the Pooled Companies. Prior to December 31, 1996, the Pooled Companies were comprised of four domestic insurance companies: Pennsylvania Manufacturers' Association Insurance Company; Manufacturers Alliance Insurance Company; Pennsylvania Manufacturers Indemnity Company; and MASCCO. Effective December 31, 1996, MASCCO was removed from the pooling arrangement. As part of a plan to reduce the amount of indemnity reserves from accident years 1991 and prior in the Pooled Companies, certain workers' compensation reserves were transferred to MASCCO. The results of the Company's foreign insurance subsidiaries are not included in the SAP results. The Company's foreign insurance subsidiaries include: Pennsylvania Manufacturers International Insurance Limited ("PMII"), a Bermuda subsidiary engaged in reinsuring alternative market products offered by the Pooled Companies, Chestnut and PMA Cayman. Up to December 31, 1996, Chestnut primarily reinsured certain obligations of the Pooled Companies. At December 31, 1996, Chestnut transferred the assets and liabilities associated with such reinsurance arrangements to PMA Cayman. Under such intercompany reinsurance arrangements, PMII and PMA Cayman, in 1996, and PMII and Chestnut, in 1995 and 1994, assumed from the Pooled Companies the following amounts: (dollar amounts in millions) 1996 1995 1994 ---- ----- ---- Premiums earned .................. $ 40.9 $ 26.9 $ 19.8 Losses incurred .................. 120.9 71.7 33.1 Commissions ...................... -- 1.7 0.9 In addition to the above, the GAAP results for the Property and Casualty Group include the results of other entities within the Property and Casualty Group, but excluded from the aforementioned pooling agreement, including PMA Life Insurance Company and other affiliated non-insurance companies utilized in providing certain products and services to the Property and Casualty Group's clients. The exclusion of such entities tends to decrease the SAP combined ratio relative to the GAAP combined ratio. -39- PMA Re Results of Operations In 1996, PMA Re accounted for 35.6% of the Company's operating revenues. Summarized financial results of this segment are as follows: (dollar amounts in thousands) 1996 1995 1994 ---- ---- ---- Net premiums written .................... $164,053 $152,760 $113,351 ======== ======== ======== Net premiums earned ..................... $151,974 $139,345 $105,410 Net investment income ................... 48,676 45,166 42,068 -------- -------- -------- Operating revenues ...................... 200,650 184,511 147,478 -------- -------- -------- Losses and LAE incurred ................. 111,937 103,947 78,750 Acquisition and operating expenses ...... 45,930 41,121 35,025 -------- -------- -------- Total losses and expenses ............... 157,867 145,068 113,775 -------- -------- -------- Pre-tax operating income ................ $ 42,783 $ 39,443 $ 33,703 ======== ======== ======== GAAP loss ratio ......................... 73.7% 74.6% 74.7% GAAP combined ratio ..................... 103.9% 104.1% 108.0% SAP loss ratio .......................... 73.7% 74.6% 74.7% SAP combined ratio ...................... 104.4% 105.5% 108.2% Premium Revenues In 1996 and 1995, net premiums written increased 7.4% and 34.8%, respectively. In 1996, the increase was primarily the result of increased participation on reinsurance treaties with existing clients and writing of additional layers and programs with current clients. To a lesser extent, new ceding clients have also contributed to PMA Re's growth during 1996. Such increases were partially offset by premium reductions resulting from the current trend of larger ceding companies increasing their retentions. The increase in 1995 was attributable to an increase in the demand for reinsurance as well as increased participation on reinsurance treaties with existing clients. The increased demand was due to several industry trends such as the growth of regional and niche companies that have greater needs for reinsurance and strong growth in certain primary industry segments in which PMA Re specializes, such as excess and surplus lines. The following table indicates PMA Re's gross and net premiums written by major category of business: -40- (dollar amounts in thousands)
1996 1995 1996 1995 1994 Change Change ---- ---- ---- ------ ------ Gross Premiums Written: Casualty lines.......................... $144,040 $128,736 $107,000 11.9 % 20.3% Property lines.......................... 63,325 63,693 36,592 (0.6)% 74.1% Other lines............................. 793 (63) 838 -- -- --------- --------- --------- --------- --------- Total................................... $208,158 $192,366 $144,430 8.2 % 33.2% ========= ========= ========= ========= ========= Net Premiums Written: Casualty lines.......................... $122,020 $107,383 $ 88,585 13.6 % 21.2% Property lines.......................... 41,240 45,440 23,929 (9.2)% 89.9% Other lines............................. 793 (63) 837 -- -- --------- --------- ----------- --------- --------- Total................................... $164,053 $152,760 $113,351 7.4 % 34.8% ========= ========= =========== ========= =========
PMA Re's net casualty premiums written increased 13.6% and 21.2% in 1996 and 1995, respectively, for a 17.4% compound annual rate. The growth in 1996 and 1995 is attributable to the expansion of several programs covering specialty business, which includes professional liability, directors' and officers' liability, and other coverages written on a surplus lines basis. PMA Re's property business decreased 9.2% during 1996 and increased 89.9% during 1995. The decrease in 1996 is primarily attributable to higher ceding company retentions and competitive pricing conditions in a soft reinsurance market. During 1995, PMA Re was able to increase property premiums through expansion of several property programs; these programs encompassed such lines as auto physical damage, inland marine, and certain specialty property coverages written on a surplus line basis. The programs written by PMA Re contain per occurrence limits and/or are not considered significantly catastrophe exposed, either because of the locations of the insured values or the nature of the underlying properties insured. In November 1995, PMA Re commenced writing facultative reinsurance. During 1996, this new line of business contributed 1% to total net premiums written. It is anticipated that the facultative operations will be a source of premium growth for future years. Net premiums earned increased 9.1% and 32.2% in 1996 and 1995, respectively. These increases both correspond to the increase in net premiums written. Losses and Expenses PMA Re's combined ratios have remained fairly stable from 1994 through 1996, with a slight decreasing trend. This relative stability is attributable to (i) consistently favorable development of unpaid losses and LAE; (ii) prudent management of catastrophe exposures; and (iii) lower loss ratios offsetting generally increased acquisition costs related to writing more business with ceding commissions. The following table indicates the components of PMA Re's GAAP combined ratios: -41-
1996 1995 1994 ---- ---- ---- Loss Ratio ....................................... 73.7% 74.6% 74.7% ----- ----- ----- Expense ratio: Amortization of deferred acquisition costs ..... 24.7% 24.2% 26.3% Operating expenses ............................. 5.5% 5.3% 7.0% ----- ----- ----- Total expense ratio .......................... 30.2% 29.5% 33.3% ----- ----- ----- Combined ratio-GAAP .............................. 103.9% 104.1% 108.0% ===== ===== =====
For the past three years, PMA Re's loss ratios remained fairly stable, decreasing to 73.7% in 1996 from 74.6% and 74.7% in 1995 and 1994, respectively. Favorable development on prior years' unpaid losses and LAE was $28.6 million in 1996 and $15.0 million in both 1995 and 1994. The lower loss ratios are also largely attributable to the trends in PMA Re's mix of business toward contracts written on a pro rata basis and other contracts containing ceding commissions. Premiums for such contracts tend to be higher relative to the losses when compared to contracts that do not contain ceding commissions. The ratio of amortization of deferred acquisition costs to net premiums earned ("Acquisition Expense Ratio") increased 0.5 points to 24.7% in 1996. This slight increase is due to the fact that PMA Re has written more contracts with ceding commissions. For such contracts, PMA Re pays the ceding company a commission, but in return, PMA Re receives a higher proportion of the subject premium. In 1995, the Acquisition Expense Ratio decreased 2.1 points from the three-year high of 26.3% recorded in 1994. Such decrease relates primarily to the fact that, beginning in 1996, PMA Re's property retrocession program was changed to include a ceding commission, which resulted in additional $10.6 million and $7.5 million of offsets to acquisition costs in 1996 and 1995, respectively. In the three-year period ended December 31, 1996, PMA Re added to its operating infrastructure in the following ways: (i) added staff in response to increased volume, and to increase the level of specialized support services to customers; (ii) in November 1994, moved its headquarters into a new facility and significantly upgraded several of its data processing systems; and (iii) in 1995, added a facultative underwriting unit. In 1994, the resulting increases in operating expenses outpaced the increase in premium volume, as all of the costs associated with the move to the new facility were incurred, and a large proportion of the new support services were added. As such, the ratio of operating expenses to net premiums earned (the "Operating Expense Ratio") was 7.0%. In 1995 and 1996, the increases in premium volume, coupled with relatively flat levels of operating expenses, caused the Operating Expense Ratio to remain relatively stable. Net Investment Income Net investment income increased from $42.1 million in 1994 to $45.2 million in 1995, and from $45.2 million in 1995 to $48.7 million in 1996, increases of 7.4% and 7.8%, respectively. Such increases were primarily attributable to the overall increase in PMA Re's invested assets. At amortized cost, PMA Re's cash and invested assets increased $34.9 million, or 4.4% and $92.4 million, or 13.1% during 1996 and 1995, respectively. Additionally, the 1996 increase was also due to a decrease in holdings of tax-exempt securities for which yields tend to be lower than other investment vehicles. -42- Comparison of SAP and GAAP Results The difference between the combined ratios presented on a GAAP basis versus the SAP combined ratios is primarily attributable to the different accounting treatment of acquisition costs. As PMA Re has grown in terms of premium volume during 1996 and 1995, PMA Re has incurred additional acquisition costs, which are deferred for GAAP. Since, for SAP purposes, PMA Re is not permitted to defer its acquisition costs, there is an incremental expense recorded on a SAP basis which is not required for GAAP. Corporate Operations The corporate segment is primarily comprised of corporate overhead and the operations of the Company's properties. In 1995 and 1994, management reviewed its property holdings, some of which the Company is presently attempting to sell or lease. In doing such review, management determined that the fair market values of the Company's former headquarters building and certain adjacent properties were less than the carrying values plus the costs to carry and sell the properties. As such, the Company recorded charges of $8.4 million and $4.9 million, in 1995 and 1994, respectively, to write down these properties to their fair market values less costs to carry and sell the properties. No such charges were recorded during 1996. In addition, certain overhead costs were reduced in 1996 as compared to 1995. Net Realized Investment Gains Net realized investment gains amounted to $3.0 million, $31.9 million, and $47.5 million in 1996, 1995, and 1994, respectively. During the three-year period ended December 31, 1996, the Company realized gains from investment sales related to the following: (i) transactions to move holdings between taxable and tax-exempt fixed maturity investments in order to maximize after-tax yields; (ii) transactions to expand the asset classes in which the Company invests to capitalize on favorable yield spreads between such instruments and U.S. Treasury securities; (iii) sales based upon an assessment of the interest rate environment and the shape of the yield curve; and (iv) sales of equity securities, as the Company has substantially reduced its holdings of this asset class over the last three years. During 1996 and 1995, most of the investment sales activity resulted from reducing the Company's holdings of tax-advantaged securities. Based upon an assessment of the Company's position with respect to alternative minimum tax ("AMT"), the Company reduced its tax-advantaged securities positions beginning in late 1995 and throughout 1996. In 1996, these sales resulted in a net loss of $0.9 million, versus 1995 when such transactions resulted in a net gain of $12.1 million. During 1995, the declining interest rate environment gave rise to favorable sales opportunities; these opportunities were less prevalent in 1996 due to the higher interest rate environment. In early 1994, the Company realized gains of approximately $47.5 million from sales of taxable securities. The objective of such transactions was to increase the proportion of tax-advantaged securities and to shorten the duration of the investment portfolio. In addition to gains and losses arising from the sales of fixed maturity investments, sales of equity securities generated net realized gains of $3.9 million, $0.9 million, and $8.5 million in 1996, 1995, and 1994, respectively. Interest Expense and Income Taxes Interest expense decreased from $18.7 million in 1995 to $17.1 million in 1996. Such reduction relates to slightly lower average debt balances in 1996. In addition, principal payments on the Company's higher coupon senior notes (average coupon rate of amounts paid was 9.49%) were funded with drawdowns on the Company's revolving credit facility, which had an average interest rate of 6.08% in 1996. In March 1997, the Company refinanced all of its existing debt facilities with a new revolving credit arrangement, which is expected to reduce interest expense (see "Liquidity and Capital Resources" below). Interest expense -43- increased to $18.7 million in 1995 from $13.1 million in 1994. This increase relates mainly to the fact that the Company added $25.0 million of revolving bank debt in late December 1994, which brought the total bank debt at that time to $100.0 million. In addition, the Company refinanced $100.0 million of floating rate bank debt through the issuance of $107.0 million of fixed rate senior notes. See "Liquidity and Capital Resources" below. The senior notes carried a higher fixed rate of interest (approximately 100 basis points) than the average variable rate the Company had been paying during 1994 on the revolving credit facility. The Company's effective tax rates were 29.3% (benefit), 30.9%, and 12.4% in 1996, 1995, and 1994, respectively. The Company recorded a net deferred tax asset of $101.6 million and $67.3 million in 1996 and 1995, respectively. The $34.3 million increase from 1995 to 1996 resulted primarily from the operating loss reported in 1996. The net deferred tax asset of $101.6 million reflects management's estimate of the amounts that the Company expects to recover in future years primarily through the utilization of net operating losses and AMT credit carryforwards. Management believes that the benefit of its net deferred tax asset will be fully realized, and, therefore, has not provided for a valuation allowance. At December 31, 1996, the Company had $153.2 million of net operating carryforwards (expiring in 2011) and $13.3 million of AMT credit carryforwards (which do not expire). The increase in the effective tax rate in 1995 versus 1994 relates primarily to three factors. First, in 1995, management determined that, for AMT purposes, the Company did not require as much tax-exempt income as was projected; therefore, the Company reduced its exposure to tax-advantaged securities throughout the year. For GAAP purposes, such portfolio adjustments generally increase the effective tax rate, even though there were economic advantages associated with the transactions. In terms of the targeted amount of tax-exempt investments, management assesses the optimal level of tax-exempt interest, with such assessment based upon: (i) the Company's tax position in terms of the margin between regular federal taxes and AMT and (ii) the relative attractiveness of tax-advantaged securities versus other investment vehicles. Second, the effective tax rate in 1995 was impacted by the fact that net realized investment gains were a larger proportion of income than in 1994. Third, the Company's effective tax rate increased in 1995 due to losses of a foreign reinsurance affiliate utilized in the Property and Casualty Group's operations. Liquidity and Capital Resources Liquidity Liquidity is a measure of an entity's ability to secure enough cash to meet its contractual obligations and operating needs. At the holding company level, the Company requires cash to pay debt obligations and dividends to shareholders, to pay taxes to the Federal government, as well as to capitalize subsidiaries from time to time. PMC's primary sources of liquidity are dividends from subsidiaries, net tax payments received from subsidiaries and borrowings. The Company paid interest of $16.6 million, $15.1 million and $12.9 million in 1996, 1995 and 1994, respectively. In addition, the Company made scheduled debt repayments of $25.1 million, $125.1 million and $15.9 million in 1996, 1995 and 1994 respectively, and paid dividends to shareholders of $7.9 million in 1996 and 1995 and $5.9 million in 1994. PMC also made cash capital contributions to its subsidiaries totaling $50.0 million, $61.0 million and $17.1 million in 1996, 1995 and 1994, respectively. In 1995, PMC also utilized cash to settle intercompany balances with its domestic insurance subsidiaries. -44- Dividends from subsidiaries were $53.6 million, $103.2 million and $34.0 million in 1996, 1995 and 1994, respectively. Net tax cash flows were $12.0 million, $11.4 million and $11.9 million in 1996, 1995 and 1994, respectively. In addition to dividends and tax payments from subsidiaries, the Company utilized the following sources to generate liquidity for the above needs. During 1996, the Company financed scheduled repayments on its senior note facilities of $25.0 million through drawdowns on its revolving credit facility. In 1995, the Company converted its expiring revolving credit agreement into a more permanent form of financing by issuing $107.0 million of 7.62% privately placed senior notes. Additionally, the Company funded the scheduled debt repayments on its existing senior notes by drawing down $18.0 million on a new $50.0 million revolving credit agreement with a banking syndicate. At December 31, 1996, the Company had $6.0 million available on such revolving credit agreement. In March 1997, management refinanced all of its existing credit agreements not otherwise expiring in 1997 through a new revolving credit facility (the "New Credit Facility"). See "Capital Resources" below for further discussion. The Company's domestic insurance subsidiaries' ability to pay dividends to the holding company is limited by the insurance laws and regulations of Pennsylvania. Under such laws and regulations, dividends may not be paid without prior approval of the Commissioner in excess of the greater of (i) 10% of surplus as regards to policyholders as of the end of the preceding year or (ii) statutory net income for the preceding year. Under this standard, the Pooled Companies and PMA Re can pay an aggregate of $51.9 million of dividends without the prior approval of the Commissioner during 1997. Under its plan of operation filed with the Pennsylvania Insurance Department, MASCCO must maintain a ratio of unpaid losses and loss adjustment expenses to surplus of no more than eight to one; as of December 31, 1996, MASCCO was in compliance with such requirement. In addition, certain covenants within the Company's debt agreements in effect at December 31, 1996 require the Company's insurance subsidiaries to maintain combined statutory capital and surplus of $375.0 million. The New Credit Facility requires the Company's insurance subsidiaries to maintain combined statutory capital and surplus of $450.0 million. At December 31, 1996, the Company's insurance subsidiaries had combined statutory capital and surplus of $535.7 million. Additionally, the New Credit Facility requires the domestic insurance subsidiaries of the Property and Casualty Group to maintain an adjusted surplus to authorized control level ratio (as calculated under risk based capital rules) of not less than 200%, and requires PMA Re to maintain such ratio at 300%. At December 31, 1996, the ratios of the domestic insurance subsidiaries of the Property and Casualty Group ranged from 230% to 210%, and PMA Re's ratio was 380%. PMC's dividends to shareholders are restricted by its debt agreements. Based upon the terms of the New Credit Facility, on a pro forma basis under the most restrictive debt covenant, PMC would be able to pay dividends of approximately $11.0 million in 1997. See "Capital Resources" for further discussion. Management believes that the Company's sources of funds will provide sufficient liquidity to meet short-term and long-term obligations. Investments The Company's investment policy objectives are to (i) seek competitive after-tax income and total return, (ii) maintain very high grade asset quality and marketability on all investments, (iii) maintain maturity distribution commensurate with the Company's business objectives, (iv) provide portfolio -45- flexibility for changing business and investment climates and (v) provide liquidity to meet operating objectives. The Company has established strategies, asset quality standards, asset allocations and other relevant criteria for its fixed maturity and equity portfolios. In addition, maturities are structured after projecting liability cash flows with sophisticated actuarial models. The Company also does not invest in various types of investments, including speculative derivatives. The Company's portfolio does not contain any significant concentrations in single issuers (other than U.S. treasury obligations), industry segments or geographic regions. The Company's Board of Directors is responsible for the Company's investments and investment policy objectives. The Company retains outside investment advisers to provide investment advice and guidance, supervise the Company's portfolio and arrange securities transactions through brokers and dealers. The Company's Executive and Finance Committees of the Board of Directors meet periodically with the investment advisers to review the performance of the investment portfolio and to determine what actions should be taken with respect to the Company's investments. Investments by the Pooled Companies, MASCCO and PMA Re must comply with the insurance laws and regulations of the Commonwealth of Pennsylvania. The Company's capital not allocated to the Pooled Companies, MASCCO and PMA Re may be invested in securities and other investments that are not subject to such insurance laws, but nonetheless conform to the Company's investment policy. The following table summarizes the Company's investments by carrying value as of December 31, 1996, 1995 and 1994:
(dollar amounts in millions) 1996 1995 1994 ---- ---- ---- Carrying Carrying Carrying Investment Value Percent Value Percent Value Percent - - - ---------- ----- ------- ----- ------- ----- ------- U.S. Treasury securities and obligations of U.S. Government agencies............. $1,602.8 70.8% $1,666.3 67.9% $1,050.8 45.4% Obligations of states and political subdivisions.......... 76.5 3.4% 435.9 17.8% 841.8 36.4% Corporate debt securities............ 372.8 16.5% 128.8 5.2% 45.6 2.0% Mortgage backed securities........... 74.0 3.3% -- -- 179.2 7.7% Equity securities.................... 0.3 -- 10.9 0.4% 17.5 0.8% Short-term investments............... 135.0 6.0% 214.1 8.7% 178.4 7.7% -------- ----- -------- ----- -------- ----- Total (1)....................... $2,261.4 100.0% $2,456.0 100.0% $2,313.3 100.0% ======== ===== ======== ===== ======== =====
- - - ---------------- (1) As of December 31, 1996, the market value of the Company's total investments was $2,261.4 million. The following table indicates the composition of the Company's fixed maturities portfolio at carrying value, excluding short-term investments by rating as of December 31, 1996, 1995 and 1994: -46-
(dollar amounts in millions) 1996 1995 1994 ---- ---- ---- Carrying Carrying Carrying Ratings (1) Value Percent Value Percent Value Percent - - - ----------- ----- ------- ----- ------- ----- ------- U.S. Treasury securities and AAA........................ $1,882.4 88.5% $2,025.5 90.8% $1,749.2 82.6% AA................................... 95.8 4.5% 174.1 7.8% 329.3 15.6% A.................................... 147.9 7.0% 31.4 1.4% 38.9 1.8% -------- ----- -------- ----- -------- ----- Total........................... $2,126.1 100.0% $2,231.0 100.0% $2,117.4 100.0% ======== ===== ======== ===== ======== =====
- - - ---------------- (1) Ratings as assigned by Standard and Poor's. Such ratings are generally assigned at the issuance of the securities, subject to revision on the basis of ongoing evaluations. Ratings in the table are as of December 31 of the years indicated. The following table sets forth scheduled maturities for the Company's investments in fixed maturities, excluding short-term investments, based on stated maturity dates as of December 31, 1996. Expected maturities will differ from contractual maturities because the issuers may have the right to call or prepay obligations with or without call or prepayment penalties: (dollar amounts in millions) Carrying Value Percent -------------- ------- 1 year or less........................ $ 110.8 5.2% Over 1 year through 5 years........... 525.5 24.7% Over 5 years through 10 years......... 661.2 31.1% Over 10 years......................... 754.6 35.5% Mortgage backed securities............ 74.0 3.5% -------- ----- Total............................ $2,126.1 100.0% ======== ===== The following table reflects the Company's investment results for each year in the three-year period ended December 31, 1996: (dollar amounts in millions) 1996 1995 1994 ---- ---- ---- Average invested assets (1)........ $2,366.8 $2,395.8 $2,350.9 Net investment income (2).......... $ 133.9 $ 139.4 $ 138.7 Net effective yield (3)............ 5.66% 5.82% 5.90% Net realized investment gains...... $ 3.0 $ 31.9 $ 47.5 - - - ---------------- (1) Average of beginning and ending amounts of cash and investments for the period at carrying value. (2) After investment expenses, excluding net realized investment gains. (3) Net investment income for the period divided by average invested assets for the same period. As of December 31, 1996, the duration of the Company's investments was approximately 5.6 years and the duration of its liabilities was approximately 4.9 years. -47- Capital Resources The Company's total assets decreased to $3,117.5 million at December 31, 1996 from $3,258.6 million at December 31, 1995. Total investments decreased $194.6 million to $2,261.4 million at December 31, 1996. The decrease in investments is primarily attributable to the Property and Casualty Group's pay- down of loss reserves from prior accident years. All other assets increased $53.5 million in 1996, mainly due to a $34.3 million increase in the deferred tax asset and an increase of $37.5 million in other assets, offset by decreases in investment income due and accrued of $5.2 million, uncollected premiums of $4.7 million, and reinsurance receivables of $6.7 million. Upon adoption of Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities," in 1994, the Company designated securities with a fair value of $1,420.6 million as available for sale. Accordingly, in 1994, the Company recorded a credit to equity of $45.3 million (net of tax effect of $24.4 million) representing the cumulative effect of the adoption of SFAS No. 115 related to the net unrealized gain position of fixed maturity securities available for sale at January 1, 1994. The Company does not actively trade its securities, and, therefore, none of the portfolio was classified as trading securities. In 1995, the Company re-evaluated the classifications of its investments. As a result, effective June 30, 1995, the Company reclassified its entire held to maturity portfolio to available for sale. This reclassification resulted in a $1,238.1 million increase in available for sale securities and a $2.4 million unrealized loss. During 1996, interest rates increased substantially. The effect of this increase in interest rates was to decrease the fair value of the Company's portfolio. Overall, the portfolio experienced a net unrealized loss of $65.2 million in 1996, as the fair value of the portfolio as of December 31, 1996 was lower than its amortized cost by $38.3 million; at December 31, 1995 the fair value of the portfolio was higher than its amortized cost by $26.9 million. As a result, the Company recorded a total charge of $42.4 million (net of tax effect of $22.8 million) to shareholders' equity in 1996. In 1995, the decrease in interest rates caused the fair value of the Company's available for sale portfolio to increase by $182.7 million, resulting in a credit to shareholders' equity of $67.0 million (net of tax effect of $36.1 million). The difference between amortized cost and fair value for available for sale securities decreased shareholders' equity by $24.9 million (net of tax effect of $13.4 million) at December 31, 1996 and increased shareholders' equity by $17.5 million (net of tax effect of $9.4 million) at December 31, 1995. The Company's deferred income tax asset increased to $101.6 million at December 31, 1996 from $67.3 million at December 31, 1995. The primary reasons for such increase relate to net operating losses resulting from the Property and Casualty Group's reserve strengthening and the tax effect of the unrealized loss on investments available for sale. Under SFAS No. 109, a valuation allowance should be provided to offset the effects of a deferred tax asset if management believes that it is more likely than not that the benefit of a deferred tax item will not be realized. Management believes that the benefit of its deferred tax asset will be fully realized, and therefore has not provided for a valuation allowance. The increase in other assets is mainly attributable to $18.3 million in Federal taxes receivable relating to net operating loss carrybacks. Such increase was partially offset by reductions in uncollected premiums and reinsurance receivables of $4.7 million and $6.7 million, respectively, mainly attributable to lower volume for the Property and Casualty Group. Unpaid losses and loss adjustment expenses increased $21.1 million to $2,091.1 million at December 31, 1996. This increase reflects the Property and Casualty Group's reserve strengthening charge of $191.4 million, offset by favorable reserve development at PMA Re and loss payments on prior accident years. -48- Estimating future claims costs is necessarily a complex and judgmental process inasmuch as reserve amounts are based on management's informed estimates and judgments using data currently available. As such, management reviews a variety of information, and uses a number of actuarial methods applied to historical claims data, which often produces a range of possible results. As additional experience and other data are reviewed, these estimates and judgments are revised, at which point reserves may be increased or decreased accordingly. Such increases or decreases are reflected in operating results for the time period in which the adjustments are made. While the estimate for unpaid losses and loss adjustment expenses is subject to many uncertainties, management believes that it has made adequate provision for its claims liabilities. However, if actual losses exceed the amounts recorded in the financial statement, the Company's financial condition and results of operations could be adversely affected. The Company actively manages its exposure to catastrophic events. In the underwriting process, the Company generally avoids the accumulation of insurable values in catastrophe prone regions. Also, in writing property reinsurance coverages, PMA Re typically requires per occurrence loss limitations for contracts that could have catastrophe exposure. Through per risk reinsurance, the Company also manages its net retention in each exposure. In addition, PMA Re maintains retrocessional protection of $46.0 million excess of $2.0 million per occurrence, and the Property and Casualty Group maintains catastrophe reinsurance protection of $15.0 million excess of $850,000. As a result, the Company's loss ratios have not been significantly impacted by catastrophes, and management believes that the Company has adequate reinsurance to protect against the estimated probable maximum gross loss from a catastrophic event. The Company also maintains reinsurance and retrocessional protection for other lines of business at December 31, 1996, as follows: Retention Limits --------- ------ The Property and Casualty Group: Per Occurrence: Workers' compensation.......... $1.5 million $ 103.5 million Other casualty lines........... 0.5 million (1) 49.5 million Auto physical damage........... 0.5 million 2.0 million Per Risk: Property....................... 0.5 million (2) 19.5 million PMA Re: Per Occurrence: Casualty lines................. 2.5 million (3) 12.5 million Workers' compensation.......... 2.0 million 53.0 million Per Risk: Property....................... 0.5 million 1.5 million Casualty....................... 1.0 million (3) 4.0 million - - - ---------------- (1) Effective January 1, 1997, the retention on this program was reduced to $175,000. (2) This coverage also provides protection of $28.5 million per occurrence over its combined net retention of $0.5 million. (3) Effective January 1, 1997, PMA Re's casualty program was changed to $6.0 million excess of $1.5 million per risk and $12.5 million excess of $2.75 million per occurrence. The Company performs extensive credit reviews on its reinsurers, focusing on, among other things, financial capacity, stability, trends, and commitment to the reinsurance business. Prospective and existing reinsurers failing to meet the Company's standards are excluded from the Company's reinsurance programs. -49- In addition, the Company requires letters of credit to support balances due from reinsurers not authorized to transact business in Pennsylvania. At December 31, 1996, the Company had reinsurance recoverables due from the following unaffiliated single reinsurers in excess of 3% of shareholders' equity:
Gross amount due to the Company A.M. Best Reinsurer (in thousands) Rating - - - --------- -------------------- ----------- United States Fidelity and Guaranty Company......... $84,802 A American Re-Insurance Corporation................... $34,009 A+ Kemper Reinsurance Corporation...................... $17,421 A Odyssey Reinsurance................................. $15,614 A-
The Company maintained funds held to collateralize the above balances in the amount of $86.3 million at December 31, 1996. The Company believes that it would have the right to offset the funds withheld from a reinsurer against the balances due from such reinsurer in the event of insolvency. Funds held under reinsurance treaties increased by $13.2 million in 1996, reflecting ceded premiums paid on reinsurance and retrocessional agreements written on a funds held basis. Taxes, licenses and fees and other expenses accrued increased $9.6 million in 1996, which was primarily related to additional costs associated with the VERIP. Long-term debt remained essentially constant between 1996 and 1995. During 1996, the Company funded scheduled repayments on its senior notes through drawdowns on its revolving credit facility. The revolving credit facility carried a .25% charge on the undrawn balance, and interest was payable on the utilized portion at LIBOR plus .60%. As noted previously, management refinanced its existing credit agreements during March 1997. As of December 31, 1996, the following debt was outstanding, all of which the Company refinanced under the New Credit Facility on March 14, 1997: (dollar amounts in thousands) Senior notes 9.60%, due 2001............................. $ 46,428 Senior notes 7.62%, due 2001, Series A................... 71,000 Senior notes 7.62%, due 2000, Series B................... 36,000 Revolving credit agreement, expiring in 1998............. 36,000(1) --------- Total.................................................... $189,428 ======== - - - ---------------- (1) The Company repaid $8,000 of the revolving credit agreement subsequent to December 31, 1996. The early extinguishment of the senior note agreements will result in an extraordinary loss of $4.7 million ($7.3 million pre-tax) which will be recorded in the first quarter of 1997. The New Credit Facility bears interest at LIBOR plus .70% on the utilized portion, and carries a .275% facility fee on the unutilized portion. The margin over LIBOR is adjustable downward based upon future reductions in the Company's debt to capitalization ratio. As of March 14, 1997, the interest rate on the New Credit Facility was 5.70%. The final expiration of the New Credit Facility will be December 31, 2002, with level 25% reductions in availability each year beginning December 31, 1999. Management also entered into an interest rate swap agreement which will manage the impact of the potential volatility of the interest rate associated with the -50- floating rates on the New Credit Facility. The interest rate swap covers a notional principal amount of $150.0 million and effectively converts the floating rate on such portion of the New Credit Facility to a fixed 7.24%. The Company has entered into one other interest rate swap agreement in its management of present interest rate exposures. This transaction effectively changed the Company's interest rate exposure on one of its fixed rate senior note agreements to a floating rate obligation as follows:
Principal Balance Debt Agreement at December 31, 1996 Fixed Rate Floating Rate - - - -------------- -------------------- ---------- ------------- Senior note, due 1997........... $ 7.1 million 9.53% 5.60%
The variable rate resets every six months. This agreement involves the exchange of interest payment obligation without the exchange of underlying principal. The differential to be paid or received is recognized as an adjustment of interest expense. In the event that a counterparty fails to meet the terms of the agreement, the Company's exposure is limited to the interest rate differential on the notional principal amount ($7.1 million). Management believes such credit risk is minimal and any loss would not be significant. Shareholders' equity decreased to $425.8 million at December 31, 1996 from $609.7 million at December 31, 1995. This decrease is primarily due to the net loss of $135.3 million, unrealized losses on investments available for sale of $42.4 million, and dividends declared of $7.9 million. At December 31, 1996, the Company's capital structure consisted of $204.7 million of long-term debt and $425.8 million of shareholders' equity. The Company utilizes long-term debt in its capital structure to fund internal expansion through capital contributions to subsidiaries, to pursue investment opportunities, and to refinance existing debt. Due to the inherent risks associated with the insurance industry, management strives to maintain a relatively conservative capital structure. Management believes that a certain amount of debt is necessary in order to enhance returns on shareholders' equity; however, the level of debt must be appropriate in terms of the availability of dividends from subsidiaries, operating income, and the overall capital structure. In determining the appropriate level of long-term debt, management focuses on the following statistics: statutory dividends to interest expense, (loss) earnings before interest and taxes to interest expense, pre-tax operating (loss) income before interest to interest expenses, and debt to capitalization ratio. The following table indicates the Company's status with respect to these statistics:
1996 1995 1994 ---- ---- ---- Statutory dividends to interest expense (times)................ 3.1 3.8 2.6 (Loss) earnings before interest and taxes to interest expense (times)............................... (11.2) 2.9 6.0 Pre-tax operating (loss) income before interest to interest expenses (times).............................. (11.4) 1.2 2.4 Debt to total capitalization (excluding SFAS No. 115 adjustment)............................................ 31.2% 25.6% 26.2%
Presently, management believes that the existing capital structure is appropriate for the Company. In addition, the impact of the New Credit Facility is not expected to change such conclusion. However, management continually monitors the capital structure in light of developments in the business, and the present assessment could change as management becomes aware of new opportunities and challenges in the Company's business. -51- Regulation NAIC has adopted risk-based capital ("RBC") requirements for property/casualty insurance companies to evaluate the adequacy of statutory capital and surplus in relation to investment and insurance risks such as asset quality, asset and liability matching, loss reserve adequacy and other business factors. Under RBC requirements, regulatory compliance is determined by the ratio of a Company's total adjusted capital, as defined by the NAIC, to its authorized control level, also as defined by the NAIC. Companies below prescribed trigger points in terms of such ratio are classified as follows: Company action level.......... 200% Regulatory action level....... 150% Authorized control level...... 100% Mandatory control level....... 70% PMA Re and each of the Pooled Companies had ratios in excess of 200% as of December 31, 1996. As a result of the Property and Casualty Group's 1996 loss reserve strengthening (see "Loss Reserves" above), the ratios for the individual Pooled Companies range from 230% to 210%. PMA Re's ratio was 380% at December 31, 1996. RBC requirements for property/casualty insurance companies allow a discount for workers' compensation reserves to be included in the adjusted surplus calculation. However, the calculation for RBC requires the phase-out of non-tabular reserve discounts previously taken for workers' compensation reserves. The discount phase-out has increased by 20% in each year since 1994, ultimately phasing out 100% of such discount by 1998. As a result, this phase-out negatively impacts the RBC ratios of companies which write workers' compensation insurance and discount such reserves on a non-tabular basis relative to companies which write other types of property/casualty insurance. Management believes that it will be able to maintain the Pooled Companies' RBC in excess of regulatory requirements through prudent underwriting and claims handling, investing and capital management. However, no assurances can be given that developments affecting the Property and Casualty Group, many of which could be outside of management's control, including but not limited to changes in the regulatory environment, economic conditions and competitive conditions in the jurisdictions in which the Property and Casualty Group writes business, will cause the Pooled Companies' RBC to fall below required levels resulting in a corresponding regulatory response. Three Months Ended March 31, 1997 Compared to Three Months Ended March 31, 1996 The table below presents the major components of net income for the three months ended March 31, 1997 and March 31, 1996, respectively: -52- (dollar amounts in thousands, except per share data) Three Months Ended March 31, --------------------- 1997 1996 -------- ------ Pre-tax operating income ................. $ 8,569 $7,258 Net realized investment (losses) gains.... (1,251) 943 -------- ------ Income before income taxes and extraordinary item...................... 7,318 8,201 Provision for income taxes................ 2,561 2,572 -------- ------ Income before extraordinary item.......... 4,757 5,629 Extraordinary item, net of related taxes.. (4,734) -- -------- ------ Net income................................ $ 23 $5,629 ======== ====== Per Share Data: Income before extraordinary item.......... $ 0.19 $0.22 Extraordinary item........................ (0.19) -- -------- ------ Net income................................ $ -- $0.22 ======== ====== The following table indicates the Company's pre-tax operating income by principal business segment for the three months ended March 31, 1997 and March 31, 1996, respectively: (dollar amounts in thousands, except per share data) Three Months Ended March 31, --------------------- 1997 1996 -------- ------ The Property and Casualty Group $ 291 $ 3,711 PMA Re.................................... 12,820 9,058 Corporate operations...................... (208) (1,039) ------- ------- Pre-tax operating income before interest expense........................ 12,903 11,730 Interest expense.......................... 4,334 4,472 ------- ------- Pre-tax operating income.................. $ 8,569 $ 7,258 ======= ======= On a consolidated basis, the Company reported pre-tax operating income of $8.6 million, or $0.35 per share, for the three months ended March 31, 1997 compared to $7.3 million, or $0.29 per share, for the three months ended March 31, 1996. This increase is due primarily to an increase in pre-tax operating income reported by PMA Re of $3.8 million to $12.8 million for the first quarter of 1997. The increase in PMA Re's pre-tax operating income was attributable primarily to improved loss ratios and increased investment income. The pre-tax operating loss for corporate operations decreased $800,000 for the first quarter of 1997 compared to the first quarter of 1996 primarily as a result of increased income earned on some of the Company's properties in 1997. The improvements in pre-tax operating income by PMA Re and corporate operations were offset by a decrease in the Property and Casualty Group's pre-tax operating income of $3.4 million in the first quarter of 1997 compared to the first quarter of 1996. The decrease in the Property and Casualty Group's pre-tax operating income was primarily attributable to lower premiums earned coupled with accretion of loss reserve discount for the Property and Casualty Group's run-off entities. The -53- decrease in net premiums earned is attributable to a decrease in the rolling 12-month net premiums written at March 31, 1997 compared to the rolling 12-month net premiums written at March 31, 1996 as a result of, in part, rate changes in the Property and Casualty Group's principal business jurisdiction, Pennsylvania. Interest expense remained fairly stable in conjunction with the related debt levels, decreasing $200,000 from $4.5 million for the quarter ended March 31, 1996 to $4.3 million for the quarter ended March 31, 1997. Net realized investment losses were $1.3 million for the three months ended March 31, 1997 compared to net realized investment gains of $900,000 for the three months ended March 31, 1996. During the first quarter of 1997, PMC liquidated the remainder of its tax advantaged portfolio at a small loss. Net income on a consolidated basis was $23,000 for the three months ended March 31, 1997 compared to net income of $5.6 million for the three months ended March 31, 1996. On March 14, 1997, the Company refinanced substantially all of its outstanding credit agreements not already maturing in 1997 with a new $235.0 million revolving credit arrangement ("New Credit Facility"). See "Liquidity and Capital Resources" below. In connection with this refinancing, the Company recognized an extraordinary loss from the early extinguishment of debt of $4.7 million, or $7.3 million pre-tax. The Property and Casualty Group Results of Operations In the three months ended March 31, 1997, the Property and Casualty Group accounted for 63.8% of the Company's operating revenues. Summarized financial results of this segment are as follows: (dollar amounts in thousands) Three Months Ended March 31, -------------------- 1997 1996 ------- -------- Net premiums written....................... $90,392 $ 90,817 ======= ======== Net premiums earned........................ $68,654 $ 76,314 Net investment income...................... 22,128 22,198 Service revenues........................... 2,548 1,748 ------- -------- Operating revenues......................... 93,330 100,260 ------- -------- Losses and LAE incurred.................... 65,091 67,169 Acquisition and operating expenses ........ 24,691 26,258 Policyholder dividends..................... 3,257 3,122 ------- -------- Total losses and expenses.................. 93,039 96,549 ------- -------- Pre-tax operating income .................. $ 291 $ 3,711 ======= ======== GAAP loss ratio............................ 94.8% 88.0% GAAP combined ratio........................ 135.5% 126.5% SAP loss ratio............................. 85.3% 85.3% SAP combined ratio......................... 116.1% 119.2% -54- Premium Revenues Direct premiums written for the Property and Casualty Group increased $8.2 million for the three months ended March 31, 1997 as compared to the three months ended March 31, 1996. Net premiums written decreased $400,000 and earned premiums decreased by $7.7 million during the three months ended March 31, 1997. Direct premiums written increased $11.4 million for commercial lines and decreased $3.2 million for workers' compensation for the three months ended March 31, 1997 compared to the first quarter of 1996. Reinsurance premiums assumed decreased $600,000 and reinsurance premiums ceded increased $8.0 million for the three months ended March 31, 1997 compared to the three months ended March 31, 1996, respectively. The decrease in direct written premiums for workers' compensation was due primarily to rate changes in Pennsylvania, the Property and Casualty Group's principal business jurisdiction, continued changes in product mix toward alternative market products and competitive conditions. Workers' compensation reform laws adopted in Pennsylvania (Act 57) resulted in a reduction in workers' compensation rates of 25%, on average, effective February 1997. Act 57 is also expected to lower the Property and Casualty Group's loss and loss adjustment expenses for business written after June 1996. The rate decreases resulting from these changes were partially offset by an increase in exposures underwritten by the Property and Casualty Group. The Property and Casualty Group has continued its marketing of alternative market workers' compensation products for larger accounts, including large-deductible policies and offshore rent-a-captive programs. Typically, the Property and Casualty Group receives a lower up-front premium for these types of alternate market product plans. However, under this type of business, the insured retains a greater share of the underwriting risk than under rate-sensitive or loss-sensitive products, which reduces the potential for unfavorable claim activity on the accounts and encourages loss control on the part of the insured. A substantial portion of related revenues are recorded as service revenues. Such service revenues increased $800,000 for the three months ended March 31, 1997 compared to the same period in 1996. Direct workers' compensation premiums were also impacted by changes in the level of premium adjustments, primarily related to audit premiums and retrospective policies. For the three months ended March 31, 1997, such adjustments reduced premiums written by $1.0 million, while in the comparable 1996 period such adjustments increased premiums written by $1.7 million. This decrease in premium adjustments billed for the three months ended March 31, 1997 compared to the same period in 1996 is primarily due to the increase in retrospectively rated premiums returned to insureds, resulting from the favorable loss experience in more recent accident years in workers' compensation. For the three months ended March 31, 1997, the Property and Casualty Group's direct writings of commercial lines, including commercial auto, general liability, umbrella, multi-peril and commercial property lines increased $11.4 million compared to the three months ended March 31, 1996. This increase was primarily focused in the property and general liability lines of business, which accounted for $8.2 million and $1.2 million of the increase, respectively, and is primarily due to the timing of policy renewals. Management intends to reduce its net emphasis on such commercial lines in 1997. Therefore, slower growth in commercial lines is expected over the remainder of the year. Ceded premiums increased $8.0 million for the three months ended March 31, 1997 compared to the three months ended March 31, 1996. In 1997, the Property and Casualty Group entered into a new reinsurance treaty that covers substantially all commercial lines casualty business at a $175,000 per risk attachment point, as compared to a $500,000 per risk attachment point in 1996. The effect of this new treaty, and the increased direct premiums written in property lines, for which the Property and Casualty Group -55- generally purchases more reinsurance, caused ceded premiums to increase by $6.0 million in the three months ended March 31, 1997 compared to the same period in 1996. Losses and Expenses The following table reflects the components of the Property and Casualty Group's combined ratios, as computed under GAAP: Three Months Ended March 31, ------------------- 1997 1996 ------ ------ Loss ratio............................ 94.8% 88.0% ------ ------ Expense ratio: Amortization of deferred acquisition costs................. 15.9% 16.9% Operating expenses.................. 20.1% 17.5% ------ ------ Total expense ratio................. 36.0% 34.4% ------ ------ Policyholders' dividends.............. 4.7% 4.1% ------ ------ Combined ratio-GAAP(1)................ 135.5% 126.5% ====== ====== - - - ---------------- (1) The combined ratio computed on a GAAP basis is equal to losses and loss adjustment expenses, plus amortization of deferred acquisition costs, plus operating expenses, plus policyholders' dividends, all divided by net premiums earned. The increase in the GAAP loss ratio for the first quarter of 1997 compared to the first quarter of 1996 period is due primarily to the accretion of loss reserve discount in the Property and Casualty Group's run-off operations. In December 1996, the Property and Casualty Group designated two of its insurance subsidiaries as run-off companies, for the purpose of reinsuring the Pooled Companies for substantially all of the accident years 1991 and prior workers' compensation indemnity reserves. The domestic insurance subsidiary, MASCCO, reinsures only established Pennsylvania indemnity claims, while the offshore insurance subsidiary, PMA Cayman, reinsures both medical and indemnity claims. The increase in accretion of discount is primarily due to the reserve strengthening that the Property and Casualty Group recorded in December 1996. Reserves recorded for prior accident years continue to be within the ranges estimated by management, and 1997 accident year loss ratios recorded by management for its principal lines of business are generally consistent with those ratios established for accident year 1996. The operating expenses in the first quarter of 1997 decreased $1.6 million compared to the first quarter of 1996. The GAAP expense ratio for the first quarter of 1997 was greater than that in the first quarter of 1996 by 1.6 points, primarily due to the increase in alternative market products, which have much lower, if any, premiums. Management continues to review expense reduction alternatives to decrease operating expenses in an effort to be commensurate with net premiums earned. The policyholder dividend ratios were 4.7% and 4.1% during the three months ended March 31, 1997 and 1996, respectively. The ratio increased in the first quarter 1997 compared to the same period in 1996 due primarily to sliding-scale dividend plans. Under such plans, the insured receives a dividend based upon the collective loss experience of the plan. As the loss experience improved relative to the years prior to this period, the Property and Casualty Group has incurred higher policyholder dividends. -56- Net Investment Income Net investment income was $22.1 million for the three months ended March 31, 1997 compared to $22.2 million for the three months ended March 31, 1996. Net investment income remained stable primarily due to higher fixed income yields and lower investment expenses, offset by lower average invested assets resulting from the pay-down of loss reserves from prior accident years and decreasing premium volume. The ongoing commutation strategy is expected to lower investment income in 1997 relative to 1996, as average invested asset balances are expected to be lower in 1997. PMA Re Results of Operations In the three months ended March 31, 1997, PMA Re accounted for 35.8% of the Company's operating revenues. Summarized financial results of this segment are as follows: (dollar amounts in thousands) Three Months Ended March 31, ---------------------- 1997 1996 ------- ------- Net premiums written................... $59,490 $56,627 ======= ======= Net premiums earned.................... $39,296 $41,623 Net investment income.................. 13,154 11,154 ------- ------- Operating revenues..................... 52,450 52,777 ------- ------- Losses and LAE incurred................ 29,845 32,844 Acquisition and operating expenses..... 9,785 10,875 ------- ------- Total losses and expenses.............. 39,630 43,719 ------- ------- Pre-tax operating income............... $12,820 $ 9,058 ======= ======= GAAP loss ratio........................ 75.9% 78.9% GAAP combined ratio.................... 100.8% 105.0% SAP loss ratio......................... 75.9% 78.9% SAP combined ratio..................... 103.8% 106.0% Premium Revenues Net premiums written increased $2.9 million to $59.5 million for the three months ended March 31, 1997 compared to $56.6 million for the three months ended March 31, 1996. The main reasons for this increase are new treaties resulting from a marketing program initiated in late 1996 and early 1997 which has resulted in increased participations on reinsurance treaties and new programs with existing clients. These increases were slightly offset by the trend toward large ceding companies increasing their retentions, which decreases PMA Re's subject premium. The following table indicates PMA Re's gross and net premiums written by major category of business: -57- (dollar amounts in thousands) For the Three Months Ended March 31, ------------------ 1997 1996 Change (%) ------- ------- ---------- Gross Premiums Written: Casualty lines................. $50,428 $49,216 2.5% Property lines................. 23,766 21,812 9.0% Other lines.................... 453 454 (0.2%) ------- ------- ------ Total.......................... $74,647 $71,482 4.4% ======= ======= ====== Net Premiums Written: Casualty lines................. $42,750 $42,501 0.6% Property lines................. 16,287 13,685 19.0% Other lines.................... 453 441 2.7% ------- ------- ------ Total.......................... $59,490 $56,627 5.1% ======= ======= ====== The majority of the growth in the net premiums written was in the property lines, which increased 19.0% to $16.3 million for the the first quarter of 1997 compared to $13.7 million for the first quarter of 1996 and certain large agri-business programs added during 1997. The net increase in property lines primarily relates to additional auto programs added during 1996. The net written casualty premiums remained relatively stable in comparison to the first quarter of 1996, increasing 0.6% to $42.8 million for the three months ended March 31, 1997 compared to $42.5 million for the the same period in 1996. Net premiums earned decreased 5.6% during the three months ended March 31, 1997 compared with the three months ended March 31, 1996. This decrease is mainly due to the changing mix of business toward monthly and quarterly reporting contracts and the timing of recognition on premiums in force at March 31, 1997 in comparison to March 31, 1996. Losses and Expenses The following table reflects the components of PMA Re's combined ratios, as computed under GAAP: Three Months Ended March 31, ----------------- 1997 1996 ------ ------ Loss ratio.................................. 75.9% 78.9% ------ ------ Expense ratio: Amortization of deferred acquisition costs....................... 19.0% 20.4% Operating expenses........................ 5.9% 5.7% ------ ------ Total expense ratio....................... 24.9% 26.1% ------ ------ Combined ratio-GAAP......................... 100.8% 105.0% ====== ====== PMA Re's loss ratio decreased 3.0 points to 75.9% for the three-month period ended March 31, 1997 compared to the same period in 1996. This decrease is principally attributable to generally favorable loss experience and favorable loss development. -58- The ratio of amortization of deferred acquisition costs to net premiums earned, the Acquisition Expense Ratio, decreased 1.4 points to 19.0% for the three-month period ended March 31, 1997 compared to the the three-month period ended March 31, 1996. This decrease is due primarily to the changing mix of business. The ratio of operating expenses to net premiums earned increased 0.2 points to 5.9% during the first three months of 1997 versus 5.7% for the comparable 1996 quarter. This increase is attributable to increases in operating expenses, such as salaries and facility expenses, in connection with the addition of staff and expansion of its office facilities. Net Investment Income Net investment income increased $2.0 million to $13.2 million for the three months ended March 31, 1997 compared to $11.2 million for the three months ended March 31, 1996. This increase is attributable to two factors: (i) an increase in the average invested assets, and (ii) a change in portfolio holdings. During the first quarter of 1997, PMA Re shifted some of its holdings from government securities to high-quality corporate securities, which generally yield higher levels of investment income. Corporate Operations The corporate segment is primarily comprised of corporate overhead and the operations of the Company's properties. For the first three months of 1997, corporate operations experienced an operating loss of $200,000 compared to an operating loss of $1.0 million for the first three months of 1996. The $800,000 decrease in operating loss was primarily related to increased income earned by the Company's properties during the first quarter of 1997 versus the comparable 1996 quarter. Net Realized Investment Gains (Losses) The Company recognized net realized investment losses of $1.3 million for the three months ended March 31, 1997 compared to net realized investment gains of $900,000 for the comparable 1996 period. During the first quarter of 1997, the Company sold the remaining portion of its tax-exempt portfolio in response to changes in the Company's tax position. Due to the high interest rate environment, the majority of these sales generated realized losses. During the first quarter of 1996, the interest rate environment was more favorable and the Company was able to sell tax-exempt securities at realized gains. Interest Expense and Income Taxes Interest expense decreased $200,000 to $4.3 million for the three months ended March 31, 1997 compared to $4.5 million for the three months ended March 31, 1996. Such reduction relates to slightly lower average debt balances during the three months ended March 31, 1997 versus the comparable 1996 period. On March 14, 1997, the Company refinanced its outstanding credit agreements with the New Credit Facility, which is expected to reduce future interest expense. See "Liquidity and Capital Resources" below. It is expected that interest expense will decline in subsequent quarters in 1997 due to the New Credit Facility. The Company's effective tax rate was 35.0% for the three months ended March 31, 1997 versus 31.4% for the three months ended March 31, 1996. The primary reason for this increase was the change in the Company's investment portfolio from tax-exempt securities to taxable securities. Management has determined that, for AMT purposes, the Company did not require as much tax-exempt income as was projected; therefore, the Company reduced its exposure to tax-advantaged securities since March 31, 1996. -59- See "Net Realized Investment Gains (Losses)" above. For GAAP purposes, such portfolio adjustments generally increase the effective tax rate, even though there are economic advantages associated with the transactions. In terms of the targeted amount of tax-exempt investments, management assesses the optimal level of tax-exempt interest, with such assessment based upon: (i) the Company's tax position in terms of the margin between regular federal taxes and AMT and (ii) the relative attractiveness of tax-advantaged securities versus other investment vehicles. Liquidity and Capital Resources at March 31, 1997 Liquidity Liquidity is a measure of an entity's ability to secure enough cash to meet its contractual obligations and operating needs. At the holding company level, the Company requires cash to pay debt obligations and dividends to shareholders, pay taxes to the Federal government, as well as to capitalize subsidiaries from time to time. The Company's primary sources of liquidity are dividends from subsidiaries, net tax payments received from subsidiaries, and borrowings. The Company paid interest of $4.3 million and $4.5 million for the three-month periods ended March 31, 1997 and 1996, respectively. During the first three months of 1997, the Company made scheduled debt repayments of $8.0 million before refinancing all of its credit agreements not already maturing in 1997 with the New Credit Facility. See "Capital Resources" below. Scheduled debt repayments during the first three months of 1996 were immaterial. The Company paid dividends to shareholders of $2.0 million in the first three months of 1997 and 1996. Dividends from subsidiaries were $4.0 million for the first quarter of 1996. The Company did not receive any dividends from subsidiaries during the first quarter of 1997. Net tax cash flows from subsidiaries were $2.6 million for the first quarter of 1997 and $2.5 million for the first quarter of 1996. The Company's domestic insurance subsidiaries' abilities to pay dividends to the holding company is limited by the insurance laws and regulations of Pennsylvania. Under such laws and regulations, dividends may not be paid without prior approval of the Commissioner in excess of the greater of (i) 10% of surplus as regards to policyholders as of the end of the preceding year or (ii) statutory net income for the preceding year. Under this standard, the Pooled Companies and PMA Re can pay an aggregate of $51.9 million of dividends without the prior approval of the Commissioner during 1997. PMC's dividends to shareholders are restricted by its debt agreements. Based upon the terms of the New Credit Facility, under the most restrictive debt covenant, PMC would be able to pay dividends of approximately $11.0 million in 1997. Management believes that the Company's sources of funds will provide sufficient liquidity to meet its short-term and long-term obligations. Capital Resources The Company's total assets remained stable, decreasing to $3,114.2 million at March 31, 1997 versus $3,117.5 million at December 31, 1996. Total investments decreased $117.9 million to $2,143.4 million at March 31, 1997. This decrease is primarily attributable to the Property and Casualty Group's pay-down of loss reserves from prior accident years and an increase in the portfolio's unrealized loss due to higher interest -60- rates. All other assets increased $114.6 million, mainly due to increases in uncollected premiums of $52.7 million, reinsurance receivables of $20.0 million, and the deferred tax asset of $17.6 million. During the first three months of 1997, interest rates continued to increase, causing the fair value of the Company's investment portfolio to decrease. Overall, the investment portfolio experienced a net unrealized loss of $58.5 million in the first three months of 1997, as the fair value of the portfolio as of March 31, 1997 was lower than its amortized cost by $96.8 million; at December 31, 1996, the fair value of the portfolio was lower than its amortized cost by $38.3 million. As a result, the Company recorded a total charge of $38.1 million (net of tax effect of $20.4 million) to shareholders' equity for the three months ended March 31, 1997. Uncollected premiums increased 18.4% to $338.7 million at March 31, 1997 due primarily to normal policy renewal activity. Reinsurance receivables increased $20.0 million from December 31, 1996 to March 31, 1997 due to the lower net retention for the Property and Casualty Group's commercial lines. See "Premium Revenues". The deferred tax asset increased $17.6 million to $119.2 million at March 31, 1997 primarily due to the tax effect of the unrealized loss on investments available for sale. Under SFAS No. 109, a valuation allowance should be provided to offset the effects of a deferred tax asset if management believes that it is more likely than not that the benefit of a deferred tax item will not be realized. Management believes that the benefit of its deferred tax asset will be fully realized, and therefore has not provided for a valuation allowance. Unearned premiums increased 25.5% to $258.4 million at March 31, 1997 mainly due to normal policy renewal activity. As previously noted, on March 14, 1997 the Company refinanced its existing credit agreements through the establishment of the New Credit Facility. The Company drew down $196.0 million from the New Credit Facility to pay off the following outstanding balances: (dollar amounts in thousands) Senior notes 9.60% due 2001................... $ 46,428 Senior notes 7.62% due 2001, Series A......... 71,000 Senior notes 7.62% due 2000, Series B......... 36,000 Revolving credit agreement, expiring 1998..... 36,000 -------- Total......................................... $189,428 ======== The New Credit Facility bears interest at LIBOR plus .70% on the utilized portion, and carries a .275% facility fee on the unutilized portion. The margin over LIBOR is adjustable downward based upon future reductions in the Company's debt to capitalization ratio. As of March 31, 1997, the interest rate on the New Credit Facility was 6.24%. The final expiration of the New Credit Facility will be December 31, 2002, with level 25% reductions in availability each year beginning December 31, 1999. Management also entered into an interest rate swap agreement which is intended to manage the impact of the potential volatility of the interest rate associated with the floating rates on the New Credit Facility. The interest rate swap covers a notional principal amount of $150.0 million and effectively converts the floating rate on such portion of the New Credit Facility to a fixed rate of 7.24%. -61- The Company has entered into one other interest rate swap agreement in its management of present interest rate exposures. This transaction effectively changed the Company's interest rate exposure on one of its fixed-rate senior note agreements to a six-month floating rate obligation as follows: (dollar amounts in thousands) Principal Balance Debt Agreement at March 31, 1997 Fixed Rate Floating Rate - - - -------------------------------------------------------------------------------- Senior note, due June, 1997 $7,143 9.53% 5.60% The Company's interest rate swap agreements involve the exchange of interest payment obligation without the exchange of underlying principal. The differential to be paid or received is recognized as an adjustment of interest expense. In the event that a counterparty fails to meet the terms of the agreement, the Company's exposure is limited to the interest rate differential on the notional principal amount ($157,143,000). Management believes such credit risk is minimal and any loss would not be significant. Shareholders' equity decreased to $385.0 million at March 31, 1997 from $425.8 million at December 31, 1996. This decrease is primarily attributable to unrealized losses on investments available for sale of $38.1 million and dividends declared of $2.0 million. New Accounting Pronouncements In June 1996, the Financial Accounting Standards Board issued SFAS No. 125. "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." SFAS No. 125, which is effective for transfers and extinguishments occurring after December 31, 1996, provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. The Property and Casualty Group's domestic insurance subsidiaries currently participate in a transfer arrangement of certain accounts receivable. Such arrangement will be restructured or terminated as a result of the adoption of SFAS No. 125. The restructuring or termination of such arrangement is not expected to have a material impact on the Company's financial condition or results of operations. The Company does not presently engage in any other transactions for which the accounting would be impacted by the adoption of SFAS No. 125. In February 1997, the Financial Accounting Standards Board issued SFAS No. 128, "Earnings Per Share," which supersedes Accounting Principles Board Opinion No. 15, "Earnings Per Share" and related interpretations. SFAS No. 128, which is effective for financial statements for both interim and annual periods ending after December 15, 1997, requires presentation of earnings per share by all entities that have issued common stock or potential common stock if those securities trade in a public market either on a stock exchange or in the over-the-counter market, including securities quoted only locally or regionally. The adoption of SFAS No. 128 is not expected to have a material impact on the Company's financial condition or results of operations. -62- Item 3. Properties The Company's headquarters are located in a four story, 110,000 square foot building in Blue Bell, Pennsylvania. PMA Re's headquarters are located in 78,000 square feet of leased space in Mellon Bank Center, Philadelphia, Pennsylvania. Through various wholly owned subsidiaries, the Company also owns and occupies additional office facilities in three other locations and rents additional office space for its insurance operations in 13 other locations. The Company believes that such owned properties are suitable and adequate for its current business operations. The Company also owns its former headquarters at 925 Chestnut Street, Philadelphia, Pennsylvania and certain other adjacent properties. Although the Company has leased a portion of this facility and has had discussions with potential purchasers and lessees, no assurance can be given that the Company will be able to sell or further lease this facility in the near future on acceptable terms and conditions. In 1995 and 1994, the Company recorded $8.4 million and $4.9 million, respectively, of expense charges to reflect the difference in the carrying values versus the fair market values plus the costs to carry and sell these properties. No such charges were incurred in 1996. Subsidiaries of the Company also own various real estate properties that are not used by the Company in its insurance operations but are leased to third parties. These properties are one to eight story buildings that are generally located within several blocks of the Company's former headquarters. Item 4. Security Ownership of Certain Beneficial Owners and Management Principal Beneficial Owners of Common Stock The following table sets forth, as of April 1, 1997, (i) the number of shares and percentage of the Company's Common Stock and Class A Common Stock beneficially owned by each person who is known by the Company to own beneficially more than 5% of its outstanding Common Stock or Class A Common Stock, and (ii) the percentage of the total number of votes that such persons will be entitled to cast on matters submitted to the shareholders of the Company:
Class A Common Stock Percent Common Stock Percent Beneficially of Beneficially of Percent of Name and Address Owned Class Owned(1) Class(1) Total Votes - - - ---------------- ------------ ------- ------------ -------- ----------- PMA Foundation................... 4,561,225 29.4% 912,225 11.0% 28.4% The PMA Building 380 Sentry Parkway Blue Bell, PA 19422-2328 James F. Malone III.............. 1,245,000 8.0% 99,000 1.2% 7.7% Northridge Office Plaza 17 VIP Drive, Suite 310 Wexford, PA 15090 Edward H. Owlett................. 788,160(2) 5.1% 162,040(2) 1.9% 4.9% One Charles Street Wellsboro, PA 16901
-63- - - - --------------- (1) These columns do not reflect the shares of Class A Common Stock issuable upon conversion of the shares of Common Stock, each of which is convertible into one share of Class A Common Stock. (2) Includes 378,200 shares of Common Stock and 9,500 shares of Class A Common Stock held in certain Owlett family trusts and 24,160 shares of Common Stock and 7,840 shares of Class A Common Stock held by Mr. Owlett's wife. Also includes 152,250 shares of Common Stock and 30,450 shares of Class A Common Stock held in a trust for which Mr. Owlett serves as trustee; Mr. Owlett disclaims beneficial ownership of the shares held in this trust. Beneficial Ownership by Directors and Executive Officers The following table sets forth, as of April 1, 1997, (i) the number of shares and percentage of the Company's Common Stock and Class A Common Stock beneficially owned by (a) each director and each nominee for director, (b) each executive officer named in the Summary Compensation Table and (c) all executive officers and directors of the Company as a group, and (ii) the respective percentage of the total number of votes that such persons and group will be entitled to cast on matters submitted to the shareholders of the Company:
Class A Common Stock Percent Common Stock Percent Name of Individual Beneficially of Beneficially of Percent of or Identity of Group Owned(1) Class(2) Owned(1)(3) Class(2)(3) Total Votes(2)(4) - - - -------------------- ------------ -------- ------------ ----------- ----------------- Frederick W. Anton III........ 166,979 1.1% 377,405(5) 4.4% 1.1% Paul I. Detwiler, Jr.......... 72,750(6) 10,425(6) James J. Fleming, Jr.......... 73,568 125,450(7) 1.5% Joseph H. Foster.............. 12,025 5,000 Anne S. Genter................ 500 500 Stephen F. Litz............... 110,597(8) 146,191(8) 1.7% James F. Malone III........... 1,245,000 8.0% 99,000 1.2% 7.7% A. John May................... 257,200(9) 1.7% 69,400(9) 1.6% Louis N. McCarter III......... 8,965(10) 24,610(10) John W. Miller, Jr............ 549,750 3.5% 108,250 1.3% 3.4% Edward H. Owlett.............. 788,160(11) 5.1% 162,040(11) 1.9% 4.9% Louis I. Pollock.............. 308,125(12) 2.0% 59,225(12) 1.9% Roderic H. Ross............... 3,500 2,550 L.J. Rowell, Jr............... 1 -- John W. Smithson.............. 195,000 1.3% 368,995(13) 4.3% 1.2% Stephen G. Tirney............. 106,375 134,725(14) 1.6% All executive officers and directors as a group (18 persons)................. 3,899,620 25.1% 1,821,316(15) 19.3% 24.3%
- - - --------------- (1) Certain directors are shareholders, directors and/or officers of organizations that are members of PMA Foundation (the "Foundation"), formerly known as Pennsylvania Manufacturers' Association. As of April 1, 1997, the Foundation owned 4,561,225 shares of Common Stock and 912,225 shares of Class A Common Stock, which entitle the Foundation to cast approximately 28.4% of the total number of votes that will be entitled to be cast on matters submitted to the shareholders of the Company. Certain -64- directors and officers of the Company are also trustees and officers of the Foundation. Also, certain directors and officers of the Company are trustees of the Pennsylvania Manufacturers Corporation Pension Plan (the "Pension Plan") and directors and/or officers of Pennsylvania Manufacturers' Association, Northeast Branch ("NE Branch"). As of April 1, 1997, the Pension Plan owned 249,000 shares of Common Stock, and NE Branch owned 70,500 shares of Common Stock and 14,100 shares of Class A Common Stock. (2) Less than 1% unless otherwise indicated. (3) These columns do not reflect the shares of Class A Common Stock issuable upon conversion of the shares of Common Stock, each of which is currently convertible into one share of Class A Common Stock. (4) The calculation of these percentages does not include shares of Class A Common Stock issuable upon currently exercisable stock options held by such persons under the Company's equity incentive plans. (5) Includes 325,260 shares of Class A Common Stock as to which Mr. Anton holds currently exercisable options to acquire under the Company's equity incentive plans. (6) Includes 1,000 shares of Class A Common Stock owned jointly by Mr. Detwiler and his wife and 9,375 shares of Common Stock and 2,500 shares of Class A Common Stock owned by one of Mr. Detwiler's children who resides in his household. (7) Includes 125,450 shares of Class A Common Stock as to which Mr. Fleming holds currently exercisable options to acquire under the Company's equity incentive plans. (8) Includes 2,125 shares of Common Stock held by Mr. Litz's wife and 122,450 shares of Class A Common Stock as to which Mr. Litz holds currently exercisable options to acquire under the Company's equity incentive plans. (9) Includes 11,250 shares of Common Stock and 2,650 shares of Class A Common Stock owned jointly by Mr. May and his wife; 1,550 shares of Class A Common Stock owned by Mr. May's wife as custodian for their minor grandchildren; and 17,250 shares of Class A Common Stock held by a partnership of which Mr. May is a general partner. (10) These shares are owned jointly by Mr. McCarter and his wife. (11) Includes 378,200 shares of Common Stock and 9,500 shares of Class A Common Stock held in certain Owlett family trusts and 24,160 shares of Common Stock and 7,840 shares of Class A Common Stock held by Mr. Owlett's wife. Also includes 152,250 shares of Common Stock and 30,450 shares of Class A Common Stock held in a trust for which Mr. Owlett serves as trustee; Mr. Owlett disclaims beneficial ownership of the shares held in this trust. (12) Includes 164,375 shares of Common Stock and 31,625 shares of Class A Common Stock held by Mr. Pollock's wife and 100 shares of Class A Common Stock owned jointly by Mr. Pollock and his wife. (13) Includes 312,300 shares of Class A Common Stock as to which Mr. Smithson holds currently exercisable options to acquire under the Company's equity incentive plans. (14) Includes 115,000 shares of Class A Common Stock as to which Mr. Tirney holds currently exercisable options to acquire under the Company's equity incentive plans. -65- (15) Includes 1,103,010 shares of Class A Common Stock as to which such persons hold currently exercisable options to acquire under the Company's equity incentive plans. Item 5. Directors and Executive Officers The executive officers and directors of the Company are as follows: Name Age Position - - - ---- --- -------- Frederick W. Anton III....... 63 Chairman of the Board John W. Smithson............. 51 President and Chief Executive Officer Francis W. McDonnell......... 40 Senior Vice President, Chief Financial Officer and Treasurer Vincent T. Donnelly.......... 44 President and Chief Operating Officer - The Property and Casualty Group Stephen G. Tirney............ 43 President and Chief Operating Officer - PMA Re James J. Fleming............. 48 Senior Vice President - Corporate Operations - The Property and Casualty Group Stephen F. Litz.............. 48 Senior Vice President - Branch Operations - The Property and Casualty Group Paul I. Detwiler, Jr......... 63 Director Joseph H. Foster............. 68 Director Anne S. Genter............... 62 Director James F. Malone III.......... 53 Director A. John May.................. 68 Director Louis N. McCarter III........ 68 Director John W. Miller, Jr., M.D..... 62 Director Edward H. Owlett............. 70 Director Louis I. Pollock............. 67 Director Roderic H. Ross.............. 66 Director L. J. Rowell, Jr............. 65 Director Frederick W. Anton III has served as Chairman of the Board since 1995 and as a director of the Company since 1972. Mr. Anton's current term as a director of the Company expires in 2000. Mr. Anton served as Chairman of the Board and Chief Executive Officer from 1995 to May 1997, as President and Chief Executive Officer from 1981 to 1995, as President of The Property and Casualty Group from 1972 to 1989 and as Secretary and General Counsel of PMAIC from 1962 to 1972. John W. Smithson has served as President and Chief Executive Officer of the Company since May 1997, and as a director of the Company since 1987. Mr. Smithson's current term as a director of the Company expires in 1999. Mr. Smithson has served as President and Chief Operating Officer of the Company from 1995 to May 1997, as Chairman, President and Chief Executive Officer of PMA Re from 1984 to 1997 and as Chairman, President and Chief Executive Officer of the Property and Casualty Group from April 1995 to 1997, and was employed by PMAIC from 1972 to 1984. Mr. Smithson is a designated Chartered Property-Casualty Underwriter. -66- Francis W. McDonnell has served as Senior Vice President and Chief Financial Officer of the Company since 1995 and as Treasurer since 1997, and has served as Senior Vice President and Chief Financial Officer of PMA Re since 1995. From 1993 to 1995, Mr. McDonnell served as Vice President - Finance of PMA Re. Prior to joining PMA Re in 1993, Mr. McDonnell served in various controllership positions with Reliance Insurance Company from 1985 to 1993. Mr. McDonnell is a Certified Public Accountant and a designated Chartered Property-Casualty Underwriter. Vincent T. Donnelly has served as President and Chief Operating Officer of the Property and Casualty Group since February 1997. Mr. Donnelly served as Senior Vice President - Finance and Chief Actuary of the Property and Casualty Group from 1992 to 1997. Prior to joining the Property and Casualty Group, Mr. Donnelly served as Vice President and Actuary of Continental Insurance Company from 1987 to 1992 and as Actuary of American International Group, a property and casualty insurance company, from 1978 to 1987. Mr. Donnelly is a Fellow of the Casualty Actuarial Society and a member of the American Academy of Actuaries. Stephen G. Tirney has served as President and Chief Operating Officer of PMA Re since 1997. Mr. Tirney served as Executive Vice President of PMA Re from 1993 to 1997, as Senior Vice President of PMA Re from 1989 to 1993 and has been an employee of PMA Re since 1976. James J. Fleming has served as Senior Vice President - Corporate Operations of the Property and Casualty Group since 1990. Mr. Fleming served as Vice President of Operations Administration of PMAIC from 1982 to 1990 and has been an employee of PMAIC since 1970. Stephen F. Litz has served as Senior Vice President - Branch Operations of the Property and Casualty Group since 1990. Mr. Litz served as Vice President of Regional Operations of PMAIC from 1981 to 1990, and has been an employee of PMAIC since 1972. Mr. Litz is a designated Chartered Property-Casualty Underwriter. Paul I. Detwiler, Jr., a director since 1984, is Chairman of the Board of New Enterprise Stone & Lime Co., a quarrying and construction company. Mr. Detwiler's current term as a director of the Company expires in 1999. Mr. Detwiler is also a director of Keystone Financial, Inc. Joseph H. Foster, a director since 1982, has been a partner of White & Williams, a law firm, since 1958. Mr. Foster's current term as a director of the Company expires in 2000. Anne S. Genter, a director since 1991, has served as President of Anne S. Genter Interior Design, an interior design company, since 1975. Ms. Genter's current term as a director of the Company expires in 1999. James F. Malone III, a director since 1974, has been a partner of Malone, Larchuk & Middleman, P.C., a law firm, since 1997 and from 1980 to 1997 was a partner of Dickie, McCamey & Chilcote, P.C., a law firm. Mr. Malone's current term as a director of the Company expires in 2000. A. John May, a director since 1977, has been a partner of Duane, Morris & Heckscher, a law firm, since 1963. Mr. May's current term as a director of the Company expires in 1999. Louis N. McCarter III a director since 1975, has been President of the McCarter Corp., a manufacturer of specialized mixing machinery, since 1954. Mr. McCarter's current term as a director of the Company expires in 1998. -67- John W. Miller, Jr., M.D., a director since 1988, has been a physician and has served as President of Ear, Nose and Throat Associates of Lancaster since 1970. Dr. Miller's current term as a director of the Company expires in 1998. Edward H. Owlett, a director since 1964, has been a partner of Owlett, Lewis & Ginn, P.C., a law firm, since 1981. From 1960 to 1981, Mr. Owlett served as a partner of Cox, Wilcox, Owlett & Lewis, a law firm. Mr. Owlett's current term as a director of the Company expires in 1998. Mr. Owlett is also a director of Citizens and Northern Corporation. Louis I. Pollock, a director since 1984, has served as President and Chief Executive Officer of Morris Coupling Company, a manufacturer of pipe and tubing, since 1957. Mr. Pollock's current term as a director of the Company expires in 1998. Roderic H. Ross, a director since 1981, has served as Chairman of the Board and Chief Executive Officer of Keystone State Life Insurance Company since 1985. Prior to 1985, Mr. Ross held various positions at Philadelphia Life Insurance Company and was an employee of Philadelphia Life Insurance Company from 1970 to 1984. Mr. Ross' current term as a director of the Company expires in 1999. Mr. Ross is also a director of Hunt Manufacturing Co. and PNC Bank Corp. L. J. Rowell, Jr., a director since 1992, was Chairman, President and Chief Executive Officer of Provident Mutual Life Insurance Company from 1992 until his retirement in July 1996. Prior to 1992, Mr. Rowell held various positions at Provident Mutual and was an employee of Provident Mutual from 1980 until July 1996. Mr. Rowell's current term as a director of the Company expires in 2000. The Board of Directors of the Company is divided into three classes, and the directors of each class are elected for a term of three years and until their successors are elected and qualified or until their earlier death, resignation or removal. Prior to each election of a class of directors, the Board of Directors must fix the size of that class of directors at a minimum of four and a maximum of eight directors. Every director must be a shareholder of the Company. No person may be considered as a candidate, and no votes may be counted for any person, unless written notice of such person's nomination or candidacy has been filed with the Secretary of the Company not less than 60 days prior to the date of election; provided, however, that nominees selected by the then existing Board of Directors or nominating committee appointed by the Board of Directors may be candidates and voted for without such notice. Item 6. Executive Compensation Compensation of Directors and Executive Officers Executive Compensation The following table sets forth certain information with respect to compensation paid or accrued by the Company during the fiscal year ended December 31, 1996 to the chief executive officer of the Company and the four most highly compensated executive officers of the Company and its principal subsidiaries whose compensation exceeded $100,000 in the fiscal year ended December 31, 1996: -68- Summary Compensation Table
Long-Term Compensation ------------ Annual Awards Compensation ------------ Securities Other Annual Underlying All Other Name and Principal Position Year Salary($) Bonus($) Compensation($) Options(#) Compensation($) - - - --------------------------- ---- --------- -------- --------------- ---------- --------------- Frederick W. Anton III (1) 1996 $700,311 -- -- 75,000 $71,198(1) Chairman of the Board and Chief Executive Officer John W. Smithson (2) 1996 $675,440 $330,000 -- 75,000 $55,765(2) President and Chief Operating Officer Stephen G. Tirney 1996 $315,544 -- -- 25,000 $32,466(3) President and Chief Operating Officer of PMA Reinsurance Corporation Stephen F. Litz 1996 $275,542 -- -- 25,000 $26,083(4) Senior Vice President of the Property and Casualty Group James J. Fleming, Jr. 1996 $276,989 -- -- 25,000 $ 8,952(5) Senior Vice President of the Property and Casualty Group
- - - --------------- (1) On May 7, 1997, Mr. Anton was elected Chairman of the Board of the Company. This amount includes Company contributions to the Company's non-qualified defined contribution plan of $35,000 and $36,198 of life insurance premiums paid by the Company. (2) On May 7, 1997, Mr. Smithson was elected President and Chief Executive Officer of the Company. This amount includes Company contributions to the Company's non-qualified defined contribution plan of $33,500 and $22,265 of life insurance premiums paid by the Company. (3) This amount includes Company contributions to the Company's non-qualified defined contribution plan of $18,000, Company contributions to the 401(k) plan of $7,500 and $6,966 of life insurance premiums paid by the Company. (4) This amount includes Company contributions to the Company's non-qualified defined contribution plan of $9,000, Company contributions to the 401(k) plan of $6,754 and $10,329 of life insurance premiums paid by the Company. (5) This amount consists of $8,952 of life insurance premiums paid by the Company. The following table sets forth certain information with respect to options to purchase shares of Class A Common Stock granted to the persons named in the Summary Compensation Table during the fiscal year ended December 31, 1996. -69- Option Grants in Last Fiscal Year
Number of % of Total Securities Options Potential Realizable Value Underlying Granted to Exercise at Assumed Annual Rates of Options Employees in Price Expiration Stock Price Appreciation Name Granted(#)(1) Fiscal Year ($/Share) Date for Option Term - - - ---- ------------- ------------ --------- ---------- -------------------------- 5% 10% -------- ---------- Frederick W. Anton III....... 75,000(2) 23.1% $17.00 7/23/06 $801,841 $2,032,022 John W. Smithson............. 75,000(3) 23.1% 17.00 7/23/06 801,841 2,032,022 Stephen G. Tirney............ 25,000(4) 7.7% 17.00 7/23/06 267,280 677,341 Stephen F. Litz.............. 25,000(5) 7.7% 17.00 7/23/06 267,280 677,341 James J. Fleming, Jr......... 25,000(5) 7.7% 17.00 7/23/06 267,280 677,341
- - - ---------- (1) All of the options in the above table represent options to purchase the Company's Class A Common Stock under the 1996 Equity Incentive Plan. (2) These options vest as follows: 61,000 shares on July 23, 1996; 2,350 shares on January 2, 1998; 5,850 shares on January 2, 1999 and 5,800 shares on January 2, 2000. (3) These options vest as follows: 51,800 shares on July 23, 1996; and installments of 5,800 shares each on January 2, 1997, 1998, 1999 and 2000, respectively. (4) These options vest as follows: 1,800 shares on July 23, 1996; and installments of 5,800 shares each on January 2, 1997, 1998, 1999 and 2000, respectively. (5) These options vest as follows: 3,350 shares on July 23, 1996; 3,350 shares on January 2, 1997; 3,350 shares on January 2, 1998; 9,150 shares on January 2, 1999; and 5,800 shares on January 2, 2000. The following table sets forth information with respect to options to purchase shares of Class A Common Stock exercised by the persons named in the Summary Compensation Table during the fiscal year ended December 31, 1996 and options held by such persons at December 31, 1996. -70- Aggregated Option Exercises in the Last Fiscal Year and Fiscal Year-End Option Values
Number of Securities Underlying Value of Unexercised In-the-Money Unexercised Options at Options Fiscal Year-End at Fiscal Year-End(2) Shares ----------------------------------- ------------------------------ Acquired on Value Name Exercise(#) Realized(1) Exercisable(#) Unexercisable(#) Exercisable Unexercisable - - - ---- ---------- ----------- -------------- ---------------- ----------- ------------- Frederick W. Anton III...... 38,900 $284,400 325,260 46,500 $1,056,945 $268,125 John W. Smithson............ 33,400 285,540 306,500 23,200 1,126,275 -- Stephen G. Tirney........... 1,850 14,569 109,200 37,450 557,800 5,313 Stephen F. Litz............. 3,000 23,250 119,100 35,400 613,588 4,688 James J. Fleming, Jr........ -- -- 122,100 35,400 638,338 4,688
- - - ---------- (1) Represents the difference between the aggregate exercise price and the aggregate market value as of the date of exercise. (2) Represents the difference between the aggregate exercise price and the aggregate market value as of December 31, 1996. Pension Plans Under The PMC Pension Plan and The PMC Supplemental Executive Retirement Plan, participants are entitled to benefits pursuant to the formula set forth under such plans, without regard to the limits under Section 415 and Section 401(a)(17) of the Internal Revenue Code of 1986 (the "Code"). The benefit is based upon the accrued pension benefit for the participant at December 31, 1992 plus annual accruals beginning January 1, 1993 equal to the sum of (i) 1.5% of the participant's compensation for the applicable benefit year, consisting of wages and commissions but excluding bonus, severance payments or other supplementary payments, plus (ii) .3% of the participant's covered compensation, consisting of the average of the participant's taxable wage base in effect for each calendar year during the 35-year period ending the last day of the calendar year in which the participant attains Social Security retirement age. A maximum of 25 years of service is considered in calculating the annual benefit payable upon normal retirement at normal retirement age. Based upon this formula, the estimated annual benefits payable upon normal retirement at age 65 for each person named in the Summary Compensation Table are as follows: (i) Mr. Anton, $141,509; (ii) Mr. Smithson, $95,511; (iii) Mr. Tirney, $44,789; (iv) Mr. Litz, $62,030; and (v) Mr. Fleming, $59,937. These amounts for Mr. Anton and Mr. Smithson do not include other retirement payments that would be provided pursuant to their respective employment agreements. Employment Agreements Frederick W. Anton III has an employment agreement with the Company for a term that commenced April 1, 1995 and ends March 31, 2000, and is automatically extended for an additional period of one year for each year Mr. Anton is elected as Chairman of the Board of the Company commencing with the 1996 organizational meeting of the Board of Directors of the Company. The -71- employment agreement provides for a salary of not less than $700,000, which may be increased but not decreased by the Company at any time or from time to time. Mr. Anton is also entitled to receive such bonus compensation as he may be awarded from time to time. Mr. Anton has agreed during the term of the employment agreement not to engage or have a material financial interest in any business that competes with the business of the Company as then conducted. In the event of Mr. Anton's death during the term of the agreement, Mr. Anton's survivors are entitled to an annual payment of 60% of Mr. Anton's annual salary on the date of his death for a period of 10 years. If Mr. Anton retires at any time after April 1, 1996, Mr. Anton would be entitled to receive monthly payments equal to 5% of his annual salary on the date of his retirement and continuing throughout his lifetime. If, during his retirement and prior to his death, the total payments made during retirement are less than 60% of his annual salary at retirement multiplied by 15, the difference is to be paid to his survivors within one year of the date of his death. Under the agreement, the Company is required to maintain a split-dollar life insurance policy in the face amount of $1,000,000 on the life of Mr. Anton. John W. Smithson has an employment agreement with the Company for a term that commenced April 1, 1995 and ends March 31, 1998, and is automatically extended for an additional period of one year for each year Mr. Smithson is elected President of the Company commencing with the 1996 organizational meeting of the Board of Directors of the Company. The employment agreement provides for a salary of not less than $670,000 per year, which may be increased but not decreased at the discretion of the Company at any time or from time to time. Mr. Smithson is also entitled to receive such bonus compensation as he may be awarded from time to time. Mr. Smithson has agreed during the term of the employment agreement not to engage in or have a material financial interest in any business that competes with the Company as then conducted. In the event of Mr. Smithson's death during the term of the agreement, Mr. Smithson's survivors are entitled to 180 consecutive monthly payments of an amount equal to 25% of Mr. Smithson's monthly salary as of the date of his death, reduced by the amount of any similar payments for disability paid to Mr. Smithson during his lifetime in the event Mr. Smithson becomes disabled during the employment term. Under the agreement, the Company is required to maintain a split-dollar life insurance policy in the face amount of $1,000,000 on the life of Mr. Smithson. Director Compensation In addition to expenses of attendance, which are paid to all directors, directors of the Company who are not also employees of the Company are paid an annual retainer of $7,000 for their services and a fee of $300 for each Board of Directors meeting attended. A non-employee director who serves on the Executive and Finance Committees receives a $2,000 annual retainer and a fee of $600 for each Executive and Finance Committees meeting attended. A non-employee director who serves on the Audit Committee receives a $1,000 annual retainer and a fee of $300 for each Audit Committee meeting attended. Item 7. Certain Relationships and Related Transactions. The Company's largest shareholder is PMA Foundation (the "Foundation"), formerly known as Pennsylvania Manufacturers' Association, which is a not-for-profit corporation qualified under Section 501(c)(6) of the Internal Revenue Code and whose purposes include the promotion of the common business interests of its members and the economic prosperity of the Commonwealth of Pennsylvania. As of April 1, 1997, the Foundation owned 4,561,225 shares of Common Stock (29.4% of the class) and 912,225 shares of Class A Common Stock (11.0% of the class), which constitutes 28.4% of the total number of votes available to be cast in matters brought before the Company's shareholders. See "Item 4. Security Ownership of and Beneficial Owners and Management." Members of the Company's Board of Directors currently serve as the members of the Foundation's Board of Trustees. Also, Frederick W. -72- Anton III, Chairman and former Chief Executive Officer of the Company, serves as President and Chief Executive Officer of the Foundation. The Company and certain of its subsidiaries provide certain administrative services to the Foundation for which the Company and its affiliates receive reimbursement. Total reimbursements amounted to $82,000, $269,000, and none for years ended December 31, 1996, 1995, and 1994, respectively. The Foundation also leases its Harrisburg, Pennsylvania headquarters facility from a subsidiary of the Company under a monthly operating lease presently requiring rent payments of $20,000 per month and reimburses a subsidiary of the Company for its use of office space in the Blue Bell, Pennsylvania facility. Rent and related reimbursements paid to the Company's affiliates by the Foundation amounted to $247,428, $294,109, and $315,272 for the years ended December 31, 1996, 1995, and 1994, respectively. James F. Malone III, A. John May, Edward H. Owlett and Joseph H. Foster, who are directors of the Company, are or have been members of law firms that furnished legal representation to the Company and its subsidiaries during 1996. In the opinion of the Company's management, the amounts paid to such firms represented reasonable charges for the services rendered and were as fair as the charges would have been had such services been furnished by law firms unaffiliated with any of the directors. Duane, Morris & Heckscher, of which Mr. May is a member, was paid an aggregate of $3,671,875 and $3,165,092 in 1996 and 1995, respectively. The Company has provided demand loans to certain officers of the Company and its subsidiaries, mainly for the purpose of providing such officers with funds to purchase Common Stock or Class A Common Stock. The loans are collateralized by the Common Stock or the Class A Common Stock purchased by the officer and bear interest at a rate of 6% per annum. The following table sets forth certain information with respect to indebtedness of executive officers of the Company under such program:
Largest Amount Balance at Executive Officer Year Outstanding During Period End of Period - - - ----------------- ---- ------------------------- -------------- Frederick W. Anton III.................. 1996 $146,600 $ -- 1995 $146,600 $146,600 1994 $246,600 $146,600 John W. Smithson........................ 1996 $158,400 $ -- 1995 $158,400 $158,400 1994 $258,400 $158,400 Stephen G. Tirney....................... 1996 $220,000 $220,000 1995 $220,000 $220,000 1994 $220,000 $220,000 Stephen F. Litz......................... 1996 $270,000 $ -- 1995 $270,000 $270,000 1994 $270,000 $270,000 James F. Fleming, Jr.................... 1996 $127,833 $127,833 1995 $127,833 $127,833 1994 $127,833 $127,833 Francis W. McDonnell.................... 1996 $437,813 $437,813
-73- The Company has arranged an executive loan program (the "Financial Support Program") with a financial institution, whereby such institution will provide prime rate personal loans to officers of the Company and its subsidiaries collateralized by Common Stock and Class A Common Stock at a maximum 75% loan to value ratio. The Company has agreed to purchase any loan made under the Financial Support Program (including accrued interest and related expenses) from the financial institution in the event that the borrower defaults on such loan. The following table sets forth certain information with respect to indebtedness of executive officers of the Company under the Financial Support Program:
Largest Amount Balance at Executive Officer Year Outstanding During Period End of Period - - - ----------------- ---- ------------------------- -------------- John W. Smithson........................ 1996 $1,081,935 $1,081,935 1995 $1,081,935 $1,081,935 1994 $1,081,935 $1,081,935 Stephen G. Tirney....................... 1996 $187,100 $187,100 1995 $187,100 $187,100 1994 $187,100 $187,100 Stephen F. Litz......................... 1996 $504,000 $504,000 1995 $210,000 $210,000 1994 $210,000 $210,000 James J. Fleming, Jr.................... 1996 $192,275 $192,275 1995 $192,275 $192,275 1994 $192,275 $192,275
Subsidiaries of the Company, in the ordinary course of their business, have had and intend to continue to have insurance transactions with directors and officers of the Company and the various businesses with which directors and officers of the Company are associated. Such insurance is written in accordance with rates and terms authorized for use in the applicable jurisdictions. Item 8. Legal Proceedings The Insurance Subsidiaries are defendants in actions arising out of their insurance business and from time to time are involved in various governmental and administrative proceedings. These actions include lawsuits seeking coverage for alleged damages relating to exposure to asbestos and other toxic substances and environmental clean-up actions under federal and state law. See "Item 1. Business - Loss Reserves" and "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations." Item 9. Market Price of and Dividends on the Registrant's Common Equity and Related Stockholder Matters As of April 1, 1997, there were 200 shareholders of record of Common Stock and 386 shareholders of record of Class A Common Stock. The Company is registering the Class A Common Stock under this registration statement. -74- Neither class of common equity is traded on an established exchange. Transactions in the Common Stock are conducted privately among persons qualified to own the Common Stock. See "Item 11. Description of Registrant's Securities to Be Registered." No price information is available for such transactions. Class A Common Stock trades under the symbol, "PMFRA", on the OTC Bulletin Board through approximately ten broker/dealers who voluntarily make a market in Class A Common Stock. The following table sets forth high and low bid information for Class A Common Stock, as well as dividend information for both Common Stock and Class A Common Stock. The Company intends to apply for qualification for listing of the Class A Common Stock on the Nasdaq National Market System under the proposed symbol "PMRA." The foregoing bid information is based upon over-the-counter market quotations, which reflects inter-dealer prices, without retail mark-up, mark-down, or commission, and may not represent actual transactions. Additionally, the limited and sporadic quotations may not constitute an established public trading market and may not be indicative of the fair market value of Class A Common Stock.
Class A Common Class A Common Dividends Per Dividends Stock High Stock Low Share - Class A Per Share - Quarter Ended Bid Price Bid Price Common Stock Common Stock - - - ------------- -------------- -------------- --------------- ------------ December 31, 1996.......... $17.500 $15.625 $.09 $.08 September 30, 1996......... $17.500 $17.000 $.09 $.08 June 30, 1996 ......... $18.500 $16.500 $.09 $.08 March 31, 1996............. $20.500 $18.250 $.09 $.08 ---- ---- Total 1996............................................................. $.36 $.32 ==== ==== December 31, 1995.......... $18.250 $17.750 $.09 $.08 September 30, 1995......... $18.250 $15.250 $.09 $.08 June 30, 1995 ......... $15.250 $14.500 $.09 $.08 March 31, 1995............. $15.500 $14.500 $.09 $.08 ---- ---- Total 1995............................................................. $.36 $.32 ==== ==== December 31, 1994.......... $15.500 $15.500 $.09 $.08 September 30, 1994......... $14.750 $14.500 $.09 $.08 June 30, 1994 ......... $14.000 $13.250 $.09 $.08 March 31, 1994............. $13.250 $12.750 $.09 $.08 ---- ---- Total 1994............................................................. $.36 $.32 ==== ====
The Company's ability to pay dividends is limited by certain restrictions in its debt agreements. In addition, dividends from certain of the Company's subsidiaries are limited by the insurance laws and regulations of Pennsylvania. See "Item 1. - Business - Restrictions on Insurance Subsidiaries Dividends" and "Item 2. - Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 15 to the Consolidated Financial Statements included in Item 13 for further discussion of dividend restrictions. -75- Item 10. Recent Sales of Unregistered Securities During the years ended December 31, 1996, 1995 and 1994, the Company sold shares of Class A Common Stock pursuant to the exercise of employee stock options pursuant to the terms of the Company's stock option plans. In 1996, an aggregate of 97,150 shares were sold to five officers of the Company pursuant to such options at exercise prices ranging from $6.60 to $10.00 per share for an aggregate price of $806,000. In 1995, an aggregate of 205,199 shares were sold to six officers and employees of the Company pursuant to such options at exercise prices ranging from $6.60 to $11.50 per share for an aggregate price of $1,776,288. In 1994, an aggregate of 26,925 shares were sold to two officers and employees of the Company pursuant to such options at exercise prices ranging from $8.00 to $10.00 per share for an aggregate price of $230,400. The Company believes that these sales were made pursuant to the exemption afforded by Section 4(2) of the Securities Act inasmuch as the sales were made to a limited number of sophisticated investors in transactions not involving a public offering. Item 11. Description of Registrant's Securities to Be Registered The following summary description is subject to the detailed provisions of the Company's Amended and Restated Articles of Incorporation and the Company's Bylaws, as amended, and does not purport to be complete and is qualified in its entirety by reference thereto. The authorized capital stock of the Company consists of 40,000,000 shares of Common Stock, par value $5 per share, ("Common Stock") and 40,000,000 shares of Class A Common Stock, par value $5 per share, ("Class A Common Stock"). As of May 1, 1997, the Company had issued and outstanding 15,374,890 shares of Common Stock and 8,460,997 shares of Class A Common Stock issued and outstanding. This registration statement relates to the Company's Class A Common Stock. The description of the Common Stock included herein is for information purposes only. Voting Except as otherwise required under Pennsylvania law, or as otherwise provided in the Company's Articles of Incorporation or Bylaws, with respect to all matters upon which shareholders of the Company are entitled to vote or to which shareholders are entitled to give consent, the holders of the outstanding shares of Common Stock and the holders of the outstanding shares of Class A Common Stock vote together without regard to class, and every holder of the outstanding shares of Common Stock is entitled to cast thereon ten votes in person or by proxy for each share of Common Stock standing in the holder's name, and every holder of outstanding shares of Class A Common Stock is entitled to cast thereon one vote in person or by proxy for each share of Class A Common Stock standing in the holder's name. Cumulative voting rights exist with respect to the election of directors, which means that each shareholder has the right, in person or by proxy, to multiply the number of votes to which he is entitled by the number of directors of the class to be elected, and to cast the whole number of such votes for one candidate or to distribute them among two or more candidates. With respect to any proposed amendment to the Company's Articles of Incorporation which would increase or decrease the number of authorized shares of either Common Stock or Class A Common Stock, increase or decrease the par value of the shares of Common Stock or Class A Common Stock, or alter or change the powers, preferences, relative voting power or special rights of the shares of Common Stock or Class A Common Stock so as to affect such class of shares adversely, the approval of a majority of the votes entitled to be cast by the holders of the class affected by the proposed amendment, voting separately as a -76- class, shall be obtained in addition to the approval of a majority of the votes entitled to be cast by the holders of Common Stock and Class A Common Stock voting together without regard to class as provided in the Articles of Incorporation. Dividends and Distributions With respect to dividend rights, Class A Common Stock is entitled to cash dividends at a rate that is 10% higher on a per share basis than the cash dividends declared and paid on shares of Common Stock. Each share of Common Stock and each share of Class A Common Stock have equal rights in respect to dividends (other than cash) and distributions, declared and paid, in the form of stock or other property of the Company, except that in the case of dividends or other distributions payable in stock of the Company, including distributions pursuant to stock split-ups or divisions, only shares of Common Stock will be distributed with respect to Common Stock and only shares of Class A Common Stock will be distributed with respect to Class A Common Stock. Convertibility Each share of Common Stock may at any time be converted at the election of the holder thereof into one fully paid and nonassessable share of Class A Common Stock. Any holder of shares of Common Stock may elect to convert any or all of such shares at one time or at various times in such holder's discretion. Such right can be exercised by the surrender of the certificate representing each share of Common Stock to be converted to the agent for the registration for transfer of shares of Common Stock at its office, or to the Company at its principal executive offices, accompanied by a written notice of the election by the holder thereof to convert and (if so required by the transfer agent or by the Company) by instruments of transfer, in form satisfactory to the transfer agent and to the Company, duly executed by such holder or his duly authorized attorney. The issuance of a certificate or certificates for shares of Class A Common Stock upon conversion of shares of Common Stock will be made without charge for any stamp or other similar tax in respect of such issuance. However, if any such certificate or certificates is or are to be issued in a name other than that of the holder of the share or shares of Common Stock converted, the person or persons requesting the issuance thereof must pay to the transfer agent or to the Company the amount of any tax which may be payable in respect of any such transfer, or must establish to the satisfaction of the transfer agent or of the Company that such tax has been paid. As promptly as practicable after the surrender for conversion of a certificate or certificates representing shares of Common Stock and the payment of any tax as hereinbefore provided, the Company will deliver or cause to be delivered at the office of the transfer agent to, or upon the written order of, the holder of such certificate or certificates, a certificate or certificates representing the number of shares of Class A Common Stock issuable upon such conversion, issued in such name or names as such holder may direct. Such conversion will be irrevocable and will be deemed to have been made immediately prior to the close of business on the date of the surrender of the certificate or certificates representing shares of Common Stock (if on such date the transfer books of the Company shall be closed, then immediately prior to the close of business on the first date thereafter that said books shall be open), and all rights of such holder arising from ownership of such shares of Common Stock will cease at such time, and the person or persons in whose name or names the certificate or certificates representing shares of Class A Common Stock are to be issued will be treated for all purposes as having become the record holder or holders of such shares of Class A Common Stock at such time and will have and may exercise all the rights and powers appertaining thereto. -77- No adjustments in respect of past cash dividends will be made upon the conversion of any share of Common Stock; provided, however, that if any shares of Common Stock are converted subsequent to the record date for the payment of a cash or stock dividend or other distribution on shares of Common Stock but prior to such payment, the registered holder of such shares at the close of business on such record date will be entitled to receive the cash or stock dividend or the distribution payable to holders of Common Stock. The Company is required at all times to reserve and keep available, solely for the purpose of issue upon conversion of outstanding shares of Common Stock, such number of shares of Class A Common Stock as may be issuable upon the conversion of all such outstanding shares of Common Stock, provided, the Company may deliver shares of Class A Common Stock which are held in the treasury of the Company for shares of Common Stock to be converted. If any shares of Class A Common Stock require registration with or approval of any governmental authority under any federal or state law before such shares of Class A Common Stock may be issued upon conversion, the Company will cause such shares to be duly registered or approved, as the case may be. All shares of Class A Common Stock which may be issued upon conversion of shares of Common Stock will, upon issue, be fully paid and nonassessable. Shares of Class A Common Stock are not convertible into shares of Common Stock. Preemptive Rights of Common Stock Except with respect to shares, rights, options, and other securities of the Company that are issued or granted in connection with any stock purchase plan, stock option plan or other similar benefit plan that has been approved by the holders of a majority of the Company's outstanding Common Stock, the holders of Common Stock of the Company are entitled, as such, as a matter of right, to subscribe for and to purchase any part of any new or additional issue of Common Stock, any rights or options to purchase Common Stock, whether now or hereafter authorized, but only in those instances in which such shares of Common Stock, rights or options to purchase Common Stock are issued for a consideration consisting solely of money. In the event of the issuance of such shares or other securities solely for money, such preemptive right is only an opportunity to acquire such shares or other securities under such terms and conditions as the Board of Directors shall fix. The preemptive rights granted under the Articles of Incorporation do not apply in any respect to Class A Common Stock, and holders of Class A Common Stock, as such, have no preemptive rights. Other Rights Except as otherwise required by Pennsylvania law or as provided in the Articles of Incorporation of the Company, each share of Common Stock and each share of Class A Common stock has identical powers, preferences and rights, including rights in liquidation. There are no redemption or sinking fund provisions applicable to Common Stock or Class A Common Stock. Holders of Common Stock and Class A Common Stock are not subject to further calls or assessments by the Company. All outstanding shares of Common Stock and Class A Common Stock are fully paid and non-assessable. Certain Articles of Incorporation and Bylaw Provisions; Pennsylvania Anti-Takeover Provisions The Company's Bylaws provide for the division of the Company's Board of Directors into three classes. Only one class is elected each year, and the regular term of each class is three years. See "Item 5 - Executive Officers and Directors." The Company's Bylaws also require any shareholder who desires to -78- nominate a candidate for election as a director to provide certain information concerning such person that is equivalent to that contained in the Company's proxy materials for those candidates nominated by the Company's Board of Directors not later than 60 days prior to the date of election. Pennsylvania has also adopted certain laws that may be deemed to be "anti-takeover" in effect. One provision permits directors, in considering the best interests of the Company, to consider the effects of any action upon its employees, suppliers, customers, shareholders and creditors and the communities in which the Company maintains facilities. The effect of this provision is to put the considerations of these constituencies on parity with one another, with the result that no one group, including shareholders, is required to be the dominant or controlling concern of directors in determining what is in the best interests of the Company. This provision applies to all Pennsylvania corporations. Other provisions under Pennsylvania law that may be deemed to be anti-takeover in effect include the authorization for the adoption of poison pill plans and the prohibition of shareholders' calling a special meeting of shareholders, taking action by less than unanimous written consent or proposing an amendment to the articles of incorporation of the Company. The Company's Amended and Restated Articles of Incorporation provides that certain other anti-takeover provisions under the Pennsylvania Business Corporation Law of 1988, as amended, shall not be applicable to the Company. Restrictions on Ownership of Common Stock Under the Company's Bylaws, no person, firm, association, corporation or other entity is qualified to own any shares of Common Stock except: (i) PMA Foundation; (ii) a member of PMA Foundation; (iii) a former member of PMA Foundation who resigned in good standing, but only in respect to Common Stock owned by such former member on the date of resignation; (iv) the Company or PMAIC; (v) an officer, proprietor or partner of a member of PMA Foundation, or a retired officer, proprietor or partner of a member or former member, but only in respect to Common Stock owned on the date of retirement; (vi) a director or officer of the Company, PMAIC or PMA Foundation; (vii) a retired director or officer of the Company, PMAIC or PMA Foundation, but only in respect to the Common Stock owned on the date of retirement; (viii) a surviving spouse of a deceased person who, at the time of his or her death, was qualified to own Common Stock; (ix) a person, firm, association, corporation or other entity who was a shareholder of record of PMAIC on April 1, 1982; (x) any child or grandchild of a shareholder of PMAIC of record on April 1, 1982; (xi) a trustee under a written trust solely for the benefit of a person qualified under the Company's Bylaws to own Common Stock or a spouse, child or grandchild of such qualified person; and (xii) such other classes of person as are from time to time approved by the Board of Directors of the Company. Pursuant to the Bylaws, the Board of Directors has authorized the following classes of persons to own shares of Common Stock: (i) employees of the Company or any of its affiliates who are not officers of these entities, but whose duties require the exercise of executive and administrative responsibilities; and (ii) a spouse of a person who owned Common Stock of record on December 8, 1990. The Company's Bylaws also provide that no person, firm, association, corporation or other entity, except PMA Foundation, may at any time hold more than 7% of the outstanding shares of Common Stock of the Company. If any shareholder ceases to be qualified to own Common Stock under the Company's Bylaw provisions, or if the executor or administrator of any shareholder, or the grantee or assignee of any Common Stock sold on execution, or for debt, or as the result of bankruptcy or insolvency proceedings, or if any person, firm, association, corporation or other entity who is not qualified to own Common Stock under the Company's Bylaws becomes the holder of Common Stock, then in any such case, unless a transfer of such Common Stock is made to a qualified person within six months, such holder will be required to offer to sell -79- such Common Stock to PMA Foundation at a price agreed upon by the holder and PMA Foundation, or by a committee of arbitrators if the holder and PMA Foundation are unable to agree upon a price. The foregoing restrictions relating to the Common Stock do not apply to shares of Class A Common Stock. Shares Eligible for Future Sale As of May 1, 1997, the Company has outstanding 15,374,890 shares of Common Stock and 8,460,997 shares of Class A Common Stock. Transferability of shares of the Company's Common Stock is limited by the restrictions on ownership under the Company's Bylaws. See "Restrictions on Ownership of Common Stock" above. Of the outstanding shares of Class A Common Stock, 7,644,167 shares will be freely transferable by persons other than "affiliates" of the Company without restriction or further registration under the Securities Act. Of the 7,644,167 shares of Class A Common Stock that are freely transferable, 1,522,646 shares are held by affiliates and may not be sold unless registered under the Securities Act or an exemption from registration is available, including the exemption afforded by Rule 144. The remaining 816,830 shares of Class A Common Stock are "restricted securities" ("Restricted Securities") within the meaning of Rule 144 under the Securities Act and may not be sold unless registered under the Securities Act or an exemption from registration is available, including the exemption afforded by Rule 144. Rule 144, as currently in effect, provides that an affiliate of the Company or a person (or persons whose shares are aggregated) who has beneficially owned Restricted Shares for at least one year but less than two years is entitled to sell, commencing 90 days after the effective date of this Registration Statement, within any three-month period a number of shares that does not exceed the greater of one percent of the then outstanding shares of Common Stock (84,609 shares immediately after the effective date of this Registration Statement) or the average weekly trading volume in the Class A Common Stock during the four calendar weeks preceding such sale. Sales under Rule 144 also are subject to certain manner-of-sale provisions, notice requirements and the availability of current public information about the Company. However, a person who is not an "affiliate" of the Company at any time during the three months preceding a sale, and who has beneficially owned Restricted Shares for at least two years, is entitled to sell such shares under Rule 144(k) without regard to the limitations described above. Therefore, of the 816,830 shares of Restricted Securities, (i) 209,864 shares held by affiliates and 182,490 shares held by non-affiliates may not be sold under Rule 144 until they have been held for at least one year, (ii) 17,961 shares held by affiliates and 25,592 shares held for more than one year but less than two years by non-affiliates may be sold under Rule 144, assuming all conditions of Rule 144 have been satisfied and (iii) 380,923 shares held for more than two years by non-affiliates may be sold without restriction under Rule 144(k). Each share of Common Stock is convertible into one share of Class A Common Stock. If the outstanding shares of Common Stock were to be converted into shares of Class A Common Stock, (i) 6,580,795 shares of Class A Common Stock held by non-affiliates of the Company that would be received upon such conversion could be sold without further restriction, (ii) 119,590 shares held by non-affiliates and 198,563 shares held by affiliates may not be sold under Rule 144 until they have been held for at least one year, and (iii) 8,475,942 shares of Class A Common Stock held by affiliates that would be received upon such -80- conversion could not be sold unless registered under the Securities Act or an exemption from registration is available, including the exemption afforded by Rule 144. In addition, the Company intends to file a registration statement under the Securities Act to register 3,561,910 shares of Class A Common Stock reserved for issuance pursuant to the exercise of outstanding stock options and shares reserved for future grants under the Company's stock option plans. Shares issued upon exercise of outstanding stock options after the effective date of such registration statement generally will be eligible for sale in the public market. Since there has been no public market for the Company's shares of the Class A Common Stock, the Company is unable to predict the effect that sales made pursuant to Rule 144 or otherwise may have on the prevailing market price at such times for shares of the Class A Common Stock. Nevertheless, sales of a substantial amount of the Class A Common Stock in the public market, or the perception that such sales could occur, could adversely affect market prices. Transfer Agent The Transfer Agent for the capital stock of the Company is ChaseMellon Shareholder Services, L.L.C. Its address for such purposes is P.O. Box 590, Ridgefield Park, New Jersey 07660, and its telephone number is 800-851-9677. Item 12. Indemnification of Directors and Officers As permitted by the provisions for indemnification of directors and officers in the Pennsylvania Business Corporation Law, which applies to the Company, the Company's Bylaws provide for indemnification of directors and officers for reasonable expenses, judgments, fines and amounts paid in settlement of actions unless the act or failure to act giving rise to the claim for indemnification is determined by a court to have constituted willful misconduct or recklessness. The Bylaws of the Company also avail directors of the Pennsylvania law limiting directors' liability for money damages except in those cases where they have breached their fiduciary duty and such breach constitutes self-dealing, willful misconduct or recklessness. Such provisions are subject to applicable federal and state regulatory restrictions. Such provisions do not apply, however, to the responsibility or liability of a director pursuant to any criminal statute or the liability of a director for the payment of taxes pursuant to local, federal or state law. The Company provides liability insurance for each director and officer of the Company and its subsidiaries for certain losses arising from claims or charges against them while serving in their capacities as directors or officers up to an aggregate of $10,000,000 including defense costs, expenses and charges. -81- Item 13. Financial Statements and Supplementary Data Index to Consolidated Financial Statements Page ---- Consolidated Statements of Operations for the years ended December 31, 1996, 1995 and 1994........................................... F-1 Consolidated Balance Sheets as of December 31, 1996 and 1995................................................. F-2 Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994........................................... F-3 Consolidated Statements of Shareholders' Equity for the years ended December 31, 1996, 1995 and 1994....................... F-4 Notes to Consolidated Financial Statements................................. F-5 Report of Independent Accountants..........................................F-28 Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 1997 and March 31, 1996 (unaudited)...........F-29 Condensed Consolidated Balance Sheets as of March 31, 1997 (unaudited) and December 31, 1996..........................................F-30 Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 1997 and March 31, 1996 (unaudited).................F-31 Notes to the Interim Condensed Consolidated Financial Statements (unaudited).....................................................F-32 -82- Pennsylvania Manufacturers Corporation Consolidated Statements of Operations
for the years ended December 31, (in thousands, except per share data) 1996 1995 1994 - - - ------------------------------------------------------------------------------------------------------------------- Revenues: Net premiums written $ 443,475 $ 489,876 $ 466,502 Change in net unearned premiums (22,900) (4,924) 32 ----------------------------------------- Net premiums earned 420,575 484,952 466,534 Net investment income 133,936 139,355 138,719 Net realized investment gains 2,984 31,923 47,521 Service revenues 9,189 5,106 3,380 ----------------------------------------- Total revenues 566,684 661,336 656,154 ----------------------------------------- Losses and Expenses: Losses and loss adjustment expenses (includes ($35,000) effect of the change in the discount rate on the Property and Casualty Group's workers' compensation unpaid losses from 4% to 5% in 1995) 536,623 422,578 402,869 Amortization of deferred acquisition costs 90,292 87,207 83,527 Operating expenses 97,856 81,161 74,648 Dividends to policyholders 16,255 16,743 16,679 Interest expense 17,052 18,734 13,051 ----------------------------------------- Total losses and expenses 758,078 626,423 590,774 ----------------------------------------- (Loss) income before income taxes (191,394) 34,913 65,380 ----------------------------------------- (Benefit) provision for income taxes: Current (44,572) (4,570) 8,000 Deferred (11,488) 15,353 130 ----------------------------------------- Total (56,060) 10,783 8,130 ----------------------------------------- Net (loss) income $ (135,334) $ 24,130 $ 57,250 ========================================= (Loss) Earnings per Common and Equivalent Share Primary: (Loss) earnings per primary share $ (5.68) $ .98 $ 2.32 ========================================= Fully diluted: (Loss) earnings per fully-diluted share $ (5.68) $ .97 $ 2.32 ========================================= See accompanying notes to the consolidated financial statements.
F-1 Pennsylvania Manufacturers Corporation Consolidated Balance Sheets
December 31, December 31, (in thousands, except share data) 1996 1995 - - - ------------------------------------------------------------------------------------------------------------- Assets Investments: Fixed maturities available for sale, at fair value $ 2,126,120 $ 2,230,992 (amortized cost: 1996 -- $2,164,391; 1995 -- $2,206,806) Equity securities, at fair value (cost: 1996--$259; 1995--$8,132) 262 10,886 Short-term investments, at amortized cost which approximates fair value 134,971 214,071 ----------------------------- Total investments 2,261,353 2,455,949 Cash 7,176 9,170 Investment income due and accrued 30,268 35,456 Uncollected premiums (net of allowance for uncollectible accounts: 1996-$18,877; 1995--$16,330) 285,982 290,705 Reinsurance receivables (net of allowance for uncollectible reinsurance: 1996--$3,901; 1995--$6,208) 257,983 264,647 Property and equipment (net of accumulated depreciation: 1996--$41,219; $1995--$28,614) 50,861 56,649 Deferred income taxes, net 101,642 67,331 Deferred acquisition costs 44,006 37,901 Other assets 78,245 40,764 ----------------------------- Total assets $ 3,117,516 $ 3,258,572 ============================= Liabilities Unpaid losses and loss adjustment expenses $ 2,091,072 $ 2,069,986 Unearned premiums 205,982 192,722 Long-term debt 204,699 203,848 Dividends to policyholders 12,524 13,156 Funds held under reinsurance treaties 86,804 73,605 Taxes, licenses and fees, and other expenses 39,226 29,607 Other liabilities 51,381 65,980 ----------------------------- Total liabilities 2,691,688 2,648,904 ----------------------------- Commitments and contingencies (Note 13) Shareholders' Equity Common stock, $5 par value (40,000,000 shares authorized; 16,095,416 shares issued and 15,670,052 outstanding--1996; 17,044,580 shares issued and 16,652,016 outstanding--1995) 80,477 85,223 Class A common stock, $5 par value (40,000,000 shares authorized; 8,247,804 shares issued and 8,173,023 outstanding--1996; 7,298,640 shares issued and 7,225,232 outstanding--1995) 41,239 36,493 Retained earnings 336,921 480,181 Unrealized (loss) gain on investments 17,511 (net of deferred income taxes: 1996--$13,394; 1995--($9,429)) (24,874) Notes receivable from officers (1,162) (3,896) Treasury stock, at cost: Common stock (1996--425,364 shares; 1995--392,564 shares) (5,408) (4,769) Class A common stock (1996--74,781 shares; 1995--73,408 shares) (1,365) (1,075) ----------------------------- Total shareholders' equity 425,828 609,668 ----------------------------- Total liabilities and shareholders' equity $ 3,117,516 $ 3,258,572 ============================= See accompanying notes to the consolidated financial statements.
F-2 Pennsylvania Manufacturers Corporation Consolidated Statements of Cash Flows
for the years ended December 31, (in thousands) 1996 1995 1994 - - - ----------------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net (loss) income $ (135,334) $ 24,130 $ 57,250 Adjustments to reconcile net (loss) income to net cash flows (used) provided by operating activities: Depreciation 12,511 7,652 8,551 Amortization (accretion) 7,243 35 (405) (Benefit) provision for deferred income taxes (11,488) 15,353 130 Net realized investment gains (2,984) (31,923) (47,521) Change in uncollected premiums and unearned premiums, net 17,983 22,381 35,623 Change in dividends to policyholders (632) 910 (7,754) Change in unpaid losses and loss adjustment expenses 21,086 (33,728) (46,951) Change in investment income due and accrued 5,188 4,961 (267) Change in deferred acquisition costs (6,105) (5,665) (1,844) Other, net (23,413) 11,807 5,482 ------------------------------------------ Net cash flows (used) provided by operating activities (115,945) 15,913 2,294 ------------------------------------------ Cashflows from investing activities: Fixed maturity investments held to maturity: Purchases -- -- (354,379) Maturities or calls -- 3,809 16,658 Fixed maturity investments available for sale: Purchases (1,227,173) (2,147,600) (756,704) Maturities or calls 52,280 75,861 34,900 Sales 1,210,114 2,085,864 1,161,133 Equity securities: Purchases (5,196) (18,104) (46,828) Sales 16,984 28,793 88,909 Net sales (purchases) of short-term investments 78,935 (35,445) (120,675) Net purchases of property and equipment (6,723) (6,017) (12,905) ------------------------------------------ Net cash flows provided (used) by investing activities 119,221 (12,839) 10,109 ------------------------------------------ Cash flows from financing activities: Proceeds from issuances of long-term debt 26,000 125,000 25,000 Repayments of long-term debt (25,149) (125,127) (15,861) Dividends paid to shareholders (7,926) (7,885) (5,881) Treasury stock transactions, net (929) 480 (3,893) Repayments of notes receivable from officers 2,734 478 235 ------------------------------------------ Net cash flows used by financing activities (5,270) (7,054) (400) ------------------------------------------ Net (decrease) increase in cash (1,994) (3,980) 12,003 Cash January 1 9,170 13,150 1,147 ------------------------------------------ Cash December 31 $ 7,176 $ 9,170 $ 13,150 ========================================== Supplementary cash flow information: Amounts paid (received) for income taxes $ 5,525 $ (951) $ 4,532 Amounts paid for interest $ 16,622 $ 15,062 $ 2,899 Fair value of securities transferred from held to maturity classification to available for sale classification $ -- $1,238,077 $ -- See accompanying notes to the consolidated financial statements.
F-3
Pennsylvania Manufacturers Corporation Consolidated Statements of Shareholders' Equity (in thousands, except share and per share data) Unrealized Notes Common Stock Class A Common Stock gain receivable ----------------------------------------------- Retained (loss) on from Shares Amounts Shares Amounts earnings investments officers - - - -------------------------------------------------------------------------------------------------------------------- Balance -- January 1, 1994 18,400,506 $ 92,003 5,942,714 $ 29,713 $ 414,132 $ 6,276 $ (4,609) Net income 57,250 Common stock dividends declared ($.32 per share) (5,686) Class A common stock dividends declared ($.36 per share) (2,160) Conversion of common stock into Class A common stock (793,656) (3,969) 793,656 3,969 Cumulative effect of accounting change -- adoption of SFAS No. 115 (net of tax effect of ($24,415)) 45,343 Unrealized loss on investments available for sale (net of tax effect of $54,430) (101,084) Repayments of notes 235 Purchase of treasury shares, net Effect of other treasury stock transactions (58) Stock options issued 474 - - - -------------------------------------------------------------------------------------------------------------------- Balance -- December 31, 1994 17,606,850 88,034 6,736,370 33,682 463,952 (49,465) (4,374) Net income 24,130 Common stock dividends declared ($.32 per share) (5,396) Class A common stock dividends declared ($.36 per share) (2,505) Conversion of common stock into Class A common stock (562,270) (2,811) 562,270 2,811 Unrealized gain on investments available for sale (net of tax effect of ($36,063)) 66,976 Repayments of notes 478 Purchase of treasury shares, net Effect of other treasury stock transactions - - - -------------------------------------------------------------------------------------------------------------------- Balance -- December 31, 1995 17,044,580 85,223 7,298,640 36,493 480,181 17,511 (3,896) Net loss (135,334) Common stock dividends declared ($.32 per share) (5,138) Class A common stock dividends declared ($.36 per share) (2,788) Conversion of common stock into Class A common stock (949,164) (4,746) 949,164 4,746 Unrealized loss on investments available for sale (net of tax effect of $22,823) (42,385) Repayments of notes 2,734 Purchase of treasury shares, net - - - -------------------------------------------------------------------------------------------------------------------- Balance -- December 31, 1996 16,095,416 $ 80,477 8,247,804 $ 41,239 $ 336,921 $ (24,874) $ (1,162) ====================================================================================================================
Treasury stock, at cost -------------------------------------- Common Stock Class A Common Stock --------------------------------------- Shares Amounts Shares Amounts Total - - - -------------------------------------------------------------------------------------- Balance -- January 1, 1994 125,799 $ (1,337) 177,103 $ (1,795) $534,383 Net income 57,250 Common stock dividends declared ($.32 per share) (5,686) Class A common stock dividends declared ($.36 per share) (2,160) Conversion of common stock into Class A common stock -- Cumulative effect of accounting change -- adoption of SFAS No. 115 (net of tax effect of ($24,415)) 45,343 Unrealized loss on investments available for sale (net of tax effect of $54,430) (101,084) Repayments of notes 235 Purchase of treasury shares, net 262,715 (3,369) 52,320 (785) (4,154) Effect of other treasury stock transactions (28,925) 319 261 Stock options issued 474 - - - -------------------------------------------------------------------------------------- Balance -- December 31, 1994 388,514 (4,706) 200,498 (2,261) 524,862 Net income 24,130 Common stock dividends declared ($.32 per share) (5,396) Class A common stock dividends declared ($.36 per share) (2,505) Conversion of common stock into Class A common stock -- Unrealized gain on investments available for sale (net of tax effect of ($36,063)) 66,976 Repayments of notes 478 Purchase of treasury shares, net 4,050 (63) 150,442 (2,355) (2,418) Effect of other treasury stock transactions (277,532) 3,541 3,541 - - - -------------------------------------------------------------------------------------- Balance -- December 31, 1995 392,564 (4,769) 73,408 (1,075) 609,668 Net loss (135,334) Common stock dividends declared ($.32 per share) (5,138) Class A common stock dividends declared ($.36 per share) (2,788) Conversion of common stock into Class A common stock -- Unrealized loss on investments available for sale (net of tax effect of $22,823) (42,385) Repayments of notes 2,734 Purchase of treasury shares, net 32,800 (639) 1,373 (290) (929) - - - -------------------------------------------------------------------------------------- Balance -- December 31, 1996 425,364 $ (5,408) 74,781 $ (1,365) $ 425,828 ======================================================================================
See accompanying notes to the consolidated financial statements. F-4 Notes to Consolidated Financial Statements (Dollar amounts in thousands, except share and per share data) 1. Summary of Significant Accounting Policies The accompanying consolidated financial statements include the accounts of Pennsylvania Manufacturers Corporation (PMC) and its wholly and majority owned subsidiaries (the Company). PMC is an insurance holding company that sells property and casualty insurance and reinsurance through its insurance subsidiaries; with the exception of certain foreign affiliates, PMC's insurance subsidiaries are domiciled in Pennsylvania. Its property and casualty insurance subsidiaries (the Property and Casualty Group) write workers' compensation and other lines of commercial insurance primarily in the Mid-Atlantic and Southern regions. PMC's reinsurance subsidiary, PMA Reinsurance Corporation (PMA Re), emphasizes risk-exposed, excess of loss reinsurance and operates in the brokered market. PMA Re's business is predominantly in casualty lines of reinsurance. The Company's significant accounting policies and practices are as follows: A. Basis of Presentation -- The consolidated financial statements have been prepared in accordance with generally accepted accounting principles (GAAP). All significant intercompany accounts and transactions have been eliminated in consolidation. These consolidated financial statements vary in certain respects from statutory accounting practices prescribed or permitted by the Pennsylvania Insurance Department (SAP). Prescribed SAP includes state laws, regulations and general administrative rules, as well as a variety of NAIC publications. Permitted SAP encompasses all accounting practices that are not prescribed. The NAIC has a project to codify SAP, the result of which is expected to constitute the only source of prescribed SAP. The project, when completed, will change the definitions of what comprises prescribed versus permitted SAP and may result in changes to the accounting policies that insurance companies use to prepare SAP financial statements. SAP net (loss) income and capital and surplus for PMC's domestic insurance subsidiaries as reported to the Pennsylvania Insurance Department are as follows:
For the years ended December 31, 1996 1995 1994 - - - ------------------------------------------------------------------------------------------------------------------- SAP Net (Loss) Income The Property and Casualty Group $(191,640) $30,925 $51,110 PMA Re 26,338 36,854 33,662 ------------------------------------------------- Total $(165,302) $67,779 $84,772 ================================================= December 31, 1996 1995 1994 - - - ------------------------------------------------------------------------------------------------------------------- SAP Capital and Surplus The Property and Casualty Group $279,764 $402,968 $405,020 PMA Re 260,853 254,088 237,387 ------------------------------------------------- Total $540,617 $657,056 $642,407 =================================================
F-5 A reconciliation of PMC's domestic insurance subsidiaries' SAP net (loss) income and capital and surplus to the Company's GAAP net (loss) income and shareholders' equity is as follows:
For the years ended December 31, 1996 1995 1994 - - - ------------------------------------------------------------------------------------------------------------------- Net (Loss) Income SAP net (loss) income: Domestic insurance subsidiaries $(165,302) $ 67,779 $ 84,772 Other entities and eliminations 18,706 (34,147) (27,682) ---------------------------------------- SAP net (loss) income -- the Company (146,596) 33,632 57,090 GAAP adjustments: Change in deferred acquisition costs 6,105 5,665 1,844 Benefit (provision) for deferred income taxes 11,488 (15,353) (130) Allowance for doubtful accounts (5,317) 4,105 (1,080) Retirement accruals (76) (3,613) -- Other (938) (306) (474) ---------------------------------------- GAAP net (loss) income $(135,334) $ 24,130 $ 57,250 ======================================== December 31, 1996 1995 1994 - - - ------------------------------------------------------------------------------------------------------------------- Shareholders' equity SAP capital and surplus: Domestic insurance subsidiaries $ 540,617 $ 657,056 $ 642,407 Other entities and eliminations (206,642) (175,213) (188,000) ---------------------------------------- SAP capital and surplus -- the Company 333,975 481,843 454,407 GAAP adjustments: Deferred acquisition costs 44,006 37,901 32,236 Deferred income taxes 101,642 67,331 118,747 Allowance for doubtful accounts (26,214) (20,897) (25,002) Retirement accruals (14,571) (14,495) (10,954) Reversal of non-admitted assets 25,599 32,841 29,324 Unrealized (loss) gain on fixed 24,186 maturity investments available for sale (38,271) (75,688) Other (338) 958 1,792 ---------------------------------------- GAAP shareholders' equity $ 425,828 $ 609,668 $ 524,862 ========================================
B. Investments -- Effective January 1, 1994, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Upon adoption of SFAS No. 115, the Company designated investments in fixed maturities with a total amortized cost and fair value of $1,350,884 and $1,420,642, respectively, as available-for-sale. Under SFAS No. 115, fixed maturities which the Company may hold for an indefinite period of time are classified as available-for-sale and, accordingly, are carried at fair value with changes in fair value, net of income tax effects, reflected in shareholders' equity. Fixed maturities which the Company has the positive intent and ability to hold to maturity are carried at amortized cost. In 1995, the Company reevaluated the classifications of its investments. As a result, effective June 30, 1995, the Company reclassified its entire held-to-maturity portfolio, which had an amortized cost of $1,241,774, to the F-6 available-for-sale designation in order to match more closely the Company's investment strategy. This reclassification resulted in a $1,238,077 increase in available-for-sale securities and a $2,403 unrealized loss (net of deferred taxes), with no impact on net income. Equity securities for all periods are stated at fair value with changes in fair value, net of income tax effects, reflected in shareholders' equity. Realized gains and losses, determined by the first-in, first-out method, are reflected in income in the period in which the sale transaction occurs. C. Premiums -- Premiums, including estimates of additional premiums resulting from audits of insureds' records, are earned principally on a pro rata basis over the terms of the policies. Premiums applicable to the unexpired terms of policies in-force are reported as unearned premiums. Estimated premiums receivable on retrospectively rated policies are reported as a component of uncollected premiums. The Company follows Emerging Issues Task Force Consensus Position No. 93-6, "Accounting for Multiple Year Retrospectively Rated Contracts by Ceding and Assuming Enterprises" (EITF 93-6). EITF 93-6 requires that the Company reflect adjustments to future premiums, as the result of past experience under multiple year reinsurance contracts, in earnings currently. The impact of EITF 93-6 has been immaterial. D. Unpaid Losses and Loss Adjustment Expenses -- Unpaid losses and loss adjustment expenses are stated net of estimated salvage and subrogation and are determined using claims adjusters' evaluations, estimates of losses and loss adjustment expenses on known claims, and estimates of losses and loss adjustment expenses incurred but not reported (IBNR). IBNR is calculated utilizing various actuarial methods. Unpaid losses on certain workers' compensation claims are discounted to present value using the Company's payment experience and SAP mortality and interest assumptions (see Note 3). The methods of making such estimates and establishing the resulting reserves are continually reviewed and updated and any adjustments resulting therefrom are reflected in earnings currently. E. Deferred Acquisition Costs -- The costs of acquiring new and renewal business are deferred and amortized over the period during which the related premiums are earned. Such costs include commissions, premium taxes, and other internal costs, which are directly related to and vary with the production of business. The Company determines whether deferred acquisition costs are recoverable considering future losses and loss adjustment expenses, maintenance costs, and anticipated investment income. To the extent that deferred acquisition costs are not recoverable, the deficiency is charged to income currently. F. Policyholder Dividends -- The Property and Casualty Group issues certain workers' compensation insurance policies with dividend payment features. These policyholders share in the operating results in the form of dividends declared at the discretion of the Company's board of directors. Dividends to policyholders are accrued during the period in which the related premiums are earned and are determined based on the terms of the individual policies. G. Income Taxes -- The Company accounts for income taxes under SFAS No. 109 "Accounting for Income Taxes" (SFAS 109). SFAS 109 is an asset and liability approach, whereby deferred tax assets and liabilities are recorded to the extent of the tax effect of differences between the financial statement carrying values and tax bases of assets and liabilities. A valuation allowance is recorded for deferred tax F-7 assets where it appears more likely than not that the Company will not be able to recover the deferred tax asset. H. Property and Equipment -- Property and equipment are stated at cost, less accumulated depreciation. Depreciation is calculated on the straight-line method utilizing useful lives ranging from 3 to 40 years. During 1996, The Property and Casualty Group changed the depreciable lives for its mainframe computer equipment from five years to three years. The effect of this adjustment was to increase 1996 depreciation expense by $4,800. I. Per Share Information -- In 1996, earnings per share was based upon the weighted average number of common shares outstanding during the year. The assumed exercise price of stock options using the average market price was not taken into consideration as these stock options would have an anti-dilutive effect on net loss per share. The number of weighted average common shares outstanding for the year ended December 31, 1996 for both primary and fully diluted earnings per share was 23,800,791. In 1995, earnings per share was based upon the weighted average number of common shares outstanding during the year and the assumed exercise price of dilutive stock options less the number of treasury shares assumed to be purchased from the proceeds as if using the average market price and the closing price of the Company's common stock and Class A common stock for primary and fully-diluted earnings per share, respectively. The number of weighted average common shares and common share equivalents outstanding for primary and fully-diluted earnings per share were 24,709,031 and 24,934,579, respectively, for the year ended December 31, 1995. In 1994, the weighted average number of common shares and common share equivalents outstanding during each year were equivalent for primary and fully-diluted earnings per share. The weighted average number of common shares and common share equivalents outstanding was 24,650,741 for the year ended December 31, 1994. J. Stock-Based Compensation -- The Company has chosen to continue to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and related Interpretations. Accordingly, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the Company's stock at the date of the grants over the amount an employee must pay to acquire the stock. K. Computer Software Costs Related to the Year 2000 -- In 1996, the Company adopted Emerging Issues Task Force Consensus Position No. 96-14, "Accounting for the Costs Associated with Modifying Computer Software for the Year 2000" (EITF 96-14). EITF 96-14 states that external and internal costs specifically associated with modifying internal-use software for the Year 2000 should be charged to expense as incurred. In accordance with EITF 96-14, the Company charged $1,808 to operating expenses during the year ended December 31, 1996, for costs associated with modifying internal-use software. L. Service Revenues -- Service revenues are earned over the term of the related contracts in proportion to the actual services rendered. M. Reclassifications -- Certain prior year amounts have been reclassified to conform to the current year presentation. Additionally, in 1995, the Company elected to change its method of reporting cash flows from the direct method to the indirect method and prior period financial statements were reclassified accordingly. F-8 N. Recently Issued Accounting Standards -- In June 1996, the Financial Accounting Standards Board issued SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." SFAS No. 125, which is effective for transfers and extinguishments occurring after December 31, 1996, provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. The Property and Casualty Group's domestic insurance subsidiaries currently participate in a transfer arrangement of certain accounts receivable. Such arrangement will be restructured or terminated as a result of SFAS No. 125. The restructuring or termination of such arrangement is not expected to have a material impact on the Company's financial condition or results of operations. In February 1997, the Financial Accounting Standards Board issued SFAS No. 128, "Earnings Per Share", which supersedes Accounting Principles Board Opinion No. 15, "Earnings Per Share" and related Interpretations. SFAS No. 128, which is effective for financial statements for both interim and annual periods ending after December 15, 1997, requires presentation of earnings per share by all entities that have issued common stock or potential common stock if those securities trade in a public market either on a stock exchange or in the over-the-counter market, including securities quoted only locally or regionally. As SFAS No. 128 is a disclosure standard, adoption is not expected to have a material impact on the Company's financial condition or results of operations. 2. Investments The Company's investment portfolio is well diversified and contains no significant concentrations in any specific industry, business segment, or individual issuer. The Company principally invests in U.S. Treasury securities, high-quality obligations of states and political subdivisions and corporations, and mortgage-backed securities. The Company does not have any investments in its portfolio that are considered below investment grade, as defined by independent security rating agencies. Equity securities consist entirely of common stocks of financial institutions, public utilities, and industrial and service entities. The amortized cost and fair value of the Company's investment portfolio are as follows:
Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value - - - --------------------------------------------------------------------------------------------------------------------- December 31, 1996 Fixed maturities available for sale: U.S. Treasury securities and obligations of U.S. Government agencies $ 1,640,881 $ 4,045 $ 42,182 $ 1,602,744 Obligations of states and political subdivisions 77,562 194 1,229 76,527 Corporate debt securities 372,620 3,203 2,977 372,846 Mortgage-backed securities 73,328 728 53 74,003 -------------------------------------------------------- Total fixed maturities available for sale 2,164,391 8,170 46,441 2,126,120 Equity securities 259 3 -- 262 Short-term investments 134,971 -- -- 134,971 -------------------------------------------------------- Total investments $ 2,299,621 $ 8,173 $ 46,441 $ 2,261,353 ========================================================
F-9
Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value - - - --------------------------------------------------------------------------------------------------------------------- December 31, 1995 Fixed maturities available for sale: U.S. Treasury securities and obligations of U.S. Government agencies $1,651,858 $17,395 $ 2,978 $1,666,275 Obligations of states and political subdivisions 429,118 9,073 2,322 435,869 Corporate debt securities 125,830 3,059 41 128,848 ------------------------------------------------------- Total fixed maturities available for sale 2,206,806 29,527 5,341 2,230,992 Equity securities 8,132 2,967 213 10,886 Short-term investments 214,071 -- -- 214,071 ------------------------------------------------------- Total investments $2,429,009 $32,494 $ 5,554 $2,455,949 =======================================================
The amortized cost and estimated fair value of fixed maturities at December 31, 1996, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because the issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Amortized Fair Cost Value - - - ----------------------------------------------------------------------------- 1997 $ 110,974 $ 110,798 1998-2001 534,450 525,507 2002-2006 679,444 661,184 2007 and thereafter 766,195 754,628 Mortgage backed securities 73,328 74,003 ---------------------------- $2,164,391 $2,126,120 ============================ Net investment income consists of the following:
For the years ended December 31, 1996 1995 1994 - - - -------------------------------------------------------------------------------------------------------------- Fixed maturities $131,530 $129,883 $135,299 Equity securities 148 503 1,253 Short-term investments 7,711 11,764 3,397 Other 3,251 4,303 830 -------------------------------------------------------- Total investment income 142,640 146,453 140,779 Investment expenses 8,704 7,098 2,060 -------------------------------------------------------- Net investment income $133,936 $139,355 $138,719 ========================================================
F-10 Net realized investment gains consist of the following:
For the years ended December 31, 1996 1995 1994 - - - ------------------------------------------------------------------------------------------------------------------ Realized gains: Fixed maturities $12,762 $37,900 $40,767 Equity securities 4,351 3,117 12,822 Other 4 -- 101 ------------------------------------------ 17,117 41,017 53,690 ------------------------------------------ Realized losses: Fixed maturities 12,861 5,956 1,844 Equity securities 436 2,200 4,325 Other 836 938 -- ------------------------------------------ 14,133 9,094 6,169 ------------------------------------------ Total net realized investment gains $ 2,984 $31,923 $47,521 ==========================================
On December 31, 1996, the Company had securities with a total amortized cost and fair value of $17,102 and $16,886, respectively, on deposit with various governmental authorities, as required by law. In addition, at December 31, 1996, securities with a total amortized cost and fair value of $10,527 and $10,404, respectively, were pledged as collateral for letters of credit issued on behalf of the Company. Change in unrealized (depreciation) appreciation of investments consists of the following:
For the years ended December 31, 1996 1995 1994 - - - ------------------------------------------------------------------------------------------------------------------ Cumulative effect of accounting change $ -- $ -- $ 69,758 Fixed maturities available for sale (62,457) 99,874 (145,444) Equity securities (2,751) 3,165 (10,070) ------------------------------------------- Change in unrealized (depreciation) appreciation of investments $ (65,208) $103,039 $ (85,756) ===========================================
F-11 3. Unpaid Losses and Loss Adjustment Expenses Activity in the liability for unpaid losses and loss adjustment expenses (LAE) is summarized as follows:
For the years ended December 31, 1996 1995 1994 - - - ---------------------------------------------------------------------------------------------------------- Balance at January 1 $2,069,986 $2,103,714 $2,150,665 Less: reinsurance recoverable on unpaid losses and LAE 261,492 247,856 218,695 --------------------------------------------- Net balance at January 1 $1,808,494 1,855,858 1,931,970 --------------------------------------------- Losses and LAE incurred, net: Current year 323,069 357,787 352,025 Prior years 156,074 51,491 366 Accretion of discount (includes ($35,000) effect of the change in the discount rate for The Property and Casualty Group's workers' compensation unpaid losses from 4% to 5% in 1995) 57,480 13,300 50,478 --------------------------------------------- Total losses and LAE incurred, net 536,623 422,578 402,869 --------------------------------------------- Losses and LAE paid, net: Current year (72,194) (71,126) (71,965) Prior years (438,427) (398,816) (407,016) --------------------------------------------- Total losses and LAE paid, net (510,621) (469,942) (478,981) --------------------------------------------- Net balance at December 31 1,834,496 1,808,494 1,855,858 Reinsurance recoverable on unpaid losses and LAE 256,576 261,492 247,856 --------------------------------------------- Balance at December 31 $2,091,072 $2,069,986 $2,103,714 =============================================
The increase in estimated incurred losses and LAE during 1996 is primarily due to a loss reserve strengthening charge of $191,400. This loss reserve strengthening was associated with the following lines of business: Pre-1991 workers' compensation $110,000 Asbestos and environmental 60,400 Other lines of business 21,000 -------- $191,400 The Company's results of operations included an increase in estimated incurred losses and LAE related to prior years of $156,074, $51,491, and $366 in 1996, 1995, and 1994, respectively. The vast majority of the adverse development relates to Pennsylvania workers' compensation claims from accident years 1987 through 1991. As claims data from these accident years have matured, the impact of disability and medical benefits available to claimants in Pennsylvania before the passage of reform legislation in 1993 and 1996, coupled with the economic conditions that have existed during the disability periods, has become more apparent. As such, the developed losses have exceeded management's prior estimates. The reform legislation enacted in 1993 and 1996 has introduced various controls and limitations on disability and medical benefits which management believes has had, and will continue to have, a beneficial effect on loss and LAE reserve development. In addition, management is taking several steps to reduce the outstanding claims associated with the Pennsylvania workers' compensation business written through 1991. F-12 The adverse development in reserves associated with asbestos and environmental claims is due to the completion of a detailed analysis of loss and LAE reserves associated with asbestos and environmental liability claims in 1996. The analysis of asbestos loss and LAE reserves involved a ground-up review and projection on an account-by-account basis. The analysis of environmental loss and LAE reserves involved an actuarial calendar year loss development technique. Estimation of obligations for asbestos and environmental exposures continues to be more difficult than other loss reserves because of several factors, including: (1) evolving methodologies for the estimation of the liabilities; (2) lack of reliable historical claim data; (3) uncertainties with respect to insurance and reinsurance coverage related to these obligations; (4) changing judicial interpretations; and (5) changing government standards. The Company's asbestos related losses were as follows:
For the years ended December 31, 1996 1995 1994 - - - ----------------------------------------------------------------------------------------------------------------------- Gross of reinsurance: Beginning reserves $27,611 $13,969 $12,913 Incurred losses and LAE 62,854 22,482 6,424 Calendar year payments for losses and LAE (10,410) (8,840) (5,368) ------------------------------------------------------------ Ending reserves $80,055 $27,611 $13,969 ============================================================ Net of reinsurance: Beginning reserves $23,443 $ 8,168 $7,700 Incurred losses and LAE 39,427 21,826 5,834 Calendar year payments for losses and LAE (9,570) (6,551) (5,366) ------------------------------------------------------------ Ending reserves $53,300 $23,443 $ 8,168 ============================================================ The Company's environmental related losses were as follows: For the years ended December 31, 1996 1995 1994 - - - ------------------------------------------------------------------------------------------------------------------------ Gross of reinsurance: Beginning reserves $20,134 $20,952 $26,129 Incurred losses and LAE 22,143 3,516 (2,150) Calendar year payments for losses and LAE (6,651) (4,334) (3,027) ------------------------------------------------------------ Ending reserves $35,626 $20,134 $20,952 ============================================================ Net of reinsurance: Beginning reserves $20,134 $20,952 $26,129 Incurred losses and LAE 21,109 3,516 (2,150) Calendar year payments for losses and LAE (6,651) (4,334) (3,027) ------------------------------------------------------------ Ending reserves $34,592 $20,134 $20,952 ============================================================
Of the total net asbestos and environmental reserves, $19,296 were for established claims reserves at December 31, 1996 ($17,100 at December 31, 1995) and $68,596 were for incurred but not reported losses ($26,500 at December 31, 1995). Management believes that its reserves for asbestos and environmental claims are appropriately established based upon known facts, existing case law, and generally accepted actuarial methodologies. However, due to changing interpretations by courts involving coverage issues, the potential for changes F-13 in federal and state standards for clean-up and liability and other factors, the ultimate exposure to the Company for these claims may vary significantly from the amounts currently recorded, resulting in a potential adjustment in the claims reserves recorded. Additionally, issues involving policy provisions, allocation of liability among participating insurers, proof of coverage, and other factors make quantification of liabilities exceptionally difficult and subject to adjustment based upon newly available data. In 1996, other commercial lines for the Property and Casualty Group experienced reserve strengthening of $21,000, as compared to a reserve release of $11,600 in 1995. The reserve strengthening was principally due to a re-estimation of loss adjustment costs associated with general liability claims. The Property and Casualty Group expects an increase in the average period that such claims will be open, and has increased the cost of adjusting such claims accordingly. The release of reserves in 1995 was primarily due to favorable loss experience in commercial automobile business. Unpaid losses on workers' compensation claims for the Property and Casualty Group include approximately $1,012,000 and $1,024,000 at December 31, 1996 and 1995, respectively, discounted to present value. The approximate discount rate used was 5% at December 31, 1996 and 1995. In 1995, the Property and Casualty Group changed its discount rate with respect to its workers' compensation unpaid losses from approximately 4% to 5% for SAP and GAAP purposes. This change was approved and is permitted by the Pennsylvania Insurance Department. The effect on net income (net of tax effect of $12,250) in 1995 was $22,750 ($0.92 per primary share and $0.91 per fully-diluted share). 4. Deferred Acquisition Costs The following represents the components of deferred acquisition costs and the amounts that were charged to expense:
For the years ended December 31, 1996 1995 1994 - - - ------------------------------------------------------------------------------------------------------ Balance at January 1 $37,901 $32,236 $30,392 Deferral of acquisition costs 96,397 92,872 85,371 Amortization of deferred acquisition costs (90,292) (87,207) (83,527) ----------------------------------------------- Balance at December 31 $44,006 $37,901 $32,236 ===============================================
5. Reinsurance In the ordinary course of business, PMC's insurance and reinsurance subsidiaries assume and cede reinsurance with other insurance companies and are members of various pools and associations. The insurance and reinsurance subsidiaries cede business, primarily on an excess of loss basis, in order to limit the maximum net loss from large risks and limit the accumulation of many smaller losses from a catastrophic event. The insurance and reinsurance subsidiaries remain primarily liable to their clients in the event their reinsurers are unable to meet their financial obligations. Amounts receivable from reinsurers related to paid and unpaid losses are displayed separately on the consolidated balance sheets, net of an allowance for uncollectible accounts. The components of net premiums earned and losses and LAE incurred are as follows: F-14
For the years ended December 31, 1996 1995 1994 - - - ------------------------------------------------------------------------------------------------------- Earned Premiums: Direct $299,386 $370,590 $379,216 Assumed 209,688 149,838 147,876 Ceded (88,499) (35,476) (60,558) ------------------------------------------------- Net $420,575 $484,952 $466,534 ================================================= Losses and LAE Incurred: Direct $420,157 $317,552 $336,183 Assumed 163,799 127,910 109,246 Ceded (47,333) (22,884) (42,560) ------------------------------------------------- Net $536,623 $422,578 $402,869 =================================================
The Company performs extensive credit reviews on its reinsurers, focusing on, among other things, financial capacity, stability, trends and apparent commitment to the reinsurance business. Prospective and existing reinsurers failing to meet the Company's standards are not accepted into the Company's reinsurance programs. In addition, the Company requires letters of credit to support balances due from reinsurers not authorized to transact business in Pennsylvania, the state of domicile of the Company's domestic insurance subsidiaries. At December 31, 1996, the Company had reinsurance recoverables due from the following unaffiliated single reinsurers in excess of 3% of shareholders' equity: Gross amount due Reinsurer to the Company A.M. Best Rating - - - -------------------------------------------------------------------------------- United States Fidelity and Guaranty Company $84,802 A American Re-Insurance Corporation 34,009 A+ Kemper Reinsurance Corporation 17,421 A Odyssey Reinsurance 15,614 A- The Company maintained funds held to collateralize the above balances in the amount of $86,301 at December 31, 1996. The Company believes that it would have the right to offset the funds withheld from a reinsurer against the balances due from such reinsurer in the event of insolvency. 6. Long-Term Debt Long-term debt consists of the following: December 31, 1996 1995 - - - ------------------------------------------------------------------------------ Senior notes 9.35%, due 1996 $ -- $ 8,572 Senior notes 9.53%, due 1997 (A) 7,143 14,286 Senior notes 9.60%, due 2001 (B) 46,428 55,714 Senior notes 7.62%, due 2001, Series A (C) 71,000 71,000 Senior notes 7.62%, due 2000, Series B 36,000 36,000 Revolving credit agreement, expiring in 1998 44,000 18,000 Mortgage notes 128 276 ------------------------- Long-term debt $204,699 $203,848 ======== ======== F-15 (A) Maturing in annual installment of $7,143 in 1997. (B) Maturing in annual installments of $9,286 through 2001. (C) Maturing in annual installments of $23,667 commencing in 1999 through 2001. On March 14, 1997, the Company refinanced substantially all of its existing credit agreements not already maturing in 1997 through the completion of a new $235,000 revolving credit facility (New Credit Facility). Utilizing the New Credit Facility, the Company refinanced the following obligations: Senior notes 9.60%, due 2001 $ 46,428 Senior notes 7.62%, due 2001, Series A 71,000 Senior notes 7.62%, due 2000, Series B 36,000 Revolving credit agreement, expiring in 1998 36,000(1) -------- Total $189,428 ======== (1) The company repaid $8,000 of the revolving credit agreement subsequent to December 31, 1996. The early extinguishment of the senior note agreements will result in an extraordinary loss of $4,732 ($7,279 pre-tax). The New Credit Facility bears interest at LIBOR plus .70% on the utilized portion and carries a .275% facility fee on the unutilized portion. The spread over LIBOR and the facility fee is adjustable downward based upon the Company's debt to capitalization ratios in the future. As of March 14, 1997, the interest rate on the New Credit Facility was 5.70%. The Company entered into an interest rate swap agreement on March 14, 1997, covering $150,000 notional principal of the New Credit Facility. The interest rate swap effectively converts the floating rate to a fixed rate of 7.24% on such portion of the New Credit Facility. The final expiration of the New Credit Facility is December 31, 2002, with level 25% reductions in availability beginning December 31, 1999. The following reflects the scheduled maturities of the Company's debt agreements over the next five years as they existed at December 31, 1996 and as adjusted for the New Credit Facility: As of December 31, 1996 As Adjusted - - - ----------------------------------------------------------------------------- 1997 $16,557 $ 7,271 1998 53,286 -- 1999 32,952 8,500 2000 68,952 62,500 2001 32,952 62,500 In November 1996, the Company entered into a letter of credit agreement with a group of banks that extends through November 1997. The agreement allows the issuing bank to issue letters of credit having an aggregate outstanding face amount up to $75,000. The agreement requires the Company to pay a commitment fee during the existence of the agreement equal to .1875% per annum on the average daily available amount. At December 31, 1996, the aggregate outstanding face amount of letters of credit issued was $47,461. This agreement primarily secures reinsurance liabilities of the insurance subsidiaries of the Company. Effective March 14, 1997, this facility was reduced to an aggregate outstanding face amount not to exceed $50,000. During 1995, the Company issued $71,000 of 7.62% Series A Senior notes and $36,000 of 7.62% Series B Senior notes. The notes pay interest semi-annually and mature in July 2001 and 2000, F-16 respectively. The proceeds were utilized to retire indebtedness under the revolving credit agreement due in 1995. This debt was retired in the first quarter of 1997 (see above). In August 1995, the Company entered into a $50,000 revolving credit facility with a group of banks that originally extended through August 1998. The rate of interest payable under the agreement was, at the Company's option, a function of the prime rate or LIBOR. The agreement required the Company to pay a facility fee equal to the Company's applicable fee percentage (such percentage was dependent on the Company's leverage ratio as defined per the revolving credit facility agreement) per annum of the average daily sum of the aggregate commitments, regardless of usage. At December 31,1996, the Company had $44,000 outstanding under this agreement and $6,000 available to be drawn. The average interest rate on the amounts outstanding and the applicable fee percentage under this agreement were 6.08% and .25%, respectively, at December 31, 1996 and 6.19% and .25%, respectively, at December 31, 1995. This facility was replaced with the New Credit Facility in the first quarter of 1997 (see above). The debt covenants supporting the senior notes, revolving credit agreement, letter of credit agreement, and the New Credit Facility contain provisions which, among other matters, limit the Company's ability to incur additional indebtedness, merge, consolidate and acquire or sell assets. The debt covenants also require the Company to satisfy certain ratios related to net worth, debt-to-capitalization, and interest coverage. Additionally, the debt covenants place restrictions on dividends to shareholders (see Note 15). The Company has entered into an interest rate swap agreement in its management of its existing interest rate exposures. This transaction effectively changed the Company's interest rate exposure on one of its fixed rate senior note arrangements to a floating rate obligation as follows:
Principal Balance at Debt Agreement December 31, 1996 Fixed Rate Floating Rate - - - ------------------------------------------------------------------------------------------------ Senior Notes, due 1997 $7,143 9.53% 5.60%
The variable rate resets every six months. This agreement involves the exchange of interest payment obligation without the exchange of underlying principal. The differential to be paid or received is recognized as an adjustment of interest expense. In the event that a counter party fails to meet the terms of the agreement, the Company's exposure is limited to the interest rate differential on the notional principal amount ($7,143). Management believes such credit risk is minimal and any loss would not be significant. 7. Stock Options The Company currently has six stock option plans in place for options granted to officers and other key employees for the purchase of the Company's Class A common stock, under which 4,163,726 Class A common shares are reserved for issuance. The stock options are granted under terms and conditions determined by a committee appointed by the Company's board of directors. Granted stock options generally have a maximum term of ten years, vest over three years, and are typically granted with an exercise price equal to the fair market value of the stock. Information regarding these option plans for 1996, 1995, and 1994 are as follows: F-17
1996 1995 1994 ---------------------------------------------------------------------------------- Weighted Weighted Weighted Average Average Average Shares Price Shares Price Shares Price - - - --------------------------------------------------------------------------------------------------------------------------- Options outstanding, beginning of year 3,087,260 $ 11.80 2,926,000 $ 10.41 2,230,000 $ 9.82 Options granted 325,000 17.00 775,000 15.59 740,000 12.11 Options exercised (99,150) (8.33) (205,199) (8.66) (26,925) (8.56) Options canceled (70,950) (11.55) (408,541) (10.65) (17,075) (9.52) ---------------------------------------------------------------------------------- Options outstanding, end of year 3,242,160 $ 12.43 3,087,260 $ 11.80 2,926,000 $10.41 ================================================================================== Option price range at $8.00 to $17.00 $6.60 to $16.00 $6.60 to $12.75 end of year Option price range for $6.60 to $10.00 $6.60 to $11.50 $8.00 to $10.00 exercised shares Options available for 921,566 425,616 42,075 grant at end of year
Stock options outstanding at December 31, 1996 and related weighted average price and life information is as follows: Weighted Options Options Average Outstanding at Exercisable at Remaining Life Exercise Prices December 31, 1996 December 31, 1996 (in years) - - - ------------------------------------------------------------------------------- $8.00 427,060 394,560 4.49 10.00 535,600 535,600 5.46 11.50 865,000 865,000 6.64 12.75 326,500 243,875 7.17 15.00 316,135 295,510 8.45 16.00 446,865 173,490 8.43 17.00 325,000 134,050 9.56 --------- --------- 3,242,160 2,642,085 ========= ========= The fair value of options at date of grant was estimated using a binomial model with the following weighted average assumptions:
1996 1995(1) 1995(2) 1994 - - - ------------------------------------------------------------------------------------------------------------------------ Expected life (years) 10 10 10 10 Interest rate 6.8% 6.1% 6.2% 6.8% Volatility 18% 18% 18% 18% Dividend yield 2.3% 2.3% 2.3% 2.3%
(1) Options granted on June 5, 1995. (2) Options granted on September 1, 1995. The Company has adopted the disclosure-only provision of SFAS No. 123 "Accounting for Stock-Based Compensation." Accordingly, no compensation cost has been recognized for the stock option plans. Had compensation costs for the Company's stock option plans been determined based on the fair value F-18 at the grant date for awards granted during the year, pretax income would have been reduced by $2,079 ($1,352 after tax, or $0.06 per share), $4,308 ($2,800 after tax, or $0.11 per share), and $3,225 ($2,096 after tax, or $0.09 per share) in 1996, 1995, and 1994, respectively. 8. Income Taxes A reconciliation between the total (benefit) provision for income taxes and the amounts computed at the Statutory Federal income tax rate of 35% for the years 1996, 1995 and 1994 is as follows:
For the years ended December 31, 1996 1995 1994 - - - ------------------------------------------------------------------------------------------------------------ Computed at the Statutory tax rate $(66,988) $12,220 $22,883 (Decrease) increase in taxes resulting from: Excludable dividends (36) (107) (273) Tax-exempt interest (4,547) (12,917) (14,697) Losses of foreign reinsurance affiliate 16,060 8,469 -- Other (549) 3,118 217 ---------------------------------------------- (Benefit) provision for income taxes $(56,060) $10,783 $ 8,130 ==============================================
The tax effects of significant temporary differences between the financial statement carrying amounts and tax bases of assets and liabilities that represent the net deferred tax asset are as follows: December 31, 1996 1995 - - - ----------------------------------------------------------------------------- Allowance for uncollectible accounts $ 9,037 $ 7,176 Unearned premiums 13,386 12,518 Discounting of unpaid losses 51,086 56,119 Unrealized depreciation of investments 13,394 -- Depreciation 5,646 -- Postretirement benefit obligation 5,111 4,723 Tax carryforwards 67,014 13,996 Other 9,458 9,684 -------------------------- Gross deferred tax asset 174,132 104,216 -------------------------- Deferred acquisition costs (15,352) (13,265) Pension asset (1,348) (1,178) Depreciation -- (392) Unrealized appreciation of investments -- (9,429) Earned but unbilled premiums -- (2,090) Losses of foreign reinsurance affiliate (55,790) (9,295) Other -- (1,236) -------------------------- Gross deferred tax liability (72,490) (36,885) -------------------------- Net deferred tax asset $101,642 $ 67,331 ========================== At December 31, 1996, the Company had $153,214 of net operating loss carryforwards (expiring in 2011) and $13,328 of alternative minimum tax credit carryforwards (which do not expire). Under SFAS 109, a valuation allowance should be provided to offset the effects of a deferred tax asset if management believes that it is more likely then not that the benefit of a deferred tax item will not F-19 be realized. Management believes that the benefit of its deferred tax asset will be fully realized, and therefore has not provided for a valuation allowance. 9. Employee Retirement, Postretirement, and Postemployment Benefits During 1996, the Property and Casualty Group initiated a Voluntary Early Retirement Program ("VERIP"). Eligibility to participate in the VERIP was contingent upon an employee's age and years of service with the Company. Of the approximately 85 employees eligible to participate in the VERIP, approximately 50 employees opted to participate. At December 31, 1996, the Company accrued $7,635 in connection with the VERIP. The components of this accrual are as follows: Pension costs $4,300 Postemployment costs 2,360 Postretirement costs 975 ------ $7,635 ====== A. Pension and Retirement Plans -- The Company sponsors a non-contributory defined benefit pension plan (Pension Plan) covering substantially all employees. After meeting certain qualifications, an employee acquires a vested right to future benefits. The benefits payable under the plan are generally determined on the basis of an employee's length of employment and career average salary. The Company's policy is to fund pension cost accrued in accordance with the Employee Retirement Income Security Act of 1974. The components of net pension cost are as follows:
For the years ended December 31, 1996 1995 1994 - - - ------------------------------------------------------------------------------------------------------------------- Service cost-benefits earned during the period $1,665 $1,132 $ 1,344 Interest cost on projected benefit obligation 2,948 2,770 2,464 Actual return on plan assets (2,830) (8,712) 715 Net amortization and deferral (842) 5,803 (3,564) VERIP 4,300 -- -- ------------------------------------- Net pension cost $5,241 $ 993 $ 959 =====================================
F-20
The funded status of the Pension Plan is as follows: December 31, 1996 1995 - - - ------------------------------------------------------------------------------------------------------------------- Actuarial present value of: Vested benefit obligation $41,932 $31,401 Non-vested benefit obligation 3,487 4,288 --------------------------------- Accumulated benefit obligation $45,419 $35,689 ================================= Projected benefit obligation $49,331 $40,293 Fair value of Pension Plan assets 46,739 43,433 --------------------------------- Pension Plan assets (less than) in excess of projected benefit (2,592) 3,140 obligation Unrecognized net loss 588 2,723 Unrecognized transition asset (1,081) (1,198) Unrecognized prior service benefit (1,199) (1,298) --------------------------------- Pension (liability) asset $(4,284) $ 3,367 =================================
Pension Plan assets consist of equity securities, fixed maturity securities, fixed income contracts, and the Company's common stock. Actuarial assumptions utilized by the Pension Plan are as follows:
For the years ended December 31, 1996 1995 1994 - - - ------------------------------------------------------------------------------------------------------------------- Discount rate 7.5% 7.0% 8.5% Rate of compensation increase 5.0% 5.0% 5.5% Expected long-term rate of return on plan assets 8.0% 8.0% 7.5%
The Company also maintains a voluntary defined contribution savings plans covering all employees who work a minimum of 20 hours per week. The Company matches employee contributions up to 5% of compensation. Contributions under such plans charged to income were $2,153, $1,726 and $1,692 in 1996, 1995 and 1994, respectively. B. Postretirement Benefits -- In addition to providing pension benefits, the Company provides certain health care benefits for retired employees. Substantially all of the Company's employees may become eligible for those benefits if they have worked fifteen or more years with the Company and have attained the age of fifty while in the service of the Company. For employees who retire on or subsequent to January 1, 1993, the Company will pay a fixed portion of medical insurance premiums. Retirees will absorb future increases in medical premiums. The funded status of this liability is as follows: F-21 December 31, 1996 1995 - - - ------------------------------------------------------------------------------- Accumulated postretirement benefit obligation: Retirees and dependents $ 6,931 $ 4,423 Fully eligible active employees 952 1,022 Active employees not fully eligible 1,871 2,004 -------------------------- Total 9,754 7,449 Unrecognized prior service cost 1,436 2,149 Unrecognized net gain 4,031 3,649 -------------------------- Accrued postretirement benefit liability $15,221 $13,247 ========================== The components of postretirement benefit cost include the following: For the years ended December 31, 1996 1995 1994 - - - ------------------------------------------------------------------------------- Service cost $ 248 $330 $ 434 Interest cost 561 658 886 Amortization (251) (209) 43 VERIP 975 -- -- ------------------------------------------ Postretirement benefit cost $1,533 $779 $1,363 ========================================== Assumptions used in the computation of the funded status and postretirement benefit cost are as follows: For the years ended December 31, 1996 1995 1994 - - - ---------------------------------------------------------------------------- Discount rate 7.0% 7.0% 8.5% Health care inflation rate: Next year 8.0% 8.5% 9.5% Ultimate 5.5% 5.5% 5.5% The assumed health care cost trend rate used to measure the expected cost of benefits covered by the plan has been established at 8% for 1996 and is expected to decline gradually to 5.5% in 2002 and remain at that level thereafter. The health care cost trend rate assumption has a significant effect on the amounts reported. A 1% increase in the trend rate for health care costs would have increased the accumulated postretirement benefit obligation by $360 and the annual service and interest cost by $24. C. Postemployment Benefits -- Effective January 1, 1994, the Company adopted SFAS No. 112, "Employers' Accounting for Postemployment Benefits." SFAS No. 112 establishes the accounting standards for employers who provide benefits to employees subsequent to their employment, but prior to retirement. These benefits include severance, long-term and short-term disability payments, salary continuation, postemployment health benefits, supplemental unemployment benefits, and other related payments. SFAS No. 112 requires that benefit obligations attributable to prior service and/or that relate to benefits that vest or accumulate must be accrued presently if the payments are probable and reasonably estimable. Postemployment benefits that do not meet such criteria are accrued when payments are probable and reasonably estimable. The effect of the implementation of the standard on prior years was immaterial. F-22 In connection with the VERIP described above, the Company recorded $2,360 of postemployment costs in 1996. 10. Fair Value of Financial Instruments The following table represents the carrying amounts and estimated fair values of the Company's financial instruments. Estimated fair value is defined as the amount at which the instrument could be exchanged in a current transaction between willing parties. Certain financial instruments, specifically amounts relating to insurance contracts, are excluded from this disclosure.
December 31, 1996 December 31, 1995 ----------------- ----------------- Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value - - - ------------------------------------------------------------------------------------------------------------------- Financial assets: Fixed maturities available for sale $2,126,120 $2,126,120 $2,230,992 $2,230,992 Equity securities 262 262 10,886 10,886 Financial liabilities: Long-term debt 204,699 218,101 203,848 216,408 Interest rate swap agreements -- 52 -- 174
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate values: Fixed maturities: The fair values are estimated based upon quoted market prices. Equity securities: The fair values are estimated based upon quoted market prices. Long-term debt: The fair value is estimated using discounted cash flow calculations based upon the Company's current incremental borrowing rate for similar types of borrowing facilities or the rate utilized to prepay obligations, where applicable. Interest rate swaps: The fair values are estimated by obtaining quotes from dealers. Guarantees: The fair values are determined based upon the likelihood of the Company being required to satisfy the underlying obligations. Management believes that it is a remote possibility that the Company would have to act upon any guarantees. Therefore, the fair value of the guarantees is zero. Other financial instruments (excluded from the above table): The carrying values approximate the fair values.
F-23 11. Disclosure of Certain Risks and Uncertainties A. Business Segments and Concentrations -- As stated in Note 1, PMC is an insurance holding company that sells property and casualty insurance and reinsurance through its insurance subsidiaries. The following summarizes the relative importance of the segments and lines of insurance in terms of net premiums written: Percent of the Company's Net Premiums Written 1996 1995 1994 - - - ---------------------------------------------------------------------------- The Property and Casualty Group-total 63.0% 68.8% 75.7% The Property and Casualty Group-workers' compensation 45.6 42.8 57.2 PMA Re-total 37.0 31.2 24.3 PMA Re-casualty reinsurance lines 27.5 21.9 19.0 The Property and Casualty Group's operations are concentrated in six contiguous states in the Mid-Atlantic and Southern regions. As such, economic trends in individual states may not be independent of one another. Also, the Property and Casualty Group's products are highly regulated by each of these states. For many of the Property and Casualty Group's products, the insurance departments of the states in which it conducts business must approve rates and policy forms. In addition, workers' compensation benefits are determined by statutes and regulations in each of these states. While the Property and Casualty Group considers factors such as rate adequacy, regulatory climate, and economic factors in its underwriting process, unfavorable developments in these factors could have an adverse impact on the Company's financial condition and results of operations. PMA Re distributes its products through major reinsurance brokers. PMA Re's top five such brokers accounted for 74.2% of PMA Re's gross premiums in force at December 31, 1996. While the Company focuses primarily on casualty lines of insurance and reinsurance, certain property lines subject the Company to exposure to catastrophic losses from natural disasters. However, management believes that the Company appropriately manages concentrations of insured values in disaster- prone areas and maintains sufficient reinsurance protection to minimize the risk of a significant loss from a catastrophic event. The catastrophes that occurred in the three year period ended December 31, 1996 did not have a significant impact on the Company's results of operations. B. Use of Estimates in the Preparation of the Financial Statements -- The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates. Unpaid Losses and Loss Adjustment Expenses -- At December 31, 1996, the Company carried $2,091,072 of unpaid losses and loss adjustment expenses. Unpaid losses and loss adjustment expenses reflect management's best estimate of future amounts needed to pay claims and related settlement costs with respect to insured events which have occurred, including events that have not been reported to the Company. In many cases, significant periods of time, ranging up to several years or more, may elapse between the occurrence of an insured loss, the reporting of the loss to the Company and the Company's F-24 payment of that loss. In general, liabilities for reinsurers become known more slowly than for primary insurers and are subject to more unforeseen development. As part of the process in determining these amounts, historical data is reviewed and consideration is given to the impact of various factors, such as legal developments, changes in social attitudes, and economic conditions. Management believes that its unpaid losses and loss adjustment expenses are fairly stated at December 31, 1996, in accordance with GAAP. However, estimating the ultimate claims liability is necessarily a complex and judgmental process inasmuch as the amounts are based on management's informed estimates and judgments using data currently available. As additional experience and data become available regarding claims payment and reporting patterns, legislative developments, and economic conditions, the estimates are revised accordingly. If the Company's ultimate net losses prove to be substantially greater than the amounts recorded at December 31, 1996, the related adjustments could have a material adverse impact on the Company's financial condition and results of operations (See also Note 3). Former Headquarters Building and Related Properties -- The Company owns its former headquarters building and certain adjacent properties in Philadelphia. As of December 31, 1996, the carrying value of these properties was $13,043. Although the Company has leased a portion of such properties and has had discussions with potential purchasers and additional lessees, no assurance can be given that the Company will be able to sell or lease the facilities in the near term on acceptable terms and conditions. In 1995 and 1994, the Company recorded charges of $8,370 and $4,900, respectively, in operating expenses, to reflect writedowns to fair market value of the properties less estimated costs to sell. There were no such charges in 1996. While management believes that the carrying values of the facilities are fairly stated at December 31, 1996, future determinations of the fair market values of the properties will be dependent upon market conditions in subsequent periods. 12. Transactions With Related Parties The Company's largest shareholder is PMA Foundation (the "Foundation"), formerly known as Pennsylvania Manufacturers' Association, which is a not-for-profit corporation qualified under Section 501(c)(6) of the Internal Revenue Code, whose purposes include the promotion of the common business interests of its members and the economic prosperity of the Commonwealth of Pennsylvania. As of December 31, 1997, the Foundation owned 4,561,225 shares of Common Stock (29.4% of the class) and 912,225 shares of Class A Common Stock (11.0% of the class), which constitutes 28.4% of the total number of votes available to be cast in matters brought before the Company's shareholders. Members of the Company's Board of Directors currently serve as the members of the Foundation's Board of Trustees. Also, Frederick W. Anton III, Chairman and Chief Executive Officer of the Company, serves as President and Chief Executive Officer of the Foundation. The Company and certain of its subsidiaries provide certain administrative services to the Foundation for which the Company and its affiliates receive reimbursement; total reimbursements amounted to $82, $269, and none for years ended December 31, 1996, 1995, and 1994, respectively. The Foundation also leases its Harrisburg, Pennsylvania headquarters facility from a subsidiary of the Company under a monthly operating lease presently requiring rent payments of $20 per month and reimburses a subsidiary of the Company for its use of office space in the Blue Bell, Pennsylvania facility. Rent and related reimbursements paid to the Company's affiliates by the Foundation amounted to $247, $294, and $315, for the years ended December 31, 1996, 1995, and 1994, respectively. In addition, the Company has arranged an executive loan program with a financial institution whereby such institution will provide prime rate personal loans to officers of the Company and its F-25 subsidiaries collateralized by Common stock and Class A Common Stock at a maximum 75% loan to value ratio. The Company has agreed to purchase any loan made under this program from the financial institution in the event that the borrower defaults on such loan. The amount of loans outstanding at December 31, 1996 under this program was $3,106. The Company incurred legal and consulting fees aggregating approximately $7,917, $6,279 and $4,798 in 1996, 1995 and 1994, respectively, from firms in which directors of the Company are partners. The Company has notes receivable from officers which are accounted for as a reduction of shareholders' equity in the accompanying balance sheets. Such notes receivable had balances of $1,162 and $3,896 as of December 31, 1996 and December 31, 1995, respectively. The interest rate on the notes is 6.0%. 13. Commitments and Contingencies For the years ended December 31, 1996, 1995 and 1994, total rent expense was $6,114, $4,536 and $4,543 respectively. At December 31, 1996, the Company was obligated under noncancelable operating leases for office space with aggregate minimum annual rentals as follows: For the years ended December 31, - - - ------------------------------------------------------------------------------- 1997 $ 4,198 1998 3,172 1999 2,017 2000 935 2001 921 Thereafter 3,086 ------- Total $14,329 ======= In the event a property and casualty insurer, operating in a jurisdiction where the Company's insurance subsidiaries also operate, becomes or is declared insolvent, state insurance regulations provide for the assessment of other insurers to fund any capital deficiency of the insolvent insurer. Generally, this assessment is based upon the ratio of an insurer's voluntary premiums written to the total premiums written for all insurers in that particular jurisdiction. The Company charges these assessments to income in the period in which it is notified of an insolvency. The Company is not aware of any material potential assessments at December 31, 1996. The Company has provided guarantees of approximately $10,150 related to loans on properties in which the Company has an interest. The Company is named in various legal proceedings arising in the normal course of business. In the opinion of management, the resolution of these matters will not have a material adverse effect on the Company's financial condition, results of operations, or cash flows. 14. Sale of Uncollected Premiums Insurance subsidiaries of PMC engage in the practice of selling uncollected premiums to a financial institution. The proceeds received from such sales were $10,628, $19,509 and $3,023 in 1996, 1995 and 1994, respectively. These receivables are excluded from uncollected premiums in the F-26 accompanying balance sheets. However, the Company has recorded an allowance for doubtful accounts related to the estimated uncollectible accounts since the Company has retained risk under the recourse provisions. At December 31, 1996, the Company was contingently obligated to repurchase $10,628 of uncollected premiums under recourse provisions. 15. Shareholders' Equity The Company maintains two classes of common stock, Class A common stock and common stock. The Company's common stock and Class A common stock generally vote without regard to class on matters submitted to shareholders, with the common stock having ten votes per share and the Class A common stock having one vote per share. With respect to dividend rights, the Class A common stock is entitled to cash dividends at least 10% higher than those declared and paid on the common stock. The Company's bylaws limit the classes of persons who may own the common stock. Holders of common stock may elect to convert any or all such shares into Class A common stock on a share-for-share basis. Under the insurance laws and regulations of Pennsylvania, PMC's insurance subsidiaries may not pay dividends, without prior regulatory approval, over a twelve-month period in excess of the greater of (a) 10% of the preceding year-end's policyholders surplus or (b) the preceding year's SAP net income, but in no event to exceed unassigned funds. At December 31, 1996, the maximum amount available to be paid as dividends from the Company's insurance subsidiaries, without the prior consent of the Pennsylvania Insurance Department, was $51,874. PMC's dividends to shareholders are restricted by its debt agreements. On March 14, 1997, the Company refinanced certain debt agreements through the completion of the New Credit Facility (see Note 6). Under the terms of the New Credit Facility, on a pro forma basis under the most restrictive debt covenant, the Company could pay dividends of approximately $11,000 in 1997. F-27
16. Business Segments Operating revenues, (loss) income before income taxes, and identifiable assets of the Company's business segments were as follows: For the year ending December 31, 1996 1995 1994 - - - --------------------------------------------------------------------------------------------------------------------------- Operating revenues (1) The Property and Casualty Group Net premiums earned $268,601 $345,607 $361,124 Net investment income 82,455 92,275 96,683 Service revenues 9,189 5,106 3,380 -------------------------------------------------- 360,245 442,988 461,187 -------------------------------------------------- PMA Re Net premiums earned 151,974 139,345 105,410 Net investment income 48,676 45,166 42,068 -------------------------------------------------- 200,650 184,511 147,478 -------------------------------------------------- Corporate, Other and Consolidating Eliminations Net investment income 2,805 1,914 (32) -------------------------------------------------- 2,805 1,914 (32) -------------------------------------------------- Total operating revenues $563,700 $629,413 $608,633 ================================================== (Loss) income before income taxes The Property and Casualty Group $(219,619) $ (4,305) $ 3,893 PMA Re 42,783 39,443 33,703 Corporate, Other and Consolidating Eliminations (490) (13,414) (6,686) -------------------------------------------------- Pre-tax operating (loss) income before interest expense (177,326) 21,724 30,910 Net realized investment gains 2,984 31,923 47,521 Interest expense (17,052) (18,734) (13,051) -------------------------------------------------- Total (loss) income before income taxes $(191,394) $34,913 $65,380 ==================================================
(1) Operating revenues exclude net realized investment gains.
December 31, 1996 1995 - - - ----------------------------------------------------------------------------------------------------------------- Identifiable assets The Property and Casualty Group $2,423,463 $2,284,173 PMA Re 1,031,149 984,211 Corporate, Other and Consolidating Eliminations (337,096) (9,812) ------------------------------------- Total identifiable assets $3,117,516 $3,258,572 =====================================
F-28 Report of Independent Accountants To the Board of Directors and Shareholders Pennsylvania Manufacturers Corporation: We have audited the accompanying consolidated balance sheets of Pennsylvania Manufacturers Corporation and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Pennsylvania Manufacturers Corporation and subsidiaries as of December 31, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. /s/ Coopers & Lybrand L.L.P. 2400 Eleven Penn Center Philadelphia, Pennsylvania February 14, 1997, except for Notes 6 and 15, as to which the date is March 14, 1997 F-29 Pennsylvania Manufacturers Corporation Condensed Consolidated Statements of Operations (Unaudited)
For the three months ended March 31, March 31, (in thousands, except per share data) 1997 1996 - - - -------------------------------------------------------------------------------------------------------------- Revenues: Net premiums written $149,882 $147,444 Change in net unearned premiums (41,932) (29,507) -------------------------- Net premiums earned 107,950 117,937 Net investment income 35,847 33,420 Net realized investment (losses) gains (1,251) 943 Service revenues 2,548 1,748 -------------------------- Total revenues 145,094 154,048 -------------------------- Losses and expenses Losses and loss adjustment expenses 94,904 99,943 Amortization of deferred acquisition costs 18,339 21,731 Operating expenses 16,942 16,579 Dividends to policyholders 3,257 3,122 Interest expense 4,334 4,472 -------------------------- Total losses and expenses 137,776 145,847 -------------------------- Income before income taxes and extraordinary item 7,318 8,201 -------------------------- (Benefit) provision for income taxes Current (353) 1,526 Deferred 2,914 1,046 -------------------------- Total 2,561 2,572 -------------------------- Income before extraordinary item 4,757 5,629 Extraordinary loss from early extinguishment of debt (net of income tax benefit of $2,554) (4,734) -- -------------------------- Net income $ 23 $ 5,629 ========================== Weighted Average Common and Common Share Equivalents 24,546 25,082 ========================== Earnings Per Share Information: Income before extraordinary item $ 0.19 $ 0.22 Extraordinary item (0.19) -- -------------------------- Net income $ -- $ 0.22 ========================== F-30
Pennsylvania Manufacturers Corporation Condensed Consolidated Balance Sheets (Unaudited) March 31, December 31, (in thousands, except share data) 1997 1996 - - - ------------------------------------------------------------------------------------------------------------------- Assets Investments: Fixed maturities available for sale, at fair value (amortized cost: 1997 - $2,198,731; 1996 - $2,164,391) $2,101,914 $2,126,120 Equity securities, at fair value (cost: 1997 - $258; 1996 - $259) 262 262 Short-term investments, at amortized cost which approximates fair value 41,250 134,971 ---------------------------- Total investments 2,143,426 2,261,353 Cash 13,986 7,176 Investment income due and accrued 36,524 30,268 Uncollected premiums (net of allowance for uncollectible accounts: 1997 - $19,017; 1996 - $18,877) 338,723 285,982 Reinsurance receivables (net of allowance for uncollectible reinsurance: 1997 - $2,567; 1996 - $3,901) 277,977 257,983 Other assets 303,569 274,754 ---------------------------- Total assets $3,114,205 $3,117,516 ============================ Liabilities Unpaid losses and loss adjustment expenses $2,085,732 $2,091,072 Unearned premiums 258,434 205,982 Long-term debt 203,232 204,699 Other liabilities 181,841 189,935 Total liabilities 2,729,239 2,691,688 ---------------------------- Shareholders' Equity Common stock, $5 par value 79,783 80,477 Class A common stock, $5 par value 41,933 41,239 Retained earnings 334,411 336,921 Unrealized loss on investments available for sale (24,874) (net of deferred income taxes: $33,885 and $13,394) (62,928) Notes receivable from officers (1,463) (1,162) Treasury stock, at cost: Common stock (5,408) (5,408) Class A common stock (1,362) (1,365) ---------------------------- Total shareholders' equity 384,966 425,828 ---------------------------- Total liabilities and shareholders' equity $3,114,205 $3,117,516 ============================
See accompanying notes to the consolidated financial statements. F-31
Pennsylvania Manufacturers Corporation Condensed Consolidated Statements of Cash Flows For the three months ended (in thousands) March 31, March 31, 1997 1996 ---------------------------- Cash flows from operating activities: Net income $ 23 $ 5,629 Adjustments to reconcile net income to net cash flows used by operating activities: Depreciation 1,367 1,754 Amortization 1,469 1,140 Provision for deferred income taxes 2,914 1,046 Net realized investment losses (gains) 1,251 (943) Change in uncollected premiums and unearned premiums, net (289) (1,839) Change in dividends to policyholders (424) 251 Change in reinsurance receivables (19,994) (11,564) Change in unpaid losses and loss adjustment expenses (5,340) (15,657) Change in investment income due and accrued (6,256) (944) Change in deferred acquisition costs (9,974) (6,342) Other, net (9,886) (8,710) --------------------------- Net cash flows used by operating activities (45,139) (36,179) --------------------------- Cashflows from investing activities: Fixed maturity investments available for sale: Purchases (534,318) (811,282) Maturities or calls 23,839 19,100 Sales 473,116 764,415 Equity securities: Purchases -- (2,752) Sales -- 3,055 Net sales of short-term investments 93,617 64,404 Net (purchases) sales of furniture and equipment (987) 1,279 --------------------------- Net cash flows provided by investing activities 55,267 38,219 --------------------------- Cash flows from financing activities: Proceeds from issuances of long-term debt 195,998 -- Repayments of long-term debt (197,465) (37) Dividends paid to shareholders (1,991) (1,984) Treasury stock transactions, net 3 19 Repayments of notes receivable from officers 137 270 --------------------------- Net cash flows used by financing activities (3,318) (1,732) --------------------------- Net increase in cash 6,810 308 Cash January 1 7,176 9,170 --------------------------- Cash March 31 $ 13,986 $ 9,478 =========================== Supplementary cash flow information: Amounts (received) paid for income taxes $ (2,900) $ 3,110 Amounts paid for interest $ 7,913 $ 4,200
See accompanying notes to the consolidated financial statements. F-32 Notes to the Interim Condensed Consolidated Financial Statements 1. Basis of presentation The accompanying interim condensed consolidated financial statements include the accounts of Pennsylvania Manufacturers Corporation and its wholly and majority owned subsidiaries (the Company). PMC is an insurance holding company that sells property and casualty insurance and reinsurance through its insurance subsidiaries. Its property and casualty insurance subsidiaries write workers' compensation and certain other lines of commercial insurance primarily in nine contiguous jurisdictions in the Mid-Atlantic and Southern regions. PMC's reinsurance subsidiary, PMA Reinsurance Corporation, emphasizes risk-exposed, excess of loss reinsurance and operates in the domestic brokered market. The interim condensed consolidated financial statements of the Company are unaudited and should be read in conjunction with the audited consolidated financial statements and the notes thereto of the Company for the year ended December 31, 1996. In the opinion of management, all significant adjustments have been made to the accompanying interim condensed consolidated financial statements so that they conform with generally accepted accounting principles. The preparation of interim financial statements fundamentally relies on estimates, most importantly in the process of determining liabilities for unpaid losses and loss adjustment expenses of insurance subsidiaries. The estimation process also includes certain other factors, such as the seasonal nature of portions of the insurance business, variations in amount and timing of realized securities gains or losses, as well as competitive and other market conditions. Operating results from any interim period are not necessarily indicative of results for the full year. Certain reclassifications have been made to the 1996 financial statements to conform with the 1997 presentation. 2. Long-Term Debt On March 14, 1997, the Company refinanced its outstanding credit agreements with a new $235.0 million credit facility (the New Credit Facility). In connection with this refinancing, the Company recognized an extraordinary loss from the early extinguishment of debt of $4.7 million ($7.3 million pre-tax). The Company drew $196.0 million to pay off the following outstanding balances: (dollar amounts in thousands) Senior notes 9.60% due 2001 $ 46,428 Senior notes 7.62% due 2001, Series A 71,000 Senior notes 7.62% due 2000, Series B 36,000 Revolving credit agreement, expiring 1998 36,000 --------- Total $189,428 ========= The New Credit Facility bears interest at LIBOR plus .70% on the utilized portion, and carries a .275% facility fee on the unutilized portion. The margin over LIBOR is adjustable downward based upon future reductions in the Company's debt to capitalization ratio. As of March 31, 1997, the interest rate on the New Credit Facility was 6.24%. The final expiration of the New Credit Facility will be December 31, 2002, with level 25% reductions in availability each year beginning December 31, 1999. Management also entered into an interest rate swap agreement which will manage the impact of the potential volatility of the interest rate associated with the floating rates on the New Credit Facility. The F-33 interest rate swap covers a notional principal amount of $150.0 million and effectively converts the floating rate on such portion of the New Credit Facility to a fixed 7.24%. F-34 Item 14. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. Item 15. Financial Statements and Exhibits (a) Financial Statements. See Item 13 of this Form 10 Registration Statement. The following Financial Statement Schedules are being filed with this registration statement: Schedule No. Description Page I Summary of Investments - Other Than S-1 Investments in Related Parties at December 31, 1996 II Condensed Financial Information of S-2 - S-4 Registrant as of December 31, 1996 and 1995 and for the years ended December 31, 1996, 1995 and 1994 III Supplementary Insurance Information for the S-5 years ended December 31, 1996, 1995 and 1994 IV Reinsurance for the years ended December S-6 31, 1996, 1995 and 1994 V Valuation and Qualifying Accounts for the S-7 years ended December 31, 1996, 1995 and 1994 VI Supplementary Information Concerning S-8 Property & Casualty Insurance Operations for the years ended December 31, 1996, 1995 and 1994 Schedules other than those listed above are omitted for the reason that they are not applicable. -83- Pennsylvania Manufacturers Corporation Schedule I Summary of Investments-Other than Investments in Related Parties December 31, 1996
Amount at which shown in Type of Investment Cost Value the balance sheet - - - ----------------------------------------------------------------------------------------------------------------------- (Dollar amounts in thousands) Fixed maturities: Bonds: U.S. Treasury Securities and obligations of U.S. $1,640,881 $1,602,744 $1,602,744 Government agencies Obligations of state and political subdivisions 77,562 76,527 76,527 Corporate debt securities 372,620 372,846 372,846 Mortgage-backed securities 73,328 74,003 74,003 --------------------------------------------------- Total fixed maturities 2,164,391 2,126,120 2,126,120 --------------------------------------------------- Equity securities: Common stocks: Industrial, miscellaneous and all other 259 262 262 --------------------------------------------------- Total equity securities 259 262 262 --------------------------------------------------- Short-term investments 134,971 134,971 134,971 --------------------------------------------------- Total investments $2,299,621 $2,261,353 $2,261,353 ===================================================
S-1 Pennsylvania Manufacturers Corporation Schedule II Condensed Balance Sheets (Parent Company Only)
as of December 31, (in thousands, except share data) 1996 1995 - - - ------------------------------------------------------------------------------------------------------------------ Assets Cash $ -- $ 799 ---------------------------- Investments - other than related parties: Fixed maturities: Available for sale, at fair value (amortized cost: 1996 - $-; 1995 - $34) -- 45 Equity securities, at fair value (cost: 1996 - $ -; 1995 - $45) -- 70 ---------------------------- Total investments - other than related parties -- 115 ---------------------------- Investment in subsidiaries 584,608 832,226 Deferred tax asset, net 36,602 -- Receivables from subsidiaries 727 9,985 Other assets 21,096 3,157 ---------------------------- Total assets $643,033 $846,282 ============================ Liabilities Long-term debt $204,571 $203,571 Payables to subsidiaries 1,605 -- Deferred tax liability, net -- 8,146 Dividends payable to shareholders 1,983 1,981 Other liabilities 9,046 22,916 --------------- ----------- Total liabilities 217,205 236,614 --------------- ----------- Shareholders' Equity Common stock, $5 par value (40,000,000 shares authorized; 16,095,416 shares issued and 15,670,052 outstanding - 1996; 17,044,580 shares issued and 16,652,016 outstanding - 1995) 80,477 85,223 Class A common stock, $5 par value (40,000,000 shares authorized; 8,247,804 shares issued and 8,173,023 outstanding - 1996; 7,298,640 shares issued and 7,225,232 outstanding - 1995) 41,239 36,493 Retained earnings 336,921 480,181 Unrealized (loss) gain on investments of parent company and subsidiaries (net of deferred income taxes: 1996 - $13,394; 1995 - ($9,429)) (24,874) 17,511 Notes receivable from officers (1,162) (3,896) Treasury stock, at cost: Common stock (1996 - 425,364 shares; 1995 - 392,564 shares) (5,408) (4,769) Class A common stock (1996 - 74,781 shares; 1995 - 73,408 shares) (1,365) (1,075) ---------------------------- Total shareholders' equity 425,828 609,668 ---------------------------- Total liabilities and shareholders' equity $643,033 $846,282 ============================ These financial statements should be read in conjunction with the Consolidated Financial Statements and the notes thereto.
S-2 Pennsylvania Manufacturers Corporation Schedule II Condensed Statements of Operations (Parent Company Only)
for the years ended December 31, (in thousands) 1996 1995 1994 - - - ----------------------------------------------------------------------------------------------------------------------- Revenues: Net investment income $ 354 $ 217 $ 107 Net realized investment gains 35 4 -- Management fees charged to subsidiaries 5,974 350 219 Other related party income 263 1,642 1,623 Miscellaneous income -- -- 245 ----------------------------------------------------- Total revenues 6,626 2,213 2,194 ----------------------------------------------------- Expenses: General expenses 7,082 6,982 3,602 Interest expense 17,039 18,712 13,020 ----------------------------------------------------- Total expenses 24,121 25,694 16,622 ----------------------------------------------------- Loss before income taxes and equity in (loss) earnings of subsidiaries (17,495) (23,481) (14,428) Benefit for income taxes (60,345) (13,210) (3,540) ----------------------------------------------------- Income (loss) before equity in (loss) earnings of subsidiaries 42,850 (10,271) (10,888) Equity in (loss) earnings of subsidiaries (178,184) 34,401 68,138 ----------------------------------------------------- Net (loss) income $(135,334) $ 24,130 $57,250 =====================================================
These financial statements should be read in conjunction with the Consolidated Financial Statements and the notes thereto. S-3 Pennsylvania Manufacturers Corporation Schedule II Condensed Statements of Cash Flows (Parent Company Only)
for the years ended December 31, (in thousands) 1996 1995 1994 - - - --------------------------------------------------------------------------------------------------------------------------- Cash Flows From Operating Activities: Net (loss) income $(135,334) $ 24,130 $ 57,250 Adjustments to reconcile net income to net cash flows provided by operating activities: Equity in losses (earnings) of subsidiaries 178,184 (34,401) (68,138) Net realized investment gains (35) (4) -- (Benefit) provision for deferred income taxes (19,822) 7,000 4,688 Dividends received from subsidiaries 53,634 103,213 34,000 Change in income taxes receivable and payable (24,926) 310 (9,677) Change in other assets and liabilities (8,357) (20,694) 11,933 ------------------------------------------------ Net cash flows provided by operating activities 43,344 79,554 30,056 ------------------------------------------------ Cash Flows From Investing Activities: Capital contributions to subsidiaries (50,000) (61,000) (17,100) Sales of fixed maturity investments 45 2,122 860 Sales (purchases) of equity investments, net 70 (16) (15) ------------------------------------------------ Net cash flows used by investing activities (49,885) (58,894) (16,255) ------------------------------------------------ Cash Flows From Financing Activities: Change in receivables and payables to subsidiaries 10,863 (12,939) (13,547) Proceeds from issuance of long-term debt 26,000 125,000 25,000 Repayments of long-term debt (25,000) (125,000) (15,715) Dividends paid to shareholders (7,926) (7,885) (5,881) Treasury stock transactions, net (929) 480 (3,893) Repayments of notes receivables from officers 2,734 478 235 ------------------------------------------------ Net cash flows provided (used) by financing activities 5,742 (19,866) (13,801) ------------------------------------------------ Net (decrease) increase in cash (799) 794 -- Cash January 1 799 5 5 ------------------------------------------------ Cash December 31 $ -- $ 799 $ 5 ================================================ Supplemental disclosures of cash flow information: Cash paid (received) for income taxes $ 5,525 $ (951) $ 4,532 Cash paid for interest $ 16,609 $ 15,040 12,868
These financial statements should be read in conjunction with the Consolidated Financial Statements and the notes thereto. S-4 Pennsylvania Manufacturers Corporation Schedule III Supplementary Insurance Information
Future policy benefits, Net Deferred policy losses, claims, and Unearned Premium investment (in thousands) acquisition costs loss expenses premiums revenue income(1) ------------- ----------------- ------------------- -------- ------- ----------- Year ended December 31, 1996: The Property and Casualty Group $ 23,488 $ 1,501,897 $ 127,986 $ 268,601 $ 82,455 PMA Re 20,518 589,175 77,996 151,974 48,676 Corporate -- -- -- -- 2,805 -------- ----------- --------- --------- --------- Total $ 44,006 $ 2,091,072 $ 205,982 $ 420,575 $ 133,936 ======== =========== ========= ========= ========= Year ended December 31, 1995: The Property and Casualty Group $ 20,747 $ 1,518,163 $ 124,988 $ 345,607 $ 92,275 PMA Re 17,154 551,823 67,734 139,345 45,166 Corporate -- -- -- -- 1,914 -------- ----------- --------- --------- --------- Total $ 37,901 $ 2,069,986 $ 192,722 $ 484,952 $ 139,355 ======== =========== ========= ========= ========= Year ended December 31, 1994: The Property and Casualty Group $ 20,910 $ 1,583,922 $ 138,112 $ 361,124 $ 96,683 PMA Re 11,326 519,792 51,339 105,410 42,068 Corporate -- -- -- -- (32) -------- ----------- --------- --------- --------- Total $ 32,236 $ 2,103,714 $ 189,451 $ 466,534 $ 138,719 ======== =========== ========= ========= =========
Benefits, claims, Amortization of Other losses and settlement deferred policy operating Net Premiums (in thousands) expenses acquisition costs expenses(2) written -------------- -------------------- ----------------- ---------- ----------- Year ended December 31, 1996: The Property and Casualty Group $ 424,686 $ 52,706 $ 86,003 $ 279,422 PMA Re 111,937 37,586 8,344 164,053 Corporate -- -- 3,509 -- --------- -------- -------- --------- Total $ 536,623 $ 90,292 $ 97,856 $ 443,475 ========= ======== ======== ========= Year ended December 31, 1995: The Property and Casualty Group $ 318,631 $ 53,420 $ 57,486 $ 337,116 PMA Re 103,947 33,787 7,334 152,760 Corporate -- -- 16,341 -- --------- -------- -------- --------- Total $ 422,578 $ 87,207 $ 81,161 $ 489,876 ========= ======== ======== ========= Year ended December 31, 1994: The Property and Casualty Group $ 324,119 $ 55,843 $ 59,561 $ 353,151 PMA Re 78,750 27,684 7,341 113,351 Corporate -- -- 7,746 -- --------- -------- -------- --------- Total $ 402,869 $ 83,527 $ 74,648 $ 466,502 ========= ======== ======== =========
(1) Net investment income is based on each segment's invested assets. (2) Other operating expenses are allocated primarily on the specific identification basis. When indirect expenses cannot be directly related to a segment, these expenses are allocated depending on the nature of the expense. S-5 PENNSYLVANIA MANUFACTURERS CORPORATION Schedule IV Reinsurance
Ceded to Assumed from Percentage of Direct other other Net amount (dollar amounts in thousands) Amount companies companies amount assumed to net - - - -------------------------------------------------------------------------------------------------------------------------- Year Ended December 31, 1996: Premiums: Property and liability insurance $ 299,386 88,499 209,688 $420,575 50% ========= ====== ======= ======== === Year Ended December 31, 1995: Premiums: Property and liability insurance $ 370,590 35,476 149,838 $484,952 31% ========= ====== ======= ======== === Year Ended December 31, 1994: Premiums: Property and liability insurance $ 379,216 60,558 147,876 $466,534 32% ========= ====== ======= ======== ===
S-6 Pennsylvania Manufacturers Corporation Schedule V Valuation and Qualifying Accounts
Balance at beginning Charged to costs and Description of period expenses ----------- -------------------- -------------------- Year ended December 31, 1996: Allowance for uncollectible accounts: Uncollected premiums $ 16,330 19,532 Year ended December 31, 1995: Allowance for uncollectible accounts: Uncollected premiums $ 22,402 -- Year ended December 31, 1994: Allowance for uncollectible accounts: Uncollected premiums $ 21,839 6,053
Deductions-write-offs of Description uncollectible accounts Balance at end of period ----------- ------------------------ ------------------------ Year ended December 31, 1996: Allowance for uncollectible accounts: Uncollected premiums 16,985 $ 18,877 Year ended December 31, 1995: Allowance for uncollectible accounts: Uncollected premiums 6,072 $ 16,330 Year ended December 31, 1994: Allowance for uncollectible accounts: Uncollected premiums 5,490 $ 22,402
S-7 Pennsylvania Manufacturers Corporation Schedule VI Supplemental Information Concerning Property and Casualty Insurers
Discount on Reserves for Reserves Unpaid for Unpaid Claims and Claims and Claim Claim Deferred policy Adjustment Adjustment Unearned Earned Net Investment Affiliation with Company acquisition costs Expenses Expenses Premiums Premiums Income ------------------------ ----------------- ----------- ---------- -------- -------- ------------- Consolidated property-casualty subsidiaries: Year ended December 31, 1996 $ 44,006 $ 2,091,072 $ 514,248 $ 205,982 $ 420,575 $ 131,131 Year ended December 31, 1995 37,901 2,069,986 587,025 192,722 484,952 137,441 Year ended December 31, 1994 32,236 2,103,714 572,047 189,451 466,534 138,751
Claims and claims adjustment expense incurred related to ---------------------------- Amortization of deferred policy Paid claims and Net Premium Affiliation with Company Current Year Prior Years acquisition costs adjustment expenses Writtten ------------------------ ------------ ---------- ----------------- ------------------- -------- Consolidated property-casualty subsidiaries: Year ended December 31, 1996 $ 323,069 $ 156,074 $ 90,292 $ 510,621 $ 443,475 Year ended December 31, 1995 357,787 51,491 87,207 469,942 489,876 Year ended December 31, 1994 352,025 366 83,527 478,981 466,502
S-8 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders Pennsylvania Manufacturers Corporation: Our report on the consolidated financial statements of Pennsylvania Manufacturers Corporation is included on page F-29 of this Form 10 Registration Statement. In connection with our audits of such financial statements, we have also audited the related financial statement schedules listed in the index on page 83 of this Form 10. 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 required to be included therein. /s/ Coopers & Lybrand L.L.P. 2400 Eleven Penn Center Philadelphia, Pennsylvania February 14, 1997, except for Notes 6 and 15, as to which the date is March 14, 1997 S-9 (b) Exhibits filed with the Form 10 Registration Statement are as follows: Exhibit No. Description of Exhibit 3.1 Amended and Restated Articles of Incorporation of the Company. 3.2 Amended and Restated Bylaws of the Company. Management Contracts 10.1 Employment Agreement dated April 1, 1995 between the Company and Frederick W. Anton III. 10.2 Employment Agreement dated May 1, 1995 between the Company and John W. Smithson. 10.3 The PMC EDC Plan Trust Agreement dated as of 1994. 10.4 The PMC Supplemental Executive Retirement Plan (SERP) dated July 1995. 10.5 The Company's Amended and Restated 1987 Incentive Stock Option Plan. 10.6 The Company's Amended and Restated 1991 Equity Incentive Plan. 10.7 The Company's Amended and Restated 1993 Equity Incentive Plan. 10.8 The Company's Amended and Restated 1994 Equity Incentive Plan. 10.9 The Company's 1995 Equity Incentive Plan. 10.10 The Company's 1996 Equity Incentive Plan. Other Material Contracts 10.11 Federal Tax Allocation Agreement. 10.12 Office Lease between Nine Penn Center Associates, L.P., as Landlord and Lorjo Corp., as Tenant, covering premises located at Mellon Bank Center, 1735 Market Street, Philadelphia, Pennsylvania, dated May 26, 1994. 10.13 Credit Agreement dated as of March 14, 1997 by and among the Company, The Bank of New York, First Union National Bank of North Carolina, Fleet National Bank, PNC Bank, National Association, Mellon Bank, N.A., CoreStates Bank, N.A. and Dresdener Bank AG, New York Branch and Grand Cayman Branch. 10.14 Master Agreement dated as of February 7, 1997 between the Company and First Union National Bank of North Carolina. -84- 10.15 First Amended and Restated Letter of Credit Agreement by and among the Company, the Bank of New York, Mellon Bank, N.A., Fleet Bank, National Association, PNC Bank, National Association and First Union Bank of North Carolina. 11.1 Computation of Per Share Earnings. 21.1 Subsidiaries of the Company. 27.1 Financial Data Schedule. -85- Signatures Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the Company has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized. PENNSYLVANIA MANUFACTURERS CORPORATION Date: June 26, 1997 By: /s/ Francis W. McDonnell ------------------------ -------------------------------- Francis W. McDonnell, Senior Vice President, Chief Financial Officer and Treasurer EXHIBIT INDEX Exhibit No. Description of Exhibit 3.1 Amended and Restated Articles of Incorporation of the Company. 3.2 Amended and Restated Bylaws of the Company. Management Contracts 10.1 Employment Agreement dated April 1, 1995 between the Company and Frederick W. Anton III. 10.2 Employment Agreement dated May 1, 1995 between the Company and John W. Smithson. 10.3 The PMC EDC Plan Trust Agreement dated as of 1994. 10.4 The PMC Supplemental Executive Retirement Plan (SERP) dated July 1995. 10.5 The Company's Amended and Restated 1987 Incentive Stock Option Plan. 10.6 The Company's Amended and Restated 1991 Equity Incentive Plan. 10.7 The Company's Amended and Restated 1993 Equity Incentive Plan. 10.8 The Company's Amended and Restated 1994 Equity Incentive Plan. 10.9 The Company's 1995 Equity Incentive Plan. 10.10 The Company's 1996 Equity Incentive Plan. Other Material Contracts 10.11 Federal Tax Allocation Agreement. 10.12 Office lease between Nine Penn Center Associates, L.P., as Landlord, and Lorjo Corp., as Tenant, covering premises located at Mellon Bank Center, 1735 Market Street, Philadelphia, Pennsylvania, dated May 26, 1994. 10.13 Credit Agreement dated as of March 14, 1997 by and among the Company, The Bank of New York, First Union National Bank of North Carolina, Fleet National Bank, PNC Bank, National Association, Mellon Bank, N.A., CoreStates Bank, N.A. and Dresdener Bank AG, New York Branch and Grand Cayman Branch. 10.14 Master Agreement dated as of February 7, 1997 between the Company and First Union National Bank of North Carolina. 10.15 First Amended and Restated Letter of Credit Agreement by and among the Company, the Bank of New York, Mellon Bank, N.A., Fleet Bank, National Association, PNC Bank, National Association and First Union Bank of North Carolina. 11.1 Computation of Per Share Earnings. 21.1 Subsidiaries of the Company. 27.1 Financial Data Schedule. EX-3.1 2 ARTICLES OF INCORPORATION Commonwealth of Pennsylvania Department of State To All to Whom These Presents Shall Come, Greeting: Whereas, In and by Article VIII of the Business Corporation Law, approved the fifth day of May, Anno Domini one thousand nine hundred and thirty-three, P.L. 364, as amended, the Department of State is authorized and required to issue a CERTIFICATE OF AMENDMENT evidencing the amendment and restatement of the Articles of Incorporation in their entirety of a business corporation organized under or subject to the provisions of that Law; and Whereas, The stipulations and conditions of that Law pertaining to the amendment of Articles of Incorporation have been fully complied with by PENNSYLVANIA MANUFACTURERS CORPORATION Henceforth The "Articles," as defined in Article I of the Business Corporation Law, shall not include any prior documents; Therefore, Know Ye, That subject to the Constitution of this Commonwealth and under authority of the Business Corporation Law, I do by these presents, which I have caused to be Sealed with the Great Seal of the Commonwealth, extend the rights and powers of the corporation named above, in accordance with the terms and provisions of the Articles of Amendment presented by it to the Department of State, with full power and authority to use and enjoy such rights and powers, subject to all the provisions and restrictions of the Business Corporation Law and all other applicable laws of this Commonwealth. Given under my Hand and the Great Seal of the Commonwealth, at the City of Harrisburg, this 7th day of May in the year of our Lord one thousand nine hundred and eighty seven and of the Commonwealth the two hundred eleventh, /s/ James J. Hagerty - - - ----------------------------- Secretary of the Commonwealth COMMONWEALTH OF PENNSYLVANIA DEPARTMENT OF STATE CORPORATION BUREAU APPLICANT'S ACCT. NO. Filed this day of May 07 1987 DSCB: BCL-806 (REV. 8-72) Commonwealth of Pennsylvania Department of State /s/ James J. Hagerty Secretary of the Commonwealth (Box for Certification) Articles of Amendment-- Domestic Business Corporation In compliance with the requirements of section 806 of the Business Corporation Law, act of May 5, 1933 (P.L.364) (15 P.S. SS.1806), the undersigned corporation, desiring to amend its Articles, does hereby certify that: 1. The name of the corporation is: Pennsylvania Manufacturers Corporation 2. The location of its registered office in this Commonwealth is (the Department of State is hereby authorized to correct the following statement to conform to the records of the Department): 1021 West Eighth Avenue ----------------------- (NUMBER) (STREET) King of Prussia Pennsylvania 19406 -------------------------------------------------------------------- (CITY) (ZIP CODE) 3. The statute by or under which it was incorporated is: Act of May 5, 1933, P.L. 364, as amended 4. The date of its incorporation is: February 23, 1982 5. (Check, and if appropriate, complete one of the following): /X/ The meeting of the shareholders of the corporation at which the amendment was adopted was held at the time and place and pursuant to the kind and period of notice herein stated. Time: The 27th day of April, 1987 Place: 925 Chestnut Street, Philadelphia, PA Kind and period of notice Written notice (Proxy Statement); 30 days / / The amendment was adopted by a consent in writing, setting forth the action so taken, signed by all of the shareholders entitled to vote thereon and filed with the Secretary of the corporation. 6. At the time of the action of shareholders: (a) The total number of shares outstanding was: 797,476 shares (b) The number of shares entitled to vote was: 797,476 shares 7. In the action taken by the shareholders: (a) The number of shares voted in favor of the amendment was: 699,557 shares (b) The number of shares voted against the amendment was: -0 against; 10,000 abstained 8. The amendment adopted by the shareholders, set forth in full, is as follows: See Exhibit A attached and incorporated by reference herein for the text of the Amended and Restated Articles of Incorporation of the Corporation. IN TESTIMONY WHEREOF, the undersigned corporation has caused these Articles of Amendment to be signed by a duly authorized officer and its corporate seal, duly attested by another such officer, to be hereunto affixed this 27th day of April, 1987. PENNSYLVANIA MANUFACTURERS CORPORATION -------------------------------------- (NAME OF CORPORATION) Attest: By: /s/ David L. Johnson By: /s/ Frederick W. Anton ------------------------------- --------------------------------- (SIGNATURE) (SIGNATURE) David L. Johnson, Secretary Frederick W. Anton, III, President - - - ----------------------------------- ------------------------------------- (TITLE; SECRETARY, (TITLE; PRESIDENT, ASSISTANT SECRETARY, ETC.) VICE PRESIDENT, ETC.) (CORPORATE SEAL) INSTRUCTIONS FOR COMPLETION OF FORM A. Any necessary copies of Form DSCB:17.2 (Consent to Appropriation of Name) or Form DSCB: 17.3 (Consent to Use of Similar Name) shall accompany Articles of Amendment effecting a change of name. B. Any necessary governmental approvals shall accompany this form. C. Where action is taken by partial written consent pursuant to the Articles, the second alternate of Paragraph 5 should be modified accordingly. D. If the shares of any class were entitled to vote as a class, the number of shares of each class so entitled and the number of shares of all other classes entitled to vote should be set forth in Paragraph 6(b). E. If the shares of any class were entitled to vote as a class, the number of shares of such class and the number of shares of all other classes voted for and against such amendment respectively should be set forth in Paragraphs 7(a) and 7(b). F. BCL Section 807 (15 P.S. Section 1807) requires that the corporation shall advertise its intention to file or the filing of Articles of Amendment. Proof of publication of such advertising should not be delivered to the Department, but should be filed with the minutes of the corporation. EXHIBIT A RESOLVED that, the Articles of Incorporation of Pennsylvania Manufacturers Corporation shall be amended and restated in their entirety as follows: AMENDED AND RESTATED ARTICLES OF INCORPORATION 1. The name of the Corporation is Pennsylvania Manufacturers Corporation. 2. The location and post office address of the registered office of the Corporation in this Commonwealth is 1021 West Eighth Avenue, King of Prussia, Pennsylvania 19406. 3. The Corporation is incorporated under the Business Corporation Law of the Commonwealth of Pennsylvania for the following purpose or purposes: The Corporation shall have unlimited power to engage in and to do any or all lawful business for which corporations may be incorporated under the Act of Assembly approved May 5, 1933, P.S. 364, as amended, under which Act the Corporation is incorporated, including, without limitation of the foregoing, the power to manufacture, buy, sell, trade and generally deal in products, merchandise, goods and articles of any kind and description whatsoever. 4. The term for which the Corporation is to exist is perpetual. 5. The aggregate number of shares which the Corporation shall have the authority to issue is: Two Million (2,000,000) shares of Common Stock, $5.00 par value per share (the "Common Stock"), and Two Million (2,000,000) shares of Class A Common Stock, $5.00 par value per share (the "Class A Common Stock"). A. Voting Rights and Powers. Except as otherwise required by the Pennsylvania Business Corporation Law or as otherwise provided in these Articles of Incorporation or the By-laws of the Corporation, with respect to all matters upon which shareholders are entitled to vote or to which shareholders are entitled to give consent, the holders of the outstanding shares of the Common Stock and the holders of any outstanding shares of the Class A Common Stock shall vote together without regard to class, and every holder of the outstanding shares of the Common Stock shall be entitled to cast thereon ten (10) votes in person or by proxy for each share of the Common Stock standing in his name, and every holder of any outstanding shares of the Class A Common Stock shall be entitled to cast thereon one (1) vote in person or by proxy for each share of the Class A Common Stock standing in his name. In all elections for directors, each shareholder is entitled to cumulate his votes. With respect to any proposed amendment to these Articles of Incorporation which would increase or decrease the number of authorized shares of either the Common Stock or the Class A Common Stock, increase or decrease the par value of the shares of the Common Stock or the Class A Common Stock, or alter or change the powers, preferences, relative voting power or special rights of the shares of the Common Stock or the Class A Common Stock so as to affect it adversely, the approval of a majority of the votes entitled to be cast by the holders of the class affected by the proposed amendment, voting separately as a class, shall be obtained in addition to the approval of a majority of the votes entitled to be cast by the holders of the Common Stock and the Class A Common Stock voting together without regard to class as hereinbefore provided. B. Dividends and Distributions. (a) Cash Dividends. At any time shares of the Class A Common Stock are outstanding, as and when cash dividends may be declared by the Board of Directors, the cash dividend payable on shares of the Class A Common Stock shall in all cases be at least ten percent (10%) higher on a per share basis than the cash dividend payable on shares of the Common Stock. (b) Other Dividends and Distributions. Each share of the Common Stock and each share of the Class A Common Stock shall be equal in respect of rights to dividends (other than cash) and distributions, when and as declared, in the form of stock or other property of the Corporation, except that in the case of dividends or other distributions payable in stock of the Corporation, including distributions pursuant to stock split-ups or divisions, which occur after the date shares of the Class A Common Stock are first issued by the Corporation, only shares of the Common Stock shall be distributed with respect to the Common Stock and only shares of Class A Common Stock shall be distributed with respect to Class A Common Stock. C. Other Rights. Except as otherwise required by the Pennsylvania Business Corporation Law or as otherwise provided in these Articles of Incorporation, each share of the Common Stock and each share of Class A Common Stock shall have identical powers, preferences and rights, including rights in liquidation. D. Conversion of the Common Stock. Each share of Common Stock may at any time be converted at the election of the holder thereof into one fully paid and nonassessable share of Class A Common Stock. Any holder of shares of Common Stock may elect to convert any or all of such shares at one time or at various times in such holder's discretion. Such right shall be exercised by the surrender of the certificate representing each share of Common Stock to be converted to the agent for the registration for transfer of shares of Common Stock at its office, or to the Corporation at its principal executive offices, accompanied by a written notice of the election by the holder thereof to convert and (if so required by the transfer agent or by the Corporation) by instruments of transfer, in form satisfactory to the transfer agent and to the Corporation, duly executed by such holder of his duly authorized attorney. The issuance of a certificate or certificates for shares of Class A Common Stock upon conversion of shares of Common Stock shall be made without charge for any stamp or other similar tax in respect of such issuance. However, if any such certificate or certificates is or are to be issued in a name other than that of the holder of the share or shares of Common Stock converted, the person or persons requesting the issuance thereof shall pay to the transfer agent or to the Corporation the amount of any tax which may be payable in respect of any such transfer, or shall establish to the satisfaction of the transfer agent or of the Corporation that such tax has been paid. As promptly as practicable after the surrender for conversion of a certificate or certificates representing shares of Common Stock and the payment of any tax as hereinbefore provided, the Corporation will deliver or cause to be delivered at the office of the transfer agent to, or upon the written order of, the holder of such certificate or certificates, a certificate or certificates representing the number of shares of Class A Common Stock issuable upon such conversion, issued in such name or names as such holder may direct. Such conversion shall be irrevocable and shall be deemed to have been made immediately prior to the close of business on the date of the surrender of the certificate or certificates representing shares of Common Stock (if on such date the transfer books of the Corporation shall be closed, then immediately prior to the close of business on the first date thereafter that said books shall be open), and all rights of A-2 such holder arising from ownership of such shares of Common Stock shall cease at such time, and the person or persons in whose name or names the certificate or certificates representing shares of Class A Common Stock are to be issued shall be treated for all purposes as having become the record holder or holders of such shares of Class A Common Stock at such time and shall have and may exercise all the rights and powers appertaining thereto. No adjustments in respect of past cash dividends shall be made upon the conversion of any share of Common Stock; provided, however, that if any shares of Common Stock shall be converted subsequent to the record date for the payment of a cash or stock dividend or other distribution on shares of Common Stock but prior to such payment, the registered holder of such shares at the close of business on such record date shall be entitled to receive the cash or stock dividend or the distribution payable to holders of the Common Stock. The Corporation shall at all times reserve and keep available, solely for the purpose of issue upon conversion of outstanding shares of Common Stock, such number of shares of Class A Common Stock as may be issuable upon the conversion of all such outstanding shares of Common Stock, provided, the Corporation may deliver shares of Class A Common Stock which are held in the treasury of the Corporation for shares of Common Stock to be converted. If any shares of Class A Common Stock require registration with or approval of any governmental authority under any federal or state law before such shares of Class A Common Stock may be issued upon conversion, the Corporation will cause such shares to be duly registered or approved, as the case may be. All shares of Class A Common Stock which may be issued upon conversion of shares of Common Stock will, upon issue, be fully paid and nonassessable. 6. Except with respect to shares, rights, options and other securities of the Corporation that are issued or granted in connection with any stock purchase plan, stock option plan or other similar benefit plan that has been approved by the holders of a majority of the Corporation's outstanding Common Stock, the holders of Common Stock of the Corporation shall be entitled, as such, as a matter of right, to subscribe for and to purchase any part of any new or additional issue of Common Stock, any rights or options to purchase Common Stock, or any securities convertible into, exchangeable for or carrying rights or options to purchase Common Stock, whether now or hereafter authorized, but only in those instances in which such shares of Common Stock, rights or options to purchase Common Stock are issued for a consideration consisting solely of money. In the event of the issuance of such shares or other securities solely for money, the preemptive right herein granted shall only be an opportunity to acquire such shares or other securities under such terms and conditions as the Board of Directors shall fix. The preemptive right herein granted shall not apply in any respect to the Corporation's Class A Common Stock, and holders of such Class A Common Stock, as such, shall have no preemptive rights. A-3 Commonwealth of Pennsylvania Department of State To All to Whom These Presents Shall Come, Greeting: Whereas, In and by Article VIII of the Business Corporation Law, approved the fifth day of May, Anno Domini one thousand nine hundred and thirty-three, P.L. 364, as amended, the Department of State is authorized and required to issue a CERTIFICATE OF AMENDMENT evidencing the amendment of the Articles of Incorporation of a business corporation organized under or subject to the provisions of that Law; and Whereas, The stipulations and conditions of that Law pertaining to the amendment of Articles of Incorporation have been fully complied with by PENNSYLVANIA MANUFACTURERS CORPORATION Therefore, Know Ye, That subject to the Constitution of this Commonwealth and under the authority of the Business Corporation Law, I do by these presents, which I have caused to be sealed with the Great Seal of the Commonwealth, extend the rights and powers of the corporation named above, in accordance with the terms and provisions of the Articles of Amendment presented by it to the Department of State, with full power and authority to use and enjoy such rights and powers, subject to all the provisions and restrictions of the Business Corporation Law and all other applicable laws of this Commonwealth. Given under my Hand and the Great Seal of the Commonwealth, at the City of Harrisburg, this 27th day of April in the year of our Lord one thousand nine hundred and eighty eight and of the Commonwealth the two hundred twelfth. /s/ James J. Hagerty - - - ----------------------------- Secretary of the Commonwealth pjd DSCB-21 (7-73) COMMONWEALTH OF PENNSYLVANIA DEPARTMENT OF STATE CORPORATION BUREAU Filed this day of April 27 1988 Commonwealth of Pennsylvania Department of State /s/ James J. Hagerty Secretary of the Commonwealth (Box for Certification) Articles of Amendment-- Domestic Business Corporation In compliance with the requirements of section 806 of the Business Corporation Law, act of May 5, 1933 (P.L.364) (15 P.S. SS.1806), the undersigned corporation, desiring to amend its Articles, does hereby certify that: 1. The name of the corporation is: Pennsylvania Manufacturers Corporation 2. The location of its registered office in this Commonwealth is (the Department of State is hereby authorized to correct the following statement to conform to the records of the Department): 1021 West Eighth Avenue ----------------------- (NUMBER) (STREET) King of Prussia Pennsylvania 19406 -------------------------------------------------------------------- (CITY) (ZIP CODE) 3. The statute by or under which it was incorporated is: Act of May 5, 1933, P.L. 364, as amended 4. The date of its incorporation is: February 23, 1982 5. (Check, and if appropriate, complete one of the following): /X/ The meeting of the shareholders of the corporation at which the amendment was adopted was held at the time and place and pursuant to the kind and period of notice herein stated. Time: The 25th day of April, 1988 Place: 925 Chestnut Street, Philadelphia, PA Kind and period of notice Written notice (proxy statement); 30 days / / The amendment was adopted by a consent in writing, setting forth the action so taken, signed by all of the shareholders entitled to vote thereon and filed with the Secretary of the corporation. 6. At the time of the action of shareholders: (a) The total number of shares outstanding was: 749,605 shares of Common Stock and 206,511 shares of Class A Common Stock. (b) The number of shares entitled to vote was: 749,605 shares of Common Stock (entitled to cast ten votes per share) and 206,511 shares of Class A Common Stock (entitled to cast one vote per share). 7. In the action taken by the shareholders: (a) The number of shares voted in favor of the amendment was: 652,403 shares of Common Stock and 184,675 shares of Class A Common Stock. (b) The number of shares voted against the amendment was: 11,680 shares of Common Stock and 2,336 shares of Class A Common Stock. 8. The amendment adopted by the shareholders, set forth in full, is as follows: RESOLVED, that the first full paragraph of Article 5 of the Articles of Incorporation of Pennsylvania Manufacturers Corporation shall be amended and restated in its entirety as follows: 5. The aggregate number of shares which the Corporation shall have authority to issue is: Ten Million (10,000,000) shares of Common Stock, $5.00 par value per share (the "Common Stock"), and Ten Million (10,000,000) shares of Class A Common Stock, $5.00 par value per share (the "Class A Common Stock"). IN TESTIMONY WHEREOF, the undersigned corporation has caused these Articles of Amendment to be signed by a duly authorized officer and its corporate seal, duly attested by another such officer, to be hereunto affixed this 25th day of April, 1988. PENNSYLVANIA MANUFACTURERS CORPORATION -------------------------------------- (NAME OF CORPORATION) Attest: By: /s/ David L. Johnson By: /s/ Frederick W. Anton ------------------------------- --------------------------------- (SIGNATURE) (SIGNATURE) David L. Johnson, Secretary Frederick W. Anton, III, President - - - ----------------------------------- ------------------------------------- (TITLE; SECRETARY, (TITLE; PRESIDENT, ASSISTANT SECRETARY, ETC.) VICE PRESIDENT, ETC.) (CORPORATE SEAL) INSTRUCTIONS FOR COMPLETION OF FORM A. Any necessary copies of Form DSCB:17.2 (Consent to Appropriation of Name) or Form DSCB: 17.3 (Consent to Use of Similar Name) shall accompany Articles of Amendment effecting a change of name. B. Any necessary governmental approvals shall accompany this form. C. Where action is taken by partial written consent pursuant to the Articles, the second alternate of Paragraph 5 should be modified accordingly. D. If the shares of any class were entitled to vote as a class, the number of shares of each class so entitled and the number of shares of all other classes entitled to vote should be set forth in Paragraph 6(b). E. If the shares of any class were entitled to vote as a class, the number of shares of such class and the number of shares of all other classes voted for and against such amendment respectively should be set forth in Paragraphs 7(a) and 7(b). F. BCL Section 807 (15 P.S. Section 1807) requires that the corporation shall advertise its intention to file or the filing of Articles of Amendment. Proofs of publication of such advertising should not be delivered to the Department, but should be filed with the minutes of the corporation. Commonwealth of Pennsylvania Department of State To All to Whom These Presents Shall Come, Greeting: Whereas, In and by Article VIII of the Business Corporation Law, approved the fifth day of May, Anno Domini one thousand nine hundred and thirty-three, P.L. 364, as amended, the Department of State is authorized and required to issue a CERTIFICATE OF AMENDMENT evidencing the amendment of the Articles of Incorporation of a business corporation organized under or subject to the provisions of that Law; and Whereas, The stipulations and conditions of that Law pertaining to the amendment of Articles of Incorporation have been fully complied with by PENNSYLVANIA MANUFACTURERS CORPORATION Therefore, Know Ye, That subject to the Constitution of this Commonwealth and under the authority of the Business Corporation Law, I do by these presents, which I have caused to be sealed with the Great Seal of the Commonwealth, extend the rights and powers of the corporation named above, in accordance with the terms and provisions of the Articles of Amendment presented by it to the Department of State, with full power and authority to use and enjoy such rights and powers, subject to all the provisions and restrictions of the Business Corporation Law and all other applicable laws of this Commonwealth. Given under my Hand and the Great Seal of the Commonwealth, at the City of Harrisburg, this 24th day of April in the year of our Lord one thousand nine hundred and eighty-nine and of the Commonwealth the two hundred thirteenth. /s/ James J. Hagerty - - - ----------------------------- Secretary of the Commonwealth cas DSCB-21 (7-73) COMMONWEALTH OF PENNSYLVANIA DEPARTMENT OF STATE CORPORATION BUREAU Filed this day of April 24 1989 Commonwealth of Pennsylvania Department of State /s/ James J. Hagerty Secretary of the Commonwealth (Box for Certification) Articles of Amendment-- Domestic Business Corporation In compliance with the requirements of section 806 of the Business Corporation Law, act of May 5, 1933 (P.L.364) (15 P.S. SS.1806), the undersigned corporation, desiring to amend its Articles, does hereby certify that: 1. The name of the corporation is: Pennsylvania Manufacturers Corporation 2. The location of its registered office in this Commonwealth is (the Department of State is hereby authorized to correct the following statement to conform to the records of the Department): 1021 West Eighth Avenue ----------------------- (NUMBER) (STREET) King of Prussia Pennsylvania 19406 -------------------------------------------------------------------- (CITY) (ZIP CODE) 3. The statute by or under which it was incorporated is: Act of May 5, 1933, P.L. 364, as amended 4. The date of its incorporation is: February 23, 1982 5. (Check, and if appropriate, complete one of the following): /X/ The meeting of the shareholders of the corporation at which the amendment was adopted was held at the time and place and pursuant to the kind and period of notice herein stated. Time: The 17th day of April, 1989 Place: 925 Chestnut Street, Philadelphia, PA Kind and period of notice Written notice (proxy statement); 31 days / / The amendment was adopted by a consent in writing, setting forth the action so taken, signed by all of the shareholders entitled to vote thereon and filed with the Secretary of the corporation. 6. At the time of the action of shareholders: (a) The total number of shares outstanding was: 805,275 shares of Common Stock and 220,725 shares of Class A common Stock. (b) The number of shares entitled to vote was: 805,275 shares of Common Stock (entitled to cast ten votes per share) and 220,725 shares of Class A Common Stock (entitled to cast one vote per share). 7. In the action taken by the shareholders: (a) The number of shares voted in favor of the amendment was: 720,853 shares of Common Stock and 196,822 shares of Class A Common Stock. (b) The number of shares voted against the amendment was: 10,000 shares of Common Stock and 2,000 shares of Class A Common Stock. 8. The amendment adopted by the shareholders, set forth in full, is as follows: RESOLVED, that the first full paragraph of Article 5 of the Articles of Incorporation of Pennsylvania Manufacturers Corporation shall be amended and restated in its entirety as follows: 5. The aggregate number of shares which the Corporation shall have authority to issue is: Twenty Million (20,000,000) shares of Common Stock, $5.00 par value per share (the "Common Stock"), and Twenty Million (20,000,000) shares of Class A Common Stock, $5.00 par value per share (the "Class A Common Stock"). IN TESTIMONY WHEREOF, the undersigned corporation has caused these Articles of Amendment to be signed by a duly authorized officer and its corporate seal, duly attested by another such officer, to be hereunto affixed this 17th day of April, 1989. PENNSYLVANIA MANUFACTURERS CORPORATION -------------------------------------- (NAME OF CORPORATION) Attest: By: /s/ David L. Johnson By: /s/ Frederick W. Anton ------------------------------- --------------------------------- (SIGNATURE) (SIGNATURE) David L. Johnson, Secretary Frederick W. Anton, III, President - - - ----------------------------------- ------------------------------------- (TITLE; SECRETARY, (TITLE; PRESIDENT, ASSISTANT SECRETARY, ETC.) VICE PRESIDENT, ETC.) (CORPORATE SEAL) INSTRUCTIONS FOR COMPLETION OF FORM A. Any necessary copies of Form DSCB:17.2 (Consent to Appropriation of Name) or Form DSCB: 17.3 (Consent to Use of Similar Name) shall accompany Articles of Amendment effecting a change of name. B. Any necessary governmental approvals shall accompany this form. C. Where action is taken by partial written consent pursuant to the Articles, the second alternate of Paragraph 5 should be modified accordingly. D. If the shares of any class were entitled to vote as a class, the number of shares of each class so entitled and the number of shares of all other classes entitled to vote should be set forth in Paragraph 6(b). E. If the shares of any class were entitled to vote as a class, the number of shares of such class and the number of shares of all other classes voted for and against such amendment respectively should be set forth in Paragraphs 7(a) and 7(b). F. BCL Section 807 (15 P.S. Section 1807) requires that the corporation shall advertise its intention to file or the filing of Articles of Amendment. Proofs of publication of such advertising should not be delivered to the Department, but should be filed with the minutes of the corporation. ARTICLES OF AMENDMENT-DOMESTIC BUSINESS CORPORATION In compliance with the requirements of 15 Pa. C.S. ss. 1915 (relating to articles of amendment), the undersigned business corporation, desiring to amend its Articles, hereby states that: 1. The name of the corporation is Pennsylvania Manufacturers Corporation 2. The (a) address of this corporation's current registered office in this Commonwealth or (b) name of its commercial registered office provider and the county of venue is (the Department is hereby authorized to correct the following information to conform to the records of the Department): (a) 1021 West Eighth Avenue King of Prussia Pennsylvania 19046 Montgomery --------------------------------------------------------------------------------------- Number and Street City State Zip County (b) c/o: -------------------------------------------------------------------------------- Name of Commercial Registered Office Provider County
For a corporation represented by a commercial registered office provider, the county in (b) shall be deemed the county in which the corporation is located for venue and official publication purposes. 3. The statute by or under which it was incorporated is: Act of Assembly approved May 5, 1933, P.S. 364 4. The date of its incorporation is: February 23, 1982 5. (Check, and if appropriate complete, one of the following): X The amendment shall be effective upon filing these Articles of Amendment in the Department of State. __ The amendment shall be effective on _________________ at _______________ Date Hour 6. (Check one of the following): X The amendment was adopted by the shareholders (or members) pursuant to 15 Pa.C.S. ss. 1914(a) and (b). __ The amendment was adopted by the board of directors pursuant to 15 Pa. C.S. ss. 1914(c). 7. (Check, and if appropriate complete, one of the following): __ The amendment adopted by the corporation, set forth in full, as follows: X The amendment adopted by the corporation as set forth in full in Exhibit A attached hereto and made a part hereof. 8. (Check if the amendment restates the Articles): __ The restated Articles of Incorporation supersede the original Articles and all amendments thereto. IN TESTIMONY WHEREOF, the undersigned corporation has caused these Articles of Amendment to be signed by a duly authorized officer thereof this 22nd day of April 1991. PENNSYLVANIA MANUFACTURERS CORPORATION --------------------------------------- (Name of Corporation) BY: /s/ Frederick W. Anton, III ---------------------------- Frederick W. Anton, III TITLE: President ----------------- EXHIBIT A TO ARTICLES OF AMENDMENT OF PENNSYLVANIA MANUFACTURERS CORPORATION The first full paragraph of Article 5 of the Articles of Incorporation of Pennsylvania Manufacturers Corporation is amended and restated to read in its entirety as follows: "5. The aggregate number of shares which the Corporation shall have authority to issue is: Forty Million (40,000,000) shares of Common Stock, $5.00 par value per share (the "Common Stock"), and Forty Million (40,000,000) shares of Class A Common Stock, $5.00 par value per share (the "Class A Common Stock")." STATEMENT OF CHANGE OF REGISTERED OFFICE Indicate type of entity (check one) _X_ Domestic Business Corporation (15 PA.C.S. ss. 1507) ___ Foreign Business Corporation (15 PA.C.S. ss. 4144) ___ Domestic Nonprofit Corporation (15 PA.C.S. ss. 5507) ___ Foreign Nonprofit Corporation (15 PA.C.S. ss. 6144) ___ Domestic Limited Partnership (15 PA.C.S. ss. 8506) In compliance with the requirements of the applicable provisions of 15 Pa.C.S. (relating to corporations and unincorporated associations) the undersigned corporation or limited partnership, desiring to effect a change of registered office, hereby states that: 1. The name of the corporation or limited partnership is: ---------------------- Pennsylvania Manufacturers Corporation ---------------------------------------------------------------------------- 2. The (a) address of this corporation's or limited partnership's current registered office in this Commonwealth or (b) name of its commercial registered office provider and the county of venue is: (the Department is hereby authorized to correct the following information to conform to the records of the Department): (a) 1021 W. Eighth Avenue, King of Prussia PA 19406 Montgomery ------------------------------------------------------------------------ Number and Street City State Zip County (b) c/o: -------------------------------------------------------------------- Name of Commercial Registered Office Provider County For a corporation or a limited partnership represented by a commercial registered office provider, the county in (b) shall be deemed the county in which the corporation or limited partnership is located for venue and official publication purposes. 3. (Complete part (a) or (b)): (a) The address to which the registered office of the corporation or limited partnership in this Commonwealth is to be changed is: 380 Sentry Parkway Blue Bell PA 19422-0754 Montgomery ------------------------------------------------------------------------ Number and Street City State Zip County (b) The registered office of the corporation or limited partnership shall be provided by: c/o: -------------------------------------------------------------------- Name of Commercial Registered Office Provider County For a corporation or a limited partnership represented by a commercial registered office provider, the count in (b) shall be deemed the county in which the corporation or limited partnership is located for venue and official publication purposes. 4. (Strike out if a limited partnership): Such change was authorized by the Board of Directors of the corporation. IN TESTIMONY WHEREOF, the undersigned corporation or limited partnership has caused this statement to be signed by a duly authorized officer thereof this 14 day of September, 1974. --- --------- -- Pennsylvania Manufacturers Corporation ---------------------------------------- (Name of Corporation/Limited Partnership) BY: /s/ Robert Gaffney ------------------------------------ (Signature) TITLE: Secretary --------------------------------- ARTICLES OF AMENDMENT-DOMESTIC BUSINESS CORPORATION In compliance with the requirements of 15 Pa.C.S. (section) 1915 (relating to articles of amendment), the undersigned business corporation, desiring to amend its Articles, hereby states that: 1. The name of the corporation is: Pennsylvania Manufacturers Corporation ------------------------------------------ - - - ------------------------------------------------------------------------------- 2. The (a) address of this corporation's current registered office in this Commonwealth or (b) name of its commercial registered office provider and the county of venue is (the Department is hereby authorized to correct the following information to conform to the records of the Department): (a) The PMA Building, 380 Sentry Parkway Blue Bell PA 19422 Montgomery ----------------------------------------------------------------------- Number and Street City State Zip County (b) c/o N/A ----------------------------------------------------------------------- Name of Commercial Registered Office Provider County For a corporation represented by a commercial registered office provider, the county in (b) shall be deemed the county in which the corporation is located for venue and official publication purposes. 3. The statute by or under which it was incorporated is: Act of May 5, 1934, P.L. 364, as amended -------------------- 4. The date of its incorporation is: February 23, 1982 --------------------------------------- 5. (Check, and if appropriate complete, one of the following): X The amendment shall be effective upon filing these Articles of --- Amendment in the Department of State. --- The amendment shall be effective on: at -------------- --------------- Date Hour 6. (Check one of the following): X The amendment was adopted by the shareholders (or members) pursuant to --- 15 Pa.C.S. (section) 1914(a) and (b). --- The amendment was adopted by the board of directors pursuant to 15 Pa.C.S. (section) 1914(c). 7. (Check, and if appropriate, complete one of the following): X The amendment adopted by the corporation, set forth in full, --- as follows: Article 7, the full text of which is set forth in its entirety below, is hereby added to the Amended and Restated Articles of Incorporation of the Corporation: "7. Subchapters E, F, G, H, I and J of Chapter 25 and Sections 2538 and 2539 of Subchapter D of Chapter 25 of the Pennsylvania Business Corporation Law of 1988, as amended, shall not be applicable to the Corporation." --- The amendment adopted by the corporation is set forth in full in Exhibit A attached hereto and made a part hereof. 8. (Check if the amendment restates the Articles): The restated articles of Incorporation supercede the original --- Articles and all amendments thereto. IN TESTIMONY WHEREOF, the undersigned corporation has caused these Articles of Amendment to be signed by a duly authorized officer thereof this 25th day of June , 1997. - - - ------------- ------------ ---- Pennsylvania Manufacturers Corporation ---------------------------------------------------- (Name of Corporation) BY: /s/ Francis W. McDonnell ------------------------------------------------ (Signature) Francis W. McDonnell, Senior Vice President, TITLE: Chief Financial Officer and Treasurer ---------------------------------------------- EX-3.2 3 AMENDED AND RESTATED BYLAWS AMENDED AND RESTATED BYLAWS OF PENNSYLVANIA MANUFACTURERS CORPORATION TABLE OF CONTENTS ARTICLE 1 Corporate Office.................................................. 1 ARTICLE 2 Shareholders; Share Certificates.................................. 1 ARTICLE 3 Shareholders Meetings............................................. 5 ARTICLE 4 Quorum of Shareholders............................................ 6 ARTICLE 5 Proxies........................................................... 7 ARTICLE 6 Record Date....................................................... 8 ARTICLE 7 Record of Shareholders............................................ 8 ARTICLE 8 Judges of Election................................................ 9 ARTICLE 9 Consent of Shareholders in Lieu of Meeting........................ 10 ARTICLE 10 Directors......................................................... 10 ARTICLE 11 Removal of Directors.............................................. 12 ARTICLE 12 Vacancies in the Board of Directors............................... 12 ARTICLE 13 Action by Written Consent......................................... 13 ARTICLE 14 Compensation of Directors......................................... 13 ARTICLE 15 Committees........................................................ 13 ARTICLE 16 Liability of Directors............................................ 14 ARTICLE 17 Officers.......................................................... 16 ARTICLE 18 Duties of Officers................................................ 17 ARTICLE 19 Indemnification of Officers, Directors, Employees, and Agents..... 18 ARTICLE 20 Fiscal Year....................................................... 21 ARTICLE 21 Manner of Giving Written Notice; Waivers of Notice................ 22 ARTICLE 22 Amendments........................................................ 22 APPENDIX..................................................................... 24 AMENDED AND RESTATED BYLAWS OF PENNSYLVANIA MANUFACTURERS CORPORATION ARTICLE 1 Corporate Office Section 1.1 The Corporation shall have and continuously maintain in the Commonwealth of Pennsylvania a registered office at an address to be designated from time to time by the Board of Directors which may, but need not, be the same as its place of business. Section 1.2 The Corporation may also have offices at such other places as the Board of Directors may from time to time designate or the business of the Corporation may require. ARTICLE 2 Shareholders: Share Certificates Section 2.1 No person, firm, association, corporation or other entity is qualified to own any shares of Common Stock, $5.00 par value, ("Common Stock") of the Corporation except: (1) PMA Foundation. (2) A member of PMA Foundation. (3) A former member of PMA Foundation who resigned in good standing, but only in respect to Common Stock of the Corporation owned by such former member of PMA Foundation on the date of resignation. (4) The Corporation or Pennsylvania Manufacturers' Association Insurance Company. (5) An officer, proprietor or partner of a member of PMA Foundation or a retired officer, proprietor or partner of a member or former member of PMA Foundation but only in respect to Common Stock of the Corporation owned by such retired officer, proprietor or partner on the date of retirement. (6) A director or officer of the Corporation, Pennsylvania Manufacturers' Association Insurance Company or PMA Foundation. 1 (7) A retired director or officer of the Corporation, Pennsylvania Manufacturers' Association Insurance Company or PMA Foundation but only in respect to Common Stock of the Corporation owned by such retired director or officer on the date of retirement. (8) The surviving spouse of a deceased person who, at the time of his or her death, was qualified to own Common Stock of the Corporation, but not a surviving spouse of a person who became qualified to own Common Stock of the Corporation solely by reason of the provisions of this Subsection (8). (9) A person, firm, association, corporation or other entity who was a shareholder of record of Pennsylvania Manufacturers' Association Insurance Company on April 1, 1982. (10) Any child or grandchild of a shareholder of Pennsylvania Manufacturers' Association Insurance Company of record on April 1, 1982. (11) A trustee under a written trust solely for the benefit of a person qualified under these Bylaws to own Common Stock of the Corporation or a spouse, child or grandchild of such qualified person. (12) Such other classes of persons as are from time to time approved by the Board of Directors of the Corporation. Nothing set forth in this Section 2.1 shall prohibit any person from owning any shares of Class A Common Stock, $5.00 par value, ("Class A Common Stock") of the Corporation. Section 2.2 All shares issued by the Corporation shall be represented by certificates. The share certificates of the Corporation shall be numbered and registered in a share register as they are issued; shall state that the Corporation is incorporated under the laws of the Commonwealth of Pennsylvania; shall bear the name of the registered holder, the number and class of shares and the designation of the series, if any, represented thereby, the par value, if any, of each share or a statement that the shares are without par value, as the case may be; shall be signed by the President or a Vice President, and the Secretary or the Treasurer or any other person properly authorized by the Board of Directors, and shall bear the corporate seal, which seal may be facsimile engraved or printed. Where the certificate is signed by a transfer agent or a registrar, the signature of any corporate officer on such certificate may be a facsimile engraved or printed. In case any officer who has signed, or whose facsimile signature has been placed upon, any share certificate shall have ceased to be such officer because of death, 2 resignation or otherwise before the certificate is issued, such share certificate may be issued by the Corporation with the same effect as if the officer had not ceased to be such at the date of its issue. Section 2.3 Duplicate certificates may be issued for those lost or destroyed, under such terms as may be prescribed by the Board of Directors. Section 2.4 No person, firm, association, corporation or other entity, except PMA Foundation shall at any time hold more than seven percent of the outstanding Common Stock of the Corporation. Nothing set forth in this Section 2.4 shall limit in any respect any person's ownership of shares of Class A Common Stock of the Corporation. Section 2.5 Upon surrender to the Corporation of a share certificate duly endorsed by the person named in the certificate or by attorney duly appointed in writing and accompanied where necessary by the proper evidence of succession, assignment or authority to transfer, a new certificate shall be issued to the person enticed thereto and the old certificate cancelled and the transfer recorded on the share register of the Corporation. A transferee of shares of the Corporation shall not be a record holder of such shares entitled to the rights and benefits associated therewith unless and until the share transfer has been recorded on the share transfer books of the Corporation. No transfer shall be made if it would be inconsistent with the provisions of (i) Article 8 of the Pennsylvania Uniform Commercial Code or (ii) Article 2 of these Bylaws. Section 2.6 The Common Stock of the Corporation shall be owned by and shall be transferable only to a person, firm, association, corporation or other entity qualified to own Common Stock under these Bylaws. If any shareholders of the Corporation shall cease to be qualified to own Common Stock under these Bylaws or if the executor or administrator of any shareholder, or the grantee or assignee of any Common Stock sold on execution, or for debt, or as the result of bankruptcy or insolvency proceedings, or if any other person, firm, association, corporation or other entity who is not qualified to own Common Stock under these Bylaws shall become the holder of Common Stock, then in any such case, unless a transfer of such Common Stock shall be made within six months to a person qualified, such holder shall be required to offer to sell such Common Stock to PMA Foundation at a price to be agreed upon by the holder and PMA Foundation. If the holder and PMA Foundation are unable to agree upon a price, a committee of arbitrators shall be appointed to appraise the fair market value of the Common Stock. The number of arbitrators shall be three, and shall be appointed as follows: one member of the committee shall be appointed by the Executive Committee of PMA Foundation, and one member by the 3 holder of the Common Stock. The two members so appointed shall appoint a third member of the committee. The committee shall then, by a majority agreement, appraise the fair market value of the Common Stock. Thereafter, PMA Foundation shall have the option to purchase such Common Stock at the fair market value as appraised by the majority of the three appointees. If within 30 days after the appraisal of the fair market value of the Common Stock and the presentment thereof to PMA Foundation, PMA Foundation does not exercise its option to purchase, then the Corporation shall have the option to purchase such Common Stock at the appraised fair market value, and if within 30 days after the presentment of such Common Stock to the Corporation for purchase, the Corporation does not exercise its option to purchase, then the holder of such Common Stock shall be deemed the qualified owner thereof until such time as the holder transfers such Common Stock to a person, firm, association, corporation or other entity who is qualified to own Common Stock under these Bylaws. It shall be the duty of any unqualified holder of Common Stock to comply with the provisions of this Section 2.6, and no dividends shall be paid on account of such Common Stock held by any unqualified holder after a holding period of six months in the absence of compliance with the provisions of this Section 2.6. No transfer of any interest in Common Stock of the Corporation shall be effective for any purpose unless such transfer is made in accordance with the provisions of this Section 2.6. Nothing set forth in this Section 2.6 shall limit the transfer of any shares of Class A Common Stock of the Corporation. Section 2.7 Upon issuance of each certificate of Common Stock a receipt shall be taken as follows: "Received Certificate No. ___, subject to the conditions and restrictions therein referred to and to the Bylaws of this Corporation to which the undersigned agrees to conform. This agreement shall be binding upon the heirs, executors, administrators and assigns of the undersigned." Section 2.8. All certificates of Common Stock, in addition to the usual and necessary matters, shill contain the following printed thereon: "The ownership and transfer of Common Stock in this Corporation is limited by the Bylaws printed on the back of this certificate." 4 Upon the back of each certificate of Common Stock shall be printed Sections 2.1, 2.4 and 2.6 of Article 2 of these Bylaws. ARTICLE 3 Shareholders Meetings Section 3.1 All meetings of the shareholders shall be held at such time and place, within or without the Commonwealth of Pennsylvania, as may be determined from time to time by the Board of Directors and need not be held at the registered office of the Corporation. Section 3.2 An annual meeting of the shareholders for the election of directors and the transaction of such other business as may properly be brought before the meeting shall be held in each calendar year at such time and place as may be determined by the Board of Directors. Section 3.3 Special meetings of the shareholders may be called at any time by (i) the Chairman or President, (ii) the Board of Directors or (iii) shareholders entitled to cast at least one-fifth of the votes that all shareholders are entitled to cast at the particular meeting. The request of any person who has called a special meeting of shareholders shall be addressed to the Secretary of the Corporation, shall be signed by the persons making the request and shall state the purpose or purposes of the meeting. Upon receipt of any such request it shall be the duty of the Secretary to fix the time and provide written notice of the special meeting of shareholders, which shall be held not more than 60 days after the receipt of the request. If the Secretary shall neglect or refuse to fix the time or provide written notice of the special meeting, the person or persons making the request may fix the time and provide written notice of the special meeting. Section 3.4 Written notice of each meeting other than an adjourned meeting of shareholders, stating the place and time, and, in the case of a special meeting of shareholders, the general nature of the business to be transacted, shall be provided to each shareholder of record entitled to vote at the meeting at such address as appears on the books of the Corporation. Except as otherwise required by Article 22 hereof, such notice shall be given, in accordance with the provisions of Article 21 of these Bylaws, at least (i) ten days prior to the day named for a meeting to consider a fundamental change under Chapter 19 of the Pennsylvania Business Corporation Law of 1988 (the "BCL") or (ii) five days prior to the day named for the meeting in any other case. 5 Section 3.5 Whenever the Corporation has been unable to communicate with a shareholder for more than 24 consecutive months because communications to the shareholder are returned unclaimed or the shareholder has otherwise failed to provide the Corporation with a current address, the giving of notice to such shareholder pursuant to Section 3.4 of these Bylaws shall not be required. Any action or meeting that is taken or held without notice or communication to that shareholder shall have the same validity as if the notice or communication had been duly given. Whenever a shareholder provides the Corporation with a current address this Section 3.5 shall cease to be applicable to such shareholder. The Corporation shall not be required to give notice to any shareholder pursuant to Section 3.4 hereof if and for as long as communication with such shareholder is unlawful. Section 3.6 The Board of Directors may provide by resolution with respect to a specific meeting or with respect to a class of meetings that one or more shareholders may participate in such meeting or meetings of shareholders by means of conference telephone or other communications equipment by means of which all persons participating in the meeting can hear one another. Participation in the meeting by such means shall constitute presence in person at the meeting. Any notice otherwise required to be given in connection with any meeting at which participation by conference telephone or other communications equipment is permitted shall so specify. ARTICLE 4 Quorum of Shareholders Section 4.1 A meeting of shareholders duly called shall not be organized for the transaction of business unless a quorum is present. Section 4.2 The holders of a majority of the outstanding voting power of the shares of stock of the Corporation, appearing either in person or by proxy, shall constitute a quorum for the transaction of business at any annual or special meeting of the shareholders. Section 4.3 The shareholders present at a duly organized meeting can continue to do business until adjournment notwithstanding the withdrawal of enough shareholders to leave less than a quorum. 6 Section 4.4 If a meeting of shareholders cannot be organized because a quorum is not present, those present in person or by proxy, may, except as otherwise provided by statute, adjourn the meeting to such time and place as they may determine, without notice other than an announcement at the meeting, until the requisite number of shareholders for a quorum shall be present in person or by proxy. Section 4.5 Notwithstanding the provisions of Sections 4.1, 4.2, 4.3 and 4.4 of these Bylaws: (1) Any meeting at which directors are to be elected may be adjourned only from day to day, or for such longer periods not exceeding 15 days each as the shareholders present and entitled to vote shall direct. (2) Those shareholders entitled to vote who attend a meeting called for election of directors that has been previously adjourned for lack of a quorum, although less than a quorum as fixed in these Bylaws, shall nevertheless constitute a quorum for the purpose of electing directors. (3) Those shareholders entitled to vote who attend a meeting that has been previously adjourned for one or more periods aggregating at least 15 days because of an absence of a quorum, although less than a quorum as fixed in these Bylaws, shall nevertheless constitute a quorum for the purpose of acting upon any matter set forth in the notice of the meeting if the notice states that those shareholders who attend the adjourned meeting shall nevertheless constitute a quorum for the purpose of acting upon the matter. Section 4.6 Except as otherwise provided by statute, the Articles of Incorporation or these Bylaws, at any duly organized meeting of shareholders the vote of the holders of a majority of the votes cast shall decide any question brought before such meeting. ARTICLE 5 Proxies Section 5.1 Every shareholder entitled to vote at a meeting of shareholders, or to express consent or dissent to corporate action in writing without a meeting, may authorize another person or persons to act for him by proxy. Every proxy shall be executed in writing by the shareholder or his duly authorized attorney-in-fact and filed with the Secretary of the Corporation. A proxy, unless coupled with an interest, shall be revocable at will, notwithstanding any other agreement or any provision in the proxy to the contrary, but the revocation of a proxy shall not be effective until written 7 notice thereof has been given to the Secretary of the Corporation. An unrevoked proxy shall not be valid after three years from the date of its execution unless a longer time is expressly provided therein. A proxy shall not be revoked by the death or incapacity of the maker, unless before the vote is counted or the authority is exercised, written notice of such death or incapacity is given to the Secretary of the Corporation. Section 5.2 Where two or more proxies of a shareholder are present, the Corporation shall, unless otherwise expressly provided in the proxy, accept as the vote of all shares represented thereby the vote cast by a majority of them and, if a majority of the proxies cannot agree whether the shares represented shall be voted or upon the manner of voting the shares, the voting of the shares shall be divided equally among those persons. ARTICLE 6 Record Date Section 6.1 The Board of Directors may fix a time prior to the date of any meeting of shareholders as a record date for the determination of the shareholders entitled to notice of, or to vote at, the meeting, which time, except in the case of an adjourned meeting, shall not be more than 90 days prior to the date of the meeting of shareholders. Only shareholders of record on the date so fixed shall be entitled to notice of, or to vote at, such meeting, notwithstanding any transfer of shares on the books of the Corporation after any record date fixed as aforesaid. The Board of Directors may similarly fix a record rate for the determination of shareholders of record for any other purpose, such as the payment of a distribution or conversion or exchange of shares. ARTICLE 7 Record of Shareholders Section 7.1 The Treasurer shall have charge of the share transfer books of the Corporation and shall maintain an alphabetical record of the shareholders with their addresses and the number of shares held by each. 8 ARTICLE 8 Judges of Election Section 8.1 Prior to any meeting of shareholders, the Board of Directors may appoint judges of election, who may but need not be shareholders, to act at such meeting or any adjournment thereof. If judges of election are not so appointed, the presiding officer of any such meeting may, ant on the request of any shareholder or his proxy shall, make such appointment at the meeting. The number of judges shall be one or three. No person who is a candidate for an office to be filled at the meeting shall act as a judge of election. Section 8.2 In case any person appointed as a judge of election fails to appear or fails or refuses to act, the vacancy so created may be filled by appointment made by the Board of Directors in advance of the convening of the meeting or at the meeting by the presiding officer thereof. Section 8.3 The judges of election shall determine the number of shares outstanding and the voting power of each, the shares represented at the meeting, the existence of a quorum and the authenticity, validity and effect of proxies. The judges of election shall also receive votes or ballots, hear and determine all challenges and questions in any way arising in connection with the right to vote, count and tabulate all votes, determine the result and do such other acts as may be proper to conduct the election or vote with fairness to all shareholders. The judges of election shall perform their duties impartially, in good faith, to the best of their ability and as expeditiously as practicable. If there are three judges of election, the decision, act or certificate of a majority shall be the decision, act or certificate of all. Section 8.4 On request of the presiding officer of the meeting or of any shareholder, the judges of election shall make a report in writing of any challenge, question or matter determined by then and execute a certificate of any fact found by them. Any report or certificate made by them shall be prima facie evidence of the facts found by them. 9 ARTICLE 9 Consent of Shareholders in Lieu of Meeting Section 9.1 Any action required or permitted to be taken at a meeting of the shareholders may be taken without a meeting if, prior or subsequent to the action, a written consent or consents thereto signed by all of the shareholders who would be entitled to vote at a meeting for such purpose shall be filed with the Secretary of the Corporation. Section 9.2 Any action required or permitted to be taken at a meeting of the shareholders or of a class of shareholders may be taken without a meeting upon the written consent of shareholders who would have been entitled to cast the minimum number of votes that would be necessary to authorize the action at a meeting at which all the shareholders entitled to vote thereon were present and voting. The consents shall be filed with the Secretary of the Corporation. If a written consent or consents are signed by fewer than all of the shareholders who would be entitled to vote at a meeting for such purpose, the action shall not become effective until ten days after written notice of the action has been given to each shareholder entitled to vote thereon who has not consented thereto. ARTICLE 10 Directors Section 10.1 The business and affairs of the Corporation shall be managed under the direction of a Board of Directors of not less than 12 or more than 24 directors. The Board of Directors shall be divided into three classes, and directors of each class shall be elected for a term of three years and until their successors are elected and qualified or until their earlier death, resignation or removal. A decrease in the number of directors shall not have the effect of shortening the term of any incumbent director. Prior to each election of a class of directors the Board of Directors shall fix the size of that class of directors at a minimum of four and a maximum of eight directors. The Board of Directors may exercise all such powers of the Corporation and do all such lawful acts and things as are required or permitted to be exercised and done by statute, the Articles of Incorporation or these Bylaws. Section 10.2 In all elections of directors, each shareholder, or his proxy, shall be entitled to the number of votes to which the shares of stock owned by him are entitled to cast under the Articles of Incorporation of the Corporation and may cumulate his votes as provided in the Articles of Incorporation. All elections shall be by ballot. 10 Section 10.3 Every director shall be a shareholder in the Corporation. When first elected to the Board of Directors, each director shall be regularly engaged in a business, trade, or profession and shall be a resident of a jurisdiction in which the Corporation is transacting business. No person shall be elected a director who is or becomes 70 years of age prior to or during his first term in office as a director. No person shall be considered as a candidate, nor shall any votes be counted for any person, unless written notice of the nomination of the candidacy shall have been filed with the Secretary of the Corporation for the information of the shareholders not less than 60 days prior to the election; provided, however, that nominees selected by the then existing Board of Directors, or by a Nominating Committee appointed by the Board of Directors and consisting of four directors continuing in office, may be condidates and voted for without such notice. Section 10.4 A meeting of the Board of Directors may be held immediately following the annual meeting of shareholders at which directors have been elected without the necessity of notice to the directors. At the first regular meeting of the Board of Directors after each annual meeting of shareholders, the Board of Directors shall elect a Chairman of the Board of Directors, a President, a Secretary, a Treasurer and such other officers as the Board of Directors shall determine. The President and Secretary shall be natural persons of full age. The Treasurer may be a corporation, but if a natural person shall be of full age. The Chairman of the Board of Directors and the President shall be, and each other officer may be, a director of the Corporation. The offices of Secretary and Treasurer may be filled by one person. Section 10.5 Regular meetings of the Board of Directors shall be held at least four times each year at times and places within or without the Commonwealth of Pennsylvania designated by the Board of Directors. One or more directors may participate in any meeting of the Board of Directors, or of any committee thereof, by means of a conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear one another. Participation in a meeting by such means shall constitute presence in person at the meeting. Section 10.6 A special meeting of the Board of Directors may be called at any time by the Chairman of the Board on 24 hours' notice to each director, either by telephone, or if in writing, in accordance with Article 21 of these Bylaws and shall be called by him or, in his absence, by the Secretary, upon the written request of three members of the Board of Directors. Such special meeting of the Board of Directors shall be held at a time and place designated by the Chairman of the Board, or, in his absence, the Secretary. 11 Section 10.7 A majority of the directors then in office shall constitute a quorum at any regular or special meeting of the Board of Directors, and the acts of a majority of the directors present and voting at a meeting at which a quorum is present shall be the acts of the Board of Directors, except as may be otherwise specifically provided by statute or by the Articles of Incorporation or by these Bylaws. ARTICLE 11 Removal of Directors Section 11.1 Unless otherwise provided in the Articles of Incorporation, or in Article 11, Section 11.3 of these Bylaws the entire Board of Directors, or any class of the Board of Directors or any individual director, may be removed from office by vote of the shareholders entitled to vote thereon only for cause. Notwithstanding the foregoing, an individual director shall not be removed (unless the entire Board of Directors or class of Directors is removed) from the Board of Directors if sufficient votes are cast against the resolution for such director's removal which, if cumulatively voted at an annual or other regular election of directors, would be sufficient to elect one or more directors to the Board of Directors or a class thereof. If any directors are so removed, new directors may be elected at the same meeting. Section 11.2 The Board of Directors may declare vacant the office of a director who has been judicially declared of unsound mind or who has been convicted of an offense punishable by imprisonment for a term of more than one year. Section 11.3 The Board of Directors may be removed at any time with or without cause by the unanimous consent of shareholders entitled to vote thereon. ARTICLE 12 Vacancies in the Board of Directors Section 12.1 Vacancies in the Board of Directors occurring for any reason, including vacancies resulting from an increase in the number of directors, shall be filled by a majority vote of the remaining members of the Board of Directors, though less than a quorum, or by a sole remaining director, and each person so elected shall be a director to serve for the balance of the unexpired term and until his successor has been elected and qualified or until his earlier death, resignation or removal. 12 Section 12.2 When one or more directors resign from the Board of Directors effective at a future date, the directors then in office, including those who have so resigned, shall have the power by a majority vote to fill the vacancies, the vote thereon to take effect when the resignations become effective. ARTICLE 13 Action by Written Consent Section 13.1 Any action required or permitted to be taken at a meeting of the Board of Directors may be taken without a meeting if, prior or subsequent to the action, a consent or consents thereto signed by all of the directors is filed with the Secretary of the Corporation. ARTICLE 14 Compensation of Directors Section 14.1 Directors, as such, may receive a stated salary for their services or a fixed sum and expenses for attendance at regular and special meetings, or any combination of the foregoing as may be determined from time to time by resolution of the Board of Directors, and nothing contained herein shall be construed to preclude any director from receiving compensation for services rendered to the Corporation in any other capacity. ARTICLE 15 Committees Section 15.1 The Board of Directors may, by resolution adopted by a majority of the directors in office, establish one or more committees consisting of one or more directors as may be deemed appropriate or desirable by the Board of Directors to serve at the pleasure of the Board. Any committee, to the extent provided in the resolution of the Board of Directors pursuant to which it was created, shall have and may exercise all of the powers and authority of the Board of Directors, except that no committee shall have any power or authority as to the following: 13 (1) The submission to shareholders of any action requiring approval of shareholders; (2) The creation or filling of vacancies in the Board of Directors; (3) The adoption, amendment or repeal of these Bylaws; (4) The amendment or repeal of any resolution of the Board of Directors that by its terms is amendable or repealable only by the Board of Directors; and (5) Action on matters committed by the Bylaws or resolution of the Board of Directors to another committee of the Board of Directors. Section 15.2 At the first meeting following each annual meeting of shareholders, the Board of Directors shall elect an Executive Committee of not less than four (4) directors and not more than six (6) directors, a Finance Committee of not less than four (4) directors and not more than six (6) directors and an Audit Committee of three (3) directors. These committees shall meet at the call of the Chairman of the Board. A majority of the elected and ex officio members of the committees shall constitute a quorum. Section 15.3 The Executive Committee shall have supervision of all business of the Corporation and shall have the authority in between the time of regular meetings of the Board of Directors as specified in Article 10, Section 10.5 hereof, to exercise all powers of the Corporation and do all such lawful acts and things as are required or permitted to be exercised and done by statute, the Articles of Incorporation or these Bylaws. The Executive Committee shall have the power to create offices and titles as deemed desirable or advisable. The holders of such offices need not be directors of the Corporation. Section 15.4 The Finance Committee shall make all loans and investments of the funds of the Corporation under such directions as the Board of Directors may prescribe. Section 15.5 The Audit Committee shall review the annual audit of the Corporation's books and shall have such other duties as the Board of Directors may prescribe. ARTICLE 16 Liability of Directors Section 16.1 A director of the Corporation shall stand in a fiduciary relation to the Corporation and shall perform his duties as a director, including his duties as a member of any committee of the Board of Directors upon which he may serve, in good faith, in a 14 manner he reasonably believes to be in the best interests of the Corporation, and with such care, including reasonable inquiry, skill and diligence, as a person of ordinary prudence would use under similar circumstances. In performing his duties, a director shall be entitled to rely in good faith on information, opinions, reports or statements, including financial statements and other financial data, in each case prepared or presented by any of the following: (i) one or more officers or employees of the Corporation whom the director reasonably believes to be reliable and competent in the matters presented; (ii) lead counsel, public accountants or other persons as to matters which the director reasonably believes to be within the professional or expert competence of such persons; or (iii) a committee of the Board of Directors upon which he does not serve, duly designated in accordance with law, as to matters within its designated authority, which committee the director reasonably believes to merit confidence. A director shall not be considered to be acting in good faith if he has knowledge concerning the matter in question that would cause his reliance to be unwarranted. Section 16.2 In discharging the duties of their respective positions, the Board of Directors, committees of the Board of Directors and individual directors may, in considering the best interests of the Corporation, consider the effects of any action upon employees, upon suppliers and customers of the Corporation and upon communities in which offices or other establishments of the Corporation are located, and all other pertinent factors. The consideration of these factors shall not constitute a violation of Section 16.1 of this Article 16. Section 16.3 Absent breach of fiduciary duty, lack of good faith or self-dealing, actions taken as a director or any failure to take any action shall be presumed to be in the best interests of the Corporation. Section 16.4 A director of the Corporation shall not be personally liable for monetary damages as such for any action taken, or any failure to take any action, unless: (i) the director has breached or failed to perform the duties of his office under Sections 16.1 through 16.3 of this Article 16; and (ii) the breach or failure to perform constitutes self-dealing, willful misconduct or recklessness. Section 16.5 The provisions of Section 16.4 of this Article 16 shall not apply to: (i) the responsibility or liability of a director pursuant to any criminal statute; or (ii) the liability of a director for the payment of taxes pursuant to local, state or federal law. Section 16.6 Notwithstanding any other provisions of these Bylaws, the approval by the affirmative vote of the holders of a majority of the outstanding voting power of the shares of stock of the Corporation shall be required to amend, repeal or adopt any provision as part of these Bylaws that is inconsistent with the purpose or intent of 15 Sections 16.1, 16.2, 16.3, 16.4, 16.5 or 16.6 of this Article 16, and, if any such action shall be taken, it shall become effective only on a prospective basis from and after the date of such shareholder approval. The provisions of Section 16.1, 16.2, 16.3, 16.4 and 16.5 were originally adopted by the shareholders of the Corporation on April 27, 1987. ARTICLE 17 Officers Section 17.1 The Corporation shall have a Chairman of the Board, a President, a Secretary and a Treasurer or persons who shall act as such, regardless of the name or title by which they may be designated, elected or appointed and may have such other officers and assistant officers as the Board of Directors may authorize from time to time. The Chairman of the Board or the President shall be the chief executive officer of the Corporation, as the Board of Directors may determine from time to time. Each officer shall hold office at the pleasure of the Board of Directors and until his successor has been elected and qualified or until his earlier death, resignation or removal. Any officer may resign at any time upon written notice to the Corporation. The resignation shall be effective upon receipt thereof by the Corporation or at such subsequent time as may be specified in the notice of resignation. Section 17.2 Except as otherwise provided in the Articles of Incorporation, an officer shall perform his duties as an officer in good faith, in a manner he reasonably believes to be in the best interests of the Corporation and with such care, including reasonable inquiry, skill and diligence, as a person of ordinary prudence would use under similar circumstances. A person who so performs his duties shall not be liable by reason of having been an officer of the Corporation. Section 17.3 Any officer or agent of the Corporation may be removed by the Board of Directors with or without cause by a vote of not less than two-thirds of the whole Board. The removal shall be without prejudice to the contract rights, if any, of any person so removed. Election or appointment of an officer or agent shall not of itself create contract rights. If the office of any officer becomes vacant for any reason, the vacancy may be filled by the Board of Directors. 16 ARTICLE 18 Duties of Officers Section 18.1 The Chairman of the Board shall preside at all meetings of the Board of Directors and at all meetings of the shareholders, appoint all committees not otherwise provided for in the Bylaws and shall be ex officio a member of all committees. Section 18.2 In the absence of the Chairman of the Board, the President shall preside at all meetings of the Board of Directors and at all meetings of the shareholders. Except as otherwise provided herein, the President shall have general supervision and control of all the employees of the Corporation; shall be responsible for the general and active management of the business of the Corporation; shall see that all orders and resolutions of the Board of Directors are put into effect, subject, however, to the right of the Board of Directors to delegate any specific powers, except such as may be by statute exclusively conferred on the President or on any other officer or officers of the Corporation; shall have the authority to execute bonds, mortgages and other contracts requiring a seal, under the seal of the Corporation, except where required or permitted by law to be otherwise signed and executed and except where the signing and execution thereof shall be expressly delegated by the Board of Directors to some other office or agent of the Corporation; and shall be ex officio a member of all committees. Section 18.3 In the absence of the President, the Executive Vice President, if any, shall assume the duties of the President. The Executive Vice President, if any, shall perform such duties as may be assigned to him by the Corporation's chief executive officer, the Board of Directors or the Executive Committee of the Board of Directors. Section 18.4 The Vice Presidents shall perform such duties as may be designated from time to time by the Corporation's chief executive officer, the Board of Directors or the Executive Committee of the Board of Directors. Section 18.5 The Secretary shall act under the direction and superintendence of the Corporation's chief executive officer; attend all the meetings of shareholders, directors and committees, and keep in suitable books the minutes thereof; superintend the keeping and have charge of the seal, books, papers and records pertaining to his office, sign such document and shall require his attention, issue notices for all meetings; make or superintend the making of monthly and annual statements to the Board of Directors. which shall fully show the current business and condition of the Corporation and perform generally all the duties incident to the office of Secretary. 17 Section 18.6 The Treasurer or his designee shall receive and take care of all moneys, securities and evidences of indebtedness belonging to the Corporation; maintain day by day records of his transactions and deposit the daily receipts in a General Account in the name of the Corporation in such bank or banks or such depositories as the Board of Directors or the Executive Committee may direct. All checks or other orders on such banks or depositories for the payment or transfer of money shall be signed by the Treasurer or his designee and by another officer of the Corporation. In addition to the aforesaid General Account, the Treasurer or his designee shall maintain Special Accounts as the Board of Directors or the Executive Committee may from time to time create in banks for current payments; such deposits shall be made in the name of the Corporation and shall be replenished from the General Account as may be necessary to maintain working balances in such Special Accounts. All checks or drafts drawn against such Special Accounts shall be signed by such officer or officers or employees as may from time to time be authorized by the Board of Directors or the Executive Committee of the Board of Directors. Section 18.7 The Assistant Secretary shall, in the absence of the Secretary, perform the duties of the Secretary and such other duties as may be assigned to him by the Secretary. Section 18.8 The Assistant Treasurer shall, in the absence of the Treasurer, perform the duties of the Treasurer and such other duties as may be assigned to him by the Treasurer. Section 18.9 All officers and employees shall give bond for the faithful performance of their duties in such amount as is required by the Board of Directors or the Executive Committee of the Board of Directors. ARTICLE 19 Indemnification of Officers, Directors. Employees, and Agents Section 19.1 The Corporation shall indemnify any director or officer, and may indemnify any other employee or agent, who was or is a party to, or is threatened to be made a party to or who is called as a witness in connection with, any threatened, pending, or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, including an action by or in the right of the Corporation by reason of the fact that he is or was a director, officer, employee or agent of the Corporation, or is or 18 was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses, including attorneys' fees, judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding unless the act or failure to act giving rise to the claim for indemnification is determined by a court to have constituted willful misconduct or recklessness. Section 19.2 The indemnification and advancement of expenses provided by, or granted pursuant to, this Article 19 shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any Bylaw, agreement, contract, vote of shareholders or disinterested directors or pursuant to the direction, howsoever embodied, of any court of competent jurisdiction or otherwise, both as to action in their official capacity and as to action in another capacity while holding such office. It is the policy of the Corporation that indemnification of, and advancement of expenses to, directors and officers of the Corporation shall be made to the fullest extent permitted by law. To this end, the provisions of this Article 19 shall be deemed to have been amended for the benefit of directors and officers of the Corporation effective immediately upon any modification of the BCL or the Directors' Liability Act of the Commonwealth of Pennsylvania (the "DLA") which expands or enlarges the power or obligation of corporations organized under the BCL or subject to the DLA to indemnify, or advance expenses to, directors and officers of corporations. Section 19.3 The Corporation shall pay expenses incurred by an officer or director, and may pay expenses incurred by any other employee or agent, in defending a civil or criminal action, suit or proceeding in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such person to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the Corporation. Section 19.4 The indemnification and advancement of expenses provided by, or granted pursuant to, this Article 19 shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such person. Section 19.5 The Corporation shall have the authority to create a fund of any nature, which may, but need not, be under the control of an independent trustee, or otherwise secure or insure in any manner, its indemnification obligations, whether arising under these Bylaws or otherwise. The authority shall include, without limitation, the authority to: (i) deposit funds in trust or in escrow, (ii) establish any form of self-insurance, (iii) secure its indemnity obligation by grant of a security interest, mortgage or 19 other lien on the assets of the Corporation or (iv) establish a letter of credit, guaranty or surety arrangement for the benefit of such persons in connection with the anticipated indemnification or advancement of expenses contemplated by this Article 19. The provisions of this Article 19 shall not be deemed to preclude the indemnification of, or advancement of expenses to, any person who is not specified in Section 19.1 of this Article 19 but whom the Corporation has the power or obligation to indemnify, or to advance expenses for, under the provisions of the BCL or the DLA or otherwise. The authority granted by this Section 19.5 shall be exercised by the Board of Directors of the Corporation. Section 19.6 The Corporation shall have the authority to enter into a separate indemnification agreement with any officer, director, employee or agent of the Corporation or any subsidiary providing for such indemnification of such person as the Board of Directors shall determine up to the fullest extent permitted by law. Section 19.7 As soon as practicable after receipt by any person specified in Section 19.1 of this Article 19 of notice of the commencement of any action, suit or proceeding specified in Section 19.1 of this Article 19, such person shall, if a claim with respect thereto may be made against the Corporation under Article 19 of these Bylaws, notify the Corporation in writing of the commencement or threat thereof; however, the omission so to notify the Corporation shall not relieve the Corporation for any liability under Article 19 of the Bylaws unless the Corporation shall have been prejudiced thereby or from any other liability which it may have to such person other than under Article 19 of these Bylaws. With respect to any such action as to which such person notifies the Corporation of the commencement or threat thereof, the Corporation may participate therein at its own expense, and except as otherwise provided below, to the extent that it desires, the Corporation jointly with any other indemnifying party similarly notified, shall be entitled to assume the defense thereof, with counsel selected by the Corporation to the reasonable satisfaction of such person. After notice from the Corporation to such person of its election to assume the defense thereof, the Corporation shall not be liable to such person under Article 19 of these Bylaws for any legal or other expenses subsequently incurred by such person in connection with the defense thereof other than as otherwise provided below. Such person shall have the right to employ his own legal counsel in such action, but the fees and expenses of such legal counsel incurred after notice from the Corporation of its assumption of the defense thereof shall be at the expense of such person unless: (i) the employment of legal counsel by such person shall have been authorized by the Corporation; (ii) such person shall have reasonably concluded that there may be a conflict of interest between the Corporation and such person in the conduct of the defense of such proceeding; or (iii) the Corporation shall not in fact have employed legal counsel to assume the defense of such action. The Corporation shall not be entitled to assume the defense of any proceeding brought by or on behalf of the Corporation or as 20 to which such person shall have reasonably concluded that there may be a conflict of interest. If indemnification under Article 19 of these Bylaws or advancement of expenses are not paid or made by the Corporation, or on its behalf, within 90 days after a written claim for indemnification or a request for an advancement of expenses has been received by the Corporation, such person may, at any time thereafter, bring suit against the Corporation to recover the unpaid amount of the claim or the advancement of expenses. The right to indemnification and advancement of expenses provided hereunder shall be enforceable by such person in any court of competent jurisdiction. The burden of proving that indemnification is not appropriate shall be on the Corporation. Expenses reasonably incurred by such person in connection with successfully establishing the right to indemnification or advancement of expenses, in whole or in part, shall also be indemnified by the Corporation. Section 19.8 The Corporation shall have power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the Corporation would have the power to indemnify him against such liability under the provisions of this Article 19. Section 19.9 Notwithstanding any other provisions of these Bylaws, the approval by (i) the affirmative vote of the holders of a majority of the outstanding voting power of the shares of stock of the Corporation or (ii) a majority vote of the members of the Board of Directors shall be required to amend, repeal or adopt any provision as part of these Bylaws which is inconsistent with the purpose or intent of this Article 19, and, if any such action shall be taken, it shall become effective only on a prospective basis from and after the date of such approval. The provisions of Sections 19.1, 19.2, 19.3, 19.4, 19.5, 19.6, 19.7 and 19.8 were originally adopted by the shareholders of the Corporation on April 27, 1987. ARTICLE 20 Fiscal Year Section 20.1 The fiscal year of the Corporation shall be determined by the Board of Directors. 21 ARTICLE 21 Manner of Giving Written Notice; Waivers of Notice Section 21.1 Whenever written notice is required to be given to any person under the provisions of these Bylaws, it may be given to the person either personally or by sending a copy thereof by first class or express mail, postage prepaid, or by telegram (with messenger service specified), telex or TWX (with answer back received) or courier service, charges prepaid, or by telecopier, to his address (or to his telex, TWX, telecopier or telephone number) appearing on the books of the Corporation or, in the case of written notice to directors, supplied by each director to the Corporation for the purpose of the notice. If the notice is sent by mail, telegraph or courier service, it shall be deemed to have been given to the person entitled thereto when deposited in the United States mail or with a telegraph office or courier service for delivery to that person or, in the case of telex or TWX, when dispatched. Section 21.2 Any written notice required to be given to any person under the provisions of statute, the Corporation's Articles of Incorporation or these Bylaws may be waived in a writing signed by the person entitled to such notice whether before or after the time stated therein. Except as otherwise required by statute, and except in the case of a special meeting, neither the business to be transacted at, nor the purpose of, a meeting need be specified in the waiver of notice. In the case of a special meeting of shareholders, the waiver of notice shall specify the general nature of the business to be transacted. Attendance of any person, whether in person or by proxy, at any meeting shall constitute a waiver of notice of such meeting, except where a person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting was not lawfully called or convened. ARTICLE 22 Amendments Section 22.1 Neither this Section 22.1 nor Article 2 of these Bylaws may be altered, amended or repealed unless approved by the affirmative vote of the holders of two-thirds of the outstanding Common Stock of the Corporation, voting as a separate class, at any annual meeting of shareholders or at a special meeting of shareholders called for that purpose, provided that 30 days' notice of the proposed amendments shall have been mailed to the last recorded address of each shareholder as furnished to the Corporation, and that the same shall have been submitted to the Board of Directors at least 30 days prior to such meeting. 22 Section 22.2 Neither this Section 22.2 nor Article 16 of these Bylaws may be altered, amended or repealed unless approved by the affirmative vote of the holders of a majority of the outstanding voting power of the shares of stock of the Corporation at a duly organized meeting of shareholders called for that purpose, provided that 30 days' notice of the proposed amendments shall have been mailed to the last recorded address of each shareholder as furnished to the Corporation, and that the same shall have been submitted to the Board of Directors at least 30 days prior to such meeting. Section 22.3 Neither this Section 22.3 nor Article 19 of these Bylaws may be altered, amended or repealed unless approved by: (i) the affirmative vote of the holders of a majority of the outstanding voting power of the shares of stock of the Corporation at a duly organized meeting called for that purpose, provided that 30 days' notice of the proposed amendments shall have been mailed to the last recorded address of each shareholder as furnished to the Corporation, and that the same shall have been submitted to the Board of Directors at least 30 days prior to such meeting, or (ii) a majority vote of the members of the Board of Directors at any regular meeting or any special meeting duly convened after notice to the directors of that purpose, subject to the power of the shareholders to change such action by the affirmative vote of the holders of a majority of the outstanding voting power of the shares of stock of the Corporation at any duly organized meeting called for that purpose. Section 22.4 All provisions of these Bylaws other than Articles 2, 16 and 19 and Sections 22.1, 22.2 and 22.3 may be altered, amended or repealed: (i) by the affirmative vote of the holders of a majority of the outstanding voting power of the shares of stock of the Corporation at a duly organized meeting called for that purpose, or (ii) by a majority vote of the members of the Board of Directors at any regular meeting or any special meeting duly convened after notice to the directors of that purpose, subject to the power of the shareholders to change such action by the affirmative vote of the holders of a majority of the outstanding voting power of the shares of stock of the Corporation at any duly organized meeting called for that purpose. 23 APPENDIX TO THE AMENDED AND RESTATED BYLAWS OF PENNSYLVANIA MANUFACTURERS CORPORATION Pursuant to Article 2, Section 2.1 (12) of the Bylaws, the Board of Directors has authorized the following classes of persons to own shares of Common Stock. 1. Employees of the Corporation or any of its affiliates who are not officers of any of these entities, but whose duties require the exercise of executive and administrative responsibilities, shall be deemed qualified to own Common Stock of the Corporation. By resolution of the Board of Directors dated May 19, 1983 as amended by resolution of the Board of Directors dated February 27, 1996. 2. A spouse of a person who owned Common Stock of record on December 8, 1990 is qualified to own shares of the Corporation's Common Stock. By resolution of the Board of Directors dated December 8, 1990. 24 EX-10.1 4 EMPLOYMENT AGREEMENT EXHIBIT 10.1 EMPLOYMENT AGREEMENT THIS AGREEMENT, made as of the first day of April, 1995, by and between PENNSYLVANIA MANUFACTURERS CORPORATION, a Pennsylvania corporation, whose principal office is located at Blue Bell, Pennsylvania, (hereinafter "PMC") and FREDERICK W. ANTON, III, of Philadelphia, Pennsylvania (hereinafter "Anton") to set forth the terms and conditions upon which PMC shall continue to employ Anton. 1. The Employment Term. During the period beginning April 1, 1995 and ending March 31, 2000, (hereinafter "Employment Term") PMC shall continue to employ Anton as its chief executive officer and Anton agrees to be so employed. If, at the annual organizational meeting of the Board of Directors of PMC held in l996 and in any subsequent year, Anton is elected as Chairman of the Board of PMC, the Employment Term shall be automatically extended for a further period of one year without the need for further action by the Board of Directors or the execution of a formal amendment to this Agreement. 2. Duties During the Employment Term. During the Employment Term Anton shall serve as the chief executive officer of PMC, and, if elected, shall serve as Chairman of the Board of PMC. Anton shall at all times throughout the Employment Term devote his full time and his best efforts to the business of PMC and its subsidiaries and affiliates. -1- 3. Salary During the Employment Term. During the Employment Term PMC shall pay Anton on a bi-weekly basis a salary of not less than $700,000 per year. Anton's annual salary may be increased but not decreased by PMC at any time and from time to time. In addition, Anton shall be entitled to receive such bonus compensation, if any, as he may be awarded from time to time by PMC. 4. Inability to Perform. If for any reason during the Employment Term, Anton shall at any time or from time to time be unable to perform the services required of him pursuant to paragraph 2 hereof, he shall nevertheless be entitled to receive the salary payments and other benefits provided by this Agreement until the end of the Employment Term or until the date of his death, whichever first occurs. 5. Expenses. PMC shall pay the ordinary and necessary business expenses incurred by Anton in connection with the performance of his duties on behalf of PMC. 6. Restrictive Covenant. Anton shall not during the Employment Term, directly or indirectly, either as principal, agent, stockholder, or in any other capacity, engage in or have a material financial interest in any business which competes with the business of PMC as then conducted. -2- 7. Death. If Anton shall die during the Employment Term, PMC shall in each year thereafter for a period of 10 years pay each of Frederick W. Anton IV and Sara Daniels Anton (individually for this Paragraph "Beneficiary" and collectively "Beneficiaries"), the natural children of Anton, 60% of Anton's annual salary on the date of his death payable on the first day of each calendar quarter, but if either or both Beneficiaries shall die during the 10 year term, the amount to which he or she would otherwise be entitled shall be paid to his or her surviving children, if any, in equal shares; if there is no child or children of a deceased Beneficiary, then the payments shall instead be made to the surviving Beneficiary, and if he or she dies, then to the surviving child or children of such surviving Beneficiary in equal shares; upon the death of both Beneficiaries without surviving children, no further payments will be due to be paid by PMC. 8. Retirement. Anton may elect to retire from full time employment by PMC at any time after April 1, 1996, and the Employment Term shall thereupon terminate on the date his retirement becomes effective. Beginning on the date of his retirement and continuing throughout Anton's lifetime PMC shall pay to Anton monthly five percent (5%) of his annual salary on the date of his retirement. If, during Anton's retirement and prior to his death, the total payments made to Anton by PMC pursuant to this paragraph are less than 60% of Anton's annual salary at retirement multiplied by 15, the difference expressed in dollars shall be divided equally between each of Frederick W. Anton IV and Sara Daniels Anton (individually for this Paragraph "Beneficiary" and collectively "Beneficiaries"), the natural children of Anton, and the amount so determined shall be paid to the Beneficiaries who survive Anton one year after the -3- date of Anton's death, but if either of both Beneficiaries shall die before Anton or within six months following the date of Anton's death, the amount to which he or she would otherwise be entitled shall be paid to his or her surviving children, if any, in equal shares; if there is no child or children of a Beneficiary who died before Anton or within six months following the date of Anton's death, then payment shall instead be made to the surviving Beneficiary, but if he or she also dies before Anton or within six months following the date of Anton's death, then to the surviving child or children of such surviving Beneficiary in equal shares; upon the death of both Beneficiaries before Anton's death or within six months following the date of Anton's death without surviving children, no payment will be due to be paid by PMC. At the time of his retirement, Anton shall have the right, if he elects, to require PMC to purchase a fully-paid annuity or its equivalent issued by an insurance company which is then accorded A. M. Best and Company's financial rating of 'A' or better, which annuity shall provide all necessary funds for the retirement payments to be made pursuant to this Paragraph 8. The purchase of such annuity shall not in any way terminate the obligation of PMC to make the retirement payments required to be made pursuant to this Paragraph 8. 9. Employee Benefit Plans. No provision of this Agreement shall in any way abrogate or impair any rights or privileges of Anton as an employee of PMC under any qualified or unqualified retirement, pension, profit sharing, disability life insurance, hospitalization or other employee plan or plans which are now in effect or which may hereafter be adopted by PMC. Any payment made by PMC pursuant to Paragraph 4 hereof or any retirement payments made pursuant to Paragraph 8 of this Agreement shall be in addition to, and not in lieu of, all benefits which Anton is or will be entitled to receive under PMC's Pension Plan and any supplementary -4- retirement plan as well as any other qualified or unqualified benefit plan or plans which presently are or hereafter become available to PMC employees. 10. Provision for Life insurance. In accordance with the terms of Anton's Employment Agreement with PMC dated May 1, 1991, PMC and the trustee named by Anton (the "trustee") has secured from The Manufacturers Life Insurance Company of Toronto, Canada (the "Insurer"), a life insurance policy in the face amount of $1,000,000 on the life on Anton. In furtherance thereof, the trustee has entered into a split-Dollar Life Insurance Agreement with PMC (the "Split-Dollar Agreement") which requires PMC to pay the annual premiums due on such policy throughout Anton's lifetime and which provides for the eventual recovery by PMC of its interest in the policy, which is as follows: (a) if the Policy matures as a death claim, PMC shall receive an amount equal to the total premiums paid by PMC during Anton's lifetime less an amount equal to that portion of the premiums paid by PMC during Anton's lifetime which conferred an economic benefit upon Anton which shall be determined by the use of the lesser of (i) the one-year term life insurance rates published by the Insurer or (ii) the uniform One-Year Term Premiums Table published by the U. S. Treasury Department known as the "P.S. 58 cost"; and (b) if the Policy is surrendered, PMC shall receive an amount equal to the lesser of (i) the total cash surrender value of the Policy or (ii) the cumulative total of the premiums on the Policy that PMC has paid less an amount equal to that portion of the premiums paid by PMC during Anton's lifetime which conferred an economic benefit upon Anton which shall be determined by the use of the -5- lesser of (A) the one-year term life insurance rates published by the Insurer or (B) the Uniform One-Year Term Premiums Table published by the U.S. Treasury Department known as the "P.S. 58 cost". The trustee and PMC have entered into a Collateral Assignment Agreement with respect to the Policy in order to secure PMC's interest in the Policy. The rights and undertakings of PMC and Anton in connection with the Split-Dollar Agreement and related documentation, as originally set forth in the Employment Agreement between PMC and Anton dated May 1, 1991, shall continue in full force and effect. 11. Contested Benefits. If, for any reason, PMC shall fail to make any payment required to be made pursuant to this Agreement, and Anton shall be required to bring one or more actions at law or in equity against PMC, and/or its successors and assigns, to enforce his rights under this Agreement, Anton shall be entitled to recover from PMC his reasonable attorney's fees and expenses incurred in connection with such action or actions. 12. No Third Party Rights. This Agreement may be amended from time to time hereafter by the joint agreement of PMC and Anton without the consent or approval of any other person or entity. Such amendment or amendments may, among other things, change the persons to whom monies are to be paid or the amount to be paid to any person or the time for the making of any payment except that no change may be made in respect of the irrevocable trust treated under Paragraph 10 hereof. This Agreement shall not create in any person who is not a party a vested right to receive monies unless the terms of this Agreement shall remain in full force -6- and effect at the time when a determination is required to be made concerning a payment or payments hereunder to a person who is not a party. 13. Successors and Assigns of PMC. This Agreement shall inure to the benefit of and be binding upon PMC, its successors and assigns, and shall supersede and replace the Employment Agreement between PMC and Anton dated as of April 1, 1993, as amended by an Amendment and Supplement dated as of April 1, 1994, except that the provisions of Paragraph 11 of the Agreement of April 1, 1993 relating to Split-Dollar Insurance shall continue in full force and effect as provided in Paragraph 10 hereof. IN WITNESS WHEREOF, PMC and Anton have executed this Agreement as of the day and year first above written. PENNSYLVANIA MANUFACTURERS CORPORATION ATTEST: /s/ Robert Pratter By /s/ John W. Smithson - - - ----------------------------- ----------------------------------- SECRETARY PRESIDENT /s/ Frederick W. Anton -------------------------------------- FREDERICK W. ANTON, III -7- EX-10.2 5 EMPLOYMENT AGREEMENT EXHIBIT 10.2 EMPLOYMENT AGREEMENT THIS AGREEMENT, made as of the first day of May, 1995, by and between PENNSYLVANIA MANUFACTURERS CORPORATION, a Pennsylvania corporation, whose principal office is located at Blue Bell, Pennsylvania (hereinafter "PMC") and JOHN W. SMITHSON of Newtown, Pennsylvania (hereinafter "Smithson") to set forth the terms and conditions upon which PMC shall employ Smithson. 1. The Employment Term. During the period beginning April 1, 1995 and ending March 31, 1998 (hereinafter "Employment Term") PMC shall employ Smithson as its chief operating officer and Smithson agrees to be so employed. If, at the annual organizational meeting of the Board of Directors of PMC held in 1996 and in any subsequent year, Smithson is elected President of PMC, the Employment Term shall be automatically extended for a further period of one year without the need for further action by the Board of Directors of PMC or the execution of a formal amendment to this Agreement. 2. Duties During the Employment Term. During the Employment Term, Smithson shall serve as the chief operating officer of PMC, and, if so elected by the Board of Directors, shall serve as President of PMC. Smithson shall at all times throughout the Employment Term devote his full time and his best efforts to the business of PMC and its subsidiaries and affiliates. 3. Salary During the Employment Term. During the Employment Term, PMC shall pay Smithson on a bi-weekly basis a salary of not less than $670,000 per year. Smithson's annual salary may be increased but not decreased by PMC in its discretion at any time and from time to time. In addition, Smithson shall be entitled to receive such bonus compensation, if any, as he may be awarded from time to time by PMC. 4. Inability to Perform. If for any reason during the Employment Term, Smithson shall at any time or from time to time be unable to perform the services required of him pursuant to Paragraph 2 hereof, he shall nevertheless be entitled to receive the salary payments and other benefits provided by this Agreement until the end of the Employment Term or until the date of his death, whichever first occurs. 5. Total Disability. If Smithson becomes totally disabled during the Employment Term, commencing upon the expiration of the Employment Term and for a period of 180 months thereafter, or until the termination of his total disability or the date of his death, whichever first occurs (the "Disability Period"), PMC shall pay to Smithson on a monthly basis an amount equal to 25% of Smithson's monthly salary as of the date such total disability commenced without reduction for any amounts that may be paid to Smithson pursuant to any disability or other insured benefit program or programs in effect for executives of PMC at the time such total disability commenced. For purposes of this Agreement, the term "totally disabled" shall mean a mental - 2 - or physical condition which in the reasonable opinion of the Board of Directors of PMC renders Smithson unable or incompetent to carry out the job responsibilities he held at the time the disability was incurred. 6. Death. If Smithson shall die at any time during the Employment Term or during the Disability Period described in Paragraph 5 hereof, PMC shall each month thereafter for 180 consecutive months, reduced by the number of months during the Disability Period in which Smithson received salary payments in accordance with Paragraph 5 hereof, pay an amount equal to 25% of Smithson's monthly salary as of the date of his death to: (a) Smithson's spouse at the time of his death if she survives him and for as long as she survives him, but if Smithson shall die leaving no surviving spouse or if Smithson's surviving spouse shall die during the aforesaid 180 month period, as reduced, then to (b) Smithson's surviving natural or adopted children in equal shares. Upon the death of Smithson's surviving spouse and any surviving natural or adopted children, PMC shall have no further obligation to make any payments pursuant to this Paragraph. 7. Expenses. PMC shall pay the ordinary and necessary business expenses incurred by Smithson in connection with the performance of his duties on behalf of PMC. - 3 - 8. Restrictive Covenant. Smithson shall not during the Employment Term, directly or indirectly, either as a principal, agent, employee, director, officer or in any other capacity, engage in or have a material financial interest in any business which competes with the business of PMC or any of its affiliates as then conducted. 9. Employee Benefit Plans. No provision of this Agreement shall in any way abrogate or impair any rights or privileges of Smithson as an employee of PMC under any qualified or unqualified retirement, pension, profit sharing, disability, life insurance, hospitalization or other employee plan or plans which are now in effect or which may hereafter be adopted by PMC. 10. Provision for Life Insurance. In accordance with Smithson's Employment Agreement with PMA Reinsurance Corporation ("PMA Re"), a wholly owned subsidiary of PMC, dated April 1, 1992, PMA Re and the trustee named by Smithson (the "trustee") has secured from The Metropolitan Life Insurance Company (the "Insurer"), a life insurance policy in the face amount of $1,000,000 on the life of Smithson. In furtherance thereof, the trustee has entered into a split-Dollar Life insurance Agreement with PMA Re (the "Split-Dollar Agreement") which requires PMA Re to pay the annual premiums due on such policy through Smithson's lifetime and which provides for the eventual recovery by PMA Re of its interest in the policy, which is as follows: (a) if the Policy matures as a death claim, PMA Re shall receive an amount equal to the total premiums paid by PMA Re during Smithson's lifetime - 4 - less an amount equal to that portion of the premiums paid by PMA Re during Smithson's lifetime which conferred an economic benefit upon Smithson which shall be determined by the use of the lesser of (i) the one-year term life insurance rates published by the Insurer or (ii) the uniform One-Year Term Premiums Table published by the U.S. Treasury Department known as the "P.S. 58 cost"; and (b) if the Policy is surrendered, PMA Re shall receive an amount equal to the lesser of (i) the total cash surrender value of the Policy or (ii) the cumulative total of the premiums on the Policy that PMA RE has paid less an amount equal to that portion of the premiums paid by PMA Re during Smithson's lifetime which conferred an economic benefit upon Smithson which shall be determined by the use of the lesser of (A) the one-year term life insurance rates published by the Insurer or (B) the Uniform One-Year Term Premiums Table published by the U.S. Treasury Department known as the "P.S. 58 cost". The trustee and PMA Re have entered into a Collateral Assignment Agreement with respect to the Policy in order to secure PMA Re's interest in the Policy. The rights and undertakings of PMA Re and Smithson in connection with the Split-Dollar Agreement and related documentation, as originally set forth in the Employment Agreement between PMA Re and Smithson dated April 1, 1992, shall continue in full force and effect, but, as soon as may be practicable, PMC shall be substituted for PMA Re and shall assume its obligations and become entitled to PMA Re's rights in connection with the Split-Dollar Agreement and the Collateral Assignment Agreement. - 5 - 11. Successors and Assigns; Replacement of Prior Agreement. This Agreement shall inure to the benefit of and be binding upon the parties hereto, their respective successors and assigns, and shall supersede and replace the Employment Agreement between PMA Re and Smithson dated as of April 1, 1993, as amended by an Amendment and Supplement dated as of April 1, 1994, which Agreement and the Amendment thereto shall have no further force or effect. IN WITNESS WHEREOF, PMC and Smithson have executed this Agreement the day and year first above written, and PMA Re has approved the provisions of Paragraph 10 which apply to it. PENNSYLVANIA MANUFACTURERS CORPORATION ATTEST: /s/ Robert Pratter By /s/ Frederick W. Anton - - - ----------------------------- ----------------------------------- Secretary Chairman of the Board of Directors /s/ John W. Smithson -------------------------------------- JOHN W. SMITHSON APPROVED AS TO PARAGRAPH 10: PMA REINSURANCE CORPORATION By: /s/ John W. Smithson -------------------------- - 6 - EX-10.3 6 EDC PLAN TRUST AGREEMENT EXHIBIT 10.3 THE PMC EDC PLAN TRUST AGREEMENT ------------------------ THE PMC EDC PLAN TRUST AGREEMENT ------------------------ TABLE OF CONTENTS PAGE ---- ARTICLE I DEFINITIONS................................. 3 ARTICLE II CREATION OF THE TRUST....................... 4 ARTICLE III CORPORATION'S DUTIES........................ 10 ARTICLE IV TRUSTEE'S DUTIES............................ 14 ARTICLE V INVESTMENT COMMITTEE'S DUTIES............... 24 ARTICLE VI AMENDMENT AND TERMINATION................... 28 ARTICLE VII COMMUNICATIONS.............................. 29 ARTICLE VIII IMMUNITY AND PROTECTION..................... 31 ARTICLE IX MISCELLANEOUS............................... 32 THE PMC EDC PLAN TRUST AGREEMENT THIS TRUST AGREEMENT is made as of the ____ day of ____________, 1994, by and between Pennsylvania Manufacturers Corporation (the "Corporation"), a corporation organized and existing under the laws of the Commonwealth of Pennsylvania, and CoreStates Bank, N.A., a national banking association, having its principal place of business in Philadelphia, PA (the "Trustee"). W I T N E S S E T H: WHEREAS, the Corporation has incurred and expects to continue to incur certain unfunded retirement income and death benefit liabilities to or with respect to certain key management employees pursuant to the terms of The PMC Executive Deferred Compensation Plan and any other plan or plans of the Corporation, as the Corporation may decide to cover under the Trust (hereinafter collectively referred to as the "Plans" or individually as a "Plan"); and WHEREAS, the Plans are intended to constitute a nonqualified deferred compensation program for a select group of management or highly compensated employees as described under the Employee Retirement Income Security Act of 1974, as amended ("ERISA"); and - 1 - WHEREAS, all retirement income and death benefits under the Plans are payable by the Corporation from its general revenue and assets; and WHEREAS, the Corporation determined to provide additional assurance to some or all such key employees (the "Participants") and their surviving spouses, dependent children, beneficiaries or estates under the Plans (collectively, the "Beneficiaries") that their unfunded retirement income and death benefits under each Plan will in the future be met or substantially met by application of funds accumulated in an irrevocable trust fund; and WHEREAS, pursuant to the foregoing determination the Corporation established in 1988 an irrevocable trust fund with respect to the benefits to be provided to the Participants and Beneficiaries in The PMC Executive Deferred Compensation Plan and appointed Provident National Bank to serve as trustee of the trust fund; and WHEREAS, Provident National Bank is no longer serving as trustee, and the Corporation now desires the Trustee to act as successor trustee of the trust fund established in 1988; and WHEREAS, the trust continued by this Agreement is intended to be a "grantor trust" with the corpus and income of the trust being treated as the assets and income of the Corporation pursuant to Sections 671 through 679 of the Internal Revenue Code of 1986, as amended (the "Code"). - 2 - NOW, THEREFORE, in consideration of the mutual covenants contained herein, the Corporation and the Trustee hereby agree as follows: ARTICLE I DEFINITIONS 1.1 "Agreement" means this Trust Agreement entered into between the Corporation and the Trustee. 1.2 "Beneficiary" means the person, trust, estate, or other entity, if any, that becomes entitled to benefits under the Plan by reason of the death of a Participant. 1.3 "Board of Directors" means the Corporation's Board of Directors or any committee thereof which is authorized to act on behalf of the Board of Directors. 1.4 "Corporation" means Pennsylvania Manufacturers Corporation and any successor thereto, or to the business thereof, by whatever form or manner resulting. 1.5 "Custodian" means any custodian appointed by the Investment Committee to hold the Directed Fund. 1.6 "Directed Fund" means all or such portion of the Fund that is established as a separate fund pursuant to Section 4.4 hereof. 1.7 "Fund" means the money and property held by the Trustee under this Agreement. 1.8 "Insolvent" means that (i) the Corporation is unable to pay its debts as they become due or (ii) the Corporation is - 3 - subject to a pending proceeding as a debtor under the United States Bankruptcy Code. 1.9 "Investment Committee" means the committee designated in Article V hereof to be responsible for the investment and management of the Directed Fund. 1.10 "Participant" means each employee who is entitled to a benefit from a Plan. 1.11 "Plan" or "Plans" means The PMC Executive Deferred Compensation Plan and any other plan providing supplemental retirement or death benefits which the Corporation decides to cover under this Agreement. Each such Plan, other than The PMC Executive Deferred Compensation Plan, shall be listed on Appendix A attached hereto. Each use of the singular term shall be deemed a reference to each Plan individually. 1.12 "Trust" means the trust provided for under this Agreement which shall be known as "The PMC EDC Plan Trust". 1.13 "Trustee" means the successor trustee of the Trust. The successor trustee of the Trust is CoreStates Bank, N.A. 1.14 "Valuation Date" means each day that the New York Stock Exchange is open for business. ARTICLE II CONTINUATION OF THE TRUST 2.1 Trustee's Acceptance. The Corporation, by execution of this Agreement, appoints CoreStates Bank, N..A. as successor trustee. The Trustee, by execution of this Agreement, accepts its - 4 - appointment and the Trust transferred to it from the predecessor trustee on the terms and subject to the provisions set forth herein, and the Trustee agrees to discharge and perform fully and faithfully all of the duties and obligations imposed upon it under this Agreement. 2.2 Continuation of Trust. Subject to the claims of the Corporation's creditors as set forth in Section 2.5 hereof, the Trustee shall continue the Trust consisting of the assets heretofore held by the predecessor trustee and such additional sums of money and other property as the Corporation in its sole discretion may from time to time pay or deliver to the Trustee to be held, administered and disposed of by the Trustee pursuant to the terms of this Agreement. 2.3 Purpose of Trust. The Trust is being continued by the Corporation and the Trustee for the purpose of accumulating funds to pay benefits under the Plans to Participants and their Beneficiaries and of defraying the reasonable expenses of administering the Plans and Trust, provided that until paid to the Participants, or their Beneficiaries, or returned to the Corporation pursuant to the terms of the Plans or this Agreement, the Fund shall remain subject to the claims of the Corporation's general creditors as provided in Section 2.5 hereof. Payments from the Fund to Participants or their Beneficiaries shall be in discharge of the Corporation's liability to such Participants or Beneficiaries under the terms of the Plans to the extent of such payments. - 5 - 2.4 Unfunded Status. The Corporation represents to the Trustee that the Plans are unfunded plans maintained for the purpose of providing deferred compensation for a select group of management or highly compensated employees of the Corporation or its subsidiaries and, as such, is exempt from the requirements of ERISA, except for the enforcement provisions of ERISA, and for applicable administrative and reporting and disclosure requirements, compliance with which shall be the sole responsibility of the Corporation. The continuation of the Trust and maintenance of the Fund are not intended to cause the Plans to be, and this Agreement shall not be construed, interpreted or carried out in a manner which would cause the Plans to be, funded plans for purposes of the applicable provisions of ERISA and the Code. 2.5 Claims of Creditors. The Fund shall at all times during the continuance of the Trust be subject to the claims of the general creditors of the Corporation under federal or state law as set forth below. Within 30 days after the Corporation becomes Insolvent, the Corporation, through its Board of Directors or its Chief Executive Officer, shall give notice of such event to the Trustee. If the Trustee (i) shall receive such notice or in the absence of such notice, shall acquire actual knowledge that the Corporation is in fact Insolvent, or (ii) after receipt of a written allegation of the Corporation's insolvency, as hereinafter provided, shall make a determination that the Corporation is in fact Insolvent, the Trustee shall thereafter for so long as such - 6 - condition or proceeding exists suspend all payments from the Fund to Participants and Beneficiaries and apply the Fund and make distributions therefrom only as a court of competent jurisdiction shall direct. (a) Except as hereinafter provided and unless the Trustee has actual knowledge that the Corporation is Insolvent, the Trustee shall have no duty to inquire into whether the Corporation is Insolvent. However, if a person claiming to be a creditor of the Corporation alleges in writing to the Trustee that the Corporation has become Insolvent, the Trustee within thirty (30) days after receipt of such notice, shall request the Corporation to provide the Trustee with a written statement confirming whether or not the Corporation is Insolvent and pending the receipt of such statement, the Trustee shall discontinue payments of any benefits, shall hold the Fund for the benefit of the Corporation's general creditors and shall resume payments of benefits only after the Trustee has obtained a written statement from the Corporation that it is not Insolvent. The Trustee may in all events rely on such evidence concerning the Corporation's solvency as may be furnished to the Trustee by the Corporation and that provides the Trustee with a reasonable basis for making a determination concerning the Corporation's solvency. (b) Nothing in this Agreement shall in any way diminish any rights of Participants or their Beneficiaries to pursue their rights as general creditors of the Corporation with respect to benefits due under the Plans or otherwise. - 7 - (c) For purposes of this Section 2.5, "notice" shall mean actual receipt of written notification by an employee of the Trustee's Trust Department. The Trustee shall not be deemed to have notice of facts or events in public records or received by other departments of the Trustee. 2.6 Unsecured Interests. No Participant or Beneficiary shall have a secured interest in the Fund and, notwithstanding the existence of the Trust to provide a source of funds for the payment of the benefits payable under the Plans, the rights of each Participant and Beneficiary with respect to benefits under the Plans are those of an unsecured general creditor of the Corporation. Neither the Plans nor their Participants and Beneficiaries shall have any preferred claim on, or any beneficial ownership interest in, any assets of the Trust prior to the time such assets are paid as benefits under Section 3.6 hereof. The Corporation agrees, however, that during the existence of the Trust the Corporation shall not permit or cause, or amend this Agreement to permit or cause, the Fund, or any part thereof, to be used for or diverted to purposes other than the payment of benefits under the Plans to Participants and their Beneficiaries, except as may be required to satisfy the claims of creditors of the Corporation in a bankruptcy or other insolvency proceeding under federal or state law. 2.7 Make-Up of Missed Payments. Provided that there are sufficient assets, if the Trustee discontinues the payment of benefits from the Trust pursuant to Section 2.5 hereof and - 8 - subsequently resumes such payments, the first payment following such discontinuance shall include the aggregate amount of all payments which would have been made to the Participants and Beneficiaries in accordance with the Plans during the period of such discontinuance, less the aggregate amount, if any, of payments made to the Participants and Beneficiaries by the Corporation in lieu of the payments provided for hereunder during any such period of discontinuance. The Corporation shall advise the Trustee of the aggregate amount payable in accordance with Section 3.6 hereof for the period of the discontinuance. 2.8 Grantor Trust. It is intended that the Trust constitute a "grantor trust" under Sections 671 through 679 of the Code. Accordingly, the Corporation acknowledges and agrees that it is the owner of the Trust for income tax purposes and that, as such, all items of income, deduction and credit of the Fund shall be included in the Corporation's income tax returns. However, except as necessary to satisfy the Corporation's obligation upon a distribution to withhold taxes and to pay over such withheld amounts to the appropriate taxing authorities, neither the Corporation nor the Trust shall have any obligation or liability for the payment of any income, estate, gift, employment or other taxes payable by a Participant or Beneficiary, or the estate of a Participant or Beneficiary, with respect to benefits payable under the Plans. Except in the case of fiduciary returns which are required to be filed by the Trustee, the Corporation shall have the sole responsibility to file any tax returns, reports or other - 9 - information as may be required by any federal, state, local or other taxing or governmental authority with respect to the Trust, its income and distributions and withholding therefrom. ARTICLE III CORPORATION'S DUTIES 3.1 Contributions. The Corporation shall make such contributions to the Trust to accumulate funds to provide benefits under the Plans as shall be determined from time to time by the Board of Directors of the Corporation in its sole discretion. Such contributions may, but need not, be made in accordance with a funding policy established by the Corporation with the assistance of such outside consultants or actuaries as the Corporation deems advisable. No person, including, without limitation, the Trustee, any Participant or former Participant, or any Beneficiary thereof, shall have the right to require the Corporation to make any contribution to the Trust or to question the accuracy or correctness of any amounts so contributed. 3.2 Benefit Obligations. Except to the extent that benefits to which a Participant, or the Beneficiary thereof, is entitled under the Plan are actually paid from the Fund, nothing contained in this Agreement shall relieve the Corporation of its obligations under the Plan to or with respect to such Participant or Beneficiary. 3.3 Investment Policy. The Corporation shall determine the investment policy for the Fund pursuant to which the Trustee - 10 - shall exercise its investment responsibilities. The Corporation may appoint one or more investment managers in addition to, or in lieu of, the Trustee to exercise investment responsibility with respect to the Fund. 3.4 Furnishing Information. The Corporation shall maintain, and furnish the Trustee with such reports, documents, and information as shall be required by the Trustee to carry out its obligations under this Agreement. 3.5 Accounts. The Corporation, if it so elects or if required by any Plan, shall establish and maintain an account or accounts (the "Account" or "Accounts") with respect to the benefits of one or more Participants or Beneficiaries and to allocate any amounts theretofore received by the Trustee and any earnings thereon to such Account or Accounts. The Corporation shall have responsibility for maintenance of all Account records. Accounts shall be valued on a daily basis to reflect the realized and unrealized gains and losses and the income and expenses of the Fund. (a) Once established, an Account shall be maintained with respect to the benefits of each Participant until it has been liquidated through distribution to the Participant, or a Beneficiary thereof, or until the Corporation's obligations, if any, under the Plan with respect thereto have been satisfied, or until the Account has been exhausted by reason of the application of the Fund to satisfy the claims of the Corporation's creditors in - 11 - a bankruptcy or insolvency preceding under federal or state law, whichever occurs first. (b) If any amounts remain in an Account after satisfaction of all the Corporation's obligations under the Plan to the Participant with respect to whom the Account is maintained, the remaining amounts shall be allocated to other Accounts then existing under the Fund in the proportion that the value of each such other Account bears to the value of all such other Accounts. In the event amounts remain in the Fund after satisfaction of the Corporation's legal liability under the Plan to all Participants with respect to whose benefits Accounts have been maintained, such excess shall be returned to the Corporation. 3.6 Payment from Fund. At such time as a Participant, or the Beneficiary thereof, is entitled to a payment or the receipt of benefits from the Plans, he shall be entitled to receive from the Fund the amount to which he is entitled under the terms of the Plans unless he receives such payment or benefit directly from the Corporation. The Trustee shall make payments from the Fund to each Participant or Beneficiary entitled thereto under each Plan promptly upon receipt of a written direction from the Corporation stipulating the date and amount to which the Participant or Beneficiary is entitled under each Plan. Each such benefit payment shall be charged against the Account, if any, maintained with respect to the benefits of such Participant or Beneficiary. The Trustee shall not be required to engage in its own independent investigation regarding any such payment, but shall provide the - 12 - Corporation with written confirmation of the fact and amount of such payment after it is made. 3.7 Responsibility for Taxes. The Corporation shall be responsible for (i) providing instructions to the Trustee with respect to all taxes to be deducted and withheld from payments to Participants and Beneficiaries from the Fund; (ii) paying to the appropriate taxing authorities all income and employment taxes withheld from any payments made from the Trust; (iii) furnishing to each person receiving payment or distribution from the Trust appropriate tax information evidencing such payment or distribution and the amount thereof including amounts of taxes withheld; (iv) payment of the employer's portion of any employment taxes payable with respect to benefit payments made by the Trust; and (v) preparing and filing all information reports required to be filed with any federal, state, or local government agency or authority with respect to payments from the Trust. Failure by the Corporation to comply with any or all of the foregoing matters or to provide the Trustee with instructions or other information relating to such matters shall not, however, relieve the Trustee of its obligation to make payments to Participants in accordance with the provisions of this Agreement. 3.8 Enforcement. The Corporation shall have the right to enforce any provisions of this Agreement. In any action or proceeding affecting the Trust the only necessary parties shall be the Corporation and the Trustee and, except as otherwise required by applicable law, no other person shall be entitled to any notice - 13 - or service of process. Any judgment entered in such an action or proceeding shall be binding and conclusive on all persons having or claiming to have any interest in the Trust. 3.9 No Unrelated Trade or Business. Notwithstanding any powers granted to the Trustee pursuant to this Agreement or to applicable law, the Trustee shall not have any power that could give this Trust the objective of carrying on a business and dividing the gains therefrom, within the meaning of Reg. Section 301.7701-2 promulgated pursuant to the Code. ARTICLE IV TRUSTEE'S DUTIES 4.1 Exclusivity of Agreement. The Fund shall be held in trust by the Trustee. The sole responsibilities, powers and duties of the Trustee with respect to the Trust and the Fund shall be as set forth in this Agreement. 4.2 Investment Authority. (a) Subject to the provisions of Section 4.4 hereof and to such investment policies or guidelines as the Corporation shall establish for the Fund and deliver to the Trustee in writing, the Trustee shall invest and reinvest the Fund, without distinction as to principal and income, in any property, whether real, personal or mixed, and wherever situate, including without limitation, capital, common and preferred stocks, and corporate and governmental or other obligations, whether secured or unsecured; all without being limited or restricted to investments of a - 14 - character authorized for trustees or other fiduciaries under any present or future laws and, except as otherwise required by Federal law, without regard to the proportion any such property may bear to the entire amount of the Fund. The Trustee may hold uninvested such cash as it considers to be required for current expenditures. (b) Specifically, but not by way of limitation, the Trustee is authorized and empowered to invest all or any part of the Trust in any common or collective trust fund or pooled investment fund presently or hereafter maintained by the Trustee or by any affiliate of the Trustee as the same may be amended from time to time, and the Declaration of Trust establishing such common or collective fund is hereby made a part hereof as if set forth at length herein. The assets of the Fund invested in said common or collective trust shall be held and administered by the Trustee strictly in accordance with the terms of the instrument creating such common or collective trust, and the combining of assets of the Trust with assets of other trusts in such common or collective trust fund is specifically authorized hereby; provided, however, that prior to investing any portion of the Trust in any such common or collective trust for the first time the Trustee shall obtain the written permission of the Corporation. (c) The Trustee, in its discretion, may keep such portion of the Fund in cash or cash balances or hold all or any portion of the Fund in savings accounts, certificates of deposit, and other types of time or demand deposits which bear a reasonable rate of interest with any financial institution or quasi-financial - 15 - institution, either domestic or foreign (including the Trustee or any such institution operated or maintained by the Trustee in its corporate capacity) as the Trustee may from time to time determine to be in the best interests of the Fund. (d) The Trustee may register, hold or retain any real or personal property, investments or instruments, or certificates representing same (including, without limitation, stocks, bonds or other securities) in its own name or in the name of its nominee, or may keep same unregistered and may retain same in such condition that title or interest may pass by delivery. 4.3 Trustee's Powers. In addition to the powers elsewhere conferred upon the Trustee under this Agreement, in the Plans or by law, the Trustee shall have the following power and authority, without court approval, with respect to all property constituting part of the Fund: (a) Sell, transfer, exchange, pledge, lease or otherwise dispose of such property at public or private sale for cash or on credit and grant options for the purchase or exchange thereof; (b) Borrow funds to the extent temporarily required to make any payment or investment authorized by this Agreement; (c) Exercise all rights of ownership with respect to all stocks, securities and other property owned by the Trust, including, without limitation, the power and authority to exercise voting rights, to participate in reorganizations, recapitalizations, consolidations, mergers and similar - 16 - transactions, and to exercise any options, subscription rights and conversion privileges; (d) Carry investments in its own name, in the name of a nominee or in bearer form, deposit investments with any recognized depository institution or clearing corporation, or hold investments in the book entry system of any federal reserve bank or in any equivalent book entry system; (e) Employ agents, custodians, accountants, counsel and investment advisers and pay their reasonable expenses and compensation; (f) If so directed by the Corporation, fund or provide benefits by the purchase of insurance or annuity contracts issued by insurance companies licensed to do business in any state in which the Trustee does business; (g) Purchase brokerage services, including such services provided by an affiliate of the Trustee, provided that such purchase does not constitute a prohibited transaction for which no exemption exists; (h) Exercise itself or by general or limited power of attorney, any right, including the right to vote, incident to any security or other property held by it; (i) Sue to enforce, defend, compromise, arbitrate or settle any claim, law suit or other judicial proceeding involving the Fund, provided that the Trustee shall not be required to take any action with respect to any such claim unless directed to do so - 17 - by the Corporation and unless provided with such assurance of indemnification as is satisfactory to the Trustee; and (j) Perform all acts which the Trustee shall deem necessary or appropriate to perform its duties and discharge its responsibilities under this Agreement. 4.4 Directed Fund. (a) The Investment Committee may at any time direct the Trustee in writing to segregate all or a specified portion of the Fund into a Directed Fund and to have the Directed Fund held by the Custodian. The Trustee shall execute any and all documents which are necessary or appropriate in order to implement the appointment of the Custodian. (b) The Trustee's responsibilities with respect to the Directed Fund shall be governed by this Section 4.4. The Trustee through the Custodian shall invest and reinvest the principal and income of the Directed Fund and keep the Directed Fund invested, without distinction between principal and income, in the manner directed by the Participants pursuant to paragraph (c), below. The Trustee shall have no responsibility for the selection of investment options available in the Directed Fund and shall not render investment advice to any person in connection with the selection of such options. (c) The Investment Committee shall direct the Trustee through the Custodian as to the investment options in which the Participants may invest, provided that each such investment option shall involve securities issued by the investment companies - 18 - which are part of The Vanguard Group of Investment Companies. If permitted by any of the Plans, each Participant shall direct the Investment Committee in which of the investment options to invest the assets in the Participant's Account or Accounts maintained pursuant to such Plan. (d) Furthermore, the assets in the Directed Fund which are received from the predecessor trustee shall be invested in a money market fund which is part of The Vanguard Group of Investment Companies until the Investment Committee receives a full reconciliation of such assets from the predecessor trustee, at which time (or as soon as administratively practicable thereafter) such assets shall then be invested pursuant to the proper directions from the Participants. (e) If the Custodian does not receive instructions from the Investment Committee with respect to the Directed Fund, the Custodian shall, after providing notice to the Investment Committee, invest such amounts in a money market fund which is part of the Vanguard Group of Investment Companies. (f) It is understood by the parties hereto that while the Trustee may perform certain ministerial duties with respect to the Directed Fund, such duties do not involve the exercise of any discretionary authority or other authority to manage the assets of the Directed Fund. It is agreed between the parties to this Agreement that the Trustee is not undertaking any duty or obligation expressed or implied to review and will not be deemed to have any knowledge of or responsibility with respect to - 19 - or to have participated in any transaction involving the investment of the Directed Fund as a result of the performance of, or information received in the course of performing, any ministerial duties. 4.5 Compensation. The Trustee shall be entitled to such compensation and fees for its services under this Agreement as shall be agreed upon from time to time with the Corporation. Such compensation and fees shall be paid to the Trustee by the Corporation directly; but, if the Corporation shall fail to do so, the Trustee shall be entitled to withdraw all amounts to which it is entitled from the Fund, to the extent the Fund is sufficient, and to the extent the Fund is not sufficient, the additional amounts due shall constitute a lien against the Fund. 4.6 Contributions. The Trustee shall accept for deposit in the Fund all contributions made by the Corporation under this Agreement and shall promptly acknowledge receipt of same. The Trustee shall not be liable for any failure of the Corporation to make contributions sufficient to pay benefits under the Plans nor shall the Trustee have any responsibility to determine or to question the accuracy or correctness of any amounts contributed by the Corporation. 4.7 Benefit Payments. Upon receipt of a direction from the Corporation, the Trustee shall promptly make benefit payments by its check, mailed to the payee at the address furnished to the Trustee by the Corporation. Taxes withheld from benefit payments pursuant to the instruction of the Corporation shall be forwarded - 20 - to the Corporation for payment to the appropriate taxing authorities. All returns, records, and forms required to be filed with the Federal and local taxing authorities or delivered to each Participant and Beneficiary shall be the sole responsibility of the Corporation, and the Trustee shall not be liable for the failure of the Corporation to do so. 4.8 Accounts and Records. The Trustee shall keep accurate and detailed accounts and records of all investments, receipts and disbursements and other transactions of the Trust, other than the Directed Fund. All such accounts, books and records shall be open at all reasonable times to inspection or audit by Participants and Beneficiaries and by any person designated by the Corporation. 4.9 Valuations. The Trustee shall value the Fund, other than the Directed Fund, to reflect the fair market value on a daily basis. 4.10 Transaction Statement. The Trustee shall furnish to the Corporation within 90 days after each Valuation Date, and in the event the Trust is terminated or a successor Trustee is appointed, within 90 days after such event, and at such other times as may be requested by the Corporation, a statement of transactions which sets forth all opening and closing balances, purchases, sales, receipts, disbursements and other transactions involving the Trust, other than the Directed Fund, since the date of the last statement of transactions of the Trustee (or covering such other period as may be specified by the Corporation). Such statement of - 21 - transactions shall contain an exact description and the cost shown on the books of the Trust and the fair market value as of the date of the statement of transactions, of all assets of the Trust, other than the Directed Fund. 4.11 Legal Advice. The Trustee is authorized from time to time to seek the advice of, and consult with, legal counsel with respect to any matter involving the Trust. Such counsel may, but need not, be legal counsel to the Corporation. The Trustee shall be fully protected with respect to any action taken or omitted in reliance upon the advice of legal counsel, except to the extent otherwise provided by law. 4.12 Resignation and Removal. The Trustee may resign at any time by delivery of written notice of resignation to the Corporation. The Trustee may be removed by the Corporation at any time by delivery of written notice of such removal to the Trustee. Any such resignation or removal shall take effect as of a future date specified in the notice of same, which date shall not be earlier than the date 60 days after the day on which the notice is received, or such earlier date as may be agreed to by the Trustee and the Corporation, but in no event will any such resignation be effective until a successor trustee has been appointed. Upon such resignation or removal, a successor trustee, which shall be a bank having trust powers, shall be designated by the Corporation. As soon as practicable after a Trustee has resigned or has been removed hereunder, it shall deliver to the successor trustee the originals of all reports, records, documents, and other written - 22 - information in its possession regarding the Plans, the Fund, and the Participants and shall deliver copies thereof to the Corporation and thereupon shall be entitled to all unpaid fees, compensation and reimbursements to which it is entitled under this Agreement. Delivery of the Fund to the successor trustee shall not waive any claim the Trustee may have against the Trust or the Corporation for its reasonable compensation or expenses. 4.13 Directions and Reliance. The Trustee is expressly directed and required to act only in accordance with the provisions set forth in this Agreement, and shall be required and entitled to rely solely upon the information provided to it by the Corporation concerning the interests of Participants and Beneficiaries, including the anticipated and actual dates of, and amounts of, disbursements from the Fund. 4.14 Insufficient Assets. The insufficiency of assets in the Trust shall not relieve the Corporation of its obligation or liability to make benefit payments otherwise due under the terms of any Plan. 4.15 Judicial Settlement. Nothing contained in this Agreement shall be construed as depriving the Trustee or the Corporation of the right to have a judicial settlement of the Trustee's accounts, and upon any proceeding for a judicial settlement of the Trustee's accounts or for instructions, the only necessary party thereto in addition to the Trustee shall be the Corporation. - 23 - 4.16 Indemnity of Trustee. The Corporation hereby indemnifies and holds the Trustee harmless from and against any and all losses, damages, costs, expenses or liabilities including reasonable attorneys' fees and other costs of any litigation, arbitration or administrative proceeding to which the Trustee may become subject to, arising out of, occasioned by, incurred in connection with or in any way associated with this Agreement, unless resulting from any act or omission constituting negligence or willful misconduct of the Trustee or a breach of the Trustee's fiduciary duty. ARTICLE V INVESTMENT COMMITTEE'S DUTIES 5.1 Appointment. The Corporation's Employee Benefit Plans Committee (the "EBP Committee") shall appoint an Investment Committee which shall serve at the pleasure of the EBP Committee. The members of the Investment Committee shall not receive any compensation from the Fund for their services as members of the Investment Committee. The EBP Committee may, at any time, appoint additional members or remove one or more of the members of the Investment Committee, and shall fill any vacancy in the membership of the Investment Committee caused by death, resignation or removal. In the event that a vacancy or vacancies shall occur on the Investment Committee, the remaining members or member shall act as the Investment Committee until the EBP Committee fills such vacancy or vacancies. - 24 - 5.2 Committee's Directions. Pursuant to Section 4.4 hereof, the Investment Committee shall, directly or through one or more investment advisors or other agents appointed by it as hereinafter provided, direct the Trustee through the Custodian with respect to the investment and reinvestment of the Directed Fund. The Investment Committee shall be solely responsible for any losses that shall arise by reason of its directions, and except as required by ERISA, the Trustee shall not be liable for the acts or omissions of the Investment Committee. 5.3 Custodian and Investment Advisors. (a) The Investment Committee shall be entitled to direct the Trustee to retain one or more Custodians for the purpose of holding the Directed Fund. (b) The Investment Committee shall also be entitled to retain one or more investment managers or advisors for the purpose of directing the Trustee with respect to the investment and reinvestment of the Directed Fund. The Investment Committee shall have full power and authority to delegate to any such investment manager or advisor complete discretionary authority to direct the Trustee with respect to the investment and reinvestment of all or a portion of the Directed Fund, without any requirement that the Investment Committee be consulted prior to the giving of any such directions to the Trustee or the carrying out of such directions by the Trustee. The Trustee shall not be liable for the making, retention, or disposition of any investment or reinvestment so - 25 - directed by any investment manager or advisor selected by the Investment Committee in good faith. 5.4 Duty to Follow Directions. The Trustee shall be under no duty to question any direction of the Investment Committee, or of any investment manager or advisor appointed by the Investment Committee, or to review the desirability or propriety of retaining any of the securities or property held in trust, or to make suggestions with respect to the investment and reinvestment of the Directed Fund. The Trustee shall be fully protected in acting or omitting to act in accordance with or in the absence of such directions and shall be under no liability for any loss of any kind which may result by reason of any action taken or omitted by it in accordance with any such directions or as a result of inaction in the absence of such directions. 5.5 Procedural Requirements. Subject to the provisions of this Agreement, the Investment Committee from time to time shall establish rules for the transaction of its business and shall appoint one of its members as Chairman and shall appoint a Secretary who may, but need not, be one of its members. The Secretary shall maintain minutes of the actions of the Investment Committee, and shall be authorized to certify to the Trustee or to any other person any action of or by the Investment Committee. 5.6 Transacting Business. A majority of the members of the Investment Committee at the time in office may do any act which this Agreement authorizes or requires the Investment Committee to do. The action of such majority of the members expressed from time - 26 - to time by a vote at a meeting, or in writing without a meeting, or by telephone communication without a meeting, shall constitute the action of the Investment Committee and shall have the same effect for all purposes as if assented to by all members then in office. Where action is taken by members of the Investment Committee by telephone communication, such action shall be confirmed in writing by such members as soon as practicable thereafter. The Secretary shall cause each action taken in writing without a meeting, and each written confirmation of action taken by telephone, to be included in the minutes of the Investment Committee. 5.7 Consultants. The Investment Committee may engage or consult with such investment advisors, actuaries, accountants, legal counsel, data processing services and other agents as it may deem necessary or desirable, and may charge the costs thereof to the Directed Fund to the extent such costs are not paid by the Corporation. The respective opinions of such investment advisors, actuaries, accountants, or legal counsel shall be full and complete authorization and protection in respect of any action taken by the Investment Committee in good faith in reliance thereon. 5.8 Protection from Liability. No member of the Investment Committee shall be liable or responsible to the Corporation, or to any Participant or Beneficiary or to any other person or entity, on account of any matter connected with or related to the Fund or the Plan (including, without limitation, its directing the making, retention or sale of any investment or reinvestment), unless such member shall have acted in bad faith, or - 27 - has been guilty of willful misconduct or gross negligence in respect to his duties as a member of the Investment Committee, and the Corporation shall indemnify and save each such member harmless from any liability (including liability for costs and attorney's fees) incurred in connection with his exercise of such duties except to the extent that such liability shall result from action taken by him in bad faith or from his willful misconduct or gross negligence. ARTICLE VI AMENDMENT AND TERMINATION 6.1 Amendment. This Agreement may be amended by an instrument in writing adopted by the Board of Directors, provided, however, that Sections 2.3, 2.5, 6.2 and 9.5 hereof may not be amended and provided further, however, that no amendment to this Agreement shall be effective to change the duties or responsibilities of the Trustee unless agreed to by the Trustee in writing. Moreover, this Agreement shall be amended from time to time as necessary in order to maintain each Plan as an unfunded plan for purposes of ERISA, the Code or any other applicable law, to maintain the trust as a "grantor trust" and to insure that benefits paid to the Participants and Beneficiaries from the Fund will be deductible to the Corporation in the year of payment. 6.2 Irrevocable. Subject to the provisions of Section 2.5 hereof, this Agreement and the Trust hereunder shall be irrevocable until the liability of the Corporation for the payment - 28 - of all benefits to all Participants, and the Beneficiaries thereof, has been satisfied in full, or until the Fund contains no assets, whichever occurs first. After the satisfaction of all the Corporation's liabilities under the Plans this Trust shall terminate and any assets remaining in the Fund shall be returned to the Corporation after payment of all liabilities and expenses of the Fund. 6.3 Distribution of Taxable Income. If and to the extent a Participant or Beneficiary shall be treated for federal income tax purposes as having received taxable income hereunder or under the Plan, prior to the date such amount is paid or made available to the Participant or Beneficiary from the Trust, an amount equal to the amount treated as having been received by such Participant or Beneficiary as taxable income shall be distributed to such Participant or Beneficiary. Any amount so distributed shall be treated as benefits paid to the Participant or Beneficiary under the Plan and shall be a complete discharge of the Corporation to the extent thereof. ARTICLE VII COMMUNICATIONS 7.1 Notice. (a) Communications to the Corporation shall be addressed to the Corporation at PMA Building, 925 Chestnut Street, Philadelphia, PA 19107, Attention: Chief Financial Officer; provided, however, that upon the Corporation's written request, - 29 - such communications shall be sent to such other address as the Corporation may specify. (b) Communications to the Trustee shall be addressed to its Trust Department, at Broad and Chestnut Streets, Philadelphia, PA 19107; provided, however, that upon the Trustee's written request, such communications shall be sent to such other address as the Trustee may specify. (c) No communication shall be binding on the Trustee until it is received by the Trustee, and no communication shall be binding on the Corporation until it is received by the Corporation. 7.2 Writing Required. Any action of the Corporation pursuant to this Agreement, including all orders, requests, directions, instructions, approvals and objections of the Corporation to the Trustee, shall be in writing signed on behalf of the Corporation by any duly authorized officer of the Corporation. The Trustee may rely on, and will be fully protected with respect to any such action taken or omitted in reliance on, any information, order, request, direction, instruction, approval, objection and list delivered to the Trustee by the Corporation. 7.3 Agents. The Corporation may designate individuals or a committee to act on its behalf for purposes of some or all of the provisions of this Agreement. Such individuals or committee and their respective authorities and powers under this Agreement shall be designated by the Corporation in writing to the Trustee. Their authority shall continue until revoked in writing by the Corporation and received by the Trustee. The Trustee shall incur - 30 - no liability for failure to act on such individuals' or committee's instructions without written designation from the Corporation. ARTICLE VIII IMMUNITY AND PROTECTION 8.1 Trustee Responsibility. In the performance of its duties under this Agreement, the Trustee shall exercise good faith and shall comply with the standard of care imposed upon it by law and with the terms of this Agreement. The Trustee shall have the authority to interpret its responsibilities hereunder and in the absence of fraud or breach of fiduciary responsibility, the Trustee's interpretation shall be conclusive. 8.2 Reliance on Corporation Direction. Whenever the Trustee must or may act upon the direction or approval of the Corporation or the Investment Committee, it shall be fully protected in acting in accordance with the terms of the Plan or in accordance with directions given pursuant to this Agreement. In any instance in which the Trustee may act only upon the direction of the Corporation or of the Investment Committee, it shall also be fully protected in failing or refusing to act without such direction. 8.3 Trustee's Liability to Corporation's Creditors. The Trustee shall have no liability to any creditor of the Corporation, except as to any assets remaining in the Trust at the time of actual physical delivery to the Trustee of a valid court order - 31 - directing payment to such creditor of those assets or so much of them as is necessary to satisfy that order. 8.4 Reliance on Documents. To the extent permitted by law, the Trustee shall be fully protected in acting in good faith upon any instrument, request, direction or other communication believed by it to be genuine and to be executed by the proper person or persons. 8.5 Participation in Legal Proceedings. The Trustee shall not be obligated to institute, defend or participate in any legal or administrative action or proceeding, unless requested by the Corporation and indemnified by the Corporation against all costs and expenses, or unless such action or proceeding is occasioned by the fault of the Trustee or involves a question of the Trustee's fault. 8.6 Third Parties. No persons dealing with the Trust shall be bound to see to the proper application of any money paid or property delivered to the Trustee, or to inquire into the validity or propriety of any act or transaction or the authority of the Trustee with respect thereto. ARTICLE IX MISCELLANEOUS 9.1 Applicable Law. This Trust is created and accepted in the Commonwealth of Pennsylvania. All questions pertaining to the validity or construction of this Agreement and the acts and transactions of the parties hereto and their respective successors - 32 - shall be determined in accordance with the laws of that Commonwealth, except as to matters governed by federal law. 9.2 Employment Status. Nothing contained in this Agreement shall create, or be construed or interpreted to create, any new or additional obligations on the part of the Corporation to retain any person in its employ or otherwise interfere in any way with the right of the Corporation to discharge any employee. 9.3 Invalid Provisions. Should any provision of this Agreement be determined by a court of competent jurisdiction to be unlawful or unenforceable, such determination shall not adversely affect the remaining provisions of this Agreement, unless it shall make impossible the maintenance or operation of the Trust for its intended purposes. To the extent any provision of this Agreement is determined to be unlawful or unenforceable, this Agreement shall be construed to be carried out to the fullest extent possible in a lawful and enforceable manner. 9.4 Incorporation of Plan. Each Plan is expressly incorporated herein and made a part hereof with the same force and effect as if fully set forth herein. A copy of each Plan as in effect on the date hereof shall be delivered to the Trustee. The Corporation will also deliver to the Trustee a copy of any amendments to the Plans which are hereafter adopted. The terms of each Plan shall govern the amount, form and timing of benefit payments under the Plan to which the Participant is entitled. The incorporation of the Plan into this Agreement shall not cause the Plan to become irrevocable under the provisions of Section 6.2 - 33 - hereof. The Corporation retains the right to modify or amend any of the provisions of the Plan or to terminate it as provided therein. The Trustee shall have no rights or obligations with respect to any of the provisions of the Plan. 9.5 Nonalienation. No amount payable to or in respect of a Participant or Beneficiary at any time under the Trust shall be subject, in any manner, to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance or charge of any kind and any attempt to do so shall be void; nor shall any such amounts be, in any manner, liable for or subject to the debts, contracts, liabilities, engagements or torts of any Participant or Beneficiary. 9.6 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be considered an original and said counterparts shall constitute but one and the same instrument. 9.7 Headings. All paragraph and Article headings herein have been inserted for convenience of reference only and shall in no way modify, restrict or affect the meaning or interpretation of any of the terms or provisions of this Agreement. 9.8 Entire Agreement. This Agreement is intended as a complete and exclusive statement of the agreement of the parties hereto, and supersedes all previous agreements or understandings among them. 9.9 Merger of Trustee. The term "Trustee" shall include any successor trustee. If a Trustee or Custodian hereunder is a - 34 - bank or trust company, any corporation resulting from any merger, consolidation or conversion to which such bank or trust company may be a party, or any corporation otherwise succeeding generally to all or substantially all of the assets or business of such bank or trust company, shall be the successor to it as Trustee or Custodian hereunder without the execution of any instrument or any further action on the part of any party hereto or any Participant hereunder. IN WITNESS WHEREOF, the Corporation and the Trustee have entered into this Agreement as of the date first above written. Attest: PENNSYLVANIA MANUFACTURERS CORPORATION John Stulak By:/s/ Robert Gaffney - - - ------------------------------- ----------------------------- Secretary Title: Vice President Attest: CORESTATES BANK, N.A. /s/ Kenneth E. Bachmann By:/s/ Celeste Rau - - - ------------------------------- ----------------------------- Title: Title: - 35 - EX-10.4 7 EXECUTIVE RETIREMENT PLAN EXHIBIT 10.4 THE PMC SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN Rev. 7/1/95 The PMC Supplemental Executive Retirement Plan TABLE OF CONTENTS ARTICLE PAGE ------- ---- I Definitions............................................ 1 II Excess Retirement Benefits............................. 10 III Past Service Retirement Benefits....................... 11 IV Vesting of Supplemental Retirement Benefits............ 12 V Form of Payment of Supplemental Retirement Benefits................................. 13 VI Death Benefit.......................................... 16 VII Administration of the Plan............................. 17 VIII Miscellaneous.......................................... 22 The PMC Supplemental Executive Retirement Plan WHEREAS, Sections 401(a)(17) and 415 of the Internal Revenue Code of 1986, as amended, place limitations (the "Sections 401(a)(17) and 415 Limitations") on the retirement benefits which can be paid to participants in The PMC Pension Plan (the "Pension Plan"); and WHEREAS, some executives hired in mid-career by the Company shall not be able to be credited with the maximum number of years of Benefit Service allowable under the Pension Plan ("Short Service Reduction"); and WHEREAS, in consideration of the past services of certain employees who are affected by the Sections 401(a)(17) and 415 Limitations, in consideration of the future services of certain employees affected by the Short Service Reduction and in consideration of the agreement of each such employee to abide by the terms and conditions of this Plan, Pennsylvania Manufacturers Corporation (the "Company") desires to provide supplemental executive retirement benefits for the purposes of offsetting the Short Service Reduction and the Sections 401(a)(17) and 415 Limitations under this Plan which benefits a select group of management and highly compensated employees, subject to and in accordance with the terms hereof; NOW THEREFORE, in order to address these shortcomings in the design of the Pension Plan the Company does hereby adopt effective as of January 1, 1993, a supplemental retirement plan to be known as The PMC Supplemental Executive Retirement Plan as hereinafter set forth. ARTICLE I Definitions In this Plan, unless the context clearly implies otherwise, the singular includes the plural, the masculine includes the feminine, and initially capitalized words have the following meanings: 1.1 Actuarial Equivalent. An amount or benefit of equivalent current value to the amount or benefit which otherwise would have been provided to or on account of a Participant or Beneficiary determined on the basis of the actuarial assumptions - 1 - then in effect under the Pension Plan and such other assumptions as may be deemed necessary by an actuary selected by the Committee. 1.2 Affiliated Employer. A corporation, other than the Plan Sponsor, which is included within a "controlled group of corporations" within which the Plan Sponsor is also included, as determined under Code Section 1563 without regard to subsections (a)(4) and (e)(3)(C) of Section 1563. 1.3 Beneficiary. The person or entity designated by a Participant or Former Participant on a beneficiary designation form signed by such Participant or Former Participant and filed with the Committee, and where applicable, the Spouse or other contingent annuitant who is entitled to receive benefits under this Plan. 1.4 Board. The Board of Directors of the Plan Sponsor, as constituted from time to time, or any committee thereof authorized to act on behalf of the Board of Directors. 1.5 Cause. Termination by the Company of employment with the Company for "Cause" shall mean termination upon the willful engaging by the Participant in misconduct which is demonstratably and materially injurious to the Company or any Affiliated Employer. No act, or failure to act, on the Participant's part shall be considered "willful" unless done, or omitted to be done, by the Participant not in good faith and without reasonable belief that such action or omission was in the best interest of the Company or its Affiliated Employers. Notwithstanding the foregoing, a Participant shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to the Participant a copy of a resolution duly adopted by the affirmative vote of not - 2 - less than three-quarters of the entire membership of the Committee at a meeting of the Committee called and held for the purpose (after reasonable notice to the Participant and an opportunity for the Participant, together with the Participant's counsel, to be heard before the Committee), finding that in the good faith opinion of the Committee the Participant was guilty of misconduct as set forth above in this Section and specifying the particulars thereof in detail. 1.6 Change-in-Control. For purposes of this Plan, a "Change-in-Control of the Company" shall be deemed to have occurred if: (a) any "person" (as defined in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 35% or more of the combined voting power of the Company's then outstanding securities; (b) during the term of this Plan, individuals who at the beginning of such term constitute the Board, including for this purpose any new director whose election or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds of the directors still in office who were directors at the beginning of such term, cease for any reason to constitute a majority thereof; or (c) more than 50% of the assets of the Company, including the business or businesses for which the Participant's - 3 - services are principally performed, is disposed of by the Company pursuant to a partial or complete liquidation of the Company, a sale of assets (including stock of a subsidiary or subsidiaries) of the Company or otherwise. 1.7 Code. Internal Revenue Code of 1986, as amended. 1.8 Committee. The Employee Benefits Plan Committee appointed by the Board to administer this Plan. The Committee shall be responsible for the administration of this Plan in accordance with Article VII hereof. 1.9 Company. The Plan Sponsor and each of its Affiliated Employers which upon the approval of the Board, has agreed to participate in this Plan. Each participating Affiliated Employer on the Effective Date and on January 1, 1995 is listed on Appendix A. Each Affiliated Employer who wants to adopt this Plan after January 1, 1995 shall do so by executing a written declaration of joinder. The use of the singular form shall be considered a reference to each Company individually. 1.10 Effective Date. January 1, 1993. 1.11 Eligible Executive. Any executive of the Company (i) who is hired as a Vice President or as a more senior officer on or after January 1, 1990 or who subsequent to being hired becomes such an officer after the Effective Date, (ii) who is a Participant in the Pension Plan whose age on his employment commencement date precludes him from being able to complete twenty-five (25) years of Benefit Service upon attainment of his sixtieth (60th) birthday and - 4 - (iii) who has been designated by the Committee to participate in this Plan. 1.12 Eligible Officer. Any officer of the Company engaged in rendering personal services under the direction or control of the Company on or after January 1, 1993 who is a Participant in the Pension Plan, whose benefits payable under the Pension Plan are reduced by the Sections 401(a)(17) and/or 415 Limitations and who has been designated by the Committee to participate in this Plan. 1.13 Excess Retirement Benefit. The portion of a Participant's Supplemental Retirement Benefit under this Plan determined in accordance with Section 2.1 hereof. 1.14 Former Participant. A person who has a benefit payable under this Plan but who is no longer an Eligible Executive or an Eligible Officer. 1.15 Good Reason. For purposes of this Plan, "Good Reason" shall mean any of the following events which occurs without the Participant's express written consent: (a) The assignment to the Participant of any duties inconsistent with the Participant's status, position, duties, and responsibilities with the Company immediately prior to a Change-in-Control or a substantial alteration in the nature or status of the Participant's responsibilities from those in effect immediately prior to a Change-in-Control of the Company; (b) A reduction by the Company in the Participant's annual base salary as in effect on the Effective Date or thereafter, as the same may be increased from time to time, except - 5 - for across-the-board salary reductions similarly affecting all executives of the Company and of any organization in control of the Company; (c) Following a Change-in-Control of the Company the Company's requiring the Participant to be based anywhere other than the Company's principal executive offices except for required travel on the Company's business to an extent substantially consistent with the Participant's prior travel obligations; (d) The failure by the Company to continue in effect any compensation plan of the Company in which the Participant participates, unless an equitable arrangement (embodied in an ongoing substitute or alternative plan) has been made with respect to such plan in connection with a Change-in-Control of the Company, or the failure by the Company to continue the Participant's participation therein; (e) The failure by the Company to continue to provide the Participant with benefits substantially similar to those provided under the Company's 401(k) Plan or any of the pension, life insurance, medical, health and accident, or disability plans of the Company in which the Participant was participating at the time of a Change-in-Control of the Company, or the taking of any action by the Company which would directly or indirectly materially reduce any of such benefits or deprive the Participant of any material fringe benefit enjoyed by the Participant at the time of a Change-in-Control of the Company, or the failure by the Company or its subsidiaries to provide the - 6 - number of paid vacation days to which the Participant was entitled on the basis of years of service with the Company in accordance with the normal vacation policy of the Company as in effect at the time of a Change-in-Control; (f) The failure of the Company to obtain a satisfactory agreement from any successor to assume and to perform this Plan; or (g) Any purported termination of a Participant's employment which is not effected pursuant to a written notice indicating the specific termination provisions relied upon and setting forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Participant's employment; and for purposes of this Plan, no such purported termination shall be effective. 1.16 Limited Pension Plan Benefit. The annual retirement income actually to be paid to a Participant or his Beneficiary (including a Spouse or other contingent annuitant) pursuant to the benefit formula (contained in Article V of the Pension Plan) which is applicable to such Participant and the method of payment selected by the Participant under the Pension Plan after reduction by the Sections 401(a)(17) and 415 Limitations and taking into account only the years of Benefit Service credited under the Pension Plan. (All references in this Plan to articles or specific paragraphs of the Pension Plan shall include any successor article or paragraph or any amendment thereto.) - 7 - 1.17 Maximum Past Service Credit. The maximum number of years of past service credit available to a Participant under this Plan which shall equal the difference between twenty-five (25) and the number of whole years between the commencement of the Participant's participation in this Plan and the Participant's sixtieth (60th) birthday. 1.18 Maximum Service Retirement Benefit. The annual retirement income which would have been paid to a Participant or his Beneficiary (including a Spouse or other contingent annuitant) pursuant to the benefit formula (contained in Article V of the Pension Plan) which is applicable to such Participant and the method of payment selected by the Participant under the Pension Plan, taking into account the Section 401(a)(17) and Section 415 Limitations and assuming that in addition to the years of Benefit Service actually credited to the Participant under the Pension Plan the Participant had been credited under the Pension Plan with the past service credit earned by him under this Plan, as determined pursuant to Section 3.1 hereof. For purposes of determining the portion of the Maximum Service Retirement Benefit attributable to the past service credit earned under this Plan, the Compensation deemed received during each such year of past service shall be the annual rate of pay in effect on a Participant's employment commencement date. 1.19 Participant. An Eligible Executive or Eligible Officer or a former Eligible Executive or Eligible Officer who is accruing, or who has accrued, benefits under this Plan. However, - 8 - no employee shall have any interest or rights under this Plan if he is never actively employed by the Company on or after January 1, 1993. 1.20 Past Service Retirement Benefit. The portion, if any, of a Participant's Supplemental Retirement Benefit under this Plan determined in accordance with Section 3.2 hereof. 1.21 Pension Plan. The PMC Pension Plan as in effect on the Effective Date and as such plan may be further amended and/or restated from time to time and each successor or replacement tax-qualified pension plan. In addition, the Pension Plan shall also include such other retirement plans of the Company or of such other affiliates, subsidiaries or divisions of the Company as the Committee may expressly include from time to time. 1.22 Plan. The PMC Supplemental Executive Retirement Plan as set forth herein and as it may be amended and/or restated from time to time. 1.23 Plan Sponsor. Pennsylvania Manufacturers Corporation, a Pennsylvania corporation. 1.24 Plan Year. Each calendar year beginning on January 1 and ending on the following December 31. 1.25 Section 401(a)(17) Limitation. The limitation on compensation taken into account under the Pension Plan pursuant to Section 401(a)(17) of the Code. 1.26 Section 415 Limitation. The limitation on benefits payable from the Pension Plan imposed by Section 415 of the Code. - 9 - 1.27 Spouse. A person who is married to a Participant and who is recognized as the Participant's Spouse for purposes of the Pension Plan. 1.28 Supplemental Retirement Benefit. The aggregate retirement benefit payable to a Participant under this Plan and comprised of his Excess Retirement Benefit, if any, and his Past Service Retirement Benefit, if any. 1.29 Termination of Employment. A termination of the employer - employee relationship under circumstances which give rise to a "Separation from Service" under the Pension Plan. 1.30 Unlimited Retirement Benefit. The annual retirement income which would have been paid to a Participant or his Beneficiary (including a Spouse or other contingent annuitant) pursuant to the benefit formula (contained in Article V of the Pension Plan) which is applicable to such Participant and the method of payment selected by the Participant under such Pension Plan without taking into account the Sections 401(a)(17) and 415 Limitations contained in paragraph 1.8 and Article XI of the Pension Plan. ARTICLE II Excess Retirement Benefits 2.1 Excess Retirement Benefit. Subject to Sections 2.2 and 8.2 hereof, the Excess Retirement Benefit of a Participant who is an Eligible Officer shall be an amount equal to the difference - 10 - between his Unlimited Retirement Benefit and his Limited Pension Plan Benefit. 2.2 Reemployment. Following the recommencement of Company employment by a Participant or former Participant whose employment with the Company was terminated at a time when such Participant or Former Participant had an Excess Retirement Benefit and whose benefit had commenced to be paid under this Plan, payment of such Excess Retirement Benefit shall be suspended until such individual again ceases to be employed under circumstances under which Excess Retirement Benefits are payable under the Plan. ARTICLE III Past Service Retirement Benefits 3.1 Past Service Credit. A Participant who is an Eligible Executive shall be credited with a pro rata portion of the Maximum Past Service Credit available to the Participant under this Plan (based on the number of years until the Participant's sixtieth (60th) birthday) for each year of Benefit Service credited under the Pension Plan after the Eligible Executive has commenced participation in this Plan until the Participant attains age 60 or until the sum of the Participant's years of Benefit Service credited under the Pension Plan and of his years of past service credit hereunder equal twenty-five (25), whichever occurs first. 3.2 Past Service Retirement Benefit. Subject to Sections 3.3 and 8.2 hereof, a Participant's Past Service Retirement - 11 - Benefit, if any, shall be the difference between his Maximum Service Retirement Benefit and his Limited Pension Plan Benefit. 3.3 Reemployment. Following the recommencement of Company employment by a Participant or former Participant whose employment with the Company was terminated at a time when such Participant or Former Participant had a Past Service Retirement Benefit and whose benefit had commenced to be paid under this Plan, payment of such Past Service Retirement Benefit shall be suspended until such individual again ceases to be employed under circumstances pursuant to which Past Service Retirement Benefits are payable under the Plan. ARTICLE IV Vesting of Supplemental Retirement Benefits 4.1 Full Vesting. Except as otherwise provided in Section 8.2 hereof, a Participant shall have a fully (100%) vested and nonforfeitable interest in his Supplemental Retirement Benefit once he has satisfied the age and service requirements which qualify him for an early or normal retirement under the Pension Plan, whichever occurs first. Prior thereto the Participant shall not have any vested interest in his Supplemental Retirement Benefit. Moreover, notwithstanding the foregoing, a Participant shall forfeit his vested interest, if any, in his Supplemental Retirement Benefit if his employment is terminated for Cause. 4.2 Forfeitures. Any amount forfeited hereunder by a Participant who has not become vested in a Supplemental Retirement - 12 - Benefit under this Plan shall constitute a reduction of the Company's liability under the Plan and shall not be allocated to the remaining Participants. ARTICLE V Form of Payment of Supplemental Retirement Benefits 5.1 Payment of Supplemental Retirement Benefit. Except as otherwise provided in Sections 5.3 and 8.2 hereof, a Participant's vested Supplemental Retirement Benefit, if any, shall commence to be paid at the time retirement income payments commence being made to the Participant under the Pension Plan. If a Participant begins to receive retirement income payments before age 55 under the Pension Plan, then the Participant's Supplemental Retirement Benefit shall commence at the same time as payments from the Pension Plan and shall be reduced by the same early retirement reduction factors, if any, applicable to his retirement income from the Pension Plan. 5.2 Form of Payment. The normal form of payment of a Participant's Supplemental Retirement Benefit shall be the same as that provided under the Pension Plan. Subject to Section 5.5 hereof, a Participant's Supplemental Retirement Benefit shall be paid, however, in the same form which the Participant has elected, or is deemed to have elected, pursuant to the Pension Plan. The Participant's election under the Pension Plan (with the valid consent of his Spouse where required under the Pension Plan) shall also be applicable to the payment of his Supplemental Retirement Benefit. Notwithstanding the foregoing, any Participant who - 13 - elects a Social Security level income option to augment his benefit under the Pension Plan on account of his retirement before he is eligible for retirement benefits under the Federal Social Security system (as such optional form is described in paragraph 7.2 of the Pension Plan) shall receive his Supplemental Retirement Benefit in the form of a single life annuity, as reduced, if necessary, in the manner set forth in Section 5.1 hereof. The Committee shall have the sole and absolute discretion and authority to approve or reject a Participant's request for a different method of payment than specified herein. 5.3 Change-in-Control During Employment. Upon a Change-in-Control, or within two years thereafter, regardless of whether or not the Plan has been terminated during such period, if the Company (or any successor corporation) shall terminate the Participant's employment for other than Cause, or if the Participant shall terminate employment for Good Reason or retirement, death, or total disability (as defined in the Pension Plan), then the Participant shall become eligible for and entitled to receive the Participant's Supplemental Retirement Benefit. The Participant's Supplemental Retirement Benefit under this provision shall be paid out in a lump sum upon such termination of employment. Such benefit shall be paid by the Company (or any successor corporation) to the Participant in a lump sum, in cash, on the twentieth day following the date of termination. Such amount will be calculated as the Actuarial Equivalent of the Participant's Supplemental Retirement Benefit except that the - 14 - interest rate used will be 120 percent of the applicable Federal rate (determined under Section 1274(d) of the Code and the regulations thereunder) compounded semi-annually. The applicable Federal rate to be used for this purpose is the Federal rate that is in effect for the month in which the present value is determined. Any Participant who remains employed by the Company (or any successor corporation) for two or more years after a Change-in-Control shall receive the Supplemental Retirement Benefit in accordance with Sections 5.1 and 5.2 hereof. 5.4 Change-in-Control During Retirement. In the event of a Change-in-Control of the Company, any Participant who has previously retired from the Company and is receiving payment of the Participant's Supplemental Retirement Benefit shall receive a single payment in cash which is the Actuarial Equivalent of the Participant's remaining benefit. For purposes of this Section, the single payment shall be determined using the same interest rate as would have been used for purposes of calculating the lump sum cash payment under Section 5.3 hereof. 5.5. Actuarial Equivalent. A Supplemental Retirement Benefit which is payable in any form other than the normal form under the Pension Plan, i.e., a straight life annuity over the lifetime of the Participant, or which commences at any time prior to the Participant's Normal Retirement Date, shall be the Actuarial Equivalent of the Supplemental Retirement Benefit payable hereunder. - 15 - ARTICLE VI Death Benefit 6.1 Supplemental Death Benefit. Except as otherwise provided herein, a death benefit shall be payable as follows: (a) Upon the death of a married Participant while employed by the Company, a death benefit shall be payable under this Plan to the Spouse or beneficiary of such Participant if a qualified pre-retirement survivor annuity, surviving Spouse benefit or surviving dependent benefit, as defined in the Pension Plan, would be payable to the Participant's Spouse or beneficiary under the Pension Plan. Such death benefit, if any, shall be equal to the difference between the annuity or benefit payable for the life of the Spouse or other Beneficiary under the Pension Plan and the annuity which would have been paid thereunder without taking into account the Sections 401(a)(17) and 415 Limitations contained in paragraph 1.8 and Article IX of the Pension Plan and by taking into account as Benefit Service the Participant's years of past service credit, if any, accrued to the Participant's date of death, as determined pursuant to Section 3.1 hereof. (b) Upon the death of a Participant who is not married and who is employed by the Company at the date of his death, a death benefit equal in value to 50% of the Participant's then Supplemental Retirement Benefit will be payable to the Participant's designated Beneficiary. Such value shall be converted to an Actuarial Equivalent benefit payable in monthly installments for fifteen years. - 16 - (c) The death benefit payable pursuant to this Section 6.1 will commence on the first day of the month coincident with or next following the Participant's death. In the event that the Participant has not designated a Beneficiary or that the Participant's Beneficiary has predeceased the Participant, the death benefit payable under this Plan shall be paid to the Participant's estate. The death benefit payable pursuant to this Section 6.1 shall be reduced by the Actuarial Equivalent of any surviving dependent benefit, as defined in the Pension Plan. (d) In the event of a Change-in-Control of the Company, any Beneficiary who is receiving payment of a death benefit pursuant to this Section 6.1 shall receive a single lump sum payment which is the Actuarial Equivalent (as determined pursuant to Section 5.3 hereof) of the Beneficiary's remaining death benefit. 6.2 Simultaneous Death. In the event of the simultaneous death of a Participant eligible for a death benefit under this Article VI and his Beneficiary or Spouse so that it is not possible to determine which one was the survivor, it shall be presumed for purposes of this Article VI that the Beneficiary or Spouse predeceased the Participant. ARTICLE VII Administration of the Plan 7.1 Powers and Duties of the Committee. The Committee shall be generally responsible for the operation and administration - 17 - of the Plan. To the extent that powers are not delegated to others pursuant to provisions of this Plan, the Committee shall have such powers as may be necessary to carry out the provisions of the Plan and to perform its duties hereunder, including, without limiting the generality of the foregoing, the power: (a) To appoint, retain, and terminate such persons as it deems necessary or advisable to assist in the administration of the Plan or to render advice with respect to the responsibilities of the Committee under the Plan, including accountants, actuaries, administrators, attorneys and physicians. (b) To make use of the services of the employees of the Company in administrative matters. (c) To obtain and act on the basis of all tables, valuations, certificates, opinions, and reports furnished by the persons described in paragraph (a) or (b) above. Any determination of Actuarially Equivalent benefits by the actuary selected by the Committee shall be conclusive and binding on the Company, the Committee and all Participants or Former Participants. (d) To review the manner in which benefit claims and other aspects of the Plan administration have been handled by the employees of the Company. (e) To determine all benefits and resolve all questions pertaining to the administration and interpretation of the Plan provisions, either by rules of general applicability or by particular decisions. To the maximum extent permitted by law, all - 18 - interpretations of the Plan and other decisions of the Committee shall be conclusive and binding on all parties. (f) To adopt such forms, rules and regulations as it shall deem necessary or appropriate for the administration of the Plan and the conduct of its affairs, provided that any such forms, rules and regulations shall not be inconsistent with the provisions of the Plan. (g) To remedy any inequity from incorrect information received or communicated or from administrative error. (h) To commence or defend any litigation arising from the operation of the Plan in any legal or administrative proceeding. 7.2 Required Information. Any Participant, Former Participant and any Beneficiary eligible to receive benefits under the Plan shall furnish to the Committee any information or proof requested by the Committee and reasonably required for the proper administration of the Plan. Failure on the part of the Participant, Former Participant or Beneficiary to comply with any such request within a reasonable period of time shall be sufficient grounds for delay in the payment of benefits under the Plan until such information or proof is received by the Committee. 7.3 Expenses. All expenses incident to the operation and administration of the Plan reasonably incurred, including, without limitation by way of specification, the fees and expenses of attorneys and advisors, and for such other professional, technical - 19 - and clerical assistance as may be required, shall be paid by the Company. 7.4 Indemnification. To the extent coverage is not provided by any applicable insurance policy, the Company hereby agrees to indemnify the Committee and each of its members and the Board and each of its members, and to hold them harmless against all liability, joint and several, for their acts, omissions and conduct and for the acts, omissions and conduct of their duly appointed agents made in good faith pursuant to the provisions of the Plan, including any out-of-pocket expenses reasonably incurred in the defense of any claim relating thereto; provided, however, that no person or entity so indemnified shall voluntarily assume or admit any liability, nor, except at its or his own cost, shall any of the foregoing make any payment, assume any obligations or incur any expense without the prior written consent of the Board. The Company may purchase, at its expense, liability insurance to protect the Company and the persons indemnified hereunder from liability incurred in the good faith administration of this Plan. 7.5 Claims Procedure and Review (a) Claims for benefits under the Plan shall be filed in writing by a claimant with the Committee. Within sixty (60) days after receipt of such claim, the Committee shall act on the claim and shall notify the claimant in writing as to whether the claim has been granted in whole or in part; provided, however, if the claimant has not received written notice of such decision within such sixty-day period, the claimant shall, for the purpose - 20 - of subsection (c) of this Section, regard his claim as having been denied. (b) Any notice of denial of a claim in whole or in part shall set forth (i) the specific reason or reasons for the denial, (ii) reference to the Plan provisions on which the denial is based, and (iii) a copy of the Plan's claim and review provisions. (c) Any claimant who has been denied a claim in whole or in part under the Plan shall be entitled, upon the filing of a written request for review with the Committee within sixty (60) days after receipt by the claimant of written notice of denial of his claim (or, if the claimant had not received written notice of the decision within the sixty-day period described in subsection (a) of this Section, within one hundred twenty (120) days of receipt of the claim form by the Committee), to appeal the denial of his claim to the Committee. (d) The claimant shall be entitled in connection with such appeal to examine pertinent documents and submit issues and comments in writing to the Committee. Any decision on review by the Committee shall be in writing, and shall include specific reasons for the decision (including reference to the Plan provisions on which the decision is based). Such decision shall be made by the Committee not later than sixty (60) days after receipt by it of the claimant's request for review. - 21 - ARTICLE VIII Miscellaneous 8.1 Funding. Benefits payable under this Plan shall be paid directly from the general assets of each Company. The Company shall not be obligated to set aside, earmark or escrow any funds or other assets to satisfy its obligations under this Plan, and the Participant and his Beneficiary shall not have any property interest in any specific assets of the Company other than the unsecured right to receive payments from the Company as provided herein. 8.2 Amendment or Termination. (a) The Committee shall have the right to amend, modify, restate or terminate the Plan when, in its absolute discretion, it determines such action to be advisable. Any such amendment or termination shall be made pursuant to a written resolution of the Committee which shall designate when the action is to be effective. Notwithstanding the foregoing, no such action by the Committee shall reduce a Participant's Supplemental Retirement Benefit accrued as of the time thereof and no such amendment or termination may occur as a result of a Change-in-Control, within two years after a Change-in-Control, or as part of any plan to effect a Change-in-Control. (b) If the Plan is terminated, a determination shall be made of each Participant's Supplemental Retirement Benefit as of the Plan termination date. The amount of a Participant's benefit or benefits shall be payable to the Participant at the time it - 22 - would have been payable under Article VI hereof if the Plan had not been terminated. If a Participant dies after termination of the Plan, but prior to his Termination of Employment, his Beneficiary or Beneficiaries shall receive a distribution of his death benefit, determined in accordance with Article VI hereof, but based on the Participant's Supplemental Retirement Benefit as of the Plan termination date. 8.3 Status of Employment. Nothing herein contained shall be deemed: (a) to give any Participant the right to be retained in the employ of the Company; (b) to affect the right of the Company to discipline or discharge any Participant at any time; (c) to give the Company the right to require any Participant to remain in its employ; or (d) to affect any Participant's right to terminate his employment at any time. 8.4 Payments to Minors and Incompetents. If a Participant or Beneficiary entitled to receive any benefits hereunder is a minor or is deemed by the Committee or is adjudged to be legally incapable of giving a valid receipt and discharge for such benefits, they will be paid to the duly appointed guardian of such minor or incompetent or to such other legally appointed person as the Committee may designate. Such payment shall, to the extent made, be deemed a complete discharge of any liability for such payment under the Plan. 8.5 Inalienability of Benefits. The right of any person to any benefit or payment under the Plan shall not be subject to voluntary or involuntary transfer, alienation or assignment, and, - 23 - to the fullest extent permitted by law, shall not be subject to attachment, execution, garnishment, sequestration or other legal or equitable process. In the event a person who is receiving or is entitled to receive benefits under the Plan attempts to assign, transfer or dispose of such right, or if an attempt is made to subject said right to such process, such assignment, transfer or disposition shall be null and void. 8.6 Governing Law. Except to the extent preempted by Federal law, the Plan shall be governed by and construed in accordance with the internal laws of the Commonwealth of Pennsylvania. 8.7 Severability. In case any provision of this Plan shall be held illegal or invalid for any reason, such illegality or invalidity shall not affect the remaining provisions of the Plan, and the Plan shall be construed and enforced as if such illegal and invalid provisions had never been set forth. 8.8 Required Information to Committee. Each Participant will furnish to the Committee such information as the Committee considers necessary or desirable for purposes of administering the Plan, and the provisions of the Plan respecting any payments thereunder are conditional upon the Participant's furnishing promptly such true, full and complete information as the Committee may request. The Committee, in its sole discretion, may request a Participant to submit proof of his age. The Committee will, if such proof of age is not submitted when requested, use as conclusive evidence thereof such information as is deemed by it to - 24 - be reliable, regardless of the lack of proof. Any notice or information which, according to the terms of the Plan or the rules of the Committee, must be filed with the Committee, shall be deemed so filed if addressed and either delivered in person or mailed to and received by the Committee at the following address: The PMC Employee Benefits Plan Committee c/o Vice President - Human Resources Pennsylvania Manufacturers' Association Insurance Company Corporate Operations Center 380 Sentry Parkway Blue Bell, PA 19422 8.9 Income and Payroll Tax Withholding. To the extent required by the laws in effect at the time payments are made under this Plan, the Company shall withhold from such deferred compensation payments any taxes required to be withheld for federal, state or local government purposes. TO RECORD the adoption of this Plan, the Plan Sponsor on behalf of itself and each other participating Company has caused this document to be executed by its duly authorized officers as of the 1st day of July, 1995. Attest: PENNSYLVANIA MANUFACTURERS CORPORATION /s/ By: /s/ - - - ----------------------------- ---------------------------------- Title: Title: - 25 - APPENDIX A List of Participating Affiliated Employers 1. Effective as of January 1, 1993 ------------------------------- Pennsylvania Manufacturers' Association Insurance Company PMC Reinsurance Corporation 2. Effective as of January 1, 1995 ------------------------------- Pennsylvania Manufacturers Association Pennsylvania Manufacturers Association - Harrisburg - 26 - EX-10.5 8 STOCK OPTION PLAN EXHIBIT 10.5 PENNSYLVANIA MANUFACTURERS CORPORATION AMENDED AND RESTATED 1987 INCENTIVE STOCK OPTION PLAN CLASS A COMMON STOCK 1. Purpose of the Plan. The purpose of the Pennsylvania Manufacturers Corporation 1987 Incentive Stock Option Plan (the "Plan") is to promote the growth and prosperity of Pennsylvania Manufacturers Corporation (the "Company") and its subsidiaries by providing an opportunity for the Company, through grants of options to purchase shares of its Class A common stock ("Options") and stock appreciation rights ("Rights"), to attract and retain the best available personnel for key positions of substantial responsibility, and to provide key employees with a proprietary interest in the Company and an additional incentive to contribute to the success of the Company. It is further intended that Options issued pursuant to the Plan shall constitute incentive stock options within the meaning of Section 422A of the Internal Revenue Code of 1986, as amended (the "Internal Revenue Code"). 2. Administration of the Plan. (a) The Board of Directors of the Company (the "Board") shall appoint a Stock Option Plan Committee (the "Committee"), which shall consist of not less than three members of the Board, none of whom shall be eligible to receive awards of Options under the Plan. Subject to the provisions of the Plan, the Committee shall have plenary authority, in its discretion: (i) to determine the employees of the Company and its subsidiaries to whom - 1 - Options shall be granted; (ii) to determine the time or times at which Options shall be granted; (iii) to determine the option price of the shares subject to each Option, which price shall not be less than the minimum specified in Section 5 of the Plan; (iv) to determine the time or times when each Option becomes exercisable and the duration of the exercise; (v) to determine to grant Rights in tandem with Options; (vi) to determine the optionees to whom Rights should be granted; and (vii) to interpret, prescribe, amend and rescind rules and regulations relating to the Plan. (b) The Board may, from time to time, appoint members of the Committee in substitution for members previously appointed and may fill vacancies, however caused, in the Committee. The Committee shall select one of its members as its chairman and shall hold its meetings at such times and places as it shall deem advisable. All decisions, determinations, and interpretations of the Committee shall be final and binding on all optionees. All actions of the Committee shall be taken by a majority vote of its members. The Committee may appoint a secretary to keep minutes of its meetings and shall make rules and regulations for the conduct of its meetings as it shall deem advisable. 3. Shares of Stock Subject to the Plan. There will be reserved for issuance upon the exercise of Options and Rights to be granted under the Plan (subject to the provisions of Sections 10 and 11 of the Plan), an aggregate of 30,000 shares of the Class A Common Stock of the Company - 2 - ("Class A Stock"), par value $5.00 per share, which shares may be in whole or in part, as the Board shall from time to time determine, authorized but unissued shares of Class A Common Stock or issued shares of Class A Common Stock that shall have been reacquired by the Company. Any shares subject to an Option under the Plan which Option for any reason expires or is terminated unexercised as to such shares may again by subject to an Option under the Plan. Any shares subject to an Option that is canceled upon exercise of a Right shall be treated as if the Option itself were exercised, and such shares shall no longer be available for grant. 4. Eligibility. The Committee may grant Options and Rights to the key executive, management and creative personnel of the Company or any parent or subsidiary corporation of the Company, as may from time to time be so designated by the Committee. The terms "parent corporation" and "subsidiary corporation" shall, for the purposes of the Plan, be defined in the same manner as such terms are defined by Sections 425(e) and 425(f) of the Internal Revenue Code. 5. Option Price. The exercise price with respect to each Option shall be determined by the Committee at the time such Option is granted, but in no event shall such exercise price be less than 100% of the fair market value of the Class A Common Stock on the date that the Option is granted, as determined pursuant to Section 7. - 3 - 6. Terms of Stock Option Agreements. Options and Rights granted pursuant to the Plan shall be evidenced by agreements ("Incentive Stock Option Agreements") in such form as the Committee shall, from time to time, approve. References herein to the Incentive Stock Option Agreements shall include, to the extent applicable, any amendments to the Incentive Stock Option Agreements. Each Incentive Stock Option Agreement shall comply with and be subject to the following terms and conditions: (a) Number of Shares. Each Incentive Stock Option Agreement shall state the total number of shares of Class A Common Stock for which an Option is granted and the number of shares covered by the Option which may be purchased during various periods of time within the term of the Option. (b) Maximum Value. The aggregate fair market value (determined as of the time of grant) of the Class A Common Stock for which Options granted to any employee first become exercisable in any calendar year shall not exceed the sum of $100,000. In calculating such $100,000 limitation, there shall be taken into account options for Class A Common Stock granted hereunder and options for Common Stock and Class A Common Stock granted after December 31, 1986 under any other incentive stock option plan of the Company. (c) Date of Exercise. Each Incentive Stock Option Agreement shall state that the Option granted therein may not be exercised in whole or in part for any period or periods of time specified in such agreement or otherwise as specified by the Committee. Except as may be so specified and except as - 4- provided in Section 15 of the Plan, any Option may be exercised in whole at any time or in part from time to time during its term. An Option shall be exercised when written notice has been given to the Treasurer of the Company at its principal business office by the person entitled to exercise the Option and full payment for the shares with respect to which the Option is exercised has been received by the Company. (d) Acceleration. In the case of an Option not immediately exercisable in full, the Committee may in its sole discretion accelerate the time at which such Option may be exercised. (e) Term of Options. Each Option shall expire not more than ten years from the date the Option is granted. (f) Medium of Payment. Upon exercise of an Option, the option price shall be payable to the Company either (i) in cash (including check, bank draft or money order), or (ii) at the discretion of the Committee, through the delivery of Class A Common Stock, owned by the optionee, having a fair market value equal to the exercise price, or (iii) at the discretion of the Committee, by a combination of (i) and (ii) above. The fair market value of any Class A Common Stock used as payment for the exercise of Options hereunder shall be determined by the Committee. Certificates for the shares purchased shall be issued by the Company as soon as practicable following the receipt of payment. - 5 - (g) Rights upon Termination of Employment. (i) In the event that an optionee ceases to be an employee of the Company or any subsidiary for any reason other than death, retirement (as hereinafter defined) or disability (within the meaning of Section 72(m)(7) of the Internal Revenue Code or any substitute therefor), the optionee shall have the right to exercise his Option or Right during its term within a period of three months after such termination to the extent that the Option or Right was exercisable at the time of termination, or within such other period, and subject to such terms and conditions, as may be specified by the Committee. In the event that an optionee dies, retires or becomes disabled prior to the expiration of his Option or Right and without having fully exercised his Option or Right, the optionee or his successor shall have the right to exercise the Option or Right during its term within a period of one year after termination of employment due to death, retirement or disability to the extent that the Option or Right was exercisable at the time of termination, or within such other period, and subject to such terms and conditions, as may be specified by the Committee. (ii) For purposes of this Section 6(g), the termina- tion of an optionee's employment shall occur at the time when the employee-employer relationship between the optionee and the Company, or a subsidiary is terminated for any reason, including, but not limited to, a termination by resignation, discharge, death or retirement, but excluding any termination where there is - 6 - a simultaneous reemployment by the Company, or a subsidiary. The Committee, in its absolute discretion, shall determine the effect of all other matters and questions relating to termination of employment, and all questions of whether a particular leave of absence constitutes termination of employment; provided, however, that a leave of absence shall constitute a termination of employment if, and to the extent that, such leave of absence interrupts employment for purposes of Section 422(a)(2) of the Internal Revenue Code and the then applicable Regulations and Revenue Rulings under said Section. (iii) As used in this Section 6(g), "retirement" means a termination of employment by reason of an optionee's retirement at or after his earliest permissible retirement date pursuant to and in accordance with his employer's regular retirement plan or personnel practices. (h) Sale or Reorganization. If the Company or the shareholders of the Company shall enter into an agreement to dispose of all or substantially all of the assets or stock of the Company by means of a sale, merger, reorganization, liquidation or otherwise, the Board and/or the Committee may, in its or their absolute discretion and notwithstanding anything contained in Section 6 of the Plan or in the Incentive Stock Option Agreement to the contrary, make provision for or direct (and shall give prompt notice of such provision or direction to each optionee whose Option and shall terminate not later than the date of the sale, merger, reorganization or liquidation, as the case may be, or - 7 - that the Option has been converted and changed into an option to purchase a comparable amount of shares of the corporation to which, or into which, or with which the Company will sell its assets or stock, or merge or reorganize, as the case may be. (i) Assignability. Any Option or Right granted under the Plan may not be transferred, assigned, pledged or hypothecated by any optionee in any way other than by Will or by the laws of descent and distribution and, except as provided in subparagraph (g)(2) above, is exercisable solely by such optionee during his or her lifetime. (j) Rights of a Shareholder. An optionee shall have no rights as a shareholder with respect to shares subject to an Option until the date of the issuance of the shares to the optionee or as to shares to be delivered following exercise of a Right until, after proper exercise of the Right and determination by the Committee to make payment therefor in shares, such shares shall have been recorded on the Company's official shareholder records as having been issued or transferred. No adjustment will be made for cash dividends or other distributions or rights for which the record date is prior to the date of such issuance. (k) Ten Percent Shareholders. An Option shall not be granted to any person who owns, either directly or within the meaning of the attribution rules contained in Section 425(d) of the Internal Revenue Code, stock possessing more than 10% of the total combined voting power of all classes of capital stock of the Company or of any parent or subsidiary corporation, provided - 8 - that this prohibition shall not apply as long as at the time the Option is granted the exercise price is at least 110% of the fair market value of the Class A Common Stock on the date of grant and such Option is not exercisable after the expiration of five years from the date of grant. (l) Incentive Stock Option Agreements. The Incentive Stock Option Agreements authorized under this Section may contain such other provisions as the Committee or the Board shall deem advisable, provided such additional provisions are not inconsistent with the provisions of Section 422A(b) of the Internal Revenue Code. 7. Valuation. The Committee shall determine the fair market value of the shares of Class A Common Stock of the Company as of any date for purposes of the Plan and, in so doing, shall consider the price or prices at which shares of the Class A Common Stock of the Company have recently been sold as well as other indicia of value of the Class A Common Stock that the Committee shall consider relevant in establishing the fair market value thereof. 8. Granting of Rights. (a) The Committee, at the time of grant of an Option or at any time prior to the expiration of its term, may also grant, subject to the terms and conditions of the Plan, Rights in respect of all or part of such Option to the optionee who has been granted the Option. A Right shall entitle the optionee to surrender to the Company, prior to its exercise, the Option or any - 9 - portion of the Option in respect of which the Right was granted and to receive from the Company in exchange therefor cash or Class A Common Stock having an aggregate value equal to the product of (i) the excess of the fair market value of a share of Class A Common Stock on the date of exercise, as determined pur- suant to Section 7, over the option price per share fixed by the Committee pursuant to Section 5, and (ii) the number of shares subject to the Option, or portion thereof, which is to be surrendered. (b) The Committee shall have sole discretion to determine the form in which payment will be made following the surrender of an Option or any portion of an Option in respect of which a Right was granted. All or any part of the obligation arising out of the surrender of an Option may be settled in the following manner: (i) by payment in cash, or (ii) by payment in a combination of such shares and cash. (c) The Committee may reserve the right to terminate any Right at any time prior to its exercise and may include or reserve the right to include in any Right terms in addition to, but not inconsistent with, the foregoing. 9. Exercise of Rights. (a) The holder of a Right who decides to exercise the Right in whole or in part shall give notice to the Treasurer of the Company of such exercise in writing on a form approved by the Committee. The notice shall also specify the extent, if any, to - 10 - which the optionee elects to receive shares of Common Stock and the extent, if any, to which the optionee elects to receive cash and shall be subject to the determination by the Committee as provided in subparagraph (d), below. Any exercise shall be effective as of the date specified in the notice of exercise, but not earlier than the date the notice of exercise is actually received by the Treasurer of the Company. (b) To the extent an Option is exercised in whole or in part, any Right granted in respect of such Option (or part thereof) shall terminate and cease to be exercisable. To the extent the Right is exercised in whole or in part, the Option (or part thereof) in respect of which such Right is granted shall terminate and cease to be exercisable. (c) A Right shall be exercisable only during the period in which the Option (or part thereof) in respect of which such Right was granted is exercisable, except that when the Right is held by a person who is, or within the preceding six months has been, a director or an officer of the Company for purposes of Section 16(b) of the Securities Exchange Act of 1934 who elects to receive cash for all or part of the payments upon exercise, or who exercises for cash, the person may so elect or exercise such Right only during any period beginning on the third business day following the date of release of a summary statement of the Company's quarterly or annual earnings and ending on the twelfth business day following such date. - 11 - (d) The Committee shall have sole discretion to determine the form in which payment will be made following the exercise of a Right. All or any part of the obligation arising out of an exercise of a Right may be settled in the following manner: (i) by payment in shares of Class A Common Stock with a fair market value equal to the amount of cash that would otherwise be paid, (ii) by payment in cash, or (iii) by payment in a combination of such shares and cash. (e) To the extent that any Right that shall have become exercisable shall not have been exercised or cancelled, it shall be deemed to have been exercised automatically, without any notice of exercise, on the last day on which its related Option is exercisable, provided that any conditions or limitations on its exercise, other than notice of exercise, are satisfied and further provided that the Right shall then have value. Such exercise shall be deemed to specify that, subject to determination by the Committee as provided in subparagraph (d) above, the optionee elects to receive cash and that such exercise of a Right shall be effective as of the time of the exercise. 10. Dilution or Other Adjustments. Except as hereinafter provided, in the event that the Class A Common Stock shall be subdivided or combined into a greater or smaller number of shares, the number of shares then under Option to any employee, and the number of shares reserved for issuance under the Plan but not yet subject to Option, shall - 12 - be adjusted accordingly and appropriate adjustments shall also be made in the purchase price per share for each Option to reflect such subdivision or combination. However, no such adjustment shall be made in the event of a stock dividend until the cumulative total of such stock dividends declared by the Company since the inception of the Plan equals or exceeds 10% of the issued and outstanding Class A Common Stock. The Committee may also make such adjustments in the number and kind of Rights as it shall deem appropriate in the circumstances. 11. Amendment or Termination of the Plan. (a) The Board, upon recommendation of the Committee, or by its own initiative, may amend the Plan from time to time in such respects as the Board may deem advisable, except that the aggregate number of shares of Class A Common Stock for which Options may be granted (except any adjustment required by Section 10) and the class of eligible employees may be amended only with the approval of the holders of shares of the capital stock of the Company entitled to cast at least a majority of the votes which all voting shareholders are entitled to cast on matters submitted to the Company's shareholders. (b) The Board, in its discretion, may at any time suspend or terminate the Plan. Any such suspension or termination of the Plan shall not affect Options and Rights already granted, and such Options and Rights shall remain in full force and effect as if the Plan had not been terminated. - 13 - 12. Listing and Regulation of Shares; Investment Representation. (a) Each Option and Right shall be subject to the requirement that if at any time the Committee shall determine, in its discretion, that the listing, registration, or qualification of the shares covered thereby upon any securities exchange or under any state or federal law or the consent or approval of any governmental regulatory body, is necessary or desirable as a condition of, or in connection with, the granting of such Option or the issuance or purchase of shares thereunder or under any Right, such Option may not be exercised in whole or in part, nor may such Right be exercised in whole or in part for shares of Class A Common Stock unless and until such listing, registration, qualification, consent or approval shall have been effected or obtained free of any conditions not acceptable to the Committee. Further, the inability of the Company to obtain from any regulatory body having jurisdiction the authority deemed by the Compa ny's legal counsel to be necessary to the lawful issuance and sale of any shares of its Class A Common Stock hereunder shall relieve the Company of any liability in respect of the non-issuance or sale of such stock as to which such requisite authority shall not have been obtained. (b) If required by the Company, the holder of an Option or Right granted hereunder shall represent to the Company that the shares that are issued upon exercise of the Option or Right are purchased for investment and not with a view to resale or distribution, and the certificates representing such shares shall bear - 14 - an appropriate legend to reflect the fact that such shares have not been registered under the Securities Act of 1933 and that no sale or other disposition of such shares may be made except pursuant to an effective registration statement under such Act or in a transaction which in the opinion of legal counsel to the Company is exempt from such registration requirement. 13. Continuation of Employment. Neither the Plan nor any Option or Right granted hereunder shall confer upon any employee any right to continue in the employ of the Company or any parent or subsidiary corporation or limit in any respect the right of the Company or any parent or subsidiary corporation to terminate his employment at any time. 14. No Prohibition on Corporate Action. No provision of the Plan or any Incentive Stock Option Agreement shall be construed to prevent the Company or any parent or subsidiary corporation from taking any corporate action deemed by the Company or such parent or subsidiary corporation to be appropriate or in its best interest, whether or not such action could have an adverse effect on the Plan or any Options and Rights granted hereunder, and no optionee or optionee's estate, personal representative or beneficiary shall have any claim against the Company or any parent or subsidiary corporation as a result of the taking of such action. 15. Authority of the Committee. The decision of the Committee with respect to interpretations of the various provisions of the Plan and rules and regulations relating to the Plan - 15 - and the fair market value of shares of Class A Common Stock of the Company as of any date shall be binding upon all optionees and shall be final and conclusive for all purposes. 16. Effective Date and Term of Plan; Shareholder Approval. The Plan shall have an effective date of April 27, 1987 and the term during which Options and Rights may be granted under the Plan shall expire at the close of business on April 26, 1997; however, no Option or Right may be exercised unless the Plan is approved by a vote of the holders of shares of the capital stock of the Company entitled to cast at least a majority of the votes which all voting shareholders are entitled to cast on matters submitted to the Company's shareholders at a meeting of shareholders of the Company held within twelve months after the effective date. Date Plan Approved by Board of Directors - February 21, 1987 Date Plan Approved by Shareholders - April 27, 1987 Date Plan Amended by Board of Directors - February 28, 1995 - 16 - EX-10.6 9 EQUITY INCENTIVE PLAN EXHIBIT 10.6 PENNSYLVANIA MANUFACTURERS CORPORATION AMENDED AND RESTATED 1991 EQUITY INCENTIVE PLAN 1. Purpose. The purpose of the Pennsylvania Manufacturers Corporation 1991 Equity Incentive Plan (the "Plan") is to enhance the ability of Pennsylvania Manufacturers Corporation (the "Company") and any subsidiaries to attract and retain the best available personnel for positions of substantial responsibility, to provide additional incentive to such personnel and to promote the success of the Company. To accomplish these purposes, the Plan provides a means whereby employees of the Company and its subsidiaries may receive stock options to purchase the Company's Class A Common Stock ("Options"). 2. Administration. (a) Composition of the Committee. The Plan shall be administered by a committee of at least two directors (the "Committee") appointed by the Company's Board of Directors. No member of the Committee shall have been, or shall be, granted Options under the Plan, or options or other awards under any other plan of the Company or any of its affiliates, in the year preceding his appointment or while serving on the Committee, except for participation in any plan in which participation would be permitted in accordance with the applicable rules of the Securities and Ex change Commission relating to disinterested administration under the Securities Exchange Act of 1934 (the "Exchange Act"). Subject to the foregoing, from time to time the Board of Directors may increase the size of the Committee and appoint additional members thereof, remove members (with or without cause) and appoint new members in substitution therefor, fill vacancies, however caused, or remove all members of the Committee and thereafter directly administer the Plan. (b) Authority of the Committee. The Committee shall have full and final authority, in its sole discretion, to interpret the provisions of the Plan and to decide all questions of fact arising in its application; to determine the employees to whom awards shall be made and the amount, size and terms of each such award; to determine the time when awards shall be granted; and to make all other determinations necessary or advisable for the administration of the Plan. All decisions, determinations and interpretations of the Committee shall be final and binding on all optionees and all other holders of Options granted under the Plan. 3. Stock Subject to the Plan. Subject to Section 16 hereof, the shares that may be issued under the Plan shall not exceed in the aggregate 150,000 shares of Class A Common Stock of the Company (the "Class A Stock"). Such shares may be authorized and unissued shares or shares issued and subsequently reacquired by the Company. Except as otherwise provided herein, any shares subject to an Option that for any reason expires or is terminated unexercised as to such shares shall again be available under the Plan. 4. Eligibility To Receive Options. Persons eligible to receive stock options under the Plan shall be limited to those officers and other employees of the Company and any subsidiary (as defined in Section 425 of the Internal Revenue Code of 1986 (the "Code") or any amendment or substitute thereto), who may also be directors, who are in positions in which their decisions, actions and counsel significantly impact upon the profitability and success of the Company and/or a subsidiary. Directors of the Company who are not also officers or employees of the Company or any subsidiary shall not be eligible to participate in the Plan. 5. Types of Options. Grants may be made at any time and from time to time by the Committee in the form of stock options to purchase shares of Class A Stock. Options granted hereunder may be Options that are intended to qualify as incentive stock options within the meaning of Section 422 of the Code or any amendment or substitute thereto ("Incentive Stock Options") or Options that are not intended to so qualify ("Nonqualified Stock Options"). 6. Stock Options. Options for the purchase of Class A Stock shall be evidenced by written agreements in such form not inconsistent with the Plan as the Committee shall approve from time to time. The Options granted hereunder may be evidenced by a single agreement or by multiple agreements, as determined by the Committee in its sole discretion. Each Option agreement shall contain in substance the following terms and conditions: (a) Type of Option. Each Option agreement shall identify the Options represented thereby as Incentive Stock Options or Nonqualified Stock Options, as the case may be. (b) Option Price. Each Option agreement shall set forth the purchase price of the Class A Stock purchasable upon the exercise of the Option evidenced thereby. Subject to the limitation set forth in Section 6(d)(ii), the purchase price of the Class A Stock subject to an Incentive Stock Option shall be not less than 100% of the fair market value of such stock on the date the Option is granted, as determined by the Committee, but in no event less than the par value of such stock. The purchase price of the Class A Stock subject to a Nonqualified Stock Option shall be not less than 85% of the fair market value of such stock on the date the Option is granted, as determined by the Committee. For this purpose, fair market value on any date shall mean the closing price of the Class A Stock, as reported in The Wall Street Journal (or if not so reported, as otherwise reported by the National Association of Securities Dealers Automated Quotation ("NASDAQ") System), or if the Class A Stock is not reported by NASDAQ, the fair market value shall be as determined by the Committee pursuant to Section 422 of the Code. -2- (c) Exercise Term. Each Option agreement shall state the period or periods of time within which the Option may be exercised, in whole or in part, which shall be such a period or periods of time as may be determined by the Committee, provided that no Option shall be exercisable after ten years from the date of grant thereof. The Committee shall have the power to permit an acceleration of previously established exercise terms, subject to the requirements set forth herein, upon such circumstances and subject to such terms and conditions as the Committee deems appropriate. (d) Incentive Stock Options. In the case of an Incentive Stock Option, each Option agreement shall contain such other terms, conditions and provisions as the Committee determines necessary or desirable in order to qualify such Option as a tax-favored Option (within the meaning of Section 422 of the Code or any amendment or substitute thereto or regulation thereunder) including without limitation, each of the following, except that any of these provisions may be omitted or modified if it is no longer required in order to have an Option qualify as a tax-favored Option within the meaning of Section 422 of the Code or any substitute therefor: (i) The aggregate fair market value (determined as of the date the Option is granted) of the Class A Stock with respect to which Incentive Stock Options are first exercisable by any employee during any calendar year (under all plans of the Company) shall not exceed $100,000. (ii) No Incentive Stock Options shall be granted to any employee if at the time the Option is granted such employee owns stock possessing more than ten percent of the total combined voting power of all classes of stock of the Company or its parent or its subsidiaries unless at the time such Option is granted the Option price is at least 110% of the fair market value of the stock subject to the Option and, by its terms, the Option is not exercisable after the expiration of five years from the date of grant. (iii) No Incentive Stock Options shall be exercisable more than three months (or one year, in the case of an employee who dies or becomes disabled within the meaning of Section 72(m)(7) of the Code or any substitute therefor) after termination of employment. (e) Substitution of Options. Options may be granted under the Plan from time to time in substitution for stock options held by employees of other corporations who are about to become, and who do concurrently with the grant of such options become, employees of the Company or a subsidiary as a result of a merger or consolidation of the employing corporation with the Company or a subsidiary, or the acquisition by the Company or a subsidiary of the assets of the employing corporation, or the acquisition by the Company or a subsidiary of stock of the subsidiary. The terms and conditions of the substitute options so granted may vary from the terms and conditions set forth in this Section 6 to such extent as the Committee at the time of grant may deem appropriate to conform, in whole or in part, to the provisions of the stock options in substitution for which they are granted. -3- 7. Date of Grant. The date on which an Option shall be deemed to have been granted under the Plan shall be the date of the Committee's authorization of the Option or such later date as may be determined by the Committee at the time the Option is authorized. Notice of the determination shall be given to each individual to whom an Option is so granted within a reasonable time after the date of such grant. 8. Exercise and Payment for Shares. Options may be exercised in whole or in part, from time to time, by giving written notice of exercise to the Secretary of the Company, specifying the number of shares to be purchased. The purchase price of the shares with respect to which an Option is exercised shall be payable in full with the notice of exercise in cash, Class A Stock at fair market value, or a combination thereof, as the Committee may determine from time to time and subject to such terms and conditions as may be prescribed by the Committee for such purpose. 9. Rights upon Termination of Employment. In the event that an optionee ceases to be an employee of the Company or any subsidiary for any reason other than death, retirement, as hereinafter defined, or disability (within the meaning of Section 72(m)(7) of the Code or any substitute therefor), the optionee shall have the right to exercise the Option during its term within a period of three months after such termination to the extent that the Option was exercisable at the time of termination, or within such other period, and subject to such terms and conditions, as may be specified by the Committee. In the event that an optionee dies, retires or becomes disabled prior to the expiration of his Option and without having fully exercised his Option, the optionee or his successor shall have the right to exercise the Option during its term within a period of one year after termination of employment due to death, retirement or disability to the extent that the Option was exercisable at the time of termination, or within such other period, and subject to such terms and conditions, as may be specified by the Committee. As used in this Section 9, "retirement" means a termination of employment by reason of an optionee's retirement at or after his earliest permissible retirement date pursuant to and in accordance with his employer's regular retirement plan or personnel practices. Notwithstanding the provisions of Section 6(d)(iii) hereof, an Incentive Stock Option may be exercised more than three months after termination of employment due to retirement, as provided in this Section 9, but in that event, the Option shall lose its status as an Incentive Stock Option and shall be treated as a Nonqualified Stock Option. 10. General Restrictions. Each Option granted under the Plan shall be subject to the requirement that if at any time the Committee shall determine that (i) the listing, registration or qualification of the shares of Class A Stock subject or related thereto upon any securities exchange or under any state or federal law, or (ii) the consent or approval of any government regulatory body, or (iii) an agreement by the recipient of an Option with respect to the disposition of shares of Class A Stock is necessary -4- or desirable as a condition of or in connection with the granting of such Option or the issuance or purchase of shares of Class A Stock thereunder, such Option shall not be consummated in whole or in part unless such listing, registration, qualification, consent, approval or agreement shall have been effected or obtained free of any conditions not acceptable to the Committee. 11. Rights of a Shareholder. The recipient of any Option under the Plan, unless otherwise provided by the Plan, shall have no rights as a shareholder unless and until a certificate for shares of Class A Stock is issued and delivered to him. 12. Right to Terminate Employment. Nothing contained in the Plan or in any agreement entered into pursuant to the Plan shall confer upon any optionee the right to continue in the employment of the Company or any subsidiary or affect any right that the Company or any subsidiary may have to terminate the employment of such optionee. 13. Withholding. Whenever the Company proposes or is required to issue or transfer shares of Class A Stock under the Plan, the Company shall have the right to require the recipient to remit to the Company an amount sufficient to satisfy any federal, state or local withholding tax requirements prior to the delivery of any certificate for such shares. If and to the extent authorized by the Committee, in its sole discretion, an optionee may make an election, by means of a form of election to be prescribed by the Committee, to have shares of Class A Stock that are acquired upon exercise of an Option withheld by the Company or to tender other shares of Class A Stock or other securities of the Company owned by the optionee to the Company at the time of exercise of an Option to pay the amount of tax that would otherwise be required by law to be withheld by the Company as a result of any exercise of an Option. Any such election shall be irrevocable and shall be subject to the disapproval of the Committee at any time. Any securities so withheld or tendered will be valued by the Committee as of the date of exercise. 14. Non-Assignability. No Option under the Plan shall be assignable or transferable by the recipient thereof except by will or by the laws of descent and distribution or by such other means as the Committee may approve, unless such means would be prohibited by Rule 16b-3 under the Exchange Act. During the life of the recipient such Option shall be exercisable only by such person or by such person's guardian or legal representative. -5- 15. Non-Uniform Determinations. The Committee's determinations under the Plan (including without limitation determinations of the persons to receive Options, the form, amount and timing of such grants, the terms and provisions of Options, and the agreements evidencing same) need not be uniform and may be made selectively among persons who receive, or are eligible to receive, grants of Options under the Plan whether or not such persons are similarly situated. 16. Adjustments. (a) Changes in Capitalization. Subject to any required action by the shareholders of the Company, the number of shares of Class A Stock covered by each outstanding Option and the number of shares of Class A Stock that have been authorized for issuance under the Plan but as to which no Options have yet been granted or which have been returned to the Plan upon cancellation or expiration of an Option, as well as the price per share of Class A Stock covered by each such outstanding Option, shall be proportionately adjusted for any increase or decrease in the number of issued shares of Class A Stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Class A Stock, or any other increase or decrease in the number of issued shares of Class A Stock effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Such adjustment shall be made by the Committee, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Class A Stock subject to an Option. (b) Dissolution or Liquidation. In the event of the proposed dissolution or liquidation of the Company, all outstanding Options will terminate immediately prior to the consummation of such proposed action, unless otherwise provided by the Committee. The Committee may, in the exercise of its sole discretion in such instances, declare that any Option shall terminate as of a date fixed by the Committee and give each Option holder the right to exercise his Option as to all or any part of the shares of Class A Stock covered by the Option, including shares as to which the Option would not otherwise be exercisable. (c) Sale or Merger. In the event of a proposed sale of all or substantially all of the assets of the Company, or the merger of the Company with or into another corporation, the Committee, in the exercise of its sole discretion, may take such action as it deems desirable, including, but, not limited to: (i) causing an Option to be assumed or an equivalent option to be substituted by such successor corporation or a parent or subsidiary of such successor corporation, (ii) providing that each Option holder shall have the right to exercise his Option as to all of the shares of Class A Stock covered by the Option, including shares as to which the Option would not otherwise be exercisable, or (iii) declare that an Option shall terminate at a date fixed by the Committee provided that the Option holder is given notice and opportunity prior to such date to exercise that portion of his Option that is currently exercisable. -6- 17. Amendment. The Committee may terminate or amend the Plan at any time, except that without sharehold er approval the Committee may not (i) materially increase the maximum number of shares that may be issued under the Plan (other than increases pursuant to Section 16 hereof), (ii) materially increase the benefits accruing to participants under the Plan or (iii) materially modify the requirements as to eligibility for participation in the Plan. The termination or any modification or amendment of the Plan shall not, without the consent of a participant, affect his rights under an Option previously granted. 18. Conditions upon Issuance of Shares. (a) Compliance with Securities Laws. Shares of the Company's Class A Stock shall not be issued pursuant to the exercise of an Option unless the exercise of such Option and the issuance and delivery of such shares pursuant thereto shall comply with all relevant provisions of law, including, without limitation, the Securities Act of 1933, as amended, the Exchange Act, the rules and regulations promulgated thereunder, and the requirements of any stock exchange upon which the Class A Stock of the Company may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance. (b) Investment Representations. As a condition to the exercise of an Option, the Company may require the person exercising such Option to represent and warrant at the time of any such exercise that the shares of Class A Stock are being purchased only for investment and without any present intention to sell or distribute such shares if, in the opinion of counsel for the Company, such representation is required by any of the aforementioned relevant provisions of law. 19. Reservation of Shares. The Company, during the term of the Plan, will at all times reserve and keep available such number of shares as shall be sufficient to satisfy the requirements of the Plan. Inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company's counsel to be necessary to the lawful issuance and sale of any shares hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such shares as to which such requisite authority shall not have been obtained. 20. Effect on Other Plans. Participation in the Plan shall not affect an employee's eligibility to participate in any other benefit or incentive plan of the Company or any subsidiary. Any Options granted pursuant to the Plan shall not be used in determining the benefits provided under any other plan of the Company or any subsidiary unless specifically provided. -7- 21. Duration of the Plan. The Plan shall remain in effect until all Options granted under the Plan have been satisfied by the issuance of shares, but no Option shall be granted more than ten years after the earlier of the date the Plan is adopted by the Company's Board of Directors or is approved by the Company's shareholders. 22. Forfeiture for Dishonesty. Notwithstanding anything to the contrary in the Plan, if the Committee finds, by a majority vote, after full consideration of the facts presented on behalf of both the Company and any optionee, that the optionee has been engaged in fraud, embezzlement, theft, commission of a felony or dishonest conduct in the course of his employment or retention by the Company or any subsidiary that damaged the Company or any subsidiary or that the optionee has disclosed trade secrets of the Company or any subsidiary, the optionee shall forfeit all unexercised Options and all exercised Options with respect to which the Company has not yet delivered the certificates. The decision of the Committee in interpreting and applying the provisions of this Section 22 shall be final. No decision of the Committee, however, shall affect the finality of the discharge or termination of such optionee by the Company or any subsidiary in any manner. 23. No Prohibition on Corporate Action. No provision of the Plan shall be construed to prevent the Company or any officer or director thereof from taking any corporate action deemed by the Company or such officer or director to be appropriate or in the Company's best interest, whether or not such action could have an adverse effect on the Plan or any Options granted hereunder, and no optionee or optionee's estate, personal representative or beneficiary shall have any claim against the Company or any officer or director thereof as a result of the taking of such action. 24. Indemnification. With respect to the administration of the Plan, the Company shall indemnify each present and future member of the Committee and the Board of Directors against, and each member of the Committee and the Board of Directors shall be entitled without further action on his part to indemnity from the Company for all expenses (including the amount of judgments and the amount of approved settlements made with a view to the curtailment of costs of litigation, other than amounts paid to the Company itself) reasonably incurred by him in connection with or arising out of, any action, suit or proceeding in which he may be involved by reason of his being or having been a member of the Committee and the Board of Directors, whether or not he continues to be such member at the time of incurring such expenses; provided, however, that such indemnity shall not include any expenses incurred by any such member of the Committee and the Board of Directors (i) in respect of matters as to which he shall be finally adjudged in any such action, suit or proceeding to have been guilty of gross negligence or willful misconduct in the perfor mance of his duty as such member of the Committee or the Board of Directors; or (ii) in respect of any matter in which any settlement is effected for an amount in excess of the amount approved -8- by the Company on the advice of its legal counsel; and provided further that no right of indemnification under the provisions set forth herein shall be available to or enforceable by any such member of the Committee and the Board of Directors unless, within 60 days after institution of any such action, suit or proceeding, he shall have offered the Company in writing the opportunity to handle and defend same at its own expense. The foregoing right of indemnification shall inure to the benefit of the heirs, executors or administrators of each such member of the Committee and the Board of Directors and shall be in addition to all other rights to which such member may be entitled as a matter of law, contract or otherwise. 25. Miscellaneous Provisions. (a) Compliance with Plan Provisions. No optionee or other person shall have any right with respect to the Plan, the Class A Stock reserved for issuance under the Plan or any Option until a written Option agreement shall have been executed by the Company and the optionee and all the terms, conditions and provisions of the Plan and the Option applicable to such optionee (and each person claiming under or through him) have been met. (b) Approval of Counsel. In the discretion of the Committee, no shares of Class A Stock, other securities or property of the Company, or other forms of payment shall be issued hereunder with respect to any Option unless counsel for the Company shall be satisfied that such issuance will be in compliance with applicable federal, state, local and foreign legal, securities exchange and other applicable requirements. (c) Compliance with Rule 16b-3. To the extent that Rule 16b-3 under the Exchange Act shall apply to Options granted under the Plan, it is the intent of the Company that the Plan comply in all respects with the requirements of Rule 16b-3, that any ambiguities or inconsistencies in construction of the Plan be interpreted to give effect to such intention and that if the Plan shall not so comply, whether on the date of adoption or by reason of any later amendment to or interpretation of Rule 16b-3, the provisions of the Plan shall be deemed to be automatically amended so as to bring them into full compliance with such rule. (d) Unfunded Plan. The Plan shall be unfunded. The Company shall not be required to establish any special or separate fund or to make any other segregation of assets under the Plan. (e) Effects of Acceptance of Option. By accepting any Option or other benefit under the Plan, each optionee and each person claiming under or through him shall be conclusively deemed to have indicated his acceptance and ratification of, and consent to, any action taken under the Plan by the Company, the Board of Directors and/or the Committee or its delegates. (f) Construction. The masculine pronoun shall include the feminine and neuter, and the singular shall include the plural, where the context so indicates. -9- 26. Shareholder Approval. The exercise of any Option granted under the Plan shall be subject to the approval of the Plan by the affirmative vote of the holders of a majority of the votes present or represented, and entitled to be cast, at a duly held meeting of the shareholders of the Company. Date of Adoption by Board of Directors - December 14, 1991. Date of Approval by Shareholders - May 4, 1992. Date of Amendment by Compensation and Stock Option Committee - April 12, 1995. N.B. As the result of a stock dividend of four shares of Class A Stock for each share of Class A Stock theretofore outstanding effected in May 1992, the number of shares reserved for issuance under the Plan, as set forth in Section 3 of the Plan, was increased to 750,000 shares in accordance with the adjustment provisions set forth in Section 16(a) of the Plan. -10- EX-10.7 10 EQUITY INCENTIVE PLAN EXHIBIT 10.7 PENNSYLVANIA MANUFACTURERS CORPORATION AMENDED AND RESTATED 1993 EQUITY INCENTIVE PLAN 1. Purpose. The purpose of the Pennsylvania Manufacturers Corporation 1993 Equity Incentive Plan (the "Plan") is to enhance the ability of Pennsylvania Manufacturers Corporation (the "Company") and any subsidiaries to attract and retain the best available personnel for positions of substantial responsibility, to provide additional incentive to such personnel and to promote the success of the Company. To accomplish these purposes, the Plan provides a means whereby employees of the Company and its subsidiaries may receive stock options to purchase the Company's Class A Common Stock ("Options"). 2. Administration. (a) Composition of the Committee. The Plan shall be administered by a committee of at least two directors (the "Committee") appointed by the Company's Board of Directors. No member of the Committee shall have been, or shall be, granted Options under the Plan, or options or other awards under any other plan of the Company or any of its affiliates, in the year preceding his appointment or while serving on the Committee, except for participation in any plan in which participation would be permitted in accordance with the applicable rules of the Securities and Exchange Commission relating to disinterested administration under the Securities Exchange Act of 1934 (the "Exchange Act"). Subject to the foregoing, from time to time the Board of Directors may increase the size of the Committee and appoint additional members thereof, remove members (with or without cause) and appoint new members in substitution therefor, fill vacancies, however caused, or remove all members of the Committee and thereafter directly administer the Plan. (b) Authority of the Committee. The Committee shall have full and final authority, in its sole discretion, to interpret the provisions of the Plan and to decide all questions of fact arising in its application; to determine the employees to whom awards shall be made and the amount, size and terms of each such award; to determine the time when awards shall be granted; and to make all other determinations necessary or advisable for the administration of the Plan. All decisions, determinations and interpretations of the Committee shall be final and binding on all optionees and all other holders of Options granted under the Plan. 3. Stock Subject to the Plan. Subject to Section 16 hereof, the shares that may be issued under the Plan shall not exceed in the aggregate 750,000 shares of Class A Common Stock of the Company (the "Class A Stock"). Such shares may be authorized and unissued shares or shares issued and subsequently reacquired by the Company. Except as otherwise provided herein, any shares subject to an Option that for any reason expires or is terminated unexercised as to such shares shall again be available under the Plan. 4. Eligibility To Receive Options. Persons eligible to receive stock options under the Plan shall be limited to those officers and other employees of the Company and any subsidiary (as defined in Section 425 of the Internal Revenue Code of 1986 (the "Code") or any amendment or substitute thereto), who may also be directors, who are in positions in which their decisions, actions and counsel significantly impact upon the profitability and success of the Company and/or a subsidiary. Directors of the Company who are not also officers or employees of the Company or any subsidiary shall not be eligible to participate in the Plan. 5. Types of Options. Grants may be made at any time and from time to time by the Committee in the form of stock options to purchase shares of Class A Stock. Options granted hereunder may be Options that are intended to qualify as incentive stock options within the meaning of Section 422 of the Code or any amendment or substitute thereto ("Incentive Stock Options") or Options that are not intended to so qualify ("Nonqualified Stock Options"). 6. Stock Options. Options for the purchase of Class A Stock shall be evidenced by written agreements in such form not inconsistent with the Plan as the Committee shall approve from time to time. The Options granted hereunder may be evidenced by a single agreement or by multiple agreements, as determined by the Committee in its sole discretion. Each Option agreement shall contain in substance the following terms and conditions: (a) Type of Option. Each Option agreement shall identify the Options represented thereby as Incentive Stock Options or Nonqualified Stock Options, as the case may be. (b) Option Price. Each Option agreement shall set forth the purchase price of the Class A Stock purchasable upon the exercise of the Option evidenced thereby. Subject to the limitation set forth in Section 6(d)(ii), the purchase price of the Class A Stock subject to an Incentive Stock Option shall be not less than 100% of the fair market value of such stock on the date the Option is granted, as determined by the Committee, but in no event less than the par value of such stock. The purchase price of the Class A Stock subject to a Nonqualified Stock Option shall be not less than 85% of the fair market value of such stock on the date the Option is granted, as determined by the Committee. For this purpose, fair market value on any date shall mean the closing price of the Class A Stock, as reported in The Wall Street Journal (or if not so reported, as otherwise reported by the National Association of Securities Dealers Automated Quotation ("NASDAQ") System), or if the Class A Stock is not reported by NASDAQ, the fair market value shall be as determined by the Committee pursuant to Section 422 of the Code. -2- (c) Exercise Term. Each Option agreement shall state the period or periods of time within which the Option may be exercised, in whole or in part, which shall be such a period or periods of time as may be determined by the Committee, provided that no Option shall be exercisable after ten years from the date of grant thereof. The Committee shall have the power to permit an acceleration of previously established exercise terms, subject to the requirements set forth herein, upon such circumstances and subject to such terms and conditions as the Committee deems appropriate. (d) Incentive Stock Options. In the case of an Incentive Stock Option, each Option agreement shall contain such other terms, conditions and provisions as the Committee determines necessary or desirable in order to qualify such Option as a tax-favored Option (within the meaning of Section 422 of the Code or any amendment or substitute thereto or regulation thereunder) including without limitation, each of the following, except that any of these provisions may be omitted or modified if it is no longer required in order to have an Option qualify as a tax-favored Option within the meaning of Section 422 of the Code or any substitute therefor: (i) The aggregate fair market value (determined as of the date the Option is granted) of the Class A Stock with respect to which Incentive Stock Options are first exercisable by any employee during any calendar year (under all plans of the Company) shall not exceed $100,000. (ii) No Incentive Stock Options shall be granted to any employee if at the time the Option is granted such employee owns stock possessing more than ten percent of the total combined voting power of all classes of stock of the Company or its parent or its subsid iaries unless at the time such Option is granted the Option price is at least 110% of the fair market value of the stock subject to the Option and, by its terms, the Option is not exercisable after the expiration of five years from the date of grant. (iii) No Incentive Stock Options shall be exercisable more than three months (or one year, in the case of an employee who dies or becomes disabled within the meaning of Section 72(m)(7) of the Code or any substitute therefor) after termination of employment. (e) Substitution of Options. Options may be granted under the Plan from time to time in substitution for stock options held by employees of other corporations who are about to become, and who do concurrently with the grant of such options become, employees of the Company or a subsidiary as a result of a merger or consolidation of the employing corporation with the Company or a subsidiary, or the acquisition by the Company or a subsidiary of the assets of the employing corporation, or the acquisition by the Company or a subsidiary of stock of the subsidiary. The terms and conditions of the substitute options so granted may vary from the terms and conditions set forth in this Section 6 to such extent as the Committee at the time of grant may deem appropriate to conform, in whole or in part, to the provisions of the stock options in substitution for which they are granted. -3- 7. Date of Grant. The date on which an Option shall be deemed to have been granted under the Plan shall be the date of the Committee's authorization of the Option or such later date as may be determined by the Committee at the time the Option is authorized. Notice of the determination shall be given to each individual to whom an Option is so granted within a reasonable time after the date of such grant. 8. Exercise and Payment for Shares. Options may be exercised in whole or in part, from time to time, by giving written notice of exercise to the Secretary of the Company, specifying the number of shares to be purchased. The purchase price of the shares with respect to which an Option is exercised shall be payable in full with the notice of exercise in cash, Class A Stock at fair market value, or a combination thereof, as the Committee may determine from time to time and subject to such terms and conditions as may be prescribed by the Committee for such purpose. 9. Rights upon Termination of Employment. In the event that an optionee ceases to be an employee of the Company or any subsidiary for any reason other than death, retirement, as hereinafter defined, or disability (within the meaning of Section 72(m)(7) of the Code or any substitute therefor), the optionee shall have the right to exercise the Option during its term within a period of three months after such termination to the extent that the Option was exercisable at the time of termination, or within such other period, and subject to such terms and conditions, as may be specified by the Committee. In the event that an optionee dies, retires or becomes disabled prior to the expiration of his Option and without having fully exercised his Option, the optionee or his successor shall have the right to exercise the Option during its term within a period of one year after termination of employment due to death, retirement or disability to the extent that the Option was exercisable at the time of termination, or within such other period, and subject to such terms and conditions, as may be specified by the Committee. As used in this Section 9, "retirement" means a termination of employment by reason of an optionee's retirement at or after his earliest permissible retirement date pursuant to and in accordance with his employer's regular retirement plan or personnel practices. Notwithstanding the provisions of Section 6(d)(iii) hereof, an Incentive Stock Option may be exercised more than three months after termination of employment due to retirement, as provided in this Section 9, but in that event, the Option shall lose its status as an Incentive Stock Option and shall be treated as a Nonqualified Stock Option. 10. General Restrictions. Each Option granted under the Plan shall be subject to the requirement that if at any time the Committee shall determine that (i) the listing, registration or qualification of the shares of Class A Stock subject or related thereto upon any securities exchange or under any state or federal law, or (ii) the consent or approval of any government regulatory body, or (iii) an agreement by the recipient of an Option with respect to the disposition of shares of Class A Stock is necessary -4- or desirable as a condition of or in connection with the granting of such Option or the issuance or purchase of shares of Class A Stock thereunder, such Option shall not be consummated in whole or in part unless such listing, registration, qualification, consent, approval or agreement shall have been effected or obtained free of any conditions not acceptable to the Committee. 11. Rights of a Shareholder. The recipient of any Option under the Plan, unless otherwise provided by the Plan, shall have no rights as a shareholder unless and until a certificate for shares of Class A Stock is issued and delivered to him. 12. Right to Terminate Employment. Nothing contained in the Plan or in any agreement entered into pursuant to the Plan shall confer upon any optionee the right to continue in the employment of the Company or any subsid iary or affect any right that the Company or any subsidiary may have to terminate the employment of such optionee. 13. Withholding. Whenever the Company proposes or is required to issue or transfer shares of Class A Stock under the Plan, the Company shall have the right to require the recipient to remit to the Company an amount sufficient to satisfy any federal, state or local withholding tax requirements prior to the delivery of any certificate for such shares. If and to the extent authorized by the Committee, in its sole discretion, an optionee may make an election, by means of a form of election to be prescribed by the Committee, to have shares of Class A Stock that are acquired upon exercise of an Option withheld by the Company or to tender other shares of Class A Stock or other securities of the Company owned by the optionee to the Company at the time of exercise of an Option to pay the amount of tax that would otherwise be required by law to be withheld by the Company as a result of any exercise of an Option from amounts payable to such optionee. Any such election shall be irrevocable and shall be subject to the disapproval of the Committee at any time. Any securities so withheld or tendered will be valued by the Committee as of the date of exercise. 14. Non-Assignability. No Option under the Plan shall be assignable or transferable by the recipient thereof except by will or by the laws of descent and distribution or by such other means as the Committee may approve, unless such means would be prohibited by Rule 16b-3 under the Exchange Act. During the life of the recipient such Option shall be exercisable only by such person or by such person's guardian or legal representative. -5- 15. Non-Uniform Determinations. The Committee's determinations under the Plan (including without limitation determinations of the persons to receive Options, the form, amount and timing of such grants, the terms and provisions of Options, and the agreements evidencing same) need not be uniform and may be made selectively among persons who receive, or are eligible to receive, grants of Options under the Plan whether or not such persons are similarly situated. 16. Adjustments. (a) Changes in Capitalization. Subject to any required action by the shareholders of the Company, the number of shares of Class A Stock covered by each outstanding Option and the number of shares of Class A Stock that have been authorized for issuance under the Plan but as to which no Options have yet been granted or which have been returned to the Plan upon cancellation or expiration of an Option, as well as the price per share of Class A Stock covered by each such outstanding Option, shall be proportionately adjusted for any increase or decrease in the number of issued shares of Class A Stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Class A Stock, or any other increase or decrease in the number of issued shares of Class A Stock effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Such adjustment shall be made by the Committee, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Class A Stock subject to an Option. (b) Dissolution or Liquidation. In the event of the proposed dissolution or liquidation of the Company, all outstanding Options will terminate immediately prior to the consummation of such proposed action, unless otherwise provided by the Committee. The Committee may, in the exercise of its sole discretion in such instances, declare that any Option shall terminate as of a date fixed by the Committee and give each Option holder the right to exercise his Option as to all or any part of the shares of Class A Stock covered by the Option, including shares as to which the Option would not otherwise be exercisable. (c) Sale or Merger. In the event of a proposed sale of all or substantially all of the assets of the Company, or the merger of the Company with or into another corporation, the Committee, in the exercise of its sole discretion, may take such action as it deems desirable, including, but, not limited to: (i) causing an Option to be assumed or an equivalent option to be substituted by such successor corporation or a parent or subsidiary of such successor corporation, (ii) providing that each Option holder shall have the right to exercise his Option as to all of the shares of Class A Stock covered by the Option, including shares as to which the Option would not otherwise be exercisable, or (iii) declare that an Option shall terminate at a date fixed by the Committee provided that the Option holder is given notice and opportunity prior to such date to exercise that portion of his Option that is currently exercisable. -6- 17. Amendment. The Committee may terminate or amend the Plan at any time, except that without sharehold er approval the Committee may not (i) materially increase the maximum number of shares that may be issued under the Plan (other than increases pursuant to Section 16 hereof), (ii) materially increase the benefits accruing to participants under the Plan or (iii) materially modify the requirements as to eligibility for participation in the Plan. The termination or any modification or amendment of the Plan shall not, without the consent of a participant, affect his rights under an Option previously granted. 18. Conditions upon Issuance of Shares. (a) Compliance with Securities Laws. Shares of the Company's Class A Stock shall not be issued pursuant to the exercise of an Option unless the exercise of such Option and the issuance and delivery of such shares pursuant thereto shall comply with all relevant provisions of law, including, without limitation, the Securities Act of 1933, as amended, the Exchange Act, the rules and regulations promulgated thereunder, and the requirements of any stock exchange upon which the Class A Stock of the Company may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance. (b) Investment Representations. As a condition to the exercise of an Option, the Company may require the person exercising such Option to represent and warrant at the time of any such exercise that the shares of Class A Stock are being purchased only for investment and without any present intention to sell or distribute such shares if, in the opinion of counsel for the Company, such representation is required by any of the aforementioned relevant provisions of law. 19. Reservation of Shares. The Company, during the term of the Plan, will at all times reserve and keep available such number of shares as shall be sufficient to satisfy the requirements of the Plan. Inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company's counsel to be necessary to the lawful issuance and sale of any shares hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such shares as to which such requisite authority shall not have been obtained. 20. Effect on Other Plans. Participation in the Plan shall not affect an employee's eligibility to participate in any other benefit or incentive plan of the Company or any subsidiary. Any Options granted pursuant to the Plan shall not be used in determining the benefits provided under any other plan of the Company or any subsidiary unless specifically provided. -7- 21. Duration of the Plan. The Plan shall remain in effect until all Options granted under the Plan have been satisfied by the issuance of shares, but no Option shall be granted more than ten years after the earlier of the date the Plan is adopted by the Company's Board of Directors or is approved by the Company's shareholders. 22. Forfeiture for Dishonesty. Notwithstanding anything to the contrary in the Plan, if the Committee finds, by a majority vote, after full consideration of the facts presented on behalf of both the Company and any optionee, that the optionee has been engaged in fraud, embezzlement, theft, commission of a felony or dishonest conduct in the course of his employment or retention by the Company or any subsidiary that damaged the Company or any subsidiary or that the optionee has disclosed trade secrets of the Company or any subsidiary, the optionee shall forfeit all unexercised Options and all exercised Options with respect to which the Company has not yet delivered the certificates. The decision of the Committee in interpreting and applying the provisions of this Section 22 shall be final. No decision of the Committee, however, shall affect the finality of the discharge or termination of such optionee by the Company or any subsidiary in any manner. 23. No Prohibition on Corporate Action. No provision of the Plan shall be construed to prevent the Company or any officer or director thereof from taking any corporate action deemed by the Company or such officer or direc tor to be appropriate or in the Company's best interest, whether or not such action could have an adverse effect on the Plan or any Options granted hereunder, and no optionee or optionee's estate, personal representative or beneficiary shall have any claim against the Company or any officer or director thereof as a result of the taking of such action. 24. Indemnification. With respect to the administration of the Plan, the Company shall indemnify each present and future member of the Committee and the Board of Directors against, and each member of the Committee and the Board of Directors shall be entitled without further action on his part to indemnity from the Company for all expenses (including the amount of judgments and the amount of approved settlements made with a view to the curtailment of costs of litigation, other than amounts paid to the Company itself) reasonably incurred by him in connection with or arising out of, any action, suit or proceeding in which he may be involved by reason of his being or having been a member of the Committee and the Board of Directors, whether or not he continues to be such member at the time of incurring such expenses; provided, however, that such indemnity shall not include any expenses incurred by any such member of the Committee and the Board of Directors (i) in respect of matters as to which he shall be finally adjudged in any such action, suit or proceeding to have been guilty of gross negligence or willful misconduct in the perfor mance of his duty as such member of the Committee or the Board of Directors; or (ii) in respect of any matter in which any settlement is effected for an amount in excess of the amount approved -8- by the Company on the advice of its legal counsel; and provided further that no right of indemnifi cation under the provisions set forth herein shall be available to or enforceable by any such member of the Committee and the Board of Directors unless, within 60 days after institution of any such action, suit or proceeding, he shall have offered the Company in writing the opportunity to handle and defend same at its own expense. The foregoing right of indemnification shall inure to the benefit of the heirs, executors or administrators of each such member of the Committee and the Board of Directors and shall be in addition to all other rights to which such member may be entitled as a matter of law, contract or otherwise. 25. Miscellaneous Provisions. (a) Compliance with Plan Provisions. No optionee or other person shall have any right with respect to the Plan, the Class A Stock reserved for issuance under the Plan or any Option until a written Option agreement shall have been executed by the Company and the optionee and all the terms, conditions and provisions of the Plan and the Option applicable to such optionee (and each person claiming under or through him) have been met. (b) Approval of Counsel. In the discretion of the Committee, no shares of Class A Stock, other securities or property of the Company, or other forms of payment shall be issued hereunder with respect to any Option unless counsel for the Company shall be satisfied that such issuance will be in compliance with applicable federal, state, local and foreign legal, securities exchange and other applicable requirements. (c) Compliance with Rule 16b-3. To the extent that Rule 16b-3 under the Exchange Act shall apply to Options granted under the Plan, it is the intent of the Company that the Plan comply in all respects with the requirements of Rule 16b-3, that any ambiguities or inconsistencies in construction of the Plan be interpreted to give effect to such intention and that if the Plan shall not so comply, whether on the date of adoption or by reason of any later amendment to or interpretation of Rule 16b-3, the provisions of the Plan shall be deemed to be automatically amended so as to bring them into full compliance with such rule. (d) Unfunded Plan. The Plan shall be unfunded. The Company shall not be required to establish any special or separate fund or to make any other segregation of assets under the Plan. (e) Effects of Acceptance of Option. By accepting any Option or other benefit under the Plan, each optionee and each person claiming under or through him shall be conclusively deemed to have indicated his acceptance and ratification of, and consent to, any action taken under the Plan by the Company, the Board of Directors and/or the Committee or its delegates. (f) Construction. The masculine pronoun shall include the feminine and neuter, and the singular shall include the plural, where the context so indicates. -9- 26. Shareholder Approval. The exercise of any Option granted under the Plan shall be subject to the approval of the Plan by the affirmative vote of the holders of a majority of the votes present or represented, and entitled to be cast, at a duly held meeting of the shareholders of the Company. Date of Adoption by Board of Directors - February 23, 1993. Date of Approval by Shareholders - April 26, 1993. Date of Amendment by Compensation and Stock Option Committee - April 12, 1995. -10- EX-10.8 11 EQUITY INCENTIVE PLAN EXHIBIT 10.8 PENNSYLVANIA MANUFACTURERS CORPORATION AMENDED AND RESTATED 1994 EQUITY INCENTIVE PLAN 1. Purpose. The purpose of the Pennsylvania Manufacturers Corporation 1994 Equity Incentive Plan (the "Plan") is to enhance the ability of Pennsylvania Manufacturers Corporation (the "Company") and any subsidiaries to attract and retain the best available personnel for positions of substantial responsibility, to provide additional incentive to such personnel and to promote the success of the Company. To accomplish these purposes, the Plan provides a means whereby employees of the Company and its subsidiaries may receive stock options to purchase the Company's Class A Common Stock ("Options"). 2. Administration. (a) Composition of the Committee. The Plan shall be administered by a committee of at least two directors (the "Committee") appointed by the Company's Board of Directors. No member of the Committee shall have been, or shall be, granted Options under the Plan, or options or other awards under any other plan of the Company or any of its affiliates, in the year preceding his appointment or while serving on the Committee, except for participation in any plan in which participation would be permitted in accordance with the applicable rules of the Securities and Exchange Commission relating to disinterested administration under the Securities Exchange Act of 1934 (the "Exchange Act"). Subject to the foregoing, from time to time the Board of Directors may increase the size of the Committee and appoint additional members thereof, remove members (with or without cause) and appoint new members in substitution therefor, fill vacancies, however caused, or remove all members of the Committee and thereafter directly administer the Plan. (b) Authority of the Committee. The Committee shall have full and final authority, in its sole discretion, to interpret the provisions of the Plan and to decide all questions of fact arising in its application; to determine the employees to whom awards shall be made and the amount, size and terms of each such award; to determine the time when awards shall be granted; and to make all other determinations necessary or advisable for the administration of the Plan. All decisions, determinations and interpretations of the Committee shall be final and binding on all optionees and all other holders of Options granted under the Plan. 3. Stock Subject to the Plan. Subject to Section 16 hereof, the shares that may be issued under the Plan shall not exceed in the aggregate 750,000 shares of Class A Common Stock of the Company (the "Class A Stock"). Such shares may be authorized and unissued shares or shares issued and subsequently reacquired by the Company. Except as otherwise provided herein, any shares subject to an Option that for any reason expires or is terminated unexercised as to such shares shall again be available under the Plan. 4. Eligibility To Receive Options. Persons eligible to receive stock options under the Plan shall be limited to those officers and other employees of the Company and any subsidiary (as defined in Section 425 of the Internal Revenue Code of 1986 (the "Code") or any amendment or substitute thereto), who may also be directors, who are in positions in which their decisions, actions and counsel significantly impact upon the profitability and success of the Company and/or a subsidiary. Directors of the Company who are not also officers or employees of the Company or any subsidiary shall not be eligible to participate in the Plan. 5. Types of Options. Grants may be made at any time and from time to time by the Committee in the form of stock options to purchase shares of Class A Stock. Options granted hereunder may be Options that are intended to qualify as incentive stock options within the meaning of Section 422 of the Code or any amendment or substitute thereto ("Incentive Stock Options") or Options that are not intended to so qualify ("Nonqualified Stock Options"). 6. Stock Options. Options for the purchase of Class A Stock shall be evidenced by written agreements in such form not inconsistent with the Plan as the Committee shall approve from time to time. The Options granted hereunder may be evidenced by a single agreement or by multiple agreements, as determined by the Committee in its sole discretion. Each Option agreement shall contain in substance the following terms and conditions: (a) Type of Option. Each Option agreement shall identify the Options represented thereby as Incentive Stock Options or Nonqualified Stock Options, as the case may be. (b) Option Price. Each Option agreement shall set forth the purchase price of the Class A Stock purchasable upon the exercise of the Option evidenced thereby. Subject to the limitation set forth in Section 6(d)(ii), the purchase price of the Class A Stock subject to an Incentive Stock Option shall be not less than 100% of the fair market value of such stock on the date the Option is granted, as determined by the Committee, but in no event less than the par value of such stock. The purchase price of the Class A Stock subject to a Nonqualified Stock Option shall be not less than 85% of the fair market value of such stock on the date the Option is granted, as determined by the Committee. For this purpose, fair market value on any date shall mean the closing price of the Class A Stock, as reported in The Wall Street Journal (or if not so reported, as otherwise reported by the National Association of Securities Dealers Automated Quotation ("NASDAQ") System), or if the Class A Stock is not reported by NASDAQ, the fair market value shall be as determined by the Committee pursuant to Section 422 of the Code. -2- (c) Exercise Term. Each Option agreement shall state the period or periods of time within which the Option may be exercised, in whole or in part, which shall be such a period or periods of time as may be determined by the Committee, provided that no Option shall be exercisable after ten years from the date of grant thereof. The Committee shall have the power to permit an acceleration of previously established exercise terms, subject to the requirements set forth herein, upon such circumstances and subject to such terms and conditions as the Committee deems appropriate. (d) Incentive Stock Options. In the case of an Incentive Stock Option, each Option agreement shall contain such other terms, conditions and provisions as the Committee determines necessary or desirable in order to qualify such Option as a tax-favored Option (within the meaning of Section 422 of the Code or any amendment or substitute thereto or regulation thereunder) including without limitation, each of the following, except that any of these provisions may be omitted or modified if it is no longer required in order to have an Option qualify as a tax-favored Option within the meaning of Section 422 of the Code or any substitute therefor: (i) The aggregate fair market value (determined as of the date the Option is granted) of the Class A Stock with respect to which Incentive Stock Options are first exercisable by any employee during any calendar year (under all plans of the Company) shall not exceed $100,000. (ii) No Incentive Stock Options shall be granted to any employee if at the time the Option is granted such employee owns stock possessing more than ten percent of the total combined voting power of all classes of stock of the Company or its parent or its subsidiaries unless at the time such Option is granted the Option price is at least 110% of the fair market value of the stock subject to the Option and, by its terms, the Option is not exercisable after the expiration of five years from the date of grant. (iii) No Incentive Stock Options shall be exercisable more than three months (or one year, in the case of an employee who dies or becomes disabled within the meaning of Section 72(m)(7) of the Code or any substitute therefor) after termination of employment. (e) Substitution of Options. Options may be granted under the Plan from time to time in substitution for stock options held by employees of other corporations who are about to become, and who do concurrently with the grant of such options become, employees of the Company or a subsidiary as a result of a merger or consolidation of the employing corporation with the Company or a subsidiary, or the acquisition by the Company or a subsidiary of the assets of the employing corporation, or the acquisition by the Company or a subsidiary of stock of the subsidiary. The terms and conditions of the substitute options so granted may vary from the terms and conditions set forth in this Section 6 to such extent as the Committee at the time of grant may deem appropriate to conform, in whole or in part, to the provisions of the stock options in substitution for which they are granted. -3- 7. Date of Grant. The date on which an Option shall be deemed to have been granted under the Plan shall be the date of the Committee's authorization of the Option or such later date as may be determined by the Committee at the time the Option is authorized. Notice of the determination shall be given to each individual to whom an Option is so granted within a reasonable time after the date of such grant. 8. Exercise and Payment for Shares. Options may be exercised in whole or in part, from time to time, by giving written notice of exercise to the Secretary of the Company, specifying the number of shares to be purchased. The purchase price of the shares with respect to which an Option is exercised shall be payable in full with the notice of exercise in cash, Class A Stock at fair market value, or a combination thereof, as the Committee may determine from time to time and subject to such terms and conditions as may be prescribed by the Committee for such purpose. 9. Rights upon Termination of Employment. In the event that an optionee ceases to be an employee of the Company or any subsidiary for any reason other than death, retirement, as hereinafter defined, or disability (within the meaning of Section 72(m)(7) of the Code or any substitute therefor), the optionee shall have the right to exercise the Option during its term within a period of three months after such termination to the extent that the Option was exercisable at the time of termination, or within such other period, and subject to such terms and conditions, as may be specified by the Committee. In the event that an optionee dies, retires or becomes disabled prior to the expiration of his Option and without having fully exercised his Option, the optionee or his successor shall have the right to exercise the Option during its term within a period of one year after termination of employment due to death, retirement or disability to the extent that the Option was exercisable at the time of termination, or within such other period, and subject to such terms and conditions, as may be specified by the Committee. As used in this Section 9, "retirement" means a termination of employment by reason of an optionee's retirement at or after his earliest permissible retirement date pursuant to and in accordance with his employer's regular retirement plan or personnel practices. Notwithstanding the provisions of Section 6(d)(iii) hereof, an Incentive Stock Option may be exercised more than three months after termination of employment due to retirement, as provided in this Section 9, but in that event, the Option shall lose its status as an Incentive Stock Option and shall be treated as a Nonqualified Stock Option. 10. General Restrictions. Each Option granted under the Plan shall be subject to the requirement that if at any time the Committee shall determine that (i) the listing, registration or qualification of the shares of Class A Stock subject or related thereto upon any securities exchange or under any state or federal law, or (ii) the consent or approval of any government regulatory body, or (iii) an agreement by the recipient of an Option with respect to the disposition of shares of Class A Stock is necessary -4- or desirable as a condition of or in connection with the granting of such Option or the issuance or purchase of shares of Class A Stock thereunder, such Option shall not be consummated in whole or in part unless such listing, registration, qualification, consent, approval or agreement shall have been effected or obtained free of any conditions not acceptable to the Committee. 11. Rights of a Shareholder. The recipient of any Option under the Plan, unless otherwise provided by the Plan, shall have no rights as a shareholder unless and until a certificate for shares of Class A Stock is issued and delivered to him. 12. Right to Terminate Employment. Nothing contained in the Plan or in any agreement entered into pursuant to the Plan shall confer upon any optionee the right to continue in the employment of the Company or any subsidiary or affect any right that the Company or any subsidiary may have to terminate the employment of such optionee. 13. Withholding. Whenever the Company proposes or is required to issue or transfer shares of Class A Stock under the Plan, the Company shall have the right to require the recipient to remit to the Company an amount sufficient to satisfy any federal, state or local withholding tax requirements prior to the delivery of any certificate for such shares. If and to the extent authorized by the Committee, in its sole discretion, an optionee may make an election, by means of a form of election to be prescribed by the Committee, to have shares of Class A Stock that are acquired upon exercise of an Option withheld by the Company or to tender other shares of Class A Stock or other securities of the Company owned by the optionee to the Company at the time of exercise of an Option to pay the amount of tax that would otherwise be required by law to be withheld by the Company as a result of any exercise of an Option. Any such election shall be irrevocable and shall be subject to the disapproval of the Committee at any time. Any securities so withheld or tendered will be valued by the Committee as of the date of exercise. 14. Non-Assignability. No Option under the Plan shall be assignable or transferable by the recipient thereof except by will or by the laws of descent and distribution or by such other means as the Committee may approve, unless such means would be prohibited by Rule 16b-3 under the Exchange Act. During the life of the recipient such Option shall be exercisable only by such person or by such person's guardian or legal representative. -5- 15. Non-Uniform Determinations. The Committee's determinations under the Plan (including without limitation determinations of the persons to receive Options, the form, amount and timing of such grants, the terms and provisions of Options, and the agreements evidencing same) need not be uniform and may be made selectively among persons who receive, or are eligible to receive, grants of Options under the Plan whether or not such persons are similarly situated. 16. Adjustments. (a) Changes in Capitalization. Subject to any required action by the shareholders of the Company, the number of shares of Class A Stock covered by each outstanding Option and the number of shares of Class A Stock that have been authorized for issuance under the Plan but as to which no Options have yet been granted or which have been returned to the Plan upon cancellation or expiration of an Option, as well as the price per share of Class A Stock covered by each such outstanding Option, shall be proportionately adjusted for any increase or decrease in the number of issued shares of Class A Stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Class A Stock, or any other increase or decrease in the number of issued shares of Class A Stock effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Such adjustment shall be made by the Committee, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Class A Stock subject to an Option. (b) Dissolution or Liquidation. In the event of the proposed dissolution or liquidation of the Company, all outstanding Options will terminate immediately prior to the consummation of such proposed action, unless otherwise provided by the Committee. The Committee may, in the exercise of its sole discretion in such instances, declare that any Option shall terminate as of a date fixed by the Committee and give each Option holder the right to exercise his Option as to all or any part of the shares of Class A Stock covered by the Option, including shares as to which the Option would not otherwise be exercisable. (c) Sale or Merger. In the event of a proposed sale of all or substantially all of the assets of the Company, or the merger of the Company with or into another corporation, the Committee, in the exercise of its sole discretion, may take such action as it deems desirable, including, but, not limited to: (i) causing an Option to be assumed or an equivalent option to be substituted by such successor corporation or a parent or subsidiary of such successor corporation, (ii) providing that each Option holder shall have the right to exercise his Option as to all of the shares of Class A Stock covered by the Option, including shares as to which the Option would not otherwise be exercisable, or (iii) declare that an Option shall terminate at a date fixed by the Committee provided that the Option holder is given notice and opportunity prior to such date to exercise that portion of his Option that is currently exercisable. -6- 17. Amendment. The Committee may terminate or amend the Plan at any time, except that without sharehold er approval the Committee may not (i) materially increase the maximum number of shares that may be issued under the Plan (other than increases pursuant to Section 16 hereof), (ii) materially increase the benefits accruing to participants under the Plan or (iii) materially modify the requirements as to eligibility for participation in the Plan. The termination or any modification or amendment of the Plan shall not, without the consent of a participant, affect his rights under an Option previously granted. 18. Conditions upon Issuance of Shares. (a) Compliance with Securities Laws. Shares of the Company's Class A Stock shall not be issued pursuant to the exercise of an Option unless the exercise of such Option and the issuance and delivery of such shares pursuant thereto shall comply with all relevant provisions of law, including, without limitation, the Securities Act of 1933, as amended, the Exchange Act, the rules and regulations promulgated thereunder, and the requirements of any stock exchange upon which the Class A Stock of the Company may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance. (b) Investment Representations. As a condition to the exercise of an Option, the Company may require the person exercising such Option to represent and warrant at the time of any such exercise that the shares of Class A Stock are being purchased only for investment and without any present intention to sell or distribute such shares if, in the opinion of counsel for the Company, such representation is required by any of the aforementioned relevant provisions of law. 19. Reservation of Shares. The Company, during the term of the Plan, will at all times reserve and keep available such number of shares as shall be sufficient to satisfy the requirements of the Plan. Inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company's counsel to be necessary to the lawful issuance and sale of any shares hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such shares as to which such requisite authority shall not have been obtained. 20. Effect on Other Plans. Participation in the Plan shall not affect an employee's eligibility to participate in any other benefit or incentive plan of the Company or any subsidiary. Any Options granted pursuant to the Plan shall not be used in determining the benefits provided under any other plan of the Company or any subsidiary unless specifically provided. -7- 21. Duration of the Plan. The Plan shall remain in effect until all Options granted under the Plan have been satisfied by the issuance of shares, but no Option shall be granted more than ten years after the earlier of the date the Plan is adopted by the Company's Board of Directors or is approved by the Company's shareholders. 22. Forfeiture for Dishonesty. Notwithstanding anything to the contrary in the Plan, if the Committee finds, by a majority vote, after full consideration of the facts presented on behalf of both the Company and any optionee, that the optionee has been engaged in fraud, embezzlement, theft, commission of a felony or dishonest conduct in the course of his employment or retention by the Company or any subsidiary that damaged the Company or any subsidiary or that the optionee has disclosed trade secrets of the Company or any subsidiary, the optionee shall forfeit all unexercised Options and all exercised Options with respect to which the Company has not yet delivered the certificates. The decision of the Committee in interpreting and applying the provisions of this Section 22 shall be final. No decision of the Committee, however, shall affect the finality of the discharge or termination of such optionee by the Company or any subsidiary in any manner. 23. No Prohibition on Corporate Action. No provision of the Plan shall be construed to prevent the Company or any officer or director thereof from taking any corporate action deemed by the Company or such officer or director to be appropriate or in the Company's best interest, whether or not such action could have an adverse effect on the Plan or any Options granted hereunder, and no optionee or optionee's estate, personal representative or beneficiary shall have any claim against the Company or any officer or director thereof as a result of the taking of such action. 24. Indemnification. With respect to the administration of the Plan, the Company shall indemnify each present and future member of the Committee and the Board of Directors against, and each member of the Committee and the Board of Directors shall be entitled without further action on his part to indemnity from the Company for all expenses (including the amount of judgments and the amount of approved settlements made with a view to the curtailment of costs of litigation, other than amounts paid to the Company itself) reasonably incurred by him in connection with or arising out of, any action, suit or proceeding in which he may be involved by reason of his being or having been a member of the Committee and the Board of Directors, whether or not he continues to be such member at the time of incurring such expenses; provided, however, that such indemnity shall not include any expenses incurred by any such member of the Committee and the Board of Directors (i) in respect of matters as to which he shall be finally adjudged in any such action, suit or proceeding to have been guilty of gross negligence or willful misconduct in the performance of his duty as such member of the Committee or the Board of Directors; or (ii) in respect of any matter in which any settlement is effected for an amount in excess of the amount approved -8- by the Company on the advice of its legal counsel; and provided further that no right of indemnification under the provisions set forth herein shall be available to or enforceable by any such member of the Committee and the Board of Directors unless, within 60 days after institution of any such action, suit or proceeding, he shall have offered the Company in writing the opportunity to handle and defend same at its own expense. The foregoing right of indemnification shall inure to the benefit of the heirs, executors or administrators of each such member of the Committee and the Board of Directors and shall be in addition to all other rights to which such member may be entitled as a matter of law, contract or otherwise. 25. Miscellaneous Provisions. (a) Compliance with Plan Provisions. No optionee or other person shall have any right with respect to the Plan, the Class A Stock reserved for issuance under the Plan or any Option until a written Option agreement shall have been executed by the Company and the optionee and all the terms, conditions and provisions of the Plan and the Option applicable to such optionee (and each person claiming under or through him) have been met. (b) Approval of Counsel. In the discretion of the Committee, no shares of Class A Stock, other securities or property of the Company, or other forms of payment shall be issued hereunder with respect to any Option unless counsel for the Company shall be satisfied that such issuance will be in compliance with applicable federal, state, local and foreign legal, securities exchange and other applicable requirements. (c) Compliance with Rule 16b-3. To the extent that Rule 16b-3 under the Exchange Act shall apply to Options granted under the Plan, it is the intent of the Company that the Plan comply in all respects with the requirements of Rule 16b-3, that any ambiguities or inconsistencies in construction of the Plan be interpreted to give effect to such intention and that if the Plan shall not so comply, whether on the date of adoption or by reason of any later amendment to or interpretation of Rule 16b-3, the provisions of the Plan shall be deemed to be automatically amended so as to bring them into full compliance with such rule. (d) Unfunded Plan. The Plan shall be unfunded. The Company shall not be required to establish any special or separate fund or to make any other segregation of assets under the Plan. (e) Effects of Acceptance of Option. By accepting any Option or other benefit under the Plan, each optionee and each person claiming under or through him shall be conclusively deemed to have indicated his acceptance and ratification of, and consent to, any action taken under the Plan by the Company, the Board of Directors and/or the Committee or its delegates. (f) Construction. The masculine pronoun shall include the feminine and neuter, and the singular shall include the plural, where the context so indicates. -9- 26. Shareholder Approval. The exercise of any Option granted under the Plan shall be subject to the approval of the Plan by the affirmative vote of the holders of a majority of the votes present or represented, and entitled to be cast, at a duly held meeting of the shareholders of the Company. Date of Adoption by Board of Directors - January 25, 1994. Date of Approval by Shareholders - April 25, 1994. Date of Amendment by Compensation and Stock Option Committee - April 12, 1995. -10- EX-10.9 12 EQUITY INCENTIVE PLAN EXHIBIT 10.9 PENNSYLVANIA MANUFACTURERS CORPORATION 1995 EQUITY INCENTIVE PLAN 1. Purpose. The purpose of the Pennsylvania Manufacturers Corporation 1995 Equity Incentive Plan (the "Plan") is to enhance the ability of Pennsylvania Manufacturers Corporation (the "Company") and any subsidiaries to attract and retain the best available personnel for positions of substantial responsibility, to provide additional incentive to such personnel and to promote the success of the Company. To accomplish these purposes, the Plan provides a means whereby employees of the Company and its subsidiaries may receive stock options to purchase the Company's Class A Common Stock ("Options"). 2. Administration. (a) Composition of the Committee. The Plan shall be administered by a committee of at least two directors (the "Committee") appointed by the Company's Board of Directors. No member of the Committee shall have been, or shall be, granted Options under the Plan, or options or other awards under any other plan of the Company or any of its affiliates, in the year preceding his appointment or while serving on the Committee, except for participation in any plan in which participation would be permitted in accordance with the applicable rules of the Securities and Exchange Commission relating to disinterested administration under the Securities Exchange Act of 1934 (the "Exchange Act"). Subject to the foregoing, from time to time the Board of Directors may increase the size of the Committee and appoint additional members thereof, remove members (with or without cause) and appoint new members in substitution therefor, fill vacancies, however caused, or remove all members of the Committee and thereafter directly administer the Plan. (b) Authority of the Committee. The Committee shall have full and final authority, in its sole discretion, to interpret the provisions of the Plan and to decide all questions of fact arising in its application; to determine the employees to whom awards shall be made and the amount, size and terms of each such award; to determine the time when awards shall be granted; and to make all other determinations necessary or advisable for the administration of the Plan. All decisions, determinations and interpretations of the Committee shall be final and binding on all optionees and all other holders of Options granted under the Plan. 3. Stock Subject to the Plan. Subject to Section 16 hereof, the shares that may be issued under the Plan shall not exceed in the aggregate 750,000 shares of Class A Common Stock of the Company (the "Class A Stock"). Such shares may be authorized and unissued shares or shares issued and subsequently reacquired by the Company. Except as otherwise provided herein, any shares subject to an Option that for any reason expires or is terminated unexercised as to such shares shall again be available under the Plan. -1- 4. Eligibility To Receive Options. Persons eligible to receive stock options under the Plan shall be limited to those officers and other employees of the Company and any subsidiary (as defined in Section 425 of the Internal Revenue Code of 1986 (the "Code") or any amendment or substitute thereto), who may also be directors, who are in positions in which their decisions, actions and counsel significantly impact upon the profitability and success of the Company and/or a subsidiary. Directors of the Company who are not also officers or employees of the Company or any subsidiary shall not be eligible to participate in the Plan. 5. Types of Options. Grants may be made at any time and from time to time by the Committee in the form of stock options to purchase shares of Class A Stock. Options granted hereunder may be Options that are intended to qualify as incentive stock options within the meaning of Section 422 of the Code or any amendment or substitute thereto ("Incentive Stock Options") or Options that are not intended to so qualify ("Nonqualified Stock Options"). 6. Stock Options. Options for the purchase of Class A Stock shall be evidenced by written agreements in such form not inconsistent with the Plan as the Committee shall approve from time to time. The Options granted hereunder may be evidenced by a single agreement or by multiple agreements, as determined by the Committee in its sole discretion. Each Option agreement shall contain in substance the following terms and conditions: (a) Type of Option. Each Option agreement shall identify the Options represented thereby as Incentive Stock Options or Nonqualified Stock Options, as the case may be. (b) Option Price. Each Option agreement shall set forth the purchase price of the Class A Stock purchasable upon the exercise of the Option evidenced thereby. Subject to the limitation set forth in Section 6(d)(ii), the purchase price of the Class A Stock subject to an Incentive Stock Option shall be not less than 100% of the fair market value of such stock on the date the Option is granted, as determined by the Committee, but in no event less than the par value of such stock. The purchase price of the Class A Stock subject to a Nonqualified Stock Option shall be not less than 85% of the fair market value of such stock on the date the Option is granted, as determined by the Committee. For this purpose, fair market value on any date shall mean the closing price of the Class A Stock, as reported in The Wall Street Journal (or if not so reported, as otherwise reported by the National Association of Securities Dealers Automated Quotation ("NASDAQ") System), or if the Class A Stock is not reported by NASDAQ, the fair market value shall be as determined by the Committee pursuant to Section 422 of the Code. (c) Exercise Term. Each Option agreement shall state the period or periods of time within which the Option may be exercised, in whole or in part, which shall be such a period or -2- periods of time as may be determined by the Committee, provided that no Option shall be exercisable after ten years from the date of grant thereof. The Committee shall have the power to permit an acceleration of previously established exercise terms, subject to the requirements set forth herein, upon such circumstances and subject to such terms and conditions as the Committee deems appropriate. (d) Incentive Stock Options. In the case of an Incentive Stock Option, each Option agreement shall contain such other terms, conditions and provisions as the Committee determines necessary or desirable in order to qualify such Option as a tax-favored Option (within the meaning of Section 422 of the Code or any amendment or substitute thereto or regulation thereunder) including without limitation, each of the following, except that any of these provisions may be omitted or modified if it is no longer required in order to have an Option qualify as a tax-favored Option within the meaning of Section 422 of the Code or any substitute therefor: (i) The aggregate fair market value (determined as of the date the Option is granted) of the Class A Stock with respect to which Incentive Stock Options are first exercisable by any employee during any calendar year (under all plans of the Company) shall not exceed $100,000. (ii) No Incentive Stock Options shall be granted to any employee if at the time the Option is granted such employee owns stock possessing more than ten percent of the total combined voting power of all classes of stock of the Company or its parent or its subsidiaries unless at the time such Option is granted the Option price is at least 110% of the fair market value of the stock subject to the Option and, by its terms, the Option is not exercisable after the expiration of five years from the date of grant. (iii) No Incentive Stock Options shall be exercisable more than three months (or one year, in the case of an employee who dies or becomes disabled within the meaning of Section 72(m)(7) of the Code or any substitute therefor) after termination of employment. (e) Substitution of Options. Options may be granted under the Plan from time to time in substitution for stock options held by employees of other corporations who are about to become, and who do concurrently with the grant of such options become, employees of the Company or a subsidiary as a result of a merger or consolidation of the employing corporation with the Company or a subsidiary, or the acquisition by the Company or a subsidiary of the assets of the employing corporation, or the acquisition by the Company or a subsidiary of stock of the subsidiary. The terms and conditions of the substitute options so granted may vary from the terms and conditions set forth in this Section 6 to such extent as the Committee at the time of grant may deem appropriate to conform, in whole or in part, to the provisions of the stock options in substitution for which they are granted. 7. Date of Grant. The date on which an Option shall be deemed to have been granted under the Plan shall be the date of the Committee's authorization of the Option or such later date as may be determined -3- by the Committee at the time the Option is authorized. Notice of the determination shall be given to each individual to whom an Option is so granted within a reasonable time after the date of such grant. 8. Exercise and Payment for Shares. Options may be exercised in whole or in part, from time to time, by giving written notice of exercise to the Secretary of the Company, specifying the number of shares to be purchased. The purchase price of the shares with respect to which an Option is exercised shall be payable in full with the notice of exercise in cash, Class A Stock at fair market value, or a combination thereof, as the Committee may determine from time to time and subject to such terms and conditions as may be prescribed by the Committee for such purpose. 9. Rights upon Termination of Employment. In the event that an optionee ceases to be an employee of the Company or any subsidiary for any reason other than death, retirement, as hereinafter defined, or disability (within the meaning of Section 72(m)(7) of the Code or any substitute therefor), the optionee shall have the right to exercise the Option during its term within a period of three months after such termination to the extent that the Option was exercisable at the time of termination, or within such other period, and subject to such terms and conditions, as may be specified by the Committee. In the event that an optionee dies, retires or becomes disabled prior to the expiration of his Option and without having fully exercised his Option, the optionee or his successor shall have the right to exercise the Option during its term within a period of one year after termination of employment due to death, retirement or disability to the extent that the Option was exercisable at the time of termination, or within such other period, and subject to such terms and conditions, as may be specified by the Committee. As used in this Section 9, "retirement" means a termination of employment by reason of an optionee's retirement at or after his earliest permissible retirement date pursuant to and in accordance with his employer's regular retirement plan or personnel practices. Notwithstanding the provisions of Section 6(d)(iii) hereof, an Incentive Stock Option may be exercised more than three months after termination of employment due to retirement, as provided in this Section 9, but in that event, the Option shall lose its status as an Incentive Stock Option and shall be treated as a Nonqualified Stock Option. 10. General Restrictions. Each Option granted under the Plan shall be subject to the requirement that if at any time the Committee shall determine that (i) the listing, registration or qualification of the shares of Class A Stock subject or related thereto upon any securities exchange or under any state or federal law, or (ii) the consent or approval of any government regulatory body, or (iii) an agreement by the recipient of an Option with respect to the disposition of shares of Class A Stock is necessary or desirable as a condition of or in connection with the granting of such Option or the issuance or purchase of shares of Class A Stock thereunder, such Option shall not be consummated in whole or in part unless such listing, registration, qualification, consent, approval or agreement shall have been effected or obtained free of any conditions not acceptable to the Committee. -4- 11. Rights of a Shareholder. The recipient of any Option under the Plan, unless otherwise provided by the Plan, shall have no rights as a shareholder unless and until a certificate for shares of Class A Stock is issued and delivered to him. 12. Right to Terminate Employment. Nothing contained in the Plan or in any agreement entered into pursuant to the Plan shall confer upon any optionee the right to continue in the employment of the Company or any subsidiary or affect any right that the Company or any subsidiary may have to terminate the employment of such optionee. 13. Withholding. Whenever the Company proposes or is required to issue or transfer shares of Class A Stock under the Plan, the Company shall have the right to require the recipient to remit to the Company an amount sufficient to satisfy any federal, state or local withholding tax requirements prior to the delivery of any certificate for such shares. If and to the extent authorized by the Committee, in its sole discretion, an optionee may make an election, by means of a form of election to be prescribed by the Committee, to have shares of Class A Stock that are acquired upon exercise of an Option withheld by the Company or to tender other shares of Class A Stock or other securities of the Company owned by the optionee to the Company at the time of exercise of an Option to pay the amount of tax that would otherwise be required by law to be withheld by the Company as a result of any exercise of an Option. Any such election shall be irrevocable and shall be subject to the disapproval of the Committee at any time. Any securities so withheld or tendered will be valued by the Committee as of the date of exercise. 14. Non-Assignability. No Option under the Plan shall be assignable or transferable by the recipient thereof except by will or by the laws of descent and distribution or by such other means as the Committee may approve, unless such means would be prohibited by Rule 16b-3 under the Exchange Act. During the life of the recipient such Option shall be exercisable only by such person or by such person's guardian or legal representative. 15. Non-Uniform Determinations. The Committee's determinations under the Plan (including without limitation determinations of the persons to receive Options, the form, amount and timing of such grants, the terms and provisions of Options, and the agreements evidencing same) need not be uniform and may be made selectively among persons who receive, or are eligible to receive, grants of Options under the Plan whether or not such persons are similarly situated. 16. Adjustments. -5- (a) Changes in Capitalization. Subject to any required action by the shareholders of the Company, the number of shares of Class A Stock covered by each outstanding Option and the number of shares of Class A Stock that have been authorized for issuance under the Plan but as to which no Options have yet been granted or which have been returned to the Plan upon cancellation or expiration of an Option, as well as the price per share of Class A Stock covered by each such outstanding Option, shall be proportionately adjusted for any increase or decrease in the number of issued shares of Class A Stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Class A Stock, or any other increase or decrease in the number of issued shares of Class A Stock effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Such adjustment shall be made by the Committee, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Class A Stock subject to an Option. (b) Dissolution or Liquidation. In the event of the proposed dissolution or liquidation of the Company, all outstanding Options will terminate immediately prior to the consummation of such proposed action, unless otherwise provided by the Committee. The Committee may, in the exercise of its sole discretion in such instances, declare that any Option shall terminate as of a date fixed by the Committee and give each Option holder the right to exercise his Option as to all or any part of the shares of Class A Stock covered by the Option, including shares as to which the Option would not otherwise be exercisable. (c) Sale or Merger. In the event of a proposed sale of all or substantially all of the assets of the Company, or the merger of the Company with or into another corporation, the Committee, in the exercise of its sole discretion, may take such action as it deems desirable, including, but, not limited to: (i) causing an Option to be assumed or an equivalent option to be substituted by such successor corporation or a parent or subsidiary of such successor corporation, (ii) providing that each Option holder shall have the right to exercise his Option as to all of the shares of Class A Stock covered by the Option, including shares as to which the Option would not otherwise be exercisable, or (iii) declare that an Option shall terminate at a date fixed by the Committee provided that the Option holder is given notice and opportunity prior to such date to exercise that portion of his Option that is currently exercisable. 17. Amendment. The Committee may terminate or amend the Plan at any time, except that without shareholder approval the Committee may not (i) materially increase the maximum number of shares that may be issued under the Plan (other than increases pursuant to Section 16 hereof), (ii) materially increase the benefits accruing to participants under the Plan or (iii) materially modify the requirements as to eligibility for participation in the Plan. The termination or any modification or amendment of the Plan shall not, without the consent of a participant, affect his rights under an Option previously granted. -6- 18. Conditions upon Issuance of Shares. (a) Compliance with Securities Laws. Shares of the Company's Class A Stock shall not be issued pursuant to the exercise of an Option unless the exercise of such Option and the issuance and delivery of such shares pursuant thereto shall comply with all relevant provisions of law, including, without limitation, the Securities Act of 1933, as amended, the Exchange Act, the rules and regulations promulgated thereunder, and the requirements of any stock exchange upon which the Class A Stock of the Company may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance. (b) Investment Representations. As a condition to the exercise of an Option, the Company may require the person exercising such Option to represent and warrant at the time of any such exercise that the shares of Class A Stock are being purchased only for investment and without any present intention to sell or distribute such shares if, in the opinion of counsel for the Company, such representation is required by any of the aforementioned relevant provisions of law. 19. Reservation of Shares. The Company, during the term of the Plan, will at all times reserve and keep available such number of shares as shall be sufficient to satisfy the requirements of the Plan. Inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company's counsel to be necessary to the lawful issuance and sale of any shares hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such shares as to which such requisite authority shall not have been obtained. 20. Effect on Other Plans. Participation in the Plan shall not affect an employee's eligibility to participate in any other benefit or incentive plan of the Company or any subsidiary. Any Options granted pursuant to the Plan shall not be used in determining the benefits provided under any other plan of the Company or any subsidiary unless specifically provided. 21. Duration of the Plan. The Plan shall remain in effect until all Options granted under the Plan have been satisfied by the issuance of shares, but no Option shall be granted more than ten years after the earlier of the date the Plan is adopted by the Company's Board of Directors or is approved by the Company's shareholders. -7- 22. Forfeiture for Dishonesty. Notwithstanding anything to the contrary in the Plan, if the Committee finds, by a majority vote, after full consideration of the facts presented on behalf of both the Company and any optionee, that the optionee has been engaged in fraud, embezzlement, theft, commission of a felony or dishonest conduct in the course of his employment or retention by the Company or any subsidiary that damaged the Company or any subsidiary or that the optionee has disclosed trade secrets of the Company or any subsidiary, the optionee shall forfeit all unexercised Options and all exercised Options with respect to which the Company has not yet delivered the certificates. The decision of the Committee in interpreting and applying the provisions of this Section 22 shall be final. No decision of the Committee, however, shall affect the finality of the discharge or termination of such optionee by the Company or any subsidiary in any manner. 23. No Prohibition on Corporate Action. No provision of the Plan shall be construed to prevent the Company or any officer or director thereof from taking any corporate action deemed by the Company or such officer or director to be appropriate or in the Company's best interest, whether or not such action could have an adverse effect on the Plan or any Options granted hereunder, and no optionee or optionee's estate, personal representative or beneficiary shall have any claim against the Company or any officer or director thereof as a result of the taking of such action. 24. Indemnification. With respect to the administration of the Plan, the Company shall indemnify each present and future member of the Committee and the Board of Directors against, and each member of the Committee and the Board of Directors shall be entitled without further action on his part to indemnity from the Company for all expenses (including the amount of judgments and the amount of approved settlements made with a view to the curtailment of costs of litigation, other than amounts paid to the Company itself) reasonably incurred by him in connection with or arising out of, any action, suit or proceeding in which he may be involved by reason of his being or having been a member of the Committee and the Board of Directors, whether or not he continues to be such member at the time of incurring such expenses; provided, however, that such indemnity shall not include any expenses incurred by any such member of the Committee and the Board of Directors (i) in respect of matters as to which he shall be finally adjudged in any such action, suit or proceeding to have been guilty of gross negligence or willful misconduct in the performance of his duty as such member of the Committee or the Board of Directors; or (ii) in respect of any matter in which any settlement is effected for an amount in excess of the amount approved by the Company on the advice of its legal counsel; and provided further that no right of indemnification under the provisions set forth herein shall be available to or enforceable by any such member of the Committee and the Board of Directors unless, within 60 days after institution of any such action, suit or proceeding, he shall have offered the Company in writing the opportunity to handle and defend same at its own expense. The foregoing right of indemnification shall inure to the benefit of the heirs, executors or administrators of each such member of the Committee -8- and the Board of Directors and shall be in addition to all other rights to which such member may be entitled as a matter of law, contract or otherwise. 25. Miscellaneous Provisions. (a) Compliance with Plan Provisions. No optionee or other person shall have any right with respect to the Plan, the Class A Stock reserved for issuance under the Plan or any Option until a written Option agreement shall have been executed by the Company and the optionee and all the terms, conditions and provisions of the Plan and the Option applicable to such optionee (and each person claiming under or through him) have been met. (b) Approval of Counsel. In the discretion of the Committee, no shares of Class A Stock, other securities or property of the Company, or other forms of payment shall be issued hereunder with respect to any Option unless counsel for the Company shall be satisfied that such issuance will be in compliance with applicable federal, state, local and foreign legal, securities exchange and other applicable requirements. (c) Compliance with Rule 16b-3. To the extent that Rule 16b-3 under the Exchange Act shall apply to Options granted under the Plan, it is the intent of the Company that the Plan comply in all respects with the requirements of Rule 16b-3, that any ambiguities or inconsistencies in construction of the Plan be interpreted to give effect to such intention and that if the Plan shall not so comply, whether on the date of adoption or by reason of any later amendment to or interpretation of Rule 16b-3, the provisions of the Plan shall be deemed to be automatically amended so as to bring them into full compliance with such rule. (d) Unfunded Plan. The Plan shall be unfunded. The Company shall not be required to establish any special or separate fund or to make any other segregation of assets under the Plan. (e) Effects of Acceptance of Option. By accepting any Option or other benefit under the Plan, each optionee and each person claiming under or through him shall be conclusively deemed to have indicated his acceptance and ratification of, and consent to, any action taken under the Plan by the Company, the Board of Directors and/or the Committee or its delegates. (f) Construction. The masculine pronoun shall include the feminine and neuter, and the singular shall include the plural, where the context so indicates. -9- 26. Shareholder Approval. The exercise of any Option granted under the Plan shall be subject to the approval of the Plan by the affirmative vote of the holders of a majority of the votes present or represented, and entitled to be cast, at a duly held meeting of the shareholders of the Company. Date of Adoption by Board of Directors - February 28, 1995. Date of Approval by Shareholders - April 24, 1995. -10- EX-10.10 13 EQUITY INCENTIVE PLAN EXHIBIT 10.10 PENNSYLVANIA MANUFACTURERS CORPORATION 1996 EQUITY INCENTIVE PLAN 1. Purpose. The purpose of the Pennsylvania Manufacturers Corporation 1996 Equity Incentive Plan (the "Plan") is to enhance the ability of Pennsylvania Manufacturers Corporation (the "Company") and any subsidiaries to attract and retain the best available personnel for positions of substantial responsibility, to provide additional incentive to such personnel and to promote the success of the Company. To accomplish these purposes, the Plan provides a means whereby employees of the Company and its subsidiaries may receive stock options to purchase the Company's Class A Common Stock ("Options"). 2. Administration. (a) Composition of the Committee. The Plan shall be administered by a committee of at least two directors (the "Committee") appointed by the Company's Board of Directors. No member of the Committee shall have been, or shall be, granted Options under the Plan, or options or other awards under any other plan of the Company or any of its affiliates, in the year preceding his appointment or while serving on the Committee, except for participation in any plan in which participation would be permitted in accordance with the applicable rules of the Securities and Exchange Commission relating to disinterested administration under the Securities Exchange Act of 1934 (the "Exchange Act"). Subject to the foregoing, from time to time the Board of Directors may increase the size of the Committee and appoint additional members thereof, remove members (with or without cause) and appoint new members in substitution therefor, fill vacancies, however caused, or remove all members of the Committee and thereafter directly administer the Plan. (b) Authority of the Committee. The Committee shall have full and final authority, in its sole discretion, to interpret the provisions of the Plan and to decide all questions of fact arising in its application; to determine the employees to whom awards shall be made and the amount, size and terms of each such award; to determine the time when awards shall be granted; and to make all other determinations necessary or advisable for the administration of the Plan. All decisions, determinations and interpretations of the Committee shall be final and binding on all optionees and all other holders of Options granted under the Plan. 3. Stock Subject to the Plan. Subject to Section 16 hereof, the shares that may be issued under the Plan shall not exceed in the aggregate 750,000 shares of Class A Common Stock of the Company (the "Class A Stock"). Such shares may be authorized and unissued shares or shares issued and subsequently reacquired by the Company. Except as otherwise provided herein, any shares subject to an Option that for any reason expires or is terminated unexercised as to such shares shall again be available under the Plan. 4. Eligibility To Receive Options. Persons eligible to receive stock options under the Plan shall be limited to those officers and other employees of the Company and any subsidiary (as defined in Section 425 of the Internal Revenue Code of 1986 (the "Code") or any amendment or substitute thereto), who may also be directors, who are in positions in which their decisions, actions and counsel significantly impact upon the profitability and success of the Company and/or a subsidiary. Directors of the Company who are not also officers or employees of the Company or any subsidiary shall not be eligible to participate in the Plan. 5. Types of Options. Grants may be made at any time and from time to time by the Committee in the form of stock options to purchase shares of Class A Stock. Options granted hereunder may be Options that are intended to qualify as incentive stock options within the meaning of Section 422 of the Code or any amendment or substitute thereto ("Incentive Stock Options") or Options that are not intended to so qualify ("Nonqualified Stock Options"). 6. Stock Options. Options for the purchase of Class A Stock shall be evidenced by written agreements in such form not inconsistent with the Plan as the Committee shall approve from time to time. The Options granted hereunder may be evidenced by a single agreement or by multiple agreements, as determined by the Committee in its sole discretion. Each Option agreement shall contain in substance the following terms and conditions: (a) Type of Option. Each Option agreement shall identify the Options represented thereby as Incentive Stock Options or Nonqualified Stock Options, as the case may be. (b) Option Price. Each Option agreement shall set forth the purchase price of the Class A Stock purchasable upon the exercise of the Option evidenced thereby. Subject to the limitation set forth in Section 6(d)(ii), the purchase price of the Class A Stock subject to an Incentive Stock Option shall be not less than 100% of the fair market value of such stock on the date the Option is granted, as determined by the Committee, but in no event less than the par value of such stock. The purchase price of the Class A Stock subject to a Nonqualified Stock Option shall be not less than 85% of the fair market value of such stock on the date the Option is granted, as determined by the Committee. For this purpose, fair market value on any date shall mean the closing price of the Class A Stock, as reported in The Wall Street Journal (or if not so reported, as otherwise reported by the National Association of Securities Dealers Automated Quotation ("Nasdaq") System), or if the Class A Stock is not reported by Nasdaq, the fair market value shall be as determined by the Committee pursuant to Section 422 of the Code. (c) Exercise Term. Each Option agreement shall state the period or periods of time within which the Option may be exercised, in whole or in part, which shall be such a period or -2- periods of time as may be determined by the Committee, provided that no Option shall be exercisable after ten years from the date of grant thereof. The Committee shall have the power to permit an acceleration of previously established exercise terms, subject to the requirements set forth herein, upon such circumstances and subject to such terms and conditions as the Committee deems appropriate. (d) Incentive Stock Options. In the case of an Incentive Stock Option, each Option agreement shall contain such other terms, conditions and provisions as the Committee determines necessary or desirable in order to qualify such Option as a tax-favored Option (within the meaning of Section 422 of the Code or any amendment or substitute thereto or regulation thereunder) including without limitation, each of the following, except that any of these provisions may be omitted or modified if it is no longer required in order to have an Option qualify as a tax-favored Option within the meaning of Section 422 of the Code or any substitute therefor: (i) The aggregate fair market value (determined as of the date the Option is granted) of the Class A Stock with respect to which Incentive Stock Options are first exercisable by any employee during any calendar year (under all plans of the Company) shall not exceed $100,000. (ii) No Incentive Stock Options shall be granted to any employee if at the time the Option is granted such employee owns stock possessing more than ten percent of the total combined voting power of all classes of stock of the Company or its parent or its subsid iaries unless at the time such Option is granted the Option price is at least 110% of the fair market value of the stock subject to the Option and, by its terms, the Option is not exercis able after the expiration of five years from the date of grant. (iii) No Incentive Stock Options shall be exercisable more than three months (or one year, in the case of an employee who dies or becomes disabled within the meaning of Section 72(m)(7) of the Code or any substitute therefor) after termination of employment. (e) Substitution of Options. Options may be granted under the Plan from time to time in substitution for stock options held by employees of other corporations who are about to become, and who do concurrently with the grant of such options become, employees of the Company or a subsidiary as a result of a merger or consolidation of the employing corporation with the Company or a subsidiary, or the acquisition by the Company or a subsidiary of the assets of the employing corporation, or the acquisition by the Company or a subsidiary of stock of the subsidiary. The terms and conditions of the substitute options so granted may vary from the terms and conditions set forth in this Section 6 to such extent as the Committee at the time of grant may deem appropriate to conform, in whole or in part, to the provisions of the stock options in substitution for which they are granted. 7. Date of Grant. The date on which an Option shall be deemed to have been granted under the Plan shall be the date of the Committee's authorization of the Option or such later date as may be determined -3- by the Committee at the time the Option is authorized. Notice of the determination shall be given to each individual to whom an Option is so granted within a reasonable time after the date of such grant. 8. Exercise and Payment for Shares. Options may be exercised in whole or in part, from time to time, by giving written notice of exercise to the Secretary of the Company, specifying the number of shares to be purchased. The purchase price of the shares with respect to which an Option is exercised shall be payable in full with the notice of exercise in cash, Class A Stock at fair market value, or a combination thereof, as the Committee may determine from time to time and subject to such terms and conditions as may be prescribed by the Committee for such purpose. 9. Rights upon Termination of Employment. In the event that an optionee ceases to be an employee of the Company or any subsidiary for any reason other than death, retirement, as hereinafter defined, or disability (within the meaning of Section 72(m)(7) of the Code or any substitute therefor), the optionee shall have the right to exercise the Option during its term within a period of three months after such termination to the extent that the Option was exercisable at the time of termination, or within such other period, and subject to such terms and conditions, as may be specified by the Committee. In the event that an optionee dies, retires or becomes disabled prior to the expiration of his Option and without having fully exercised his Option, the optionee or his successor shall have the right to exercise the Option during its term within a period of one year after termination of employment due to death, retirement or disability to the extent that the Option was exercisable at the time of termination, or within such other period, and subject to such terms and conditions, as may be specified by the Committee. As used in this Section 9, "retirement" means a termination of employment by reason of an optionee's retirement at or after his earliest permissible retirement date pursuant to and in accordance with his employer's regular retirement plan or personnel practices. Notwithstanding the provisions of Section 6(d)(iii) hereof, an Incentive Stock Option may be exercised more than three months after termination of employment due to retirement, as provided in this Section 9, but in that event, the Option shall lose its status as an Incentive Stock Option and shall be treated as a Nonqualified Stock Option. 10. General Restrictions. Each Option granted under the Plan shall be subject to the requirement that if at any time the Committee shall determine that (i) the listing, registration or qualification of the shares of Class A Stock subject or related thereto upon any securities exchange or under any state or federal law, or (ii) the consent or approval of any government regulatory body, or (iii) an agreement by the recipient of an Option with respect to the disposition of shares of Class A Stock is necessary or desirable as a condition of or in connection with the granting of such Option or the issuance or purchase of shares of Class A Stock thereunder, such Option shall not be consummated in whole or in part unless such listing, registration, qualification, consent, approval or agreement shall have been effected or obtained free of any conditions not acceptable to the Committee. -4- 11. Rights of a Shareholder. The recipient of any Option under the Plan, unless otherwise provided by the Plan, shall have no rights as a shareholder unless and until a certificate for shares of Class A Stock is issued and delivered to him. 12. Right to Terminate Employment. Nothing contained in the Plan or in any agreement entered into pursuant to the Plan shall confer upon any optionee the right to continue in the employment of the Company or any subsidiary or affect any right that the Company or any subsidiary may have to terminate the employment of such optionee. 13. Withholding. Whenever the Company proposes or is required to issue or transfer shares of Class A Stock under the Plan, the Company shall have the right to require the recipient to remit to the Company an amount sufficient to satisfy any federal, state or local withholding tax requirements prior to the delivery of any certificate for such shares. If and to the extent authorized by the Committee, in its sole discretion, an optionee may make an election, by means of a form of election to be prescribed by the Committee, to have shares of Class A Stock that are acquired upon exercise of an Option withheld by the Company or to tender other shares of Class A Stock or other securities of the Company owned by the optionee to the Company at the time of exercise of an Option to pay the amount of tax that would otherwise be required by law to be withheld by the Company as a result of any exercise of an Option. Any such election shall be irrevocable and shall be subject to the disapproval of the Committee at any time. Any securities so withheld or tendered will be valued by the Committee as of the date of exercise. 14. Non-Assignability. No Option under the Plan shall be assignable or transferable by the recipient thereof except by will or by the laws of descent and distribution or by such other means as the Committee may approve, unless such means would be prohibited by Rule 16b-3 under the Exchange Act. During the life of the recipient such Option shall be exercisable only by such person or by such person's guardian or legal representative. 15. Non-Uniform Determinations. The Committee's determinations under the Plan (including without limitation determinations of the persons to receive Options, the form, amount and timing of such grants, the terms and provisions of Options, and the agreements evidencing same) need not be uniform and may be made selectively among persons who receive, or are eligible to receive, grants of Options under the Plan whether or not such persons are similarly situated. -5- 16. Adjustments. (a) Changes in Capitalization. Subject to any required action by the shareholders of the Company, the number of shares of Class A Stock covered by each outstanding Option and the number of shares of Class A Stock that have been authorized for issuance under the Plan but as to which no Options have yet been granted or which have been returned to the Plan upon cancellation or expiration of an Option, as well as the price per share of Class A Stock covered by each such outstanding Option, shall be proportionately adjusted for any increase or decrease in the number of issued shares of Class A Stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Class A Stock, or any other increase or decrease in the number of issued shares of Class A Stock effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Such adjustment shall be made by the Committee, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Class A Stock subject to an Option. (b) Dissolution or Liquidation. In the event of the proposed dissolution or liquidation of the Company, all outstanding Options will terminate immediately prior to the consummation of such proposed action, unless otherwise provided by the Committee. The Committee may, in the exercise of its sole discretion in such instances, declare that any Option shall terminate as of a date fixed by the Committee and give each Option holder the right to exercise his Option as to all or any part of the shares of Class A Stock covered by the Option, including shares as to which the Option would not otherwise be exercisable. (c) Sale or Merger. In the event of a proposed sale of all or substantially all of the assets of the Company, or the merger of the Company with or into another corporation, the Committee, in the exercise of its sole discretion, may take such action as it deems desirable, including, but, not limited to: (i) causing an Option to be assumed or an equivalent option to be substituted by such successor corporation or a parent or subsidiary of such successor corporation, (ii) providing that each Option holder shall have the right to exercise his Option as to all of the shares of Class A Stock covered by the Option, including shares as to which the Option would not otherwise be exercisable, or (iii) declare that an Option shall terminate at a date fixed by the Committee provided that the Option holder is given notice and opportunity prior to such date to exercise that portion of his Option that is currently exercisable. 17. Amendment. The Committee may terminate or amend the Plan at any time, except that without shareholder approval the Committee may not (i) materially increase the maximum number of shares that may be issued under the Plan (other than increases pursuant to Section 16 hereof), (ii) materially increase the benefits accruing to participants under the Plan or (iii) materially modify the requirements as to eligibility for participation in the Plan. The termination or any modification -6- or amendment of the Plan shall not, without the consent of a participant, affect his rights under an Option previously granted. 18. Conditions upon Issuance of Shares. (a) Compliance with Securities Laws. Shares of the Company's Class A Stock shall not be issued pursuant to the exercise of an Option unless the exercise of such Option and the issuance and delivery of such shares pursuant thereto shall comply with all relevant provisions of law, including, without limitation, the Securities Act of 1933, as amended, the Exchange Act, the rules and regulations promulgated thereunder, and the requirements of any stock exchange upon which the Class A Stock of the Company may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance. (b) Investment Representations. As a condition to the exercise of an Option, the Company may require the person exercising such Option to represent and warrant at the time of any such exercise that the shares of Class A Stock are being purchased only for investment and without any present intention to sell or distribute such shares if, in the opinion of counsel for the Company, such representation is required by any of the aforementioned relevant provisions of law. 19. Reservation of Shares. The Company, during the term of the Plan, will at all times reserve and keep available such number of shares as shall be sufficient to satisfy the requirements of the Plan. Inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company's counsel to be necessary to the lawful issuance and sale of any shares hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such shares as to which such requisite authority shall not have been obtained. 20. Effect on Other Plans. Participation in the Plan shall not affect an employee's eligibility to participate in any other benefit or incentive plan of the Company or any subsidiary. Any Options granted pursuant to the Plan shall not be used in determining the benefits provided under any other plan of the Company or any subsidiary unless specifically provided. 21. Duration of the Plan. The Plan shall remain in effect until all Options granted under the Plan have been satisfied by the issuance of shares, but no Option shall be granted more than ten years after the earlier of the date the Plan is adopted by the Company's Board of Directors or is approved by the Company's shareholders. -7- 22. Forfeiture for Dishonesty. Notwithstanding anything to the contrary in the Plan, if the Committee finds, by a majority vote, after full consideration of the facts presented on behalf of both the Company and any optionee, that the optionee has been engaged in fraud, embezzlement, theft, commission of a felony or dishonest conduct in the course of his employment or retention by the Company or any subsidiary that damaged the Company or any subsidiary or that the optionee has disclosed trade secrets of the Company or any subsidiary, the optionee shall forfeit all unexercised Options and all exercised Options with respect to which the Company has not yet delivered the certificates. The decision of the Committee in interpreting and applying the provisions of this Section 22 shall be final. No decision of the Committee, however, shall affect the finality of the discharge or termination of such optionee by the Company or any subsidiary in any manner. 23. No Prohibition on Corporate Action. No provision of the Plan shall be construed to prevent the Company or any officer or director thereof from taking any corporate action deemed by the Company or such officer or direc tor to be appropriate or in the Company's best interest, whether or not such action could have an adverse effect on the Plan or any Options granted hereunder, and no optionee or optionee's estate, personal representative or beneficiary shall have any claim against the Company or any officer or director thereof as a result of the taking of such action. 24. Indemnification. With respect to the administration of the Plan, the Company shall indemnify each present and future member of the Committee and the Board of Directors against, and each member of the Committee and the Board of Directors shall be entitled without further action on his part to indemnity from the Company for all expenses (including the amount of judgments and the amount of approved settlements made with a view to the curtailment of costs of litigation, other than amounts paid to the Company itself) reasonably incurred by him in connection with or arising out of, any action, suit or proceeding in which he may be involved by reason of his being or having been a member of the Committee and the Board of Directors, whether or not he continues to be such member at the time of incurring such expenses; provided, however, that such indemnity shall not include any expenses incurred by any such member of the Committee and the Board of Directors (i) in respect of matters as to which he shall be finally adjudged in any such action, suit or proceeding to have been guilty of gross negligence or willful misconduct in the perfor mance of his duty as such member of the Committee or the Board of Directors; or (ii) in respect of any matter in which any settlement is effected for an amount in excess of the amount approved by the Company on the advice of its legal counsel; and provided further that no right of indemnification under the provisions set forth herein shall be available to or enforceable by any such member of the Committee and the Board of Directors unless, within 60 days after institution of any such action, suit or proceeding, he shall have offered the Company in writing the opportunity to handle and defend same at its own expense. The foregoing right of indemnification shall inure to the benefit of the heirs, executors or administrators of each such member of the Committee -8- and the Board of Directors and shall be in addition to all other rights to which such member may be entitled as a matter of law, contract or otherwise. 25. Miscellaneous Provisions. (a) Compliance with Plan Provisions. No optionee or other person shall have any right with respect to the Plan, the Class A Stock reserved for issuance under the Plan or any Option until a written Option agreement shall have been executed by the Company and the optionee and all the terms, conditions and provisions of the Plan and the Option applicable to such optionee (and each person claiming under or through him) have been met. (b) Approval of Counsel. In the discretion of the Committee, no shares of Class A Stock, other securities or property of the Company, or other forms of payment shall be issued hereunder with respect to any Option unless counsel for the Company shall be satisfied that such issuance will be in compliance with applicable federal, state, local and foreign legal, securities exchange and other applicable requirements. (c) Compliance with Rule 16b-3. To the extent that Rule 16b-3 under the Exchange Act shall apply to Options granted under the Plan, it is the intent of the Company that the Plan comply in all respects with the requirements of Rule 16b-3, that any ambiguities or inconsistencies in construction of the Plan be interpreted to give effect to such intention and that if the Plan shall not so comply, whether on the date of adoption or by reason of any later amendment to or interpretation of Rule 16b-3, the provisions of the Plan shall be deemed to be automatically amended so as to bring them into full compliance with such rule. (d) Unfunded Plan. The Plan shall be unfunded. The Company shall not be required to establish any special or separate fund or to make any other segregation of assets under the Plan. (e) Effects of Acceptance of Option. By accepting any Option or other benefit under the Plan, each optionee and each person claiming under or through him shall be conclusively deemed to have indicated his acceptance and ratification of, and consent to, any action taken under the Plan by the Company, the Board of Directors and/or the Committee or its delegates. (f) Construction. The masculine pronoun shall include the feminine and neuter, and the singular shall include the plural, where the context so indicates. 26. Shareholder Approval. The exercise of any Option granted under the Plan shall be subject to the approval of the Plan by the affirmative vote of the holders of a majority of the votes present or represented, and entitled to be cast, at a duly held meeting of the shareholders of the Company. Date of Adoption by Board of Directors - February 27, 1996. Date of Approval by Shareholders - April 22, 1996. -9- EX-10.11 14 CERTIFICATE OF SECRETARY CERTIFICATE OF SECRETARY The Undersigned, being the duly elected and acting Secretary of Pennsylvania Manufacturers Corporation (the "Company"), does hereby certify as follows: A) The named officer below was at the time he signed the Federal Income Tax Allocation Agreement and is currently a duly elected and acting officer of the Company in the capacity set forth opposite his name below and that the facsimile signature is true and correct as of the date hereof; NAME TITLE SIGNATURE ---- ----- --------- Francis W. McDonnell Sr. VP & CFO /s/ Francis W. McDonnell ------------------------ B) Said officer was duly authorized, on behalf of the Company, to negotiate, execute and deliver the Federal Income Tax Allocation Agreement by and between Pennsylvania Manufacturers Corporation and certain of its affiliates, a copy of which is annexed hereto as Exhibit "A." C) The Federal Income Tax Allocation Agreement is a binding and authorized contract enforceable in all respects in accordance with its terms. WITNESS MY HAND and seal this 24th day of September, 1996. /s/ Robert L. Pratter ------------------------------- Robert L. Pratter Secretary Sworn to and subscribed before me this 24th day of September, 1996. /s/ Helen K. Geckle - - - ------------------- Notary Public My Commission expires: - - - ----------------------------------- NOTARIAL SEAL HELEN K. GECKLE, Notary Public Whitpain Twp., Montgomery County My Commission Expires Dec. 14, 1999 - - - ----------------------------------- Exhibit "A" FEDERAL INCOME TAX ALLOCATION AGREEMENT This TAX ALLOCATION AGREEMENT ("Agreement") is made by and between Pennsylvania Manufacturers Corporation (hereinafter referred to as "Parent"), and the following affiliates: Pennsylvania Manufacturers' Association Ajon, Inc. Insurance Company Rosemarie, Inc. PMA Reinsurance Corporation Cris-Jen, Inc. Manufacturers Alliance Insurance Company Aud-Evad, Inc. Pennsylvania Manufacturers Indemnity Company Walprop, Inc. Mid-Atlantic States Casualty Company DP Corp. Lee-Ward, Inc. REM Corp. Sarfred, Inc. Gulph Industries, Inc. Syl-Bar, Inc. Dauphin Equities, Inc. PMA Services, Inc. Pennsylvania Manufacturers Wisteve, Inc. Association Finance Co. Marpan, Inc. 925 Chestnut, Inc. Lorjo Corp. Mid-Atlantic States Presque, Inc. Investment Company PMA Management Corporation This Agreement is made with reference to the following facts and circumstances: o The parties are members of an affiliated group ("Affiliated Group") as defined in Internal Revenue Code Section 1504. o The Affiliated Group has filed consolidated federal income tax returns since tax year 1982 and is required to file consolidated tax returns for subsequent years. o Pennsylvania Manufacturers Corporation shall be referred to herein as the parent company and each of the other companies listed above shall be referred to as the subsidiary members of the group. A-1 o The meaning of net operating loss (NOL), alternative minimum tax (AMT), and environmental tax is the meaning given these terms in the Internal Revenue Code (IRC) and Treasury Regulations. It is the intent and desire of the parties that a method be established for allocating the consolidated tax liability of the Affiliated Group among its Members, and for reimbursing the Parent for payment of such tax liability NOW, THEREFORE, in consideration of the mutual covenants and promises contained herein, the parties do hereby agree as follows: (1) Preparation of Consolidated Tax Return. A U.S. consolidated income tax return shall be filed by the Parent for the taxable year ended December 31, 1996, and for each subsequent taxable period in respect of which this Agreement is in effect and for which the Affiliated Group is required or permitted to file a consolidated tax return. Each subsidiary member of the group shall execute and file such consent, elections and other documents that may be required or appropriate for the proper filing of such returns. (2) Allocation of Tax Liability. For each tax period, each subsidiary member of the Affiliated Group shall compute its separate federal income tax liability as if it had filed a separate tax return and shall pay such amount to the parent. For purposes of this agreement, any liability for AMT and environmental tax shall be treated as part of the member's separate tax liability. Furthermore, no benefit with regard to minimum tax credit (MTC), which would be carried forward if the subsidiary member of the affiliated group had actually filed a separate federal tax return, is attributable to the subsidiary members of the group for any year in which a consolidated tax return is filed. Nor shall A-2 any subsidiary member of the group be allocated credit for any net operating losses which would be carried forward or carried back if the subsidiary member of the affiliated group had actually filed a separate federal tax return. The separate return tax liability of each member shall be computed in a manner consistent with the provisions of Section 1552(a)(2) of the IRC and Treasury Regulation Section 1.1552-1(a)(2)(ii), provided that the carryover of any NOL, AMT credit, or any other tax attribute related to a prior period tax liability of the group shall be disregarded. (3) Payment. Payment of the consolidated tax liability for a taxable period shall include the payment of estimated tax installments due for such taxable period, and each subsidiary shall pay to the Parent its share of each payment within 30 days of receiving notice of such payment from the Parent, but in no event later than the due date for each such payment. Any amounts paid by a subsidiary on account of a separate return or separate estimated tax payments that are credited against the consolidated tax liability of the Affiliated Group shall be included in determining the payments due from such subsidiary. Any overpayment of estimated tax based on the allocation principles stated herein should be refunded to the subsidiary. (4) Revised Tax Liabilities. If the consolidated tax liability is adjusted for any taxable period, whether by means of an amended return, claim for refund, or after a tax audit by the Internal Revenue Service, the liability of each member shall be recomputed to give effect to such adjustments. In the case of a refund of tax paid, the Parent shall make payment to each member for its share of the refund, determined in the same manner as in paragraph 2 above, within 30 days after the refund is received by the Parent. In the case of an increase in tax liability, each member shall pay to the Parent its allocable share A-3 of such increased tax liability within 30 days after receiving notice of such liability from the Parent. (5) If during a consolidated return period the Parent or any subsidiary acquires or organizes another corporation that is required to be included in the consolidated return, then such corporation shall join in and be bound by this agreement. (6) This agreement shall supersede the Federal Income Tax Allocation Agreement previously entered into by the Parent and the subsidiaries and shall apply to the tax year ending December 31, 1996, and all subsequent taxable periods unless the Parent and the subsidiary members of the group agree to terminate the agreement. Notwithstanding such termination, this agreement shall continue in effect with respect to any payment or refunds due for all taxable periods prior to termination. (7) The Agreement shall be binding on and inure to the benefit of any successor, whether by statutory merger, acquisition of assets, or otherwise, to any of the parties hereto, to the same extent as if the successor had been an original party to the Agreement. (8) Arbitration. Any controversy or claim arising out of or relating to this agreement, or the breach thereof, shall be settled by arbitration in accordance with the rules then obtaining of the American Arbitration Association, and judgment payable by the parties as a result of such a recomputation which is due to an amended consolidated return shall be paid within 30 days of the filing thereof, and any additional amount so payable due to adjustments made by the taxing authorities shall be paid in accordance with Sections 3 and 4 hereof. (9) Assignability. This Agreement shall not be assignable or transferable by any party hereto without the prior written consent of the others. A-4 (10) Inspection of Records. Each party or its duly accredited representative shall have free access to the books and records of the other parties at all reasonable times for the purpose of obtaining information concerning this Agreement. (11) Termination. This Agreement may be terminated by any party on sixty (60) days written notice to the other parties, and upon such termination, any sums due from such party to the others hereunder or which would have been due as a result of filing a consolidated Federal Income Tax Return for the tax year in which such termination occurs shall be apportioned as of the date of termination of this Agreement. It is the intent of the parties that this Agreement remain in full force and effect as to each subsidiary member of the group with respect to all periods of the year during which it remains a member of the group. This paragraph shall not be read, however, to require a subsidiary to contribute to consolidated tax liability for any period for which it files a separate return. Allocations of consolidated tax liability shall be made hereunder only for periods covered by this agreement. IN WITNESS WHEREOF, the parties hereto have caused this agreement to be executed by their duly authorized representatives on September 24, 1996. A-5 Pennsylvania Manufacturers Corporation PMA Reinsurance Corporation By: /s/ Francis W. McDonnell By: /s/ Francis W. McDonnell ---------------------------------- ------------------------------ Title: CFO Title: CFO ------------------------------- --------------------------- Pennsylvania Manufacturers' Association Pennsylvania Manufacturers Insurance Company Indemnity Company By: /s/ [CLIENT SUPPLY] By: /s/ [CLIENT SUPPLY] ---------------------------------- ------------------------------ Title: VP -- Finance Title: VP -- Finance ------------------------------- --------------------------- Manufacturers Alliance Insurance Mid-Atlantic States Investment Company Company\ By: [CLIENT SUPPLY] By: /s/ [CLIENT SUPPLY] ---------------------------------- ------------------------------ Title: VP -- Finance Title: VP -- Finance ------------------------------- --------------------------- Mid-Atlantic States Casualty Company Sarfred, Inc. By: /s/ [CLIENT SUPPLY] By: /s/ Francis W. McDonnell ---------------------------------- ------------------------------ Title: VP -- Finance Title: Treasurer ------------------------------- --------------------------- Lee-Ward, Inc. PMA Services, Inc. By: /s/ Francis W. McDonnell By: /s/ [CLIENT SUPPLY] ---------------------------------- ------------------------------ Title: Treasurer Title: VP -- Finance ------------------------------- --------------------------- Syl-Bar, Inc. Ajon, Inc. By: /s/ Francis W. McDonnell By: /s/ Francis W. McDonnell ---------------------------------- ------------------------------ Title: Treasurer Title: Treasurer ------------------------------- --------------------------- Wisteve, Inc. Chris-Jen, Inc. By: /s/ Francis W. McDonnell By: /s/ Francis W. McDonnell ---------------------------------- ------------------------------ Title: Treasurer Title: Treasurer ------------------------------- --------------------------- Rosemarie, Inc. Aud-Evad, Inc. By: /s/ Francis W. McDonnell By: /s/ Francis W. McDonnell ---------------------------------- ------------------------------ Title: Treasurer Title: Treasurer ------------------------------- --------------------------- A-6 Rem Corp. Gulph Industries, Inc. By: /s/ Francis W. McDonnell By: /s/ Francis W. McDonnell ---------------------------------- ------------------------------ Title: Treasurer Title: Treasurer ------------------------------- --------------------------- Dauphin Equities, Inc. Pennsylvania Manufacturers' Association Finance Company By: /s/ Francis W. McDonnell By: /s/ [CLIENT SUPPLY] ---------------------------------- ------------------------------ Title: Treasurer Title: VP -- Finance ------------------------------- --------------------------- Walprop, Inc. 925 Chestnut, Inc. By: /s/ Francis W. McDonnell By: /s/ Francis W. McDonnell ---------------------------------- ------------------------------ Title: Treasurer Title: Treasurer ------------------------------- --------------------------- Marpan, Inc. Lorjo, Inc. By: /s/ Francis W. McDonnell By: /s/ Francis W. McDonnell ---------------------------------- ------------------------------ Title: Treasurer Title: Treasurer ------------------------------- --------------------------- PMA Management Corporation Presque, Inc. By: /s/ [CLIENT SUPPLY] By: /s/ Francis W. McDonnell ---------------------------------- ------------------------------ Title: VP -- Finance Title: Treasurer ------------------------------- --------------------------- DP Corp. By: /s/ [CLIENT SUPPLY] ---------------------------------- Title: VP -- Finance ------------------------------- A-7 EX-10.12 15 OFFICE LEASE ---------------------------------- OFFICE LEASE between NINE PENN CENTER ASSOCIATES, L.P., Landlord AND LORJO CORP., Tenant ----------------------------------- MELLON BANK CENTER 1735 MARKET STREET PHILADELPHIA, PENNSYLVANIA Date: May 26, 1994 ---------------------------------- Guarantor: PMA REINSURANCE CORPORATION SCHEDULE OF EXHIBITS Exhibit Contents Section Reference ------- -------- ----------------- "A" FLOOR PLAN OF PREMISES 2.1 "B" [INTENTIONALLY OMITTED] "C" RULES AND REGULATIONS 10.5 "D" INDEX OF DEFINED TERMS 1.0 "E" CONTRACTOR INSURANCE REQUIREMENTS 7.9.2 "F" CORE AND SHELL SPECIFICATIONS 7.1 "G" CLEANING SPECIFICATIONS 8.4 "H" NON-DISTURBANCE AGREEMENT 18.3 "I" GUARANTY 35.22 "J" SALVAGEABLE MATERIALS 7.4 "K" SITE LOGISTICS AND PROCEDURES 7.11 "L" CONFIRMATION OF LEASE COMMENCEMENT 3.1.2 "M" LANDLORD'S ESTIMATES 6.2.3 "N" EXPANSION OPTION SPACE 31.1 "O" SUBLEASE 12.1 "P" SUBLEASE CONSENT 12.1 AGREEMENT OF LEASE THIS IS AN AGREEMENT OF LEASE (hereinafter "Lease") made this 26th day of May, 1994, by and between NINE PENN CENTER ASSOCIATES, L.P., a Pennsylvania limited partnership (herein called "Landlord") and LORJO CORP., a Pennsylvania corporation (herein called "Tenant"). BACKGROUND A. Landlord desires to lease to Tenant the premises identified in this Lease under the terms and conditions herein set forth. B. Tenant desires to lease and accept from Landlord the premises identified in this Lease under the terms and conditions herein set forth. C. Tenant intends to sublease the premises to PMA Reinsurance Corporation, Tenant's guarantor hereunder, in accordance with the terms of this Lease. D. Landlord has agreed to consent to the Tenant's sublease to PMA Reinsurance Corporation, so long as such sublease complies with the terms herein. AGREEMENTS IN CONSIDERATION of the Background, and the mutual covenants and agreements herein set forth, and other good, valuable and sufficient consideration received, and intending to be legally bound hereby, the parties hereto agree as follows, all of the following agreements and covenants being regarded as strict legal conditions: 1. Definitions. Exhibit "D" attached to this Lease identifies the respective Sections of this Lease in which certain terms are defined. When used in this Lease, the following terms shall have the following meanings: Additional Rent. The term "Additional Rent" or "additional rent" shall mean all sums payable under this Lease for any purpose, whether or not they are expressly designated as "Additional Rent" or "additional rent" or would otherwise be considered rent, other than Minimum Rent. Affiliate. The term "affiliate" of any entity, corporation, or partnership shall mean any other entity, corporation, or partnership controlling, controlled by, or under common control with the former. 1 Agent. The term "Agent" shall mean The Rubin Organization, having an address at The Bellevue, Third Floor, 200 South Broad Street, Philadelphia, PA 19102, or such other party or such other address as Landlord may designate, from time to time, by written notice to Tenant. Building. The term "Building" shall mean that certain commercial office building and related improvements presently known as Mellon Bank Center, located at 1735 Market Street in Philadelphia, Pennsylvania. The Building contains 1,354,725 Rentable Square Feet of space (being the aggregate Rentable Area of the Office Space, Retail Space, Storage Space and Garage Space). Business Day. The term "Business Day" shall mean Monday through Friday, except Holidays. All references to a period of days in this Lease shall be deemed to refer to calendar days unless the term Business Day is used. Business Hours. The term "Business Hours" shall mean 8:00 A.M. to 6:00 P.M., Monday through Friday, and 8:00 A.M. to 1:00 P.M. on Saturday, Holidays excepted. Construction Allowance. The term "Construction Allowance" shall mean the sum of One Million Dollars ($1,000,000.00), to be applied as set forth in Section 7.8 below. Force Majeure. The term "Force Majeure" shall mean delay, hindrance or prevention of Tenant or Tenant's contractor from the performance of the Tenant Work, directly resulting from (a) so-called "wild cat" strikes or other unforeseeable labor walk outs or lock outs, (b) acts of God, (c) enemy or terrorist act, (d) governmental ordinances, restrictions or regulations not in effect on the date of this Lease, (e) civil commotion, insurrection, sabotage, war or other national emergency, (f) accidents, floods, fires or other casualties not caused by the act or omission of Tenant or Tenant's employees or contractors, or (g) failure of utility companies to provide necessary utilities services to the Building. Garage Space. The term "Garage Space" shall mean the underground parking garage forming a part of the Building, containing 66,367 Rentable Square Feet of space. Holidays. The term "Holidays" shall mean President's Day, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, Christmas Day and New Year's Day. Land. The term "Land" shall mean those parcels of real property on which the Building is located. Landlord. The term "Landlord" shall mean that entity named on page 1 of this Lease and any subsequent owner of such Landlord's interest in the Property, as well as their respective heirs, personal 2 representatives, successors and assigns, all subject to the provisions of Section 29 hereof. Landlord Delay. The term "Landlord Delay" shall mean delay, hindrance or prevention of Tenant or Tenant's contractor from the performance of the Tenant Work, directly resulting from material interference by Landlord or Landlord's agents, contractors or employees with Tenant's contractor's performance of the Tenant Work or Tenants' fixturing of or move into the Premises (it being agreed that Landlord's reasonable control over access to and use of the Premises during performance by Landlord of Landlord's Work shall not be deemed Landlord Delay). Lease Interest Rate. The term "Lease Interest Rate" shall mean the lesser of (A) the greater of (i) twelve percent (12%) per annum or (ii) the Prime Rate in effect from time to time plus two percent (2%), or (B) the maximum amount or rate that Landlord may lawfully charge Tenant in the circumstances if such a maximum exits. Office Space. The term "Office Space" shall mean the 1,231,518 Rentable Square Feet of office space contained in the Building. Permitted Use. The term "Permitted Use" shall mean use only for commercial executive offices (and offices for the clerical and other staff providing support services necessarily attendant thereto), and for no other purpose. Prime Rate. The term "Prime Rate" shall mean the reference rate of interest as announced by Citibank, New York or its successor; if such reference rate is discontinued or no longer quoted, then such comparable rate as Landlord reasonably designates by notice to Tenant. Property. The term "Property" shall mean the Land and the Building together. Rentable Area. The term "Rentable Area" for any space in the Building shall mean the total Rentable Square Feet included in such space including office space, retail space, storage space, and garage space. Rentable Square Feet. The terms "Rentable Square Foot", "Rentable Square Feet" and "Rentable Square Footage" shall refer to the rentable square footage of any space leased by Tenant hereunder, as calculated by Landlord. Retail Space. The term "Retail Space" shall mean the 43,183 Rentable Square Feet of retail space contained in the Building. 3 Storage Space. The term "Storage Space" shall mean the 13,657 Rentable Square Feet of storage space contained in the Building. 2. Premises; Use 2.1 Premises. Landlord, for the Term and subject to the provisions and conditions hereof, leases to Tenant, and Tenant hereby leases and rents from Landlord, the space (hereinafter collectively referred to as the "Premises" and more particularly delineated on the floor plans constituting "Exhibit A" attached hereto and made a part hereof), aggregating 57,914 Rentable Square Feet, consisting of 22,638 Rentable Square Feet of space located on and being the entire 28th floor of the Building, 22,330 Rentable Square Feet of space located on and being the entire 29th floor of the Building, and 12,946 Rentable Square Feet of space located on and being a portion of the 30th floor of the Building. 2.2 Use. Tenant shall not use or occupy, or permit or suffer to be used or occupied, the Premises or any part thereof, other than for the Permitted Use. 3. Term 3.1 Duration 3.1.1 Generally. The term of this Lease (the "Term") shall commence on that date (the "Lease Commencement Date") which is the earlier of (a) the one hundred seventy-fifth (175th) calendar day following the date of full execution of this Lease, or (b) the date Tenant or anyone claiming under or through Tenant first occupies or takes possession of the Premises or any portion thereof for purposes of conducting business therein. Notwithstanding the foregoing, in the event that completion of Tenant's performance of the Tenant Work shall be delayed in excess of six (6) full days due to Force Majeure or Landlord Delay, or both (which days of delay shall be measured cumulatively and not consecutively), then the time period set forth in Section 3.1.1(a) above shall be extended one day for each full day of such delay in excess of the aforesaid six (6) days. No day of delay in performance of the Tenant Work shall be deemed to have occurred by reason of Force Majeure or Landlord's Delay if performance of the Tenant Work is simultaneously being delayed by causes within Tenant's control. Tenant shall give Landlord prompt written notice of each day of delay in performance of the Tenant Work alleged by Tenant to have been caused by Force Majeure or Landlord Delay. The Term shall continue until the last day of the first (1st) month of the eleventh (11th) Lease Year (the "Termination Date") unless sooner terminated. 3.1.2 Lease Periods. The "First Lease Year" shall be the twelve (12) month period commencing on the Lease Commencement Date, if the Lease Commencement Date is the first day of a calendar month, or, if the Lease Commencement Date is other than on the first day of a calendar month then the period commencing on the Lease Commencement Date and continuing through the 4 last day of the twelfth full calendar month thereafter. Each "Lease Year" after the First Lease Year shall be a consecutive twelve (12) month period commencing on the first day of the calendar month immediately following the preceding Lease Year. Tenant covenants that it shall accept possession of the Premises on the Lease Commencement Date and thereafter continuously occupy the Premises, subject only to any rights of sublease or assignment herein contained, during the entire Term and any exercised renewals thereof. The Lease Commencement Date shall be confirmed in a confirmation memorandum to be executed by both parties promptly following the Lease Commencement Date in a form substantially similar to that in Exhibit "L" attached hereto and made a part hereof. 4. Rent 4.1 Minimum Rent. Annual minimum rent for the Premises ("Minimum Rent") shall be as follows: First Lease Year ................... $7.00 per Rentable Square Foot ($405,398 per annum, $33,783 per month) Second Lease Year................... $9.50 per Rentable Square Foot ($550,183 per annum, $45,848 per month) Third and Fourth Lease Years........ $10.50 per Rentable Square Foot ($608,097 per annum, $50,674.75 per month) Fifth and Sixth Lease Years......... $11.00 per Rentable Square Foot ($637,054 per annum, $53,088 per month) Seventh and Eighth Lease Years...... $11.50 per Rentable Square Foot ($666,011 per annum, $55,501 per month) Ninth and Tenth Lease Years and first month of Eleventh ...... $12.50 per Rentable Square Foot ($723,925 per annum, Lease Year $60,327 per month) All Minimum Rent shall be payable in equal monthly installments commencing on the Lease Commencement Date and thereafter due on the first day of each month during the Term without demand, deduction or set-off, at the office of Agent. Notwithstanding the foregoing, in order partially to reimburse Tenant for the costs of the Tenant Work, Landlord agrees that no Minimum Rent or 5 payments on account of Real Estate Taxes or Operating Expenses shall be payable or commence to accrue hereunder during the period commencing with the Commencement Date and ending one hundred thirty-nine (139) days thereafter (the "Rent Free Period"). Tenant shall be responsible for payment of charges for electricity, use and occupancy taxes and other Additional Rent other than the aforesaid payments on account of Real Estate Taxes and Operating Expenses during the Rent Free Period. 4.2 Partial Month. If the Rent Free Period ends on a day other than the first or last day of a month, Minimum Rent from such day until the first day of the following month shall be prorated (on the basis of the number of days during such month) and shall be payable on the first day of the following month together with the Minimum Rent payment for that month. 4.3 Rent Acceptance. If Landlord, at any time or times, shall accept Minimum Rent or any other sum due to it hereunder after the same shall become due and payable, such acceptance shall not excuse delay upon subsequent occasions, or constitute, or be construed as, a waiver of any of Landlord's rights hereunder. 4.4 Additional Rent. All sums payable by Tenant under this Lease, whether or not stated to be rent, Minimum Rent or Additional Rent or otherwise denominated (hereinafter collectively referred to as "Rent"), shall be collectible by Landlord as rent and upon default in payment thereof Landlord shall have the same rights and remedies as for a failure to pay Minimum Rent (without prejudice to any other right or remedy available therefor). Notwithstanding anything to the contrary elsewhere contained in this Lease, any payment of Additional Rent other than those payments required to be made on demand may be paid by Tenant as follows, and such payments shall be considered timely notwithstanding that any other provision of this Lease stipulates that payment must be made within a fixed number of days: 4.4.1 If Landlord's bill for the Additional Rent is received by Tenant prior to the last ten (10) days of a calendar month, Tenant may pay the Additional Rent together with the payment of Minimum Rent due on the first day of the next succeeding calendar month. 4.4.2 If Landlord's bill for the Additional Rent is received by Tenant during the last ten (10) days of a calendar month, Tenant may pay such Additional Rent together with the payment of Minimum Rent due on the first day of the second calendar month next following. 4.5 Late Charge. If any payment of Rent (including, without limitation, all Minimum Rent and all Additional Rent) or any part thereof to be made by Tenant to Landlord pursuant to the terms of this Lease shall become overdue for a period in excess of ten (10) days, a late charge equal to the greater of Five Cents ($0.05) for each dollar so overdue or interest accrued on 6 the overdue payment from the date such payment or part thereof was due until paid, at the Lease Interest Rate, shall be paid by Tenant together with the overdue sum for the purpose of defraying the expense incident to handling such delinquent payment. Nothing herein or in the imposition or acceptance of a late charge by Landlord shall be construed as a waiver of any rights of Landlord arising out of any default of Tenant; the right to collect any late charge or interest is separate and apart from any rights or remedies of Landlord relating to any default by Tenant. 4.6 Independent Covenant; Survival. Tenant's covenant to pay all Rent hereunder is independent of any other covenant, agreement, term or condition of this Lease. Without limiting the other obligations of Tenant which shall survive the expiration of the Term hereof, the obligation of Tenant to pay Rent shall survive the expiration of the Term hereof. 5. Real Estate Taxes 5.1 Definitions. As used in this Section 5, the following terms shall be defined as hereinafter provided: 5.1.1 "Real Estate Taxes" shall mean all taxes and assessments of every kind and nature, ordinary or extraordinary, general or special, levied, assessed or imposed by any governmental authority with respect to the Property, as well as all fees or assessments payable on account of the Property being located in the Philadelphia Special Services District. Notwithstanding the foregoing: 5.1.1.1 if at any time during the Term of this Lease the present system of ad valorem taxation of real property shall be changed or supplemented so that in lieu of or in addition to the ad valorem tax on real property there shall be assessed on Landlord or the Property any tax of any nature which is imposed in whole or in part, in substitution for, addition to, or in lieu of any tax which would otherwise constitute a Real Estate Tax, (which tax may include, but shall not be limited to, a state, county, municipal or other local capital levy or other tax or levy on the gross rents or gross receipts with respect to the Property, unless Tenant is able to conclusively establish that such tax, assessment or levy was not intended to be in substitution for, in addition to, or in lieu of any tax which would otherwise constitute a Real Estate Tax) such tax shall be included within the term "Real Estate Taxes," but only to the extent that the same would be payable if the Property were the only property of Landlord; 5.1.1.2 Real Estate Taxes shall also encompass all of Landlord's expenses, including but not limited to reasonable attorney's fees and expenses, incurred by Landlord in any effort to minimize Real Estate Taxes whether by contesting proposed increases in assessments, applying for the benefit of any tax abatement program available for the Property, appealing the denial of any such tax abatement, or contesting any challenge to the validity of any tax abatement program or its applicability to the Property or by any other means or procedures appropriate in the circumstances; provided, however, that under no circumstances shall Landlord have any obligation to undertake any contest, appeal or other procedure to minimize Real Estate Taxes or to obtain or maintain the benefits of any tax abatement program for the Property; further provided that any reduction in Real Estate Taxes resulting from any such appeal or contest shall inure to the benefit of Tenant to the extent of Tenant's Tax Share (hereinafter defined) of such reduction; and 5.1.1.3 except as otherwise provided in Subsection 5.1.1.1 above, there shall be excluded from Real Estate Taxes all net income, excess profit, excise, franchise, estate, succession and inheritance taxes, penalties due to Landlord's lateness or failure to pay taxes when due and transfer taxes imposed on Landlord. 5.1.2 "Tenant's Tax Share" shall be that percentage of Real Estate Taxes which is equal to the ratio of the Rentable Area of the Premises (as the same may change from time to time as a result of the exercise of expansion or contraction options hereunder) to 1,354,725, the total Rentable Area contained in the Building (being the Office Space, Garage Space, Retail Space and Storage Space). As of the date of this Lease, Tenant's Tax Share is 4.275%. 5.1.3 "Tax Year" shall mean each calendar year, or such other period of twelve (12) months as now or hereafter may be duly adopted as the fiscal year for real estate tax purposes of the governmental unit in which the Property is located, occurring during the Term of this Lease. 5.1.4 "Tax Statement" shall mean a statement provided by Landlord, setting forth: (a) the Real Estate Taxes for any Tax Year, (b) Tenant's Tax Share thereof, prorated if only a part of the Tax Year falls within the Term of this Lease; and (c) the amount by which the Tenant's Tax Share thereof exceeds (or is less than) payments made by Tenant pursuant to Sections 5.2.2 and 5.2.3 below for the specified Tax Year or portions thereof. 5.2 Payment of Tenant's Tax Share. Commencing on the Lease Commencement Date, Tenant shall pay to Landlord, as Additional Rent hereunder, an amount equal to Tenant's Tax Share of Real Estate Taxes with respect to each Tax Year during the remaining Term of this Lease. If less than a full twelve (12) month period of a Tax Year is included within the term of this Lease, Tenant's Tax Share shall be prorated on a per diem basis for such partial Tax Year. Tenant's Tax Share for each Tax Year shall be paid as follows: 5.2.1 After receipt of a Real Estate Tax bill, Landlord shall furnish Tenant a Tax Statement as hereinabove defined. Within twenty-five (25) days following the receipt of such Tax Statement, Tenant shall pay to Landlord the amount, if any, by which the Tenant's Tax Share for such Tax Year exceeds the total amount, if any, of payments made pursuant to Subsection 5.2.3 below on account of the Tenant's Tax Share as shown on the Tax Statement. 5.2.2 Notwithstanding the foregoing Section 5.2.1, if at any time after execution of this Lease Landlord receives a Real Estate Tax bill for taxes in excess of the Real Estate Taxes for the preceding Tax Year or a notice of any governmental action which could effect an increase in Real Estate Taxes over the Real Estate Taxes for the preceding Tax Year including, but not limited to, notice of any increase in assessment or of a forthcoming increase in the real estate tax rate, or notice, providing that the Property is not entitled to the benefit of any tax abatement program pursuant to which Landlord has previously determined the Tenant's Tax Share, or that the validity of any tax abatement program applicable to the Property has been challenged by appropriate legal proceedings, Landlord may notify Tenant that Landlord elects to increase the installments presently being paid by Tenant pursuant to Subsection 5.2.3 below. Landlord's notice shall be in writing and shall specify the amount due, or estimated to become due, and the amount of each installment or increased installment to be paid by Tenant. Payments in the amount of the installment (or increase in installment) set forth in Landlord's notice shall be due semi-annually with the payments on account of Tenant's Tax Share made pursuant to Section 5.2.3. 5.2.3 On or before May 1 of each calendar year, Landlord will deliver a statement to Tenant specifying the amount of the installments owing on account of Tenant's Tax Share on or before June 1 and December 1 of that Tax Year; provided, however, that should Landlord deliver such statement later than May 1 in any calendar year, Tenant may defer payment of the installment owing on June 1 of that Tax Year to that date which is thirty (30) days after Tenant receives Landlord's statement. Subject to the foregoing, Tenant shall pay one half (1/2) of the Tenant's Tax Share of the Real Estate Taxes as set forth in Landlord's notice on or before June 1 and the remaining one-half (1/2) of the Tenant's Tax Share of such Real Estate Taxes on or before December 1 of each Tax Year, as an estimate and on account of the Tenant's Tax Share for the current Tax Year, which payments shall be subject to increase upon receipt by Tenant of a notice from Landlord pursuant to Subsection 5.2.2 above increasing the amount of semi-annual estimated payments. In the event either payment is not received by the specified date (subject to extension as aforesaid), then at Landlord's sole option, for the duration of the Term of this Lease, as the same may be extended, Tenant shall be required to make monthly payments, together with payment of Minimum Rent, as an estimate and on account of the Tenant's Tax Share for the current Tax Year, which payments shall be subject to increase upon receipt by Tenant of a notice from Landlord pursuant to subsection 5.2.2 above increasing the amount of monthly estimated payments. 5.2.4 Real Estate Taxes with respect to a Tax Year which is the subject of an appeal filed by or on behalf of Landlord shall be paid on the basis of the amount reflected in the tax bill and shall not be adjusted until the final determination of the appeal. Upon such determination of any appeal, Landlord will notify Tenant in writing of the actual amount of Tenant's Tax Share and the amount, if any, remaining due by Tenant in excess of Tenant's estimated payments. Tenant shall pay such entire amount so due on the due date for the next installment of Minimum Rent, or if this Lease has terminated, Tenant shall pay the amount due within fifteen (15) days after receipt of Landlord's notice. If the actual taxes are less than the amounts upon which the payments previously made by Tenant were based, Tenant shall receive a credit against the installment of Minimum Rent next coming due in the amount by which Tenant's payments on account of Tenant's Tax Share exceeded the payments actually due for the applicable year, or if the Term of the Lease has expired, Landlord shall refund to Tenant the amount of any such overpayment within fifteen (15) days after determination of the amount due to Tenant. 5.2.5 If Tenant shall pay any Tenant's Tax Share for any periods which were calculated on the basis of the qualification of the Property for a tax abatement program, and subsequently it is determined that for such periods or any portion thereof the Property was not entitled to the benefit of such program or that such program was invalid and a retroactive assessment is made, then Tenant's Tax Share for such periods shall be recomputed on the basis of the actual amount of Real Estate Taxes required to be paid in the absence of abatement, provided such period shall have occurred during the Term of this Lease. Landlord will notify Tenant in writing both of any additional amounts due (the "Deficiencies") by Tenant by reason of such recalculations of Tenant's Tax Share for such periods in excess of Tenant's previous payments of Tenant's Tax Share and of the amount of any increase in installments payable by Tenant pursuant to Subsection 5.2.3 above for the balance of the current Tax Year. Tenant shall pay the entire amount of the Deficiencies by the due date of the next installment of Minimum Rent due Landlord. 5.2.6 Pending the resolution of any dispute between Landlord and Tenant respecting the correctness of any Tax Statement furnished by Landlord to Tenant hereunder (which dispute shall be undertaken in accordance with the terms of Section 6.3 below), Tenant shall make payments in accordance with said Tax Statement or other notice which is the subject of such dispute. 5.3 Real Estate Tax Credit. In the event that the sum of (a) Tenant's Tax Share of Real Estate Taxes for the twelve (12) month period following the end of the Rent Free Period, plus (b) Philadelphia Use and Occupancy Taxes respecting the Premises for the twelve (12) month period following the end of the Rent Free Period, shall exceed $4.75 per Rentable Square Foot of the Premises, Tenant shall receive a one-time credit against Minimum Rent equal to the lesser of (i) the amount of such excess or (ii) $1.50 per Rentable Square Foot of the Premises. Solely by way of example, if Tenant's Tax Share and Philadelphia Use and Occupancy Taxes for the twelve (12) month period following the end of the Rent Free Period total $5.50 per Rentable Square Foot of the Premises, Tenant would receive a Minimum Rent credit equal to $.75 10 per Rentable Square Foot of the Premises ($5.50 - $4.75 = $.75). Such Minimum Rent credit shall be applied to the installment of Minimum Rent falling due immediately following the month in which Tenant becomes aware of such excess, and Tenant shall include a notice to Landlord with its Minimum Rent payment for that month, stating that such credit is reflected in the payment. 5.4 Timely Payment of Real Estate Taxes. Landlord shall reasonably endeavor to pay all Real Estate Taxes within the time period (if any) during which the taxing authority affords taxpayers the benefit of a discount for payment. Any discounts granted by the tax authority shall be reflected in Tenant's Tax Share of Real Estate Taxes. 6. Operating Expenses 6.2 Definitions As used in this Section 6 the following terms shall be defined as hereinafter provided: 6.1.1 "Operating Year" shall mean each calendar year, or such other period of twelve (12) months as hereafter may be adopted by Landlord as its fiscal year, occurring either in whole or in part during the Term of this Lease. 6.1.2 "Tenant's Expense Share" shall be that percentage of Operating Expenses derived by dividing the Rentable Area contained within the Premises (as the same may from time to time increase or decrease by reason of the exercise of any contraction or expansion option provided herein) by 1,231,518, the Rentable Area contained in the Building excluding the Rentable Area of the Garage Space, the Retail Space and the Storage Space. As of the date of this Lease, Tenant's Expense Share is 4.703%. 6.1.3 "Operating Expenses" shall mean the expenses incurred by Landlord in connection with the operation, repair, maintenance, protection and management of the Property (subject to allocation as provided in Section 6.1.3.26 and the exclusions contained in Section 6.1.6), including by way of example rather than of limitation, the following: 6.1.3.1 Wages, salaries, fees and other compensation and payments, payroll taxes, contributions to any social security, unemployment insurance, welfare, pension or similar fund and payments for other fringe benefits (reasonably and equitably allocated by Landlord among the Operating Expenses of the Building and the operating expenses of any other building with respect to which services are performed in the event that an employee performs services for more than one building) made to or on behalf of any and all employees of Landlord performing services rendered in connection with the operation, repair, maintenance, protection and management of the Property, including, without limitation: elevator operators; elevator starters; window cleaners; porters; janitors; maids; miscellaneous handymen; watchmen; persons engaged in patrolling and protecting the Property; carpenters; engineers; mechanics; electricians; plumbers; landscapers; insurance risk managers; building superintendent and assistants; building manager; and clerical and administrative personnel. Landlord may contract for any of the foregoing to be performed by independent contractors, in which event all sums paid to such independent contractors shall be included within Operating Expenses pursuant to Subsection 6.1.3.20 below. 6.1.3.2 The cost of employee uniforms, and the cleaning, pressing and repair thereof. 6.1.3.3 Cleaning costs for the Property, including the facade, windows and sidewalks, all costs for snow and rubbish removal (other than removal of debris associated with tenant alterations or any work performed by any tenant or Landlord in the Building, the cost of which is not included in Operating Expenses) and the costs of all labor, supplies, equipment and materials incidental to such cleaning. 6.1.3.4 Premiums and other charges incurred by Landlord with respect to all insurance relating to the Property and the operation and maintenance thereof, including without limitation: all risk of physical damage or fire and extended coverage insurance; public liability insurance; elevator insurance; workmen's compensation insurance; boiler and machinery insurance; sprinkler leakage insurance; rent insurance; and health, accident and group life insurance for employees (reasonably and equitably allocated by Landlord among the Operating Expenses of the Building and the operating expenses of any other building with respect to which services are performed in the event that an employee performed services for more than one building). 6.1.3.5 The actual cost of heat, water, sewer and all other utility services, excluding electricity, servicing the Building generally, as well as the cost of electricity consumed by central HVAC equipment serving the Building (such as, but not limited to, the condensor water system pumps, cooling tower fan and fresh air fans located within the Building core) (the cost of electricity for non-central HVAC equipment serving leased portions of the Building being billed directly to the tenant or tenants of such floor pursuant to Section 8.8, or the equivalent, of their respective leases). 6.1.3.6 Costs (other than utility costs which are provided for in Subsection 6.1.3.5 above) incurred for operation, service, maintenance, inspection, repairs and alterations of the Property, and the heating, air-conditioning, ventilating, plumbing, outdoor underground heating coils, electrical and elevator systems of the Building and the costs of labor, materials, supplies and equipment used in connection with all of the aforesaid items. 6.1.3.7 Sales and excise taxes and the like upon any of the expenses enumerated herein. 12 6.1.3.8 Management fees of the managing agent for the Building, if any, which Landlord agrees shall at all times be competitive with management fees paid to managing agents of similar first class office buildings in center city Philadelphia. 6.1.3.9 The cost of tools, equipment, and supplies and any replacement thereof. 6.1.3.10 The cost of repainting or similar cosmetic redecorating of any part of the Building other than premises demised to tenants in the Building. 6.1.3.11 Displays or decorations for the lobby, balconies and other public portions of the Property. 6.1.3.12 Dues paid to associations representing landlords, in connection with the membership of Landlord or the Building manager therein. 6.1.3.13 The cost of long distance telephone charges, telecopier and courier services, postage and delivery charges, office supplies, maintenance and repair of office equipment, and similar costs, to the extent incurred in connection with the operation of the Building management office located at Mellon Bank Center or at another location as designated by the Landlord in the event that the management office at Mellon Bank Center is relocated. 6.1.3.14 The cost of licenses, permits and similar fees and charges, excluding those relating to the Garage Space and Retail Space. 6.1.3.15 Auditing and accounting fees including accounting fees incurred in connection with the preparation and certification of the Tax Statements and the Operating Expense Statements specified in Sections 5 and 6 of this Lease. 6.1.3.16 All costs incurred by Landlord to comply with governmental requirements, whether federal, state or municipal; and all repairs, replacements and improvements which are appropriate in Landlord's reasonable judgment for the continued operation of the Building as a first class building, including capital expenditures which under generally accepted accounting principles are expensed or are regarded as deferred expenses. 6.1.3.17 All costs associated with the acquisition and installation of any energy or cost saving devices. 6.1.3.18 All costs and expenses relating to the maintenance, operation and repair of any facilities partially on or attached to and partially adjacent to the Property used in the operation thereof, including without limitation the atrium and related facilities which are partially on and partially adjacent to the Property, but specifically 13 excluding any costs or expenses relating to maintenance, operation and repair of (a) any portion of such facilities which have been leased to third parties and (b) that certain adjacent office building and related facilities (other than the aforesaid atrium) commonly known as Six Penn Center. 6.1.3.19 All that portion of the Business Privilege Tax of the City of Philadelphia which is based upon gross "receipts" with respect to the Property and not upon "net income" with respect to the Property, and any taxes imposed on personal property in the Building owned by Landlord and used in connection with the Property. For Business Privilege Tax reporting and payment purposes, the Landlord intends to exclude from its taxable base the portion of its gross receipts attributable to the distributive share of its general partner, The Equitable Life Assurance Society of the United States (a mutual life insurance company incorporated under the laws of the State of New York), in reliance on the retaliatory-tax-exclusion for foreign insurance companies set forth in the First Class Cities Business Tax Reform Act and in the City of Philadelphia Business Privilege Tax Ordinance, and in reliance on the preferential rate of tax set forth in the First Class Cities Business Tax Reform Act and in the City of Philadelphia Business Privilege Tax Ordinance for "regulated industries." It is understood and agreed by the parties hereto that if it is determined by the City of Philadelphia or a court of appropriate jurisdiction following all permissible appeals that the Landlord improperly excluded from its taxable base the portion of its gross receipts attributable to the distributive share of The Equitable Life Assurance Society of the United States and assesses deficiencies in such tax as a result of those excluded amounts, the Tenant shall pay to Landlord Tenant's allocable portion of the tax, for the period within the Term, with interest (excluding any penalties) assessed thereon by the City of Philadelphia, if any, upon written notice provided to the Tenant by the Landlord, as Additional Rent. 6.1.3.20 Cost of independent contractors performing services, including, but not limited to, cleaning, janitorial, window-washing, rubbish removal, security, landscaping, snow and ice removal services, electrical, painting, plumbing, elevator, heating, ventilation and air conditioning maintenance and repair and all fees due such independent contractors. Notwithstanding the foregoing, in the event that any services are provided to the Property by a contractor which is an affiliate of Landlord, such services shall be provided at a cost which is reasonably competitive with that which could be obtained from an independent contractor not affiliated with Landlord. 6.1.3.21 Legal fees with respect to the Property other than those incurred in the negotiation or enforcement of tenant leases, which are not reimbursed through other sources. 6.1.3.22 Capital expenditures necessitated by casualties to the extent of the lesser of the deductible under Landlord's policy of insurance insuring same, or $50,000.00. 14 6.1.3.23 Any and all other expenditures of Landlord which are properly expenses in accordance with generally accepted accounting principles consistently applied with respect to the operation, repair, maintenance, protection and management of first-class office buildings in the City of Philadelphia, Pennsylvania. 6.1.3.24 If Landlord shall lease any item of capital equipment, then, subject to the cap contained in Section 6.1.3.25 below, payments under such lease ("Capital Lease Payments") shall be included in Operating Expenses for each Operating Year in which they are incurred. 6.1.3.25 Notwithstanding anything to the contrary herein contained in this Section 6.1.3, if Landlord shall purchase any item of capital equipment or make any capital expenditure, including without limitation those described in Subsections 6.1.3.16, 6.1.3.17 or 6.1.3.22 above (collectively, "Capital Expenditures"), then the costs for same shall be amortized on a straight line basis beginning in the year of installation and continuing for the shorter of (a) the useful life thereof as determined in accordance with the United States Internal Revenue Code or (b) ten (10) years, with a per annum interest factor equal to the Prime Rate in effect on the date of purchase thereof. The amount of amortization for such costs shall be included in Operating Expenses for each Operating Year within the amortization period; provided, however, that Tenant's Expense Share of Operating Expenses shall not include Capital Lease Payments and Capital Expenditures aggregating in excess of Ten Thousand Dollars ($10,000) per Lease Year during the first five (5) Lease Years, or aggregating more than Twenty Thousand dollars ($20,000) per Lease Year during the sixth (6th) through tenth (10th) Lease Years. 6.1.3.26 Landlord shall calculate and reasonably allocate Operating Expenses among the Office Space, Retail Space, Garage Space and Storage Space, and Tenant's Share shall be applied only against Operating Expenses which are so allocated to the Office Space, and not to those portions of the Operating Expenses which are allocated to the Retail Space, Storage Space and Garage Space. In the event any portion of the Atrium attached to the Building is leased, that leased space shall be included in the Retail Space for the purpose of calculating Tenant's Expense Share. 6.1.4 Operating Expenses shall be "net" and, for that purpose, shall be reduced by the amounts of any reimbursement, discount or credit received by Landlord with respect to an item of cost that is included within Operating Expenses (other than reimbursements to Landlord by tenants of the Property pursuant either to operating expense provisions of any lease or separate contractual arrangements). 6.1.5 In determining Operating Expenses for any Operating Year during which less than ninety percent (90%) of the rentable area of the Building shall have been occupied by tenants for more than thirty (30) days during such year, that portion of the actual Operating Expenses for such year which vary with occupancy shall be increased to the amount which normally would have been incurred for such Operating Year had such occupancy of 15 the Building been ninety percent (90%) throughout such Operating Year, as reasonably determined by Landlord. Notwithstanding the foregoing, in no event shall Landlord receive more than one hundred percent (100%) of the Building's actual Operating Expenses as a result of the operation of this Subsection 6.1.5. 6.1.6 Notwithstanding the provisions of Section 6.1.3, "Operating Expenses" shall not include expenditures for any of the following: 6.1.6.1 Any capital addition made to the Building, including the cost to prepare space for occupancy by a new tenant, except as set forth in Subsections 6.1.3.16, 6.1.3.17 or 6.1.3.22 above. 6.1.6.2 Repairs or other work occasioned by fire, water, windstorm or other casualty or hazard, in excess of the lesser of the deductible under Landlord's policy of insurance insuring such casualty or hazard, or $50,000.00. 6.1.6.3 Leasing commissions and advertising expenses incurred in leasing or procuring new tenants. 6.1.6.4 Repairs or rebuilding necessitated by condemnation. 6.1.6.5 Depreciation and amortization of the Building, other than as permitted pursuant to Subsection 6.1.3.25. 6.1.6.6 Real Estate Taxes. 6.1.6.7 The salaries and benefits of executive officers of Landlord, if any. 6.1.6.8 Debt service payments on any indebtedness applicable to the Property, including any mortgage debt, or ground rents payable under any ground lease for the Property. 6.1.6.9 Costs of services not generally provided to all tenants in the Office Space. 6.1.6.10 Capital costs of replacing Building components which are replaced due to normal wear and tear or sudden failure shall not be included in Operating Expenses (or amortized under Section 6.1.3.25). 16 6.1.7 "Monthly Operating Expense Estimate" shall have the meaning specified in Subsection 6.2.1.1 hereof. 6.1.8 "Operating Expense Statement" shall mean a statement provided by Landlord, setting forth in reasonable detail: (a) the Operating Expenses for the Operating Year (or portion thereof if less than a full Operating Year) immediately preceding the Operating Year in which the statement is issued, reasonably detailed by major categories, (b) the Tenant's Expense Share for such preceding Operating Year, prorated if only a part of the Operating Year falls within the Term of this Lease, (c) the amount of payments made by Tenant on account of the Tenant's Expense Share during such preceding Operating Year, (d) the amount of payments of the Monthly Operating Expense Estimate made by Tenant in the Operating Year in which the Expense Statement is issued, and (e) the Monthly Operating Expense Estimate for the Operating Year in which the Operating Expense Statement is issued. 6.2 Tenant's Expense Share. Commencing with the Lease Commencement Date, as Additional Rent for each Operating Year or portion thereof occurring within the remainder of the Term of this Lease, Tenant shall pay to Landlord (in the manner hereinafter provided) the amount of Tenant's Expense Share of the Operating Expenses for every Operating Year. For any portion of an Operating Year less than a full twelve (12) month period occurring within the Term of this Lease, Tenant's Expense Share shall be prorated on a per diem basis. 6.2.1 Such Additional Rent shall be paid (or credited) in the following manner: 6.2.1.1 Beginning with the Lease Commencement Date and continuing thereafter on the first day of each month until receipt of the Operating Expense Statement with respect to the Operating Year during which Lease Commencement Date occurs, Tenant will pay Landlord an amount set by Landlord sufficient to pay Landlord's estimate (reasonably based on the actual Operating Expenses for the preceding Operating Year and Landlord's projections of any anticipated increases or decreases thereof) of Tenant's Expense Share for the current Operating Year (or remaining portion thereof) (the "Monthly Operating Expense Estimate"). The Monthly Operating Expense Estimate for a period less than a full calendar month shall be duly prorated. 6.2.1.2 Following the end of each Operating Year, Landlord shall furnish Tenant an Operating Expense Statement setting forth the information described in Subsection 6.1.8 above. Within thirty (30) days following the receipt of such Operating Expense Statement (the "Expense Share Date") Tenant shall pay to Landlord: (i) the amount by which the Tenant's Expense Share for the Operating Year (or portion thereof) covered by the Operating Expense Statement exceeds the aggregate of Monthly Operating 17 Expense Estimates paid by Tenant with respect to such Operating Year (or portion thereof); and (ii) the amount by which the Monthly Operating Expense Estimate for the current Operating Year as shown on the Operating Expense Statement multiplied by the number of months elapsed in the current Operating Year (including the month in which payment is made) exceeds the aggregate amount of payments of the Monthly Operating Expense Estimate theretofore made in the Operating Year in which the Operating Expense Statement is issued. Landlord shall diligently endeavor to furnish Tenant an Operating Expense Statement not later than one hundred and twenty (120) days following the end of each Operating Year. 6.2.1.3 On the first day of the first month following receipt by Tenant of any annual Operating Expense Statement and continuing thereafter on the first day of each succeeding month until the issuance of the next ensuing Operating Expense Statement, Tenant shall pay Landlord the amount of the Monthly Operating Expense Estimate shown on the Operating Expense Statement. 6.2.1.4 If on any Expense Share Date Tenant's payments of the installments of the Monthly Operating Expense Estimate for the preceding or current year's Operating Expenses are greater than the actual Operating Expenses for such preceding Operating Year or Monthly Operating Expense Estimate for the current year, Landlord shall credit Tenant with any excess, which credit may be offset by Tenant against next due installments of Rent. If the Term of the Lease has expired prior to the Expense Share Date for the applicable Operating Year and if Tenant's payments of Monthly Operating Expense Estimate either exceed or are less than Tenant's Expense Share, Landlord shall send the Operating Expense Statement to Tenant, and an appropriate payment from Tenant to Landlord or refund from Landlord to Tenant shall be made on the Expense Share Date. The provisions of this Subsection 6.2.1.4 shall remain in effect notwithstanding any termination of this Lease; provided however, that if upon termination of this Lease Tenant owes Landlord any sums under this Lease (for Rent or otherwise), Landlord shall have the right to reduce the amount of any refund due Tenant under this Section 6.2.1.4 against such sums owed by Tenant to Landlord. 6.2.2 Notwithstanding any dispute concerning any Operating Expense Statement or other notice, Tenant shall continue to make payments in accordance with said Operating Expense Statement or other notice pending the resolution of such dispute. 6.2.3 Landlord's Estimates. Landlord has submitted to Tenant, and Tenant has relied upon in entering into this Lease, the estimates of Real Estate Taxes and Operating Expenses shown on Exhibit "M" attached hereto and made a part hereof. 6.3 Audit of Landlord's Books. Landlord shall keep at all times during the Term of this Lease, at the office of Landlord or Agent, full, complete and accurate books of account and records prepared in accordance with generally accepted accounting principles with respect to Operating Expenses and Real Estate Taxes, and shall retain such books and records, as well as contracts, bills, vouchers, and checks, and such other documents as are 18 reasonably necessary to audit properly the Operating Expenses and Real Estate Taxes for at least one (1) year after the year to which they are applicable, or if any audit is required or any controversy should arise between the parties hereto regarding Tenant's Tax Share or Tenant's Expense Share, until such audit or controversy is resolved or terminated. After one (1) year from the submission of a given Operating Expense Statement or the Tax Statement, as the case may be, by Landlord to Tenant, Tenant waives its rights to inspect such books and records which are applicable to said statements. During such one (1) year period such books and records shall be open to the inspection of Tenant or its duly authorized representatives, who shall have full and free access to the same and the right to require of Landlord, its agents and employees, such information or explanation with respect to the same as may reasonably be necessary for a proper examination thereof. Anything herein to the contrary notwithstanding, Tenant shall have the right to inspect said records only during Business Hours and upon at least five (5) business days' prior written notice to Landlord and only for such period as is reasonably required to complete such inspection. Tenant shall hold all information obtained from such inspection in the strictest confidence. If it is determined that the Operating Expenses or the Real Estate Taxes shown in the Operating Expense Statement or the Tax Statement exceed the actual Operating Expenses or Real Estate Taxes for any period covered by Landlord's statement by four percent (4%) or more, Landlord shall pay all reasonable expenses incurred by Tenant in determining the actual Operating Expenses or Real Estate Taxes for said period; otherwise Tenant shall pay all expenses which it incurred in making any such audit. In the event that any audit by Tenant reveals that the actual Operating Expenses and Real Estate Taxes for any period are less than the sum paid by Tenant for the period, then the amount of the excess shall be applied on account of the next installment or installments of Rent due under this Lease unless the Term shall have ended, in which event Landlord shall pay to Tenant the amount of the excess within thirty (30) days after the parties have agreed upon the amount of the excess. 7. Improvement of the Premises 7.1 Base Building Plans. Landlord shall make available to Tenant for use by Tenant or its architect or engineer, such structural, electrical and mechanical drawings, specifications, and other information with respect to the Building ("Base Building Plans") reflecting Landlord's construction of the Core and Shell of the Building described in Exhibit F attached hereto (the "Core and Shell"). Landlord shall also make available for Tenant's inspection all shop drawings and submittals respecting the construction of the Core and Shell. Tenant acknowledges that the Core and Shell were constructed to construction industry standard tolerances permitting limited deviations from the requirements of the Base Building Plans. Accordingly, promptly following execution of the Lease, and prior to commencement of preparation of the plans and documents which Tenant is obligated to produce under Section 7.3 below, Tenant will cause its architect or engineer to conduct a field survey of the Premises to verify critical dimensions and ascertain any deviation from the Base Building Plans. 7.2 Tenant hereby designates Fred Harle as the "Tenant's Construction Representative," who Tenant agrees shall be available to meet and consult with Landlord on a continuing basis at the Premises as Tenant's 19 representative concerning the matters which are the subject of this Section 7 and who, as between Landlord and Tenant, shall have the power legally to bind Tenant in giving direction to Landlord respecting the Construction Documents and the Tenant Work, in giving approvals of design documents and work, and in making requests and approval for changes. Tenant may from time to time change the designation of Tenant's Construction Representative by written notice to Landlord, so long as there is at all times at least one individual designated to serve in such capacity. 7.3 Preparation, Review and Approval of Tenant's Schematic Design Documents, Design Development Documents and Construction Documents. Tenant shall, at its expense, consult with its architect, engineer, designer and such other consultants as it shall deem necessary for development and timely completion of certain documents as described in this Section 7, which documents shall conform to the Base Building Plans. 7.3.1 Schematic Design. Tenant shall prepare at its expense "Schematic Design Documents" reasonably satisfactory to Landlord which generally indicate functional and organizational relationships, the location and size of the Premises, all demising and interior walls, and the locations and configuration of all offices and conference rooms, libraries, file rooms and other office areas and improvements to be contained in the Premises. 7.3.2 Design Development. Subject to the procedural requirements set forth in Subsection 7.3.4 below, Tenant, at its expense, shall cause to be prepared and delivered to Landlord for its review and approval, which approval shall not be unreasonably withheld or delayed: one (1) complete reproducible set and two (2) blue-line print sets of "Design Development Documents" consisting of: architectural, mechanical, electrical, plumbing and structural drawings and other documents to fix and describe the size and character of the space, all commonly called "Space Plans", prepared by an architect or space planner approved by Landlord. Tenant shall deliver to Landlord in a timely manner the Schematic Design Documents and the Design Development Documents for approval, so that the Construction Documents are timely delivered and approved as set forth below. Tenant shall cause the Design Development Documents to be prepared in conformity with and consistent with the Schematic Design Documents. 7.3.3 Construction Documents. Tenant, at its expense, shall cause to be prepared and delivered to Landlord one (1) complete reproducible set and two (2) blue-line print sets of complete and final "Construction Documents" consisting of (a) working drawings; (b) two (2) copies of specifications, as approved by Landlord for the construction of the Premises for Tenant's occupancy; and (c) a permit set. Tenant shall deliver the Construction Documents to Landlord not later than April 18, 1994. Tenant shall cause the Construction Documents to be prepared in conformity with and consistent with the Design Development Documents. 20 7.3.3.1 Tenant's Construction Documents shall be signed and sealed by an architect or professional engineer (where applicable) licensed and registered in the Commonwealth of Pennsylvania. In addition to conforming to Landlord's Base Building Plans, Tenant's Construction Documents shall also conform to all applicable laws, ordinances, building codes and requirements of public authorities and insurance underwriters. Tenant's Construction Documents shall contain, at a minimum, floor plans, reflected ceiling plans, power and telephone plans, mechanical plans, electrical plans, fire protection plans and all other details and schedules which designate the locations and specifications for all mechanical, electrical, fire protection and life safety equipment to be installed in the Premises, and all partitions, doors, lighting fixtures, electric receptacles and switches, telephone outlets, special air conditioning, and other improvements to be installed within the Premises. 7.3.4 Landlord Approval. Tenant shall submit for Landlord's approval, Schematic Design Documents, Design Development Documents and Construction Documents, in accordance with guidelines and time frames described above. The approval by Landlord of Tenant's Schematic Design Documents, Design Development Documents and Construction Documents shall be subject to the following procedural requirements: 7.3.4.1 Landlord shall promptly review the applicable documents or any additional requested information, and either approve the same or return the same to Tenant with requested modifications. 7.3.4.2 If Landlord shall return the modified documents to Tenant with requested modifications, Landlord shall specify a reasonable period of time, not to exceed three (3) Business Days, within which such modifications shall be made and within which such modified plans shall be re-submitted to Landlord by Tenant, until the modified documents are finally approved by Landlord. 7.3.4.3 To the extent the Tenant's Schematic Design Documents, Design Development Documents or Construction Documents, as the case may be, in Landlord's sole judgment, involve any modification of, or impact upon, the Building's structural, mechanical, electrical or plumbing systems or components, then such approval may be withheld by Landlord in its absolute and sole discretion. 7.3.4.4 Tenant's Construction Documents, as approved by Landlord and as modified by Tenant to take account of any changes reasonably requested by Landlord, are hereinafter considered to be "Approved for Construction." 7.3.5 Costs of Tenant's Documents. Landlord grants to Tenant an allowance for reimbursement of Tenant's actual costs of preparation of its Schematic Design Documents, Design Development Documents and Construction Documents, including without limitation the cost of any interior design services, of Two Hundred Eighty-Nine Thousand Five Hundred Seventy 21 Dollars ($289,570.00) (Five Dollars ($5.00) per Rentable Square Foot of the Premises) ("Plans Allowance"). Tenant may draw upon the Plans Allowance by submitting to Landlord on or before the twentieth (20th) day of any month, a voucher for the sum requested executed by Tenant's Construction Representative and by an officer of Tenant, setting forth in reasonable detail the amount of the plans costs and identifying the labor, fees, costs and documents to which it relates. Landlord shall endeavor to pay to Tenant the amount of each Tenant voucher within twenty (20) days after Landlord shall have received such voucher, until the Plans Allowance is exhausted. Should the Plans Allowance not be exhausted in reimbursing Tenant the cost of preparing the Construction Documents, any portion thereof remaining shall be applied to reimburse Tenant for the costs of moving into the Premises and shall be payable by Landlord to the Tenant in one or more installments, each within a reasonable time following receipt by Landlord of a voucher from Tenant setting forth in reasonable detail the labor, fees and costs desired to be reimbursed. Notwithstanding the foregoing, Tenant may submit its first draw request voucher at the time of full Lease execution, and Landlord shall endeavor to pay same twenty (20) days thereafter. 7.4 Landlords Work. Promptly following full execution of this Lease, Landlord, in a good and workmanlike manner and at Landlord's expense, (a) shall undertake demolition of those portions of the Premises identified on and in accordance with Tenant's demolition plans and specifications, prepared by Harle Brandt Ginder Architects, dated 2/1/94, consisting of five (5) sheets numbered D1 through D5 and labelled "PMARE @ MELLON BANK CENTER", a true and correct copy of which has been delivered to and approved by Landlord (excluding any demolition of areas on the 30th floor of the Building shown on such plans and specifications but not contained in the Premises on the 30th floor of the Building), and (b) shall remove and dispose of the debris resulting from such demolition ("Landlord's Work"). Landlord shall complete the Landlord's Work within twenty-one (21) days from the date of full execution of this Lease except with respect to the removal of the stairs between the floors of the Premises and redecking of the floors, which Landlord shall complete within forty-two (42) days from the date of full execution of this Lease; provided, however, that the aforesaid periods for completion of Landlord's Work shall be extended one day for each day that Landlord is delayed in the performance of such work by reason of interference by Tenant's contractors or subcontractors performing work in the Premises. During the period of Landlord's performance of Landlord's Work, Landlord shall control the hours and locations at which Tenant's contractors and subcontractors may perform work within the Premises, but Landlord shall not be responsible for any aspect of the work performed by Tenant's contractors and subcontractors by reason of such control. Landlord shall leave in the Premises those salvageable materials listed on Exhibit "J" attached hereto, in reasonably good and serviceable condition, for use by Tenant in performance of the Tenant Work. 7.5 Tenant Work Defined. Tenant shall, in a good and workmanlike manner, cause the Premises to be improved and completed at Tenant's expense (subject to the Construction Allowance hereinafter provided) 22 and in accordance with Tenant's Construction Documents, which work (including materials, supplies, components, labor and services therefor) is herein referred to as the "Tenant Work". 7.6 Tenant's Contractor 7.6.1 The Tenant Work is to be performed by Tenant's contractor, selected by Tenant subject to Landlord's written approval. Landlord will not unreasonably withhold or delay its approval of any contractor submitted by Tenant, and Landlord's disapproval shall not be considered unreasonable if the disapproved contractor may, in Landlord's sole opinion, prejudice Landlord's relationship with Landlord's contractors or subcontractors or the relationship between such contractors and their subcontractors or employees, or otherwise disturb harmonious labor relations in or about the Building. 7.6.2 Upon Landlord's approval of the Tenant's contractor, Tenant shall enter into a construction contract or construction management agreement for the Tenant Work (the "Tenant Work Contract"). The Tenant Work Contract shall require that both Landlord and Tenant must approve the selection of each subcontractor and supplier furnishing goods or services costing over Fifty Thousand Dollars ($50,000.00) within three (3) business days of written request for approval, such approval not to be unreasonably withheld, and shall require Tenant's contractor to comply with all requirements of Section 7.9 below. 7.6.3 Prior to commencement of that portion of the Tenant Work which requires a building permit, Tenant will provide Landlord with a copy of the building permit respecting the Tenant Work. Additionally, upon completion of the Tenant Work and prior to occupancy of the Premises by Tenant, Tenant will deliver to Landlord a copy of the temporary or permanent Certificate of Occupancy respecting the Premises; provided that if Tenant delivers a temporary Certificate of Occupancy, Tenant shall diligently and continuously pursue issuance of a permanent Certificate of Occupancy and shall deliver a copy of same to Landlord upon receipt. Should Tenant so request, Landlord agrees to provide reasonable assistance to Tenant, at no expense to Landlord, in Tenant's efforts to obtain a permanent Certificate of Occupancy for the Premises. 7.7 [INTENTIONALLY OMITTED.] 7.8 Payment of Construction Allowance 7.8.1 Tenant may draw upon the Construction Allowance to pay for labor and materials provided for the Tenant Work (and to pay Tenant's architect's and engineer's and other professional fees incurred in connection with the design and construction of the Tenant Work as provided in Section 7.3.5 if the Plans Allowance is exhausted) (herein called "Tenant's Costs") in accordance with the terms of this Section 7.8. At the time Tenant's Construction Documents are finalized, Tenant will deliver to Landlord an estimated budget reasonably detailing the anticipated Tenant's Costs. Tenant 23 shall submit to Landlord on or before the twenty-eighth (28th) day of each month, a voucher for Tenant's Costs executed by Tenant's Construction Representative and by a partner or officer of Tenant, setting forth in reasonable detail the amount of such Tenant's Costs and identifying the material, labor, fees, and costs to which they relate. Landlord shall pay to Tenant the amount of each Tenant voucher within thirty (30) days after receipt of such voucher from Tenant. Notwithstanding anything set forth in this Section 7.8.1, any amounts held back as retainage under contracts for the Tenant Work shall not constitute a part of Tenant's Costs unless and until paid to the contractor under the terms of the subject contract. 7.8.2 Each voucher submitted to Landlord by Tenant (as set forth in Section 7.8.1) shall be accompanied by a certificate duly executed and sworn to by Tenant's Construction Representative stating that: (i) based on site inspections and the data comprising the invoice submitted by Tenant for payment by Landlord, the Tenant Work has progressed to the point indicated and the quality and condition of the Tenant Work theretofore completed or in the process of completion as of the date of such certificate is in accordance with the Construction Documents; and (ii) that Tenant's contractor is entitled to the amount so certified. 7.9 Tenant Contractors. In performing the Tenant Work or in performing alterations within any Expansion Area prior to Tenant's beneficial occupancy thereof, the following conditions shall be fulfilled, and Tenant, by undertaking to have such work performed by its contractor or contractors, shall be deemed to have agreed to cause such conditions to be fulfilled: 7.9.1 Prior to commencing any such work, the Construction Documents shall have been Approved for Construction in accordance with Section 7.3. 7.9.2 The work shall be performed at Tenant's expense by responsible contractors and subcontractors approved in advance by Landlord, who shall not in Landlord's sole opinion, and who in fact do not, prejudice Landlord's relationship with Landlord's contractors or subcontractors or the relationship between such contractors and their subcontractors or employees, or disturb harmonious labor relations. Tenant's contractors and subcontractors shall comply with all insurance requirements and undertakings set forth in Exhibit "E" attached hereto, as the same may be changed by written notice from Landlord to Tenant from time to time during the Term. 7.9.3 Such contractors or Tenant shall, prior to the commencement of the contractors' work and not later than ten (10) days after the execution of the contractors' respective contracts, file waivers of mechanic's liens in the appropriate public office, which waivers shall be effective to preclude the filing of any mechanic's liens on account of the work 24 to be performed by any of Tenant's contractors, subcontractors or materialmen. A copy of all such waivers shall be delivered to Landlord by Tenant prior to the commencement of any such work. 7.9.4 No such work shall be performed in such manner or at such times as to interfere with any work being done by any of Landlord's contractors or subcontractors in the Premises or in or about the Property generally. Tenant's contractors and subcontractors shall be subject to the decisions of Agent and Landlord's contractor as to such matters and as to avoidance of interference with other tenants of the Building or the work of other tenants' contractors and subcontractors, but Agent and Landlord's contractor shall not be responsible for any aspect of the work performed by Tenant's contractors or subcontractors. 7.9.5 Except as otherwise set forth in this Section 7.9, all such work shall be subject to the requirements and provisions of Sections 10.5, 10.7 and 25 of this Lease. 7.9.6 Tenant and its contractors and subcontractors shall be solely responsible for the transportation, safekeeping and storage of materials and equipment used in the performance of their work, for the removal of waste and debris resulting from the work, and for any damage caused by them to the Building or to any installations or work performed by Landlord's or any other tenant's contractors and subcontractors. 7.10 Condition of Premises. The taking of possession of the Premises by Tenant upon completion of the Tenant Work shall be conclusive evidence, as against Tenant, that the Premises and the Property were in good and satisfactory condition and that the Landlord's Work was satisfactorily completed at the time such possession was so taken. 7.11. Site Logistics and Procedures. Tenant's occupancy of the Premises during performance of the Tenant Work shall be subject to all of the terms and conditions of this Lease, excepting only that no Rent shall be payable during such period except to the extent specifically required under this Section 7.11, and except that Landlord shall not be obligated to provide janitorial services pursuant to Section 8.4. During such period, Tenant shall comply with the Site Logistics and Procedures set forth on Exhibit "K" attached hereto and incorporated herein by reference. Any work to be performed by Tenant in the elevator lobby and common corridors of the 30th floor of the Building shall be undertaken at such times and in such a manner as will not unreasonably disturb other tenants of such floor or unreasonably interfere with the conduct of their respective businesses, as determined by Landlord. Tenant shall pay to Landlord all of Landlord's costs for electricity consumed by Tenant and its contractors and subcontractors in the performance of the Tenant Work including, without limitation, the cost of electricity consumed in the provision of HVAC service to the Premises during such period, computed at the rate set forth in Section 8.1 and 8.8. The cost of electricity will be submetered on full floors of the Premises and shall be reasonably allocated by Landlord on partial floors of the Premises, based upon usage. The costs of electricity shall be payable by Tenant to Landlord within fifteen (15) days following receipt of a bill from Landlord therefor, as Additional Rent. 25 8. Landlord agrees that in consideration of Tenant's performance of its obligations under this Lease and so long as no Event of Default (hereinafter defined) has occurred and is continuing, Landlord shall provide services after the Lease Commencement Date as follows: 8.1 HVAC. Heat or air-conditioning to the Premises (depending on the season) and ventilation (collectively, "HVAC") as set forth in the Core and Shell description attached hereto as Exhibit F, during Business Hours. Heat or air-conditioning and ventilation required by Tenant at other times shall be available to Tenant at Landlord's then prevailing rates (presently $20.00 per hour, excluding costs of submetered electricity) with prior notice to Landlord, and shall be paid for by Tenant as Additional Rent within thirty (30) days after billing. The cost of electricity consumed in providing HVAC service to Tenant hereunder shall be billed to and payable by Tenant in accordance with Section 8.8, below. The furnishing of the foregoing heating, air-conditioning and ventilation services during the times and in accordance with the standards hereinabove set forth shall be subject to any statute, ordinance, rule, regulation, resolution or recommendation for energy conservation which may be promulgated by any governmental agency or organization which Landlord shall be required to abide by or in good faith may elect to observe. 8.2 Elevators. Landlord shall provide self-service passenger elevator service to the Premises during Business Hours, with one elevator subject to call at all other times. Landlord shall also provide freight elevator service, subject to such reasonable rules and regulations as to availability and use as Landlord may hereafter promulgate from time to time, provided, however, that Tenant shall be required to pay Landlord for any special services required by Tenant in connection with such use and/or in connection with its operation of such service during other than Business Hours at such rates as Landlord shall reasonably establish therefor. Notwithstanding the foregoing, during Tenants' performance of the Tenant Work and initial move into the Premises, Tenant shall not be required to pay any charges for use of the Building freight elevators (even if the initial move occurs on a weekend or Holiday, or is spread over more than one weekend). 8.3 Access. Tenant and its employees shall have access to the Premises twenty-four hours per day, 365 days per year, subject to compliance with such security measures as shall from time to time be in effect for the Building. 8.4 Janitorial. Landlord shall provide janitorial services to the Premises consistent with those set forth in the Cleaning Specifications attached hereto as Exhibit G. Any and all additional or specialized janitorial services desired by Tenant shall be contracted for by Tenant directly with Landlord's independent janitorial contractor and the cost and payment thereof shall be the sole responsibility of Tenant. 26 8.5 Landlord Repairs. Landlord shall make all necessary structural repairs to the Building, as well as all repairs and adjustments which may be reasonably requested by Tenant and which Landlord shall determine may be needed to the mechanical, HVAC, electrical and plumbing systems (including VAV boxes and their associated thermostats) in and servicing the Premises and all repairs to exterior windows. In the event that any such repair is required by reason of the negligence or abuse of Tenant or its agents, employees, invitees or of any other person using the Premises with Tenant's consent, express or implied, Landlord may make the repair and charge Tenant for the costs thereof plus interest thereon at the Lease Interest Rate computed from the date such costs are incurred by Landlord until paid, which costs and interest shall be due and payable following completion of the repairs with the next installment of Minimum Rent thereafter due. Any repairs to any non-building standard fixtures or other improvements installed or made by or at the request of Tenant requiring maintenance or repairs of a type or nature not customarily provided by Landlord to office tenants of the Building, and necessary replacements of non-building standard fixtures or improvements, shall be made by Landlord at Tenant's expense or, at Landlord's election, by contractors engaged by Tenant and approved by Landlord, at Tenant's expense. Notwithstanding the foregoing, Landlord shall not be responsible for any HVAC repairs or adjustments during any period of time when the HVAC system is under warranty. 8.6 Water. Landlord shall provide water in reasonable quantities consistent in Landlord's reasonable judgment with customary office usage for drinking, lavatory and toilet purposes to be drawn from the bathrooms or other approved fixtures within the Premises. 8.7 Public Areas. Landlord shall keep and maintain the public areas and facilities of the Property reasonably clean and in good working order, and the sidewalks adjoining the Property in good repair and, during Business Hours, free from accumulations of snow and ice. 8.8 Electricity. Landlord shall furnish, at Tenant's cost and expense, the Premises with 4.5 watts per square foot (net usable area) of electric current for lighting and normal office use, and shall replace light bulbs and tubes when required. The cost of replacement light bulbs, tubes, lamps, and ballasts, shall be paid by Tenant as Additional Rent. Tenant's use of electric energy in the Premises shall not at any time exceed the safe capacity of any of the electric conductors and equipment in or otherwise serving the Premises. Tenant shall not, without Landlord's prior written consent, which is not to be unreasonably withheld, in each instance, connect to the Building's electric distribution system any fixtures, appliances, equipment or machinery other than lamps, typewriters, desktop computers, xerox machines, and similar small office machines, as well as food and beverage vending machines, coffee makers, refrigerators, hot plates and microwave ovens, nor make 27 any alterations or additions to the electric system of the Premises. Should Landlord grant such consent, all additional lines, risers or other equipment required therefor shall be provided by Landlord at Tenant's cost and expense. Tenant agrees that its consumption of electric energy in the Premises shall be submetered by Landlord at Tenant's expense. The cost of electricity consumed at the Premises shall be billed to Tenant by Landlord, monthly on the basis of the rate paid by Landlord for electricity consumed in the Building, being the Philadelphia Electric Company High Tension Rate (or the replacement rate paid by Landlord if such rate is discontinued), based on the average cost per kilowatt hour of electricity consumed in the Building, which bill shall be payable by Tenant within ten (10) days following receipt as Additional Rent. Tenant agrees that if, in the future, it is required by the Pennsylvania Public Utility Commission or by a Federal or state law or by applicable tariff as a necessary condition to the supply of electric energy to the Premises or any part thereof, to become the direct customer of the applicable utility, Tenant will do so. 8.9 Directory. Landlord shall maintain a static directory of office tenants in the lobby area of the Building, on which shall be listed the name of Tenant, and shall maintain an electronic directory of office tenants in the lobby area of the Building in which shall be listed the name of Tenant and any sublessee, and Tenant's and such sublessees' executive officers. Landlord will not impose a charge for preparing and installing Tenant's initial listings on the lobby directories. 9. Limitation Regarding Services. Landlord reserves the right, without any liability to Tenant and without being in breach of any covenant of this Lease, to interrupt or suspend service of any of the heating, ventilating, air-conditioning, electric, sanitary, elevator or other Building systems serving the Premises, or the rendering of any of the other services required of Landlord under this Lease, whenever and for so long as may be necessary by reason of accidents, emergencies, strikes or the making of repairs or changes which Landlord is required by this Lease, by law, or in good faith deems advisable to make or by reason of difficulty in securing proper supplies of fuel, steam, water, electricity, labor or supplies, or by reason of any cause beyond Landlord's reasonable control, including, without limitation, mechanical failure and governmental restrictions on the use of materials or the use of any of the Building's systems. In each instance however, Landlord shall exercise reasonable diligence to eliminate the cause of the interruption and to effect restoration of service. Tenant shall not be entitled to any diminution or abatement of rent or other compensation, and this Lease and all of the obligations of Tenant hereunder shall not be affected or reduced nor shall Landlord be liable to Tenant in any way, by reason of the interruption, stoppage or suspension of any of the Building's systems or services arising out of any of the causes set forth in this Section. Notwithstanding the foregoing, if by virtue of any of the above circumstances, the Premises or a material portion thereof is rendered untenantable for a period exceeding five (5) consecutive business days, then the Minimum Rent and monthly payments on account of Tenant's Expense Share and semi-annual or monthly (as the case may be) payments on account of Tenant's Tax Share shall be abated, on a pro rata basis if less than the entire Premises is so rendered untenantable, from the sixth Business Day of the untenantability until the condition is remedied. 10. Care of Premises. Tenant agrees that it shall comply with the following requirements: 28 10.1 Notice of Damage or Accident. Tenant shall give Landlord prompt written notice of any accident in the Premises and of any breakage, defect or failure in any of the systems or equipment serving the Premises. 10.2 Access to Landlord. Tenant shall give Landlord access to the Premises at all reasonable times, without charge or diminution of Rent and upon twenty-four (24) hours prior notice (or such lesser time period which the parties may agree upon) and accompanied by Tenant or Tenant's representative (except that no prior notice or accompaniment shall be required in an emergency), to enable Landlord: 10.2.1 to examine the same and to take any and all measures (including inspections, repairs, additions and alterations and improvements to the Premises or the Property) as Landlord may reasonably deem necessary or advisable for the preservation of the integrity, safety and good order of the Property or any part thereof, or of Landlord's interests, or as may be necessary or desirable in the operation or improvement of the Property or in order to comply with laws, orders and requirements of governmental or other authorities; and 10.2.2 to show the Premises to prospective mortgagees, assignees and purchasers and to others having a legitimate interest therein (and to prospective tenants of the Premises as well during the one (1) year period prior to expiration of the Term, if no renewal option has been exercised by Tenant at the time). 10.3 Condition. Tenant at its sole cost and expense shall maintain the Premises and all fixtures and appurtenances thereto including, but not limited to, ceilings, partitions, doors, lighting fixtures, switches, floor coverings, and tenant improvements in good order, condition and repair during the Term of this Lease, except that the Landlord, at Landlord's expense (unless caused by the fault or negligence of Tenant, its contractors, agents or employees, in which event at Tenant's expense) shall keep in repair those items specified in Section 8.5 hereof. All repairs, replacements and alterations made by Tenant shall be at least sufficient to maintain the Premises in as good condition and repair as was the Premises at the beginning of the Term, reasonable wear and tear, damage by fire or other casualty and repairs which are Landlord's obligation expected. Tenant shall not overload the Premises or any of its systems, or damage or deface the Premises nor commit any waste thereon. In addition, Tenant shall also at all times (subject to Section 8.4 hereof) remove all dirt, rubbish, waste, and refuse from the Premises. 10.4 Surrender. Upon the termination of this Lease for any cause whatsoever, Tenant shall remove Tenant's goods and effects and those of any other person claiming under Tenant, and quit and deliver up the Premises to Landlord peaceably and quietly in as good order and condition as at the inception of the Term of this Lease (or in such condition as the same hereafter may be improved by Landlord or Tenant), reasonable wear and tear, damage by fire or other casualty and repairs which are Landlord's obligation 29 excepted. Goods and effects not removed by Tenant at the termination of this Lease shall be considered abandoned and Landlord may, upon five (5) days notice to Tenant, dispose of and/or store the same as it deems expedient, the reasonable cost thereof to be charged to Tenant and payable upon demand. This Subsection 10.4 shall survive termination of this Lease. 10.5 Rules and Regulations. Tenant shall observe the rules and regulations attached hereto as "Exhibit C" and all additions thereto and modifications thereof as may be promulgated by Landlord from time to time by written notice to Tenant and which, in Landlord's reasonable judgment, are desirable for the general safety, comfort and convenience of occupants and tenants of the Building. All rules and regulations shall be deemed a part of this Lease, as conditions, with the same effect as though written herein, and Tenant covenants that they shall be faithfully observed by Tenant, Tenant's employees, and all those visiting the Premises or claiming under Tenant. Landlord shall not be responsible for the failure of any other tenant or occupant of the Building to observe any of said rules and regulations. Landlord agrees to enforce such rules and regulations uniformly against all office tenants of the Building (it being agreed that the Pyramid Club, although a tenant within the Office Space, will not necessarily be subject to all rules and regulations applicable to office tenants by virtue of the fact that a private dining club is operated within its premises). 10.6 Compliance with Law. Tenant agrees at all times to comply promptly and fully at Tenant's sole cost and expense with all applicable laws, ordinances, regulations and other requirements whatsoever, including without limitation environmental laws, of any and all Federal, Commonwealth or local authorities or of the Board of Fire Underwriters or any insurance organizations, associations or companies (collectively the "Laws"), relating to Tenant's use and occupancy of the Premises; provided that Tenant shall have no obligation hereunder with respect to any non-compliance not attributable to Tenant's particular use of or operations within the Premises. Landlord shall at its sole cost and expense (which shall be an Operating Expense to the extent so provided under Section 6 above) comply or cause compliance with any and all Laws which are not obligations of Tenant under this Section 10.6 and which are pertinent to Tenant's use and occupancy of the Premises or its use of the common facilities of the Building. Supplementing the foregoing, Tenant agrees that it shall not knowingly do or commit, or suffer to be done or committed anywhere in or on the Property, any act or thing contrary to any of the Laws. Without limiting the foregoing, Tenant agrees that the Laws include the federal Americans with Disabilities Act ("ADA") and that Tenant's responsibilities hereunder include the duty to ensure that the Premises, and all facilities and improvements therein, comply with the requirements of the ADA and, if the Premises comprise any full floor of the Building, that all facilities on such floor of the Building, whether or not technically within the Premises (such as, but not limited to, restrooms and elevator lobbies) comply with the ADA; provided that Landlord shall be responsible for causing those restrooms contained in the Premises on the date of this Lease to comply with the ADA so long as Tenant has not made any material modifications to the facilities contained therein (in which event compliance with the ADA shall be Tenant's responsibility and cost), and Landlord shall be responsible for assuring that 30 the elevator call buttons in the elevator lobbies within the Premises comply with the ADA, all of the foregoing being at Landlord's sole expense so long as Tenant has not modified same (in which event compliance with the ADA shall be Tenant's responsibility and cost). Each of Landlord and Tenant agrees to indemnify the other and hold the other and the other's agents, officers, constituent partners, directors and employees harmless of and from all costs and expenses (including reasonable attorneys' fees) incurred by the other or any of them as a consequence of any and all claims made against the other or any of them resulting from or arising out of any failure by the indemnifying party to perform the obligations contained in this Subsection 10.6. 10.7 Alterations; Additions 10.7.1 For each and every alteration, addition or improvement Tenant wishes to make following completion of the Tenant Work, excepting alterations, additions or improvements costing less than Ten Thousand Dollars ($10,000.00) to complete and not involving alteration or modification of the Building exterior, structural elements or electrical, HVAC or other Building utilities systems, Tenant shall first (i) submit to Landlord a detailed description thereof, and (ii) obtain Landlord's written approval thereof. 10.7.2 Provided that the proposed alteration, addition or improvement does not in Landlord's judgment involve any material modification to the Building's exterior or its structural, mechanical, HVAC, electrical, or plumbing systems or components, such approval shall not be unreasonably withheld or delayed, but may be conditioned upon compliance with reasonable requirements of Landlord. If Landlord withholds its approval to any proposed alteration, addition or improvement, Landlord will cooperate in good faith in Tenant's attempt to develop an alternative proposal acceptable to Landlord. 10.7.3 Landlord may withhold its approval in its absolute and sole discretion with respect to each such alteration, addition or improvement which Landlord determines involves any material modification to the Building's exterior or its structural, electrical, mechanical, HVAC or plumbing systems or any components thereof. 10.7.4 Tenant shall not permit any financing statement or statements to be filed with respect to any of the Tenant Work or any alterations, additions or improvements made by Tenant, except a financing statement given to an affiliate of Tenant to secure a loan of funds utilized by Tenant to complete the Tenant Work and Tenant's initial move into the Premises; provided, however, that any such permitted financing statement shall be delivered by Tenant pursuant to a security agreement approved in advance by Landlord (which approval shall not be unreasonably withheld or delayed), which security agreement shall provide, inter alia, (i) that such security agreement and the security interest granted thereunder shall terminate absolutely upon any termination of this Lease for any reason, (ii) that such security agreement may not be assigned by the holder thereof, and (iii) that the holder of the security interest granted thereunder shall not have the right at any time or for any reason to enter or index a judgment against or to remove or dismantle any fixtures attached to the Premises (other than Tenant's trade and business fixtures and equipment) including in connection with any action brought to enforce or perfect the security interest granted thereunder. All Tenant Work and fixtures attached to the Premises (other than Tenant's trade and business fixtures and equipment) shall be the property of Tenant during the Term (but without the right to encumber or remove same except as expressly provided in this Lease), and, unless Landlord gives Tenant notice to remove them at the time 31 of installation, shall remain at the Premises at the expiration or sooner termination of this Lease and thereupon automatically become the property of Landlord without payment therefor or, at Landlord's option, after notice to Tenant at the time of installation, any or all of the foregoing which may be designated by Landlord in such removal notice shall be removed at the sole cost of Tenant before such expiration or sooner termination and in such event, Tenant shall repair all damage to the Premises caused by the installation or removal thereof, and shall restore the Premises to its original improved condition (ordinary wear and tear excepted), on or before the expiration or termination of this Lease. Should Tenant fail to remove the same or restore the Premises, Landlord may cause same to be removed and/or the Premises to be restored at Tenant's expense, and Tenant hereby agrees to pay Landlord the actual cost of such removal and/or restoration, together with any and all damages which Landlord may suffer and sustain by reason of the failure of Tenant to remove the same and/or restore the Premises as herein provided. 10.7.5 All such alterations, additions or improvements shall be performed at Tenant's cost (including, without limitation, the costs of permits therefor) and shall be performed by or for Tenant in accordance with the following requirements: (a) If deemed necessary by Landlord in Landlord's reasonable discretion, prior to commencing any such work, Tenant shall obtain Landlord's written approval of Tenant's reasonably detailed plans and specifications respecting the work. Landlord shall provide Tenant with its written approval or disapproval of Tenant's plans and specifications, together with any requested modifications in the event of disapproval, within seven (7) days following receipt of Tenant's written request for approval specifically referencing such seven (7) day response requirement; provided however, that notwithstanding the foregoing, such seven (7) day response requirement shall not be applicable to Tenant's plans and specifications respecting any work involving modification of the exterior of the Building, any structural elements of the Building, or any mechanical, HVAC, electrical or plumbing systems or components serving the Building generally (as opposed to those portions thereof located exclusively within the Premises), with respect to which Landlord agrees to respond within a reasonable period of time. (b) The work shall be performed at Tenant's expense by responsible contractors and subcontractors approved in advance by Landlord, who shall not in Landlord's sole opinion, and who in fact do not, prejudice Landlord's relationship with Landlord's contractors or subcontractors or the relationship between such contractors and their subcontractors or employees, or disturb harmonious labor relations. Tenant's contractors and subcontractors shall comply with all insurance requirements and 32 undertakings set forth in Exhibit "E" attached hereto, as the same may be changed or waived by written notice from Landlord to Tenant from time to time during the Term. (c) Such contractors or Tenant shall, prior to the commencement of the contractors' work and not later than ten (10) days after the execution of the contractors' respective contracts, file waivers of mechanic's liens in the appropriate public office, which waivers shall be effective to preclude the filing of any mechanic's liens on account of the work to be performed by any of Tenant's contractors, subcontractors or materialmen. A copy of all such waivers shall be delivered to Landlord by Tenant prior to the commencement of any such work. (d) No such work shall be performed in such manner or at such times as to interfere with any work being done by any of Landlord's contractors or subcontractors in the Premises or in or about the Property generally. Tenant's contractors and subcontractors shall be subject to the reasonable decisions of Agent as to such matters and as to avoidance of interference with other tenants of the Building or the work of other tenants' contractors and subcontractors, but Agent, by virtue of such decisions, or shall not be responsible for any aspect of the work performed by Tenant's contractors or subcontractors. (e) Except as otherwise set forth in this Section 10.7, all such work shall be subject to the requirements and provisions of Sections 10.5 and 25 of this Lease. (f) Tenant and its contractors and subcontractors shall be solely responsible for the transportation, safekeeping and storage of materials and equipment used in the performance of their work, for the removal of waste and debris resulting from the work, and for any damage caused by them to the Building or to any installations or work performed by Landlord's or any other tenant's contractors and subcontractors. 10.7.6 Tenant shall not place, or cause or allow to be placed, any sign, advertising matter, lettering, stand, booth, showcase or other article or matter outside of the Premises without the prior written consent of Landlord which may be withheld in its sole discretion. 11. Negative Covenants of Tenant 11.1 System Changes. Supplementing the provisions of Sections 7 and 10.7.2 above, Tenant shall not install any equipment of any kind or nature whatsoever which would or could, in Landlord's judgment, necessitate any material change, replacement or addition to (or which might cause damage to) the plumbing, heating, air-conditioning or electrical systems serving the Premises or any other portion of the Building without the prior written consent of Landlord. In the event such consent is granted, all costs in connection with such changes, replacements or additions shall be paid 33 for by Tenant in advance. If Landlord withholds its approval to any proposed equipment installation, Landlord will cooperate in good faith in Tenant's attempt to develop an alternative proposal acceptable to Landlord. 11.2 Sales. Without the prior written consent of Landlord, Tenant shall not exhibit, sell or offer for sale (or permit the exhibition, sale or offering for sale) in the Premises, or at the Property, any tangible article or thing. The parties intend the foregoing prohibition to apply solely to sales activities on the order of those carried on at retail establishments, which would generate a steady flow of persons entering into or leaving the premises, and do not intend such prohibition to extend to such activities as the offering for sale in the Premises of investment contracts, insurance or securities to clients of Tenant. 11.3 Prohibited Uses. Tenant will not make or permit to be made any use of the Premises or any part thereof which would violate any of the covenants, agreements, terms, provisions and conditions of this Lease or which directly or indirectly is forbidden by public law, ordinance or governmental regulation or which may be dangerous to life, limb or property or which may invalidate or increase the premium cost of any policy of insurance carried on the Property or covering its operation or which will suffer or permit the Premises or any part thereof to be used in any manner or which would permit anything to be brought into or kept therein which, in the reasonable judgment of Landlord, would in any way impair or tend to impair the character, reputation or appearance of the Building as a high quality office building or which would impair or interfere with or tend to impair or interfere with any of the services performed by Landlord for the Building or which could threaten the safety of the Building or any of its occupants. 11.4 Signs. Tenant shall not display, inscribe, print, paint, maintain or affix on any place in or about the Premises or the Property any sign, notice, legend, direction, figure or advertisement, except on the doors of the Premises and on the directory board of the Building and then only such name(s) and matter, and in such color, size, style, place and materials, as shall first have been approved in writing by Landlord, which approval shall not be unreasonably withheld or delayed but may be conditioned upon Tenant utilizing Landlord's Building standard signage on the exterior doors of the Premises in any portion of the Premises occupying less than a full floor of the Building. Notwithstanding the foregoing, on any full floor of the Building comprising a portion of the Premises, Tenant or PMA Reinsurance Corporation (if a subtenant) may prominently display identification signage in the elevator lobbies of that floor. The listing by Landlord of any name other than that of Tenant, whether on the doors of the Premises, on the directory board of the Building or otherwise, shall not operate to vest any right or interest in this Lease or in the Premises or be deemed to be the written consent of Landlord mentioned in Section 12 hereof, it being expressly understood that any such listing is a privilege extended by Landlord and revocable at will by written notice to Tenant. 11.5 Advertising. Without Landlord's prior written consent in each instance, which consent shall not be unreasonably withheld or 34 delayed in the case of item (1) following but may be withheld Landlord's sole discretion as to either item (2) or item (3) following, Tenant shall not: (1) advertise the business, profession or activities of Tenant conducted at the Premises in any manner which violates the letter or spirit of any code of ethics adopted by any recognized association or organization pertaining to such business, profession or activities; or (2) use the name of the Building for any purpose other than that of the business address of Tenant; or (3) use any picture or likeness of the Building in any circulars, notices, advertisements or correspondence. 11.6 Locks. Locks or similar devices may only be attached to or removed from any door or window in the Premises with Landlord's prior written consent, which consent shall not be unreasonably withheld or delayed but may be conditioned upon Landlord's receipt of a copy of the key, combination or other means of unlocking same, and in compliance with the terms of Section 21.4 below. 11.7 Compatible Labor. Tenant shall not contract for any work or service which might involve the employment of labor incompatible with the employees of the Building or with employees of contractors doing work or performing services by or on behalf of the Landlord, or which would otherwise disturb harmonious labor relations at the Building. 11.8 Hazardous Substances 11.8.1 Tenant Warranty. Tenant represents, warrants and covenants that (1) the Premises will not be used for any dangerous, noxious or offensive trade or business and that it will not cause or maintain a nuisance there, (2) it will not bring, generate, treat, store or dispose of Hazardous Substances (as hereinafter defined) at the Premises, (3) it shall at all times comply with all applicable Environmental Laws (as hereinafter defined) and shall cause the Premises to comply, and (4) Tenant will keep the Premises free of any lien imposed pursuant to any Environmental Laws and not the result of any acts or omissions of Landlord or any other tenant or occupant of the Property. "Premises" for purposes of this Section shall include the Building and the Property including parking areas. Notwithstanding the foregoing, Landlord acknowledges that Tenant will, from time to time, keep upon the Premises certain products and materials used in the normal conduct of Tenant's business therein which would technically constitute a violation of the terms of this subsection, and Landlord agrees that, with regard to such products and materials Tenant shall not be in violation hereof so long as such products and materials are (a) used at all times for the purpose for which and in the manner in which they are intended to be used by their respective manufacturers, (b) not kept upon the Premises in any greater quantities than necessary for the normal conduct of Tenant's business and (c) used and disposed of by Tenant and Tenant's employees, contractors and agents in a lawful manner evidencing reasonable care under the circumstances, given the toxicity thereof. 11.8.2 Reporting Requirements. Tenant warrants that it will promptly deliver to the Landlord, (i) copies of any documents received from the United States Environmental Protection Agency and/or any 35 state, county or municipal environmental or health agency concerning the Tenant's operations upon the Premises, (ii) copies of any documents submitted by the Tenant to the United States Environmental Protection Agency and/or any state, county or municipal environmental or health agency concerning its operations on the Premises, including but not limited to copies of permits, licenses, annual filings and registration forms, and (iii) after the occurrence of an Environmental Default (as hereinafter defined) and upon the request of Landlord, Tenant shall provide Landlord with evidence of compliance with applicable Environmental Laws. 11.8.3 Termination, Cancellation, Surrender. At the expiration or earlier termination of this Lease, Tenant shall surrender the Premises to Landlord free of any and all Hazardous Substances and in compliance with all applicable Environmental Laws. 11.8.4 Environmental Defaults. In the event of (1) a violation of an applicable Environmental Law, (2) a release, spill or discharge of a Hazardous Substance on or from the Premises, or (3) the discovery of an environmental condition requiring response which violation, release, or condition is attributable to the acts or omissions of Tenant, its agents, employees, representatives, invitees, licensees, subtenants, customers, or contractors, (together "Environmental Defaults"), Landlord shall have the right, but not the obligation, to enter the Premises upon twenty-four (24) hours prior notice (except in an emergency), to supervise and approve any actions taken by Tenant to address the violation, release, or environmental condition, or if the Landlord deems it necessary, then Landlord may perform, at Tenant's expense, any lawful actions reasonably necessary to address the violation, release, or environmental condition. 11.8.5 Mutual Indemnification 11.8.5.1 Tenant shall indemnify, defend (with counsel approved by Landlord, which approval shall not be unreasonably withheld or delayed) and hold Landlord and Landlord's affiliates, shareholders, directors, constituent partners, officers, employees and agents harmless from and against any and all claims, judgments, damages (including consequential damages), penalties, fines, liabilities, losses, suits, administrative proceedings, costs and expenses of any kind or nature, known or unknown, contingent or otherwise, which are caused by or arise out of one or more Environmental Defaults caused by the acts or omissions of Tenant, its agents, employees, representatives, invitees, licensees, subtenants, customers or contractors during or after the Term of this Lease (including, but not limited to, reasonable attorneys', consultant, laboratory and expert fees and including without limitation, diminution in the value of the Building or Property, damages for the loss or restriction on use of rentable space or of any amenity of the Building or Property and damages arising from any adverse impact on marketing of space in the Building). 36 11.8.5.2 Landlord shall indemnify, defend (with counsel approved by Tenant, which approval shall not be unreasonably withheld or delayed) and hold Tenant and Tenant's affiliates, shareholders, directors, officers, employees and agents harmless from and against any and all claims, judgments, damages (excluding consequential damages), penalties, fines, liabilities, losses, suits, administrative proceedings, costs and expenses of any kind or nature, known or unknown, contingent or otherwise which are caused by or arise out of any breach by Landlord of its warranty contained in Section 11.8.7 below during the Term of this Lease (including, but not limited to, reasonable attorneys', consultants', laboratory and expert fees). Landlord's indemnification obligation contained in this Section 11.8.5.2 shall be expressly limited by the terms of Section 29.3 below. 11.8.6 Definitions (a) "Hazardous Substances" means, (i) asbestos and any asbestos containing material and any substance that is then defined or listed in, or otherwise classified pursuant to, any Environmental Laws or any applicable laws or regulations as a "hazardous substance", "Hazardous Material", "hazardous waste," "infectious waste", "toxic substance", "toxic pollutant" or any other formulation intended to define, list, or classify substances by reason of deleterious properties such as ignitability, corrosivity, reactivity, carcinogenicity, toxicity, reproductive toxicity, or Toxicity Characteristic Leaching Procedure (TCLP) toxicity, (ii) any petroleum and drilling fluids, produced waters, and other wastes associated with the exploration, development or production of crude oil, natural gas, or geothermal resources and (iii) petroleum products, polychlorinated biphenyls, urea formaldehyde, radon gas, radioactive material (including any source, special nuclear, or by-product material), and medical waste. (b) "Environmental Laws" collectively means and includes all present and future laws and any amendments thereto (whether common law, statute, rule, order, regulation or otherwise), permits, and other requirements or guidelines of governmental authorities applicable to the Premises and relating to the environment and environmental conditions or to any Hazardous Substance (including, without limitation, CERCLA, 42 U.S.C {9601, et seq, the Resource Conservation and Recovery Act of 1976, 42 U.S.C {6901, et seq, the Hazardous Materials Transportation Act, 49 U.S.C. {1801, et seq, the Federal Water Pollution Control Act, 33 U.S.C. {1251, et seq, the Clean Air Act, 33 U.S.C. {7401, et seq, the Clean Air Act, 42 U.S.C. {741, et seq, the Toxic Substances Control Act, 15 U.S.C. {2601-2629, the Safe Drinking Water Act, 42 U.S.C. {300f-300j, the Emergency Planning and Community Right-to-Know Act, 42 U.S.C. {1101, et seq, and any so-called "Super Fund" or "Super Lien" law, any law requiring the filing of reports and notices relating to hazardous substances, environmental laws administered by the Environmental Protection Agency, and any similar state and local laws and regulations, all amendments thereto and all regulations, orders, decisions, and decrees now or hereafter promulgated thereunder concerning the environment, industrial hygiene or public health or safety). 37 11.8.7 Landlord's Warranty. Landlord represents and warrants to Tenant that, to the best of Landlord's knowledge, in the construction of the Building no Hazardous Substances were incorporated in the Building in violation of any applicable Environmental Laws. Landlord further represents and warrants to Tenant that during the Term Landlord will not bring, generate, treat, store or dispose of Hazardous Substances at the Property and shall at all times comply with all applicable Environmental Laws. Notwithstanding the foregoing, Tenant acknowledges that Landlord will, from time to time, keep upon the Property certain products and materials used in the normal operation of the Property which would technically constitute a violation of the foregoing representation and warranty, and Tenant agrees that, with regard to such products and materials, Landlord shall not be deemed to have breached the foregoing representation and warranty so long as such products and materials are (a) used at all times for the purpose for which and in the manner in which they are intended to be used by their respective manufacturers, (b) not kept upon the Premises in any greater quantities than necessary for the normal operation of the Property and (c) used and disposed of by Landlord and Landlord's employees, contractors and agents in a lawful manner evidencing reasonable care under the circumstances. 11.9 Floor Load. Tenant shall not place or permit to be placed upon any floor of the Premises any item of any nature the weight of which shall exceed such floor's rated floor load limit of seventy (70) pounds per square foot live load (including partitions) unless additional floor loads are approved in writing by Landlord in advance. In the event Landlord disapproves an additional floor load requested by Tenant, Landlord will cooperate in good faith with Tenant in Tenant's efforts to find a satisfactory alternative to such floor load. 12. Subletting and Assigning 12.1 General Restriction 12.1.1 As a material condition to this Lease, Tenant covenants that it shall deliver to Landlord within three (3) Business Days following Tenant's execution of this Lease a sublease of the entire Premises to PMA Reinsurance Corporation (the "Subtenant") in the form attached to this Lease as Exhibit "O" and made a part hereof (the "Sublease"), duly executed by both Tenant and Subtenant. Simultaneously with the execution of this Lease, Landlord, Tenant and Subtenant shall duly execute and deliver to one another a Sublease Consent, Subordination, Nondisturbance and Attornment Agreement in the form attached hereto as Exhibit "P" (the "Consent Agreement"), evidencing Landlord's consent to the Sublease. Failure of Tenant to timely sublease the Premises to Subtenant and deliver a fully executed original copy of the Sublease to Landlord as herein provided shall entitle Landlord to terminate this Lease upon written notice to Tenant (notwithstanding anything to the contrary contained in Section 17 below), it being agreed that execution and delivery of the Sublease as aforesaid is a material inducement to Landlord to enter into this Lease. Other than the Sublease to Subtenant, Tenant may not assign this Lease or sublet or all or any portion or portions of the Premises without first obtaining Landlord's prior written consent thereto, which consent may be withheld in Landlord's sole discretion. The Sublease shall at all times provide that (a) Subtenant shall not assign the Sublease without first obtaining Landlord's prior written consent thereto, which consent may be withheld in Landlord's sole discretion, and (b) Subtenant shall not further sublet all or any portion or portions of the Premises (such further subletting by Subtenant being herein referred to as a "sublease") without first obtaining Landlord's prior written consent thereto, which consent shall not be unreasonably withheld 38 or delayed. Any consent by Landlord to an assignment or sublease, if given, will not release Tenant from its obligations hereunder and will not be deemed a consent to any further subletting or assignment. Neither Tenant nor Subtenant shall convey, pledge, mortgage, encumber or otherwise transfer other than by permitted sublease or assignment (collectively "Pledge") (whether voluntarily or otherwise) this Lease, the Sublease or any interest in or under either of them. For purposes of this Section, an assignment shall include any direct or indirect transfer of fifty percent (50%) or more of the stock of a corporate tenant, or fifty percent (50%) or more of the equitable or other interests of a partnership, individual, or other non-corporate tenant. Any attempt by Tenant or Subtenant to assign or Pledge this Lease or the Sublease or sublet the Premises in contravention of the terms of this Lease shall constitute an Event of Default (as hereinafter defined) hereunder. 12.1.1.1 It shall be reasonable for Landlord to withhold its consent to a sublease proposed by Subtenant for any of the following reasons: A. the business use of the Premises to be made by the proposed sublessee: (a) would constitute a breach of any of the terms or conditions of this Lease; (b) would constitute a breach by Landlord of any lease restrictions binding on Landlord and any tenant in the Building and such tenant does not consent to such proposed sublease; (c) is one of the following uses, as a principal use: (i) employment agency; (ii) telephone answering service; (iii) barber or beautician services; (iv) medical offices where patients are examined or treated (other than a medical infirmary for use by employees); (v) school or training center; (vi) governmental offices (other than solely as senior management or executive level offices and necessary support staff); (vii) commercial real estate brokerage services (unless part of a use, the dominant character of which is financial services, investments and/or investment banking); or (viii) distribution or sale of sexually explicit, lewd (in Landlord's reasonable judgment) or illegal-drug-related materials or products; B. the proposed sublessee: (a) is insolvent or in bankruptcy; 39 (b) either refuses to present a current financial statement to Landlord or presents a financial statement indicating, in Landlord's reasonable judgment, that it is likely that it would not be able to perform the economic obligations of its sublease or this Lease required to be performed by it; (c) is an existing tenant in the Building and would be vacating space then leased and occupied by such tenant (whether or not at the end of the term of such tenant's lease) in the Building to move into the portion or portions of the Premises to be occupied by such tenant under the proposed sublease or assignment unless such existing tenant is vacating its space in the Building at the end of the term of its lease and Landlord is unable to allow such tenant to renew its lease and is unable to offer such tenant a lease of other space within the Building; or (d) is (or its business is) subject to compliance with additional requirements of the ADA (including related regulations) beyond those requirements which are applicable to the Tenant, unless the proposed assignee or sublessee shall (i) first deliver plans and specifications for complying with such additional requirements and obtain Landlord's consent thereto, and (ii) comply with all Landlord's conditions for or contained in such consent, including without limitation, requirements for security to assure the lien-free completion of such improvements at the sole cost of such expense of such sublessee, or Subtenant; or C. the length of the term of any proposed sublease extends beyond the end of the term of this Lease and beyond the end of the renewal option terms contained in this Lease, if such renewal option terms have been exercised by the Tenant. 12.1.2 Notwithstanding the foregoing: (i) no prior approval of the Landlord shall be required for the subletting by Subtenant of all or a portion of the Premises to any corporation or other entity which is a parent or wholly-owned subsidiary of, or under common majority control with, Subtenant (a "Related Party"), except that no subletting to a Related Party shall be made unless the Tenant shall have provided to the Landlord such information as the Landlord shall reasonably require such as, but not limited to, satisfactory evidence as to the relationship as parent, affiliate or subsidiary of the proposed subtenant or assignee, and evidence as to its legal existence and corporate (or other) authority to enter into the sublease or assignment; and (ii) the foregoing prohibition shall not apply to any assignment of the Sublease which would occur as a result of a merger, consolidation or reorganization of the Subtenant's corporate structure, provided the Tenant shall have first provided to the Landlord such information as the Landlord may reasonably require relating to the merger, consolidation or reorganization, such as, but not limited to, satisfactory evidence of the relationship as a result of any merger, consolidation or reorganization of the proposed assignee, evidence as to its legal existence and its corporate authority to enter into the assignment, and further provided that Tenant provides to Landlord evidence satisfying to Landlord in Landlord's reasonable discretion that Subtenant's net worth will not be diminished thereby. 40 12.2 Landlord's Costs; Forms. Tenant shall reimburse Landlord for Landlord's reasonable expenses, including reasonable attorneys' fees, in reviewing and approving (or disapproving) any documents relating to any proposed Pledge, sublease or assignment other than Tenant's initial sublease of the entire Premises to Subtenant. All forms of consents and agreements relating to or effecting any sublease or assignment shall be supplied or approved (as Landlord shall elect) by counsel to Landlord. 12.3 Rent Collection. If this Lease is assigned or if the Premises or any part thereof is sublet or occupied by a person or entity other than Tenant, Landlord may, after the occurrence of an Event of Default, collect Rent from the assignee, subtenant or occupant and apply the net amount collected to the Rent herein reserved, but no such assignment, subletting, occupancy or collection shall be deemed a waiver of any of Tenant's covenants contained in this Lease or the acceptance by Landlord of the assignee, subtenant or occupant as Tenant, or a release of Tenant from further performance by Tenant of the covenants of Tenant herein contained. 12.4 Sublet Notice. Notwithstanding anything contained in this Lease to the contrary, if at any time during the Term of this Lease Tenant or Subtenant desires to sublet or assign all or part of the Premises, Tenant shall advise Landlord in writing (such notice being hereinafter referred to as a "Sublet Notice") of the identity of the proposed assignee or subtenant and its business and of the terms of the proposed subletting or assignment and the area proposed to be sublet. Tenant shall also transmit therewith the most recent financial statement or other evidence of financial responsibility of such assignee or subtenant and a certification executed by Tenant or Subtenant (whichever desires to effect such sublease or assignment) stating whether or not any premium or other consideration is being paid for the proposed sublease or assignment. 12.5 Receipt of Sublet Notice. Upon receipt of a Sublet Notice Landlord shall have the right to: (1) approve or withhold approval of the proposed sublease or assignment in its reasonable discretion; or (2) sublet from Tenant or Subtenant such space (hereinafter referred to as the "Sublet Space") as Tenant or Subtenant proposed to lease to the proposed subtenant; or (3) terminate this Lease if the Sublet Notice contains a proposal to assign all of Tenant's rights under this Lease, to assign all of Subtenant's rights under the Sublease, or to sublease the entire Premises for the remainder of the Term. 12.6 Option to Approve or Reject Sublease. The option to approve or reject any proposed sublease or assignment or to terminate this Lease, as specified in Section 12.5 above shall be exercisable by Landlord sending Tenant a written notice specifying the exercise of any such right within nine (9) Business Days after receipt of a Sublet Notice from Tenant. 12.6.1 If Landlord exercises its option to sublease the Sublet Space, the term of the subletting from Tenant to Landlord for the Sublet Space shall be the term set forth in the Sublet Notice and 41 Landlord shall pay the same Minimum Rent and Additional Rent as Tenant is required to pay to Landlord under this Lease for the same space and shall be upon such other terms and conditions as are contained in this Lease to the extent applicable. If the Sublet Space does not constitute the entire Premises, the Minimum Rent for the Sublet Space and sublessee's share of Operating Expenses and Real Estate Taxes under the sublease shall equal the product derived by multiplying the Minimum Rent and Tenant's Expense Share and Tenant's Tax Share by the fraction, the numerator of which is the the Rentable Area of the Sublet Space and the denominator of which is the Rentable Area of the Premises. Landlord and Tenant or Subtenant (as the case may be) shall enter into a sublease of the Sublet Space on such terms. 12.6.2 If the Sublet Space does not constitute the entire Premises and Landlord exercises its option to terminate this Lease with respect to the Sublet Space pursuant to Section 12.5(3) above, then as to that portion of the Premises which is not part of the Sublet Space, this Lease shall remain in full force and effect except that the Minimum Rent, Tenant's Tax Share and Tenant's Expense Share shall be reduced by the amount each bears to the fraction, the numerator of which shall be the Rentable Area of the Sublet Space and the denominator of which shall be the Rentable Area of the Premises. 12.6.3 If Landlord elects to terminate this Lease pursuant to Section 12.5(3), this Lease shall terminate on a date set forth in Landlord's notice to Tenant described above in this Section 12.6, provided such date shall not be less than thirty (30) days after the date Landlord delivers such notice to Tenant. 12.6.4 If Landlord withholds approval to the proposed subletting or assignment, this Lease (and the Sublease) shall remain in full force and effect. 12.6.5 In the event Landlord does not exercise any of its rights specified in Section 12.5 within the time period specified in this Section 12.6, Landlord shall be deemed to have withheld approval of the sublease or assignment. Upon Landlord's failure to exercise any of its rights in writing, Tenant may again request Landlord's approval which approval shall be deemed given unless Landlord responds to the contrary within five (5) days of Tenant's second request. 12.7 Premium for Sublease 12.7.1 As a condition to Landlord's consent to any proposed assignment or sublease under this Section 12 (other than the Sublease but including any further sublease by Subtenant to any third party), Tenant shall pay to Landlord the amount of any Profit received by Tenant or Subtenant in connection with the proposed assignment or sublease. For purposes hereof the term "Profit" shall mean the amount by which the Premium (as defined in Section 12.7.3 below) payable to Tenant or Subtenant by any third party (other than an affiliate of Subtenant which does not itself further sublease the Premises to an entity unaffiliated with Subtenant) in connection with the proposed assignment or sublease exceeds the sum of (a) the Rent due under this Lease plus (b) Tenant's Expenses (as defined in Section 12.7.2 below). Tenant's Expenses shall be deemed amortized on a straight line basis over the remainder of the Term of this Lease or the term of the assignment or sublease, if shorter, 42 commencing on the effective date of the assignment or sublease, for purposes of this Section. Commencing with the first month in which Tenant receives a payment from any third party on account of the assignment or sublease, and each month thereafter during the term of such assignment or sublease, Tenant shall pay to Landlord on or before the first day of the next following calendar month, in arrears and as Additional Rent, the amount of Profit received by Tenant in such calendar month, computed as follows: Tenant shall pay the amount of any Premium received by Tenant or Subtenant in the month in question, reduced by the sum of (i) the Rent due under this Lease for such month (pro rated based upon the Rentable Area covered by the assignment or sublease if the assignment or sublease relates to less than the entire Premises) plus (ii) the amortized portion of Tenant's Expenses attributable to such month. 12.7.2 For purposes of this Lease, the term "Tenant's Expenses" shall mean the aggregate of the following costs and expenses paid by Tenant or Subtenant on account of the assignment or sublease: reasonable advertising costs, reasonable brokerage commissions, allowances or free rent provided to an assignee or subtenant, Tenant's or Subtenant's reasonable legal fees incurred in negotiating the assignment or sublease and the reasonable cost of any construction required to permit the operation of any Sublet Space as a premises separate from the balance of the Premises. 12.7.3 For purposes of this Lease, the term "Premium" shall mean any cash or other consideration which any third party agrees to pay to Tenant or Subtenant on account of an assignment or sublease, whether in the form of all Rent payable under this Lease or under the Sublease (as the case may be), an increased monthly or annual rental, a lump sum payment, or otherwise. If Tenant or Subtenant enters into a separate agreement for the lease of personal property, at reasonable rates, to any sublessee, such reasonable rates shall not be included in determining the Premium. 12.8 Liability of Assignee. Each assignee of this Lease shall assume and be deemed to have assumed this Lease and shall be and remain liable jointly and severally with Tenant for all payments and for the due performance of all terms, covenants, conditions and provisions herein contained on Tenant's part to be observed and performed. No assignment shall be binding upon Landlord unless the assignee shall deliver to Landlord an instrument in form reasonably satisfactory to Landlord containing a covenant of assumption by the assignee. The failure or refusal of assignee to execute the same shall not release an assignee from its liability as set forth herein. 12.9 Rental Basis. All the foregoing notwithstanding, neither Tenant nor Subtenant shall enter into any lease, sublease, license, concession or other agreement for the use, occupancy or utilization of the Premises or any portion thereof which provides for a rental or other payment for such use, occupancy or utilization based in whole or in part on the income or profits derived by any person from the property leased, 43 used, occupied or utilized (other than an amount based on a fixed percentage or percentages of receipts or sales). Any such purported lease, sublease, license, concession or other agreement shall be absolutely void and ineffective as a conveyance of any right or interest in the possession, use or occupancy of any part of the Premises. 12.10 Future Compliance. Any consent by Landlord hereunder shall not constitute a waiver of strict future compliance by Tenant or Subtenant of the provisions of this Section 12 or a release of Tenant from the full performance by Tenant of any of the terms, covenants, provisions, or conditions in this Lease contained. 13. Fire or Other Casualty 13.1 Repair Obligations. In the event of damage to the Premises by fire or other casualty Landlord shall at its expense cause the damage to the Premises, exclusive of the Tenant Work and other improvements made by or for Tenant or any prior tenant, to be repaired to a condition as nearly as practicable to that required by the Base Building Plans, with reasonable promptness and due diligence. Landlord shall not, however, be obligated to restore or rebuild the Premises to a condition in excess of that required by the Base Building Plans, nor in any event to repair, restore or rebuild any of Tenant's property, the Tenant Work, or any other alterations or additions made by or for Tenant or any prior tenant. In no event shall Landlord be obligated to repair, restore, or replace any furniture, furnishings or equipment. Tenant shall p thereafter, at its own cost and with reasonable promptness and due diligence, repair and restore the Tenant Work and any other improvements to the Premises made by or for Tenant or any prior tenant at least to the extent of the value and as nearly as possible to the character of the property involved as it was immediately before the loss. 13.2 Abatement of Rent. To the extent the Premises are rendered untenantable by a casualty not caused by the gross negligence or willful misconduct of Tenant, the Minimum Rent and Additional Rent shall proportionately abate from the date of the casualty until the first to occur of (a) one hundred and five (105) days after Landlord has tendered to Tenant the damaged portion of the Premises, restored by Landlord to the extent required hereunder, or (b) Tenant's resumed occupancy thereof for the purposes of conducting its business therein. Landlord shall endeavor to provide Tenant with thirty (30) days notice of its intent to tender to Tenant the restored Premises. 13.3 Landlord's Termination Right. In the event the damage shall involve the Building generally and shall be so extensive that Landlord shall decide not to repair or rebuild the Building, or if available insurance proceeds for the Building are insufficient to repair or rebuild the damage, or if any mortgagee shall not permit the application of adequate insurance proceeds for repair or restoration, or if the casualty to the Building shall not be of a type insured against under all-risk fire and extended coverage insurance, this Lease shall, at the option of Landlord, exercisable by written notice to Tenant given within 44 one hundred eighty (180) days after the date of the casualty, be terminated as of a date specified in such notice (which shall not be more than sixty (60) days thereafter) and the Minimum Rent and Additional Rent (taking into account any abatement as aforesaid) shall be adjusted proportionately as of the date of the termination and Tenant shall thereupon promptly vacate the Premises. Landlord agrees that it shall not exercise its rights to terminate the Lease enumerated within this Section 13.3, unless it also exercises its rights to terminate the leases of all other Office Space tenants. 13.4 Tenant's Termination Rights 13.4.1 If fire or other casualty not caused by the gross negligence or willful misconduct of Tenant damages the Premises rendering more than fifty percent (50%) of the Premises untenantable, or causes damage to the Building which precludes access to the Premises from the Building lobby, and the completion of the repairs to the Premises or the repairs necessary to restore access thereto which Landlord is required to perform hereunder will require a period of in excess of two hundred forty (240) days days following the commencement of construction (as reasonably estimated by Landlord or its experts, of which Tenant shall receive notice within one hundred eighty (180) days after the date of the casualty), then Tenant may terminate this Lease by written notice given to Landlord within thirty (30) days after Landlord's notice to Tenant thereof (such termination to occur as of a date specified in such notice which shall not be more than sixty (60) days thereafter), and Minimum Rent and Additional Rent (taking into account any abatement as aforesaid) shall be adjusted proportionately from the date of the termination. 13.4.2 Notwithstanding the foregoing, in the event Landlord shall elect to repair or rebuild following a casualty not caused by the gross negligence or wilful misconduct of Tenant, but the time to repair or rebuild as reasonably estimated by Landlord or its experts, as aforesaid, is such that the repairs or rebuilding are expected to be completed during the last Lease Year of the Term (as the Term may have been extended by Tenant's exercise of any renewal option pursuant to Section 30 hereof prior to the casualty), then Tenant may elect to terminate this Lease by written notice given to Landlord within thirty (30) days after Landlord's notice to Tenant thereof (such termination to occur as of a date specified in such notice which shall not be more than sixty (60) days thereafter), and Minimum Rent and Additional Rent (taking into account any abatement as aforesaid) shall be adjusted proportionately as of the date of the termination. 14. Release and Indemnity 14.1 Mutual Release 14.1.1 Tenant agrees that Landlord, Agent and their respective agents, employees, officers, directors, shareholders and constituent partners shall not be liable to Tenant and Tenant hereby releases said parties from any liability, for any personal injury, loss of income or 45 damage to or loss of persons or property, or loss of use of any property, in or about the Premises or Property from any cause whatsoever unless such damage, loss or injury results from the negligence or willful misconduct of Landlord, its officers, employees, contractors or agents. Landlord, Agent and their respective agents, employees, officers, directors and partners shall not be liable to Tenant for any such damage or loss, whether or not such damage or loss so results from such negligence or willful misconduct, to the extent Tenant is compensated therefor by Tenant's insurance. The release contained in this Section 14.1 shall apply, by way of example and not limitation, to damage, loss or injury resulting directly or indirectly from any existing or future condition, matter or thing in the Premises, the Building or any part thereof, or from equipment or appurtenances becoming out of repair, or from accident, or from the flooding of basements or other subsurface areas or from refrigerators, sprinkling devices, air-conditioning apparatus, water, snow, frost, steam, excessive heat or cold, falling plaster, broken glass, sewage, gas, odors, or noise, or the bursting or leaking of pipes or plumbing fixtures, and shall apply equally whether any such damage, loss or injury results from the act or omission of other tenants or occupants in the Building or any other persons, and whether such damage be caused by or result from any thing or circumstance, whether of a like or wholly different nature. 14.1.2 Landlord agrees that Tenant and its agents, employees, officers and shareholders shall not be liable to Landlord and Landlord hereby releases said parties from any liability, for any personal injury, loss of income or damage to or loss of persons or property or loss of use of any property in or about the untenanted portions of the Property from any cause whatsoever unless such damage, loss or injury results from the negligence or willful misconduct of Tenant, its officers, employees, contractors or agents. Tenant and its agents, employees, officers and directors shall not be liable to Landlord for any such damage or loss, whether or not such damage or loss so results from such negligence or willful misconduct, to the extent Landlord is compensated therefor by Landlord's insurance. 14.2 Tenant's Indemnity. Tenant shall defend, indemnify, save and hold harmless ("Indemnify") Landlord, Agent and their respective agents, employees, officers, directors, shareholders, and constituent partners from and against all liabilities, obligations, damages, penalties, claims, causes of action, costs, charges and expenses, including reasonable attorneys' fees, court costs, administrative costs, and costs of appeals which may be imposed upon or incurred by or asserted against any of them by reason of any of the following which shall occur during the Term of this Lease, or during any period of time prior to the Lease Commencement Date when Tenant may have been given access to or possession of all or any portion of the Premises: (1) any work or act done in, on or about the Premises or the Building or any part thereof at the direction of or caused by Tenant, its agents, contractors, subcontractors, servants, employees, licensees or invitees, unless such work or act is done or performed by Landlord or its agents, employees or contractors; 46 (2) any negligence or other wrongful act or omission on the part of Tenant or any of its agents, contractors, subcontractors, servants, employees, subtenants, licensees or invitees; and (3) any accident, injury or damage to any persons or property occurring in, on or about the Premises or any part thereof, unless caused by the negligence of Landlord, its employees, agents or contractors The obligation of Tenant to Indemnify contained in this Section 14.2 shall not be limited by any limitation on the amount or type of damages, compensation or benefits payable by or for Tenant, its agents or contractors under workers' or workman's compensation acts, disability benefit acts or other employee benefits acts, or under any other insurance coverage Tenant may obtain. 14.3 Landlord's Indemnity. Landlord shall defend, indemnify, save and hold harmless ("Indemnify") Tenant and Tenant's employees, officers, directors and shareholders from and against all liabilities, obligations, damages, penalties, claims, causes of action, costs, charges and expenses, including reasonable attorneys' fees, court costs, administrative costs and costs of appeals which may be imposed upon or incurred by or asserted against any of them by reason of any of the following which shall occur during the Term of this Lease or during any period of time prior to the Lease Commencement Date when Tenant may have been given access to or possession of all or any portion of the Premises. (1) any work or act done in, on or about the Premises or the Building or any part thereof at the direction of or caused by Landlord or its agents, employees, unless such work or act is done or performed by Tenant or its agents, employees or contractors; and (2) any negligence or any wrongful act or omission on the part of Landlord or any of its agents, contractors, subcontractors, servants, employees, subtenants, licensees or invitees; and (3) any accident, injury or damage to any persons or property occurring in, on or about those areas of the Building and Property intended for the common use of all tenants and their employees and invitees, unless caused by the negligence of Tenant, its employees, agents or contractors. The obligation of Landlord to Indemnify contained in this Section 14.3 shall not be limited by any limitation on the amount or type of damages, compensation or benefits payable by or for Landlord, its agents or contractors under workers' or workman's compensation acts, disability benefit acts or other employee benefits acts or under any other insurance coverage Landlord may obtain, but shall be expressly limited by the terms of Section 29.3, below. 47 15. Insurance 15.1 Insurance Coverage. Tenant, at its expense, shall maintain during the Term commercial general liability insurance, primary and/or excess combination, and property damage insurance under policies issued by insurers having a combined single limit for any one (1) occurrence of not less than Three Million Dollars ($3,000,000.00) for personal injury, bodily injury, death, disease and damage or injury to or destruction of property (including the loss of use thereof) occurring upon, in, or about the Premises and for: products liability; liability relating to the sale or distribution of food and/or alcoholic beverages in the Premises; punitive damages awarded by virtue of the conduct of the Tenant (to the full extent insurable and reasonably available); and contractual liability assumed under this Lease. To satisfy the liability insurance requirements of this Section 15.1, the Tenant must obtain an endorsement which applies the aggregate limits separately to the Premises (ISO Endorsement CG-25-05-11-85, Amendment-Aggregate Limits of Insurance [Per Location] or an equivalent endorsement satisfactory to Landlord). The certificate of insurance evidencing such policy must evidence that the limits of the Tenant's liability insurance required hereunder apply solely to the Premises and not to other locations. Tenant shall also maintain such other insurance in form and amount as Landlord may reasonably require, so long as such coverage is also required of other Office Space tenants within the Building (other than the Pyramid Club). 15.2 Improvements Coverage. Tenant agrees to carry all risk property insurance on a repair and replacement basis and in form and amount satisfactory to Landlord on all improvements to the Premise, including all Tenant Work or other improvements then under construction (including without limitation Builder's Risk coverage during construction of the Tenant Work or any other permitted alterations). Tenant also agrees to carry such all risk insurance in form and amount mutually satisfactory to Landlord and Tenant on Tenant's fixtures, furnishings, wall coverings, carpeting, drapes, equipment and all other items of personal property of tenant located on or within the Premises. Tenant agrees that Landlord, any ground lessor and Landlord's secured lenders with respect to the Property, shall be named as additional insureds under all such policies. 15.3 Worker's Compensation and Employer's Liability Insurance. Tenant shall carry worker's compensation insurance containing statutory limits covering Tenant's employees and business operations in the Premises, as well as employer's liability insurance providing coverage of not less than five hundred thousand dollars ($500,000.00). Tenant shall submit to Landlord evidence of such coverage satisfactory to Landlord. 15.4 Extra Expense Insurance. Tenant shall, during the Term hereof, keep in full force and effect extra expense insurance providing limits in an amount not less than two million dollars ($2,000,000.00). 48 15.5 Form of Insurance. All insurance policies obtained by Tenant pursuant to this Section 15 shall be issued by companies with a rating of not less than "A-" and of not less than "Class VIII" in financial size as rated in the most current available "Best's" Insurance Reports and which are qualified to do business in the Commonwealth of Pennsylvania. Such policies (exclusive of the worker's compensation policy) shall name Landlord and Agent as additional insureds and Tenant shall furnish Landlord with a certificate (or certificates) respecting such policies which specifies that Landlord shall receive thirty (30) days prior written notice of any proposed cancellation, non-renewal of or material change in any such policy. Originals, certified policy copies or certificates, as Landlord shall elect, of all policies of insurance obtained by Tenant shall be provided to Landlord. 15.6 Insurance Violations. Tenant will not do, fail to do, suffer to be done, or keep or suffer to be kept anything in, upon or about the Premises which will violate the provisions of Landlord's policies insuring against loss or damage by fire or other hazards (including, but not limited to, public liability) or which would adversely affect Landlord's fire or liability insurance premium rating or which would increase premiums being paid by Landlord for any such coverage, or which would prevent Landlord from procuring such policies from companies acceptable to Landlord. If anything is done, omitted to be done or suffered to be done by Tenant, or kept or suffered to be kept in, upon or about the Premises which shall cause the premium rate of fire or other insurance on the Premises or other property in the Building, with companies acceptable to Landlord, to be increased beyond the established rate fixed by the appropriate underwriters from time to time applicable to the Premises for use for the purpose permitted under this Lease, Tenant shall pay the amount of such increase. Tenant's payment of the amount of such increase shall not preclude or limit Landlord's ability to exercise its remedies under this Lease for a violation of Tenant's obligations set forth in the first sentence of this Section 15.6. 15.7 "Claims Made" Policies. Tenant shall not obtain any of the above insurance through policies written on a "claims made" basis without Landlord's prior express written consent, which consent may be conditioned upon any requirements which Landlord may impose. In all events, should Landlord consent to such a policy, then the policy shall satisfy all of the following requirements: (1) the policy retroactive date shall coincide with or precede the Tenant's occupancy or use of any portion of the Property; and (2) the Tenant shall maintain such policy for at least three (3) years following the termination or expiration of this Lease (whichever is later); and (3) if such insurance is terminated for any reason, Tenant shall purchase an extended reporting provision of at least three (3) years duration to report claims arising from this Lease or Tenant's occupancy; and 49 (4) the policy shall allow for the report of circumstances or incidents which might give rise to future claims. 15.8 Flammable and Hazardous Materials 15.8.1 Neither Tenant nor Tenant's servants, employees, contractors, agents, visitors, or licensees may use, bring or keep upon the Premises, the Building, or the Property any highly flammable, combustible, caustic, poisonous or explosive fluid, chemical or substance, or any chemicals except reasonable quantities of such as are components of commercial products not regulated by law in their use or disposal and are normally used by occupants of office buildings for ordinary cleaning and office related activities. 15.8.2 Landlord shall utilize flammable, explosive or caustic materials upon the Property only in such quantities and in such manner as Landlord reasonably deems necessary for the ordinary and normal maintenance, repair and operation of the Property and its systems. 15.9 Landlord Purchase. At Landlord's option, Landlord may, after eight (8) days notice to Tenant, elect to obtain for itself any or all of the forms of insurance required to be obtained by Tenant pursuant to this Section if Tenant fails to procure same. In the event Landlord shall so elect, Tenant shall reimburse Landlord upon demand for the cost of all insurance so obtained by Landlord. 15.10 Waiver of Subrogation. Landlord and Tenant hereby release each other from any and all liability or responsibility to each other or anyone claiming through or under them by way of subrogation or otherwise for any loss or damage to property covered by any fire and extended coverage insurance then in force, even if such fire or other casualty shall have been caused by the fault or negligence of the other party, or anyone for whom such party may be responsible, provided, however, that this release shall be applicable and in force and effect only to the extent of and with respect to any loss or damage occurring during such time as the policy or policies of insurance covering said loss shall contain a provision to the effect that this release shall not adversely affect or impair said insurance or prejudice the right of the insured to recover thereunder. Landlord and Tenant shall each cause their respective insurers to include such a provision in their respective policies, subject, however, to the following provisions: If at any time the fire insurance carriers issuing fire insurance policies to Landlord or Tenant shall exact an additional premium for the inclusion of such or similar provisions, the party whose insurance carrier has demanded the premium (the "Notifying Party") shall five the other party hereto notice thereof. In such event, if the other party requests, the Notifying Party shall require the inclusion of such or similar provisions by its fire insurance carrier, and the requesting other party shall reimburse the Notifying Party for any such additional premiums as they become due for the remainder of the term of this Lease. If at any time any such insurance carrier shall not include such or similar provisions in any fire or 50 extended coverage insurance policy, then, as to loss covered by that policy, the release set forth in this Section 15.10 shall be deemed of no further force or effect. The party whose policy no longer contains such provision shall notify the other party that the provision is no longer included in the policy, but a failure or delay in giving such notice shall not affect such termination of the release set forth in this Section. During any period while the foregoing waivers of right of recovery are in effect, the party hereto as to whom such waivers are in effect shall look solely to the proceeds of such policies to compensate itself for any loss occasioned by fire or other casualty which is an insured risk under such policies. 15.11 Landlord's Insurance. During the Term of this Lease, Landlord covenants and agrees to maintain the following insurance, all of which shall be in amounts which are commercially reasonable in light of the types and amounts of insurance customarily maintained at any given time by the owners of other first class office buildings in center city Philadelphia: (a) Commercial general liability insurance relating to the Building and the common areas thereof having a combined single limit of at least $5,000,000.00; (b) all risk fire and extended coverage insurance in an amount equal to the full replacement value of the Building; (c) boiler and machinery insurance coverage (if necessary); and (d) such insurance as Landlord's mortgagee(s) may from time to time require. 16. Eminent Domain 16.1 Total or Partial Taking. In the event of exercise of the power of eminent domain whereby: (1) such portion of the Property is taken that access to the Premises is permanently impaired thereby and reasonable alternate access is not provided by Landlord within one hundred twenty (120) days of such taking; or (2) all or substantially all of the Premises or the Property is taken; or (3) less than substantially all of the Property is taken but Landlord, acting in good faith, determines that it is economically unfeasible to continue to operate the uncondemned portion of the Building as a first-class office building; or (4) less than substantially all of the Premises is taken, but Tenant, acting in good faith, determines that because of such taking it is economically unfeasible to continue to conduct its business in 51 the uncondemned portion of the Premises, then in the case of (1) or (2), either party, and in the case of (3), Landlord, and in the case of (4), Tenant, shall have the right to terminate this Lease as of the date when possession of that part which was taken is required to be delivered or surrendered to the condemning authority; and in such case all Rent and other charges shall be adjusted to the date of termination. A "taking" as such term, is used in this Section 16 shall include a transfer of title or of any interest in the Property by deed or other instrument in settlement of or in lieu of transfer by operation of law incident to condemnation proceedings. 16.2 Temporary Taking. Notwithstanding anything hereinabove provided, in the event of a taking of only the right to or for possession of the Premises for a fixed period of time or for the duration of an emergency or other temporary condition, then this Lease shall continue in full force and effect with the abatement of Minimum Rent and Additional Rent for the duration of such taking, and all amounts payable by the condemnor with respect to such taking to Landlord. The above notwithstanding, if any such temporary taking shall continue for a period in excess of 180 days, Tenant shall have the right to terminate this Lease upon 10 days written notice to Landlord. 16.3 Tenant's Waiver. Regardless of whether this Lease shall terminate, Tenant shall have no right to participate or share in any condemnation claim, damage award or settlement in lieu thereof with respect to any taking of any nature; provided, however, that Tenant shall not be precluded from independently claiming or receiving payment for Tenant's relocation and moving expenses and the value of Tenant's improvements as may be permitted under applicable law. 17. Default and Remedies 17.1 Defaults. The occurrence of any one or more of the following shall constitute an "Event of Default" under this Lease: 17.1.1 Tenant does not pay in full when due any installment of Rent or any other charge or payment whether or not herein included as Rent, and such failure to pay is not cured within ten (10) days following Tenant's receipt of notice from Landlord thereof (it being agreed that Landlord's bill for Rent sent in the ordinary course of business shall not constitute notice for purposes of this subsection); provided, however, that Landlord shall only be obligated to give Tenant notice of failure to pay Rent two (2) times during any twelve (12) consecutive calendar months. Thereafter, for the duration of such twelve (12) calendar months, Tenant shall be in default upon Tenant's failure to pay in full, within ten (10) days after due, any installment of Rent, without benefit of such notice. 17.1.2 Tenant violates or fails to perform or otherwise breaks any covenant, agreement or condition contained in this Lease, other than those specifically addressed elsewhere in this Section 17.1, or any other obligation of Tenant to Landlord, and such violation or failure continues 52 for thirty (30) days after receipt of notice thereof from Landlord, provided that if such violation or failure is not susceptible of being cured or corrected within the aforesaid thirty (30) day period, then if Tenant shall have commenced such cure within the aforesaid thirty (30) day period and diligently and continuously prosecutes same to completion, Tenant shall have such additional time as Tenant may reasonably require to complete such cure, unless, Landlord reasonably determines that such additional time would materially jeopardize the Premises, the Property or any tenants of the Building, in which event Landlord may require Tenant to complete such cure within the aforesaid thirty (30) day period. 17.1.3 Tenant does not occupy the Premises within sixty (60) days after the Lease Commencement Date. 17.1.4 Tenant removes or attempts to remove Tenant's property from the Premises other than in the ordinary course of business or upon termination of this Lease, without having first paid to Landlord in full all Rent and any other charges that may have become due; provided however, that so long as Tenant is current in its obligations to pay Rent and other charges that may be due, such removal or attempt to remove shall not constitute an Event of Default. 17.1.5 Tenant becomes the subject of commencement of an involuntary case under the federal bankruptcy law as now or hereafter constituted, or there is filed a petition against Tenant seeking reorganization, arrangement, adjustment or composition of or in respect of Tenant under the federal bankruptcy law as now or hereafter constituted, or under any other applicable federal or state bankruptcy, insolvency, reorganization or other similar law, or seeking the appointment of a receiver, liquidator or assignee, custodian, trustee, sequestrator (or similar official) of Tenant or any substantial part of the property of either Tenant or seeking the winding-up or liquidation of its affairs and such involuntary case or petition is not stayed or dismissed within sixty (60) days after the filing thereof, or if Tenant commences a voluntary case or institutes proceedings to be adjudicated a bankrupt or insolvent, or consents to the institution of bankruptcy or insolvency proceedings against it, under the federal bankruptcy laws as now or hereafter constituted, or any other applicable federal or state bankruptcy, reorganization or insolvency or other similar law, or consents to the appointment of or taking possession by a receiver or liquidator or assignee, trustee, custodian, sequestrator (or other similar official) of Tenant or of any substantial part of its property, or makes any assignment for the benefit of creditors, or admits in writing its inability to pay its debts generally as they become due, or fails to generally pay its debts as they become due, or if Tenant takes any action in contemplation of any of the foregoing. 17.1.6 Any guarantor of Tenant hereunder becomes the subject of commencement of an involuntary case under the federal bankruptcy law as now or hereafter constituted, or there is filed a petition against any guarantor of Tenant hereunder seeking reorganization, arrangement, adjustment or composition of or in respect of any guarantor of Tenant hereunder 53 under the federal bankruptcy law as now or hereafter constituted, or under any other applicable federal or state bankruptcy, insolvency, reorganization or other similar law, or seeking the appointment of a receiver, liquidator or assignee, custodian, trustee, sequestrator (or similar official) of any guarantor of Tenant hereunder or any substantial part of the property of any guarantor of Tenant hereunder, or seeking the winding-up or liquidation of its affairs and such involuntary case or petition is not stayed or dismissed within sixty (60) days after the filing thereof, or if any guarantor of Tenant hereunder commences a voluntary case or institutes proceedings to be adjudicated a bankrupt or insolvent, or consents to the institution of bankruptcy or insolvency proceedings against it, under the federal bankruptcy laws as now or hereafter constituted, or any other applicable federal or state bankruptcy, reorganization or insolvency or other similar law, or consents to the appointment of or taking possession by a receiver or liquidator or assignee, trustee, custodian, sequestrator (or other similar official) of any guarantor of Tenant hereunder or of any substantial part of its property, or makes any assignment for the benefit of creditors, or admits in writing its inability to pay its debts generally as they become due, or fails to generally pay its debts as they become due, or if any guarantor of Tenant hereunder takes any action in contemplation of any of the foregoing. 17.1.7 Tenant fails to deliver a requested estoppel statement within the time period required following Landlord's second request for same pursuant to Section 26.2 below. 17.1.8 Tenant or Subtenant makes an assignment of its rights under this Lease or enters into any sublease (or purports to do so) in violation of the terms of Section 12, above. 17.2 Landlord's Remedies. Upon the occurrence of an Event of Default, and at the sole option of Landlord, in addition to all remedies Landlord may have at law or in equity, 17.2.1 the whole balance of Rent and any other charges, whether or not payable as Rent, for the entire balance of the Term and any renewal or extension thereof for which Tenant has become bound, discounted to present value at the rate of 6.5% per annum, and also all or any costs and sheriff's, marshall's, constable's or other officials' commissions, whether chargeable to Landlord or Tenant, including watchman's wages, shall be taken to be due and payable and in arrears as if by the terms of this Lease said balance of Rent and such other charges and expenses were on that date payable in advance, and/or 17.2.2 the Term of this Lease shall terminate and become absolutely void, without notice and without any right on the part of Tenant to save the forfeiture by payment of any sum due or by other performance of any condition, term, agreement or covenant broken, and/or 17.2.3 any prothonotary or attorney of any court of record is hereby irrevocably authorized and empowered to appear for Tenant in any action to confess judgment against Tenant, and may sign for Tenant 54 an agreement, for which this Lease shall be his sufficient warrant, for entering in any competent court an action or actions in ejectment, and in any suits or in said actions to confess judgment against Tenant as well as all persons claiming by, through or under Tenant for the recovery by Landlord of possession of the Premises. Such authority shall not be exhausted by any one or more exercises thereof, but judgment may be confessed from time to time as often as any event set forth in Subsection 17.1 hereof shall have occurred or be continuing. Such powers may be exercised during as well as after the expiration or termination of the original Term and during and at any time after any extension or renewal of the Term, and/or 17.2.4 [INTENTIONALLY OMITTED.] 17.2.5 In any confession of judgment for ejectment, Landlord shall cause to be filed in such action an affidavit setting forth the facts necessary to authorize the entry of judgment and if a true copy of this Lease (and of the truth of the copy, such affidavit shall be sufficient proof) be filed in such action, it shall not be necessary to file the original as a warrant of attorney, notwithstanding any law, rule of court, custom or practice to the contrary. Tenant releases to Landlord, and to any and all attorneys who may appear for Tenant, all procedural errors in any proceedings taken by Landlord, whether by virtue of the powers of attorney contained in this Lease or not, and all liability therefor. Tenant expressly waives the benefits of all laws, now or hereafter in force, exempting any property within the Premises or elsewhere from distraint, levy or sale. Tenant further waives the right to any notice to remove as may be specified in the Pennsylvania Landlord and Tenant Act of April 6, 1951, as amended, or any similar or successor provision of law, and agrees that five (5) days notice shall be sufficient in any case where a longer period may be statutorily specified, and/or 17.2.6 After re-entry or retaking or recovering of the Premises, whether by way of termination of this Lease or not, Landlord may lease the Premises or any part or parts thereof to such person or persons and upon such terms as may in Landlord's reasonable discretion seem best for a term within or beyond the Term of this Lease, and Tenant shall be liable for any loss of Rent for the balance of the Term and any renewal or extension for which Tenant has become bound plus the costs and expenses of reletting and of making repairs and alterations to the Premises. Further, Tenant, for itself and its successors and assigns, hereby irrevocably constitutes and appoints Landlord as Tenant's agent to collect the rents due and to become due from all subleases and apply the same to the Rent due hereunder without in any way affecting Tenant's obligation to pay any unpaid balance of Rent due or to become due hereunder not covered by such application of sublease rent, and/or 17.2.7 Landlord may (but shall not be obligated to do so), in addition to any other rights it may have in law or equity, cure such Event of Default on behalf of Tenant, and Tenant shall reimburse Landlord upon demand for all costs incurred by Landlord in curing such Event of Default, including, without limitation, reasonable attorneys' fees and 55 other legal expenses, together with interest thereon at the Lease Interest Rate, which costs and interest thereon shall be deemed Additional Rent hereunder. 17.3 Remedies Cumulative. All remedies available to Landlord hereunder and at law and in equity shall be cumulative and concurrent. No termination of this Lease nor taking or recovering possession of the Premises shall deprive Landlord of any remedies or actions against Tenant for Rent, for charges or for damages for the breach of any covenant, agreement or condition herein contained, nor shall the bringing of any such action for Rent, charges or breach of covenant, agreement or condition, nor the resort to any other remedy or right for the recovery of Rent, charges or damages for such breach be construed as a waiver or release of the right to insist upon the forfeiture and to obtain possession. No re-entering or taking possession of the Premises, or making of repairs, alterations or improvements thereto, or reletting thereof, shall be construed as an election on the part of Landlord to terminate this Lease unless written notice of such election be given by Landlord to Tenant. The failure of Landlord to insist upon strict and/or prompt performance of the terms, agreements, covenants and conditions of this Lease or any of them, and/or the acceptance of such performance thereafter shall not constitute or be construed as a waiver of Landlord's right to thereafter enforce the same strictly according to the terms thereof in the event of a continuing or subsequent default. 17.4 Expenses of Enforcement. In the event of any litigation between Landlord and Tenant, the prevailing party shall be entitled to receive from the other the amount of its reasonable out-of-pocket legal fees and out-of-pocket expenses of counsel incurred in connection therewith. 17.5 Nonwaiver. Any failure of Landlord to enforce any remedy allowed for the violation of any provision of this Lease shall not imply the waiver of any such provision, even if such violation is continued or repeated, and no express waiver shall affect any provision other than the one(s) specified in such waiver and only for the time and in the manner specifically stated. No receipt of monies by Landlord from Tenant after the termination of this Lease shall in any way (i) alter the length of the Term or of Tenant's right of possession hereunder, or (ii) after the giving of any notice, reinstate, continue or extend the Term or affect any notice given to Tenant prior to the receipt of such moneys, it being agreed that after the service of notice or the commencement of a suit or after final judgment for possession of the Premises, Landlord may receive and collect any Rent due, and the payment of said Rent shall not waive or affect said notice, suit or judgment. 17.6 Tenant's Remedies. If after the Commencement Date Landlord shall be in default for 5 consecutive days in the performance of any of its obligations to provide any service to the Premises and shall thereafter be in default for 30 consecutive days after written notice thereof from Tenant (unless the default is not susceptible of cure within 30 days after such notice, in which event Landlord shall have failed to commence curing the default within such 30-day period after written notice thereof and to diligently prosecute such cure until completion), and provided such default does not arise as a result of Force Majeure, then in addition to any other rights Tenant may have at law or in equity, Tenant may (but shall not be obligated to) cure such default on behalf of Landlord, and Landlord shall reimburse Tenant upon demand for all reasonable out-of-pocket costs incurred by Tenant in curing such 56 default, together with interest thereon at the Lease Interest Rate. Notwithstanding the foregoing, Tenant shall not have any right in exercising its remedies under the preceding sentence (i) to make any repairs or modifications to areas outside the Premises or to Building systems except (and subject to Sections 10.7 and 11.1) those within and solely affecting the Premises, (ii) to provide any services for the benefit of any occupants of the Property other than Tenant, or (iii) to retain any contractors or subcontractors to perform such services which are not responsible contractors and subcontractors which, in Landlord's reasonable judgment, may prejudice Landlord's relationship with Landlord's contractors or subcontractors or the relationship between such contractors and their subcontractors or employees, or may disturb harmonious labor relations. 18. Subordination 18.1 Generally. This Lease is and shall be subject and subordinate to all ground or underlying leases of the Property and to all mortgages which may now or hereafter be secured upon such leases or the Property and to any and all renewals, modifications, consolidations, replacements and extensions thereof so long as any subsequent mortgagee and Tenant execute and deliver to one another a non-disturbance agreement in a form substantially similar to that attached as Exhibit H, subject only to the requirements of Section 4 of the non-disturbance agreement attached as Exhibit H (or any equivalent section) if same is contained in a non-disturbance agreement executed by Tenant hereunder which is then in effect. This Section shall be self-operative and no further instrument of subordination shall be required by any lessor or mortgagee, but in confirmation of such subordination, Tenant shall execute, within fifteen (15) days after being so requested, any certificate that Landlord may reasonably require, in a form reasonably acceptable to Tenant, acknowledging such subordination. If Landlord shall so request, Tenant shall send to any mortgagee or ground lessor of the Property designated by Landlord, a copy of any notice thereafter given by Tenant to Landlord alleging a material breach by Landlord of its obligations under this Lease. 18.2 Rights of Mortgagee. In the event of any act or omission of Landlord which would give Tenant the right, immediately or after lapse of a period of time, to cancel or terminate this Lease, or to claim a partial or total eviction, Tenant shall not exercise such right: (1) until it has given written notice of such act or omission to the holder of each such mortgage or ground lease whose name and address shall previously have been furnished to Tenant in writing; and (2) until a reasonable period for remedying such act or omission not to exceed thirty (30) days shall have elapsed following the giving of such notice (which reasonable period shall in no event be less 57 than the period to which Landlord would be entitled under this Lease or otherwise, after similar notice, to effect such remedy). 18.3 Non-Disturbance. Landlord shall deliver to Tenant for execution a non-disturbance agreement from Landlord's present mortgagee substantially in the form attached hereto as Exhibit "H" on the date of Tenant's execution of this Lease. As a condition to the subordination of this Lease to any future mortgage or ground lease under Section 18.1 above, Landlord agrees to obtain for the benefit of Tenant a subordination, nondisturbance and attornment agreement substantially in the same form as that attached hereto as Exhibit "H" from every mortgagee to which Landlord grants a mortgage of the Property hereafter, and from every ground lessor which may hereafter acquire fee title to the Land. 19. Holding Over. Should Tenant continue to occupy the Premises after the expiration of the Term of this Lease or any renewal or renewals thereof, or after a forfeiture incurred, such tenancy shall (without limiting any of Landlord's rights or remedies concerning an Event of Default) be one at sufferance from month to month at a minimum monthly rent equal to two (2) times the total of the Minimum Rent payable for the last month of the Term of this Lease prior to the holdover and, in addition thereto, Tenant shall pay to Landlord all other Rent falling due during the holdover period (without increase), as if the Term had been extended. Neither Landlord's demand nor Landlord's receipt of the aforesaid compensation for use and occupancy shall be deemed to provide Tenant with any right to any use, occupancy, or possession of the Premises either for the period for which such compensation has been demanded or paid, or for any time before or after such period. The provisions of this Section 19 shall not be deemed to limit or constitute a waiver of any other rights or remedies of Landlord provided herein or at law or in equity. 20. Notices. All bills, statements, notices or other communications given hereunder shall be deemed sufficiently given or rendered only if in writing and sent to Tenant or Landlord by certified or registered mail, return receipt requested, postage prepaid, by commercial overnight delivery service (such as Federal Express), or by hand delivery against signed receipt, as follows: If to Tenant: Prior to the Commencement Date: Lorjo Corp. c/o PMA Reinsurance Corporation 925 Chestnut Street Philadelphia, PA 19107 Attn: Steve Tirney 58 With a copy to: Lorjo Corp. c/o PMA Reinsurance Corporation 925 Chestnut Street Philadelphia, PA 19107 Attn: Paul T. Luber After the Commencement Date: Lorjo Corp. c/o PMA Reinsurance Corporation Suite 2800 1735 Market Street Mellon Bank Center Philadelphia, PA 19103 Attn: Steve Tirney With a copy to: The PMA Building 380 Sentry Parkway Blue Bell, PA 19422 Attn: Paul T. Luber If to Landlord: c/o The Rubin Organization The Bellevue, 3rd Floor 200 S. Broad Street Philadelphia, PA. 19102 Attn: Director of Leasing With a copy to: Richard I. Rubin & Co., Inc. Management Office Concourse Level, Mellon Bank Center 1735 Market Street Philadelphia, PA 19103 Attention: Building Manager 59 If to Landlord's mortgagee: Banque Paribas The Equitable Tower 787 Seventh Avenue New York, New York 10019 Attention: Douglas Veasey With a copy to: Winston & Strawn 175 Water Street New York, New York 10038 Attention: Douglas L. Wisner, Esq. or such other person or place as either party hereto may designate by notice given as aforesaid. Notice shall be deemed received as of the date set forth on the return receipt, the date of delivery reflected in the records of the overnight delivery service, or the date set forth on the hand delivery receipt, as the case may be. 21. Certain Rights Reserved to the Landlord. Landlord waives no rights except those that may be specifically waived in this Lease, and explicitly retains all other rights including, without limitation, the following rights, the exercise of which shall not be deemed to constitute an eviction or disturbance of Tenant's use or possession of the Premises and shall not give rise to any claim for set-off or abatement of Rent or any other claim: 21.1 Building Name. To change the name of the Building, presently Mellon Bank Center, and to change the street address of the Building, presently 1735 Market Street. 21.2 Exterior Signs. To install and maintain a sign or signs on the exterior of the Building. 21.3 Decoration. To decorate or to make repairs, alterations, additions or improvements, whether structural or otherwise, in or about the Property, or any part thereof, and for such purposes to temporarily close doors, entry ways, public space and corridors in and about the Property and to interrupt or temporarily suspend services or use of facilities, all without affecting any of Tenant's obligations hereunder, so long as the Premises are reasonably accessible and usable. 21.4 Keys. To furnish, at Landlord's expense, 10 door keys, and 100 pass cards for the entry door(s) in the Premises at the commencement of the Lease and to retain at all times, and to use in appropriate instances, keys and pass cards to all doors within 60 and into the Premises. Tenant agrees to (i) purchase, only from Landlord, additional duplicate keys or pass cards as required, (ii) change no locks or other security devices and (iii) not to affix locks on doors without the prior written consent of the Landlord, which consent shall not be unreasonably withheld or delayed but may be conditioned upon Landlord's receipt of a key, combination or other means of unlocking any new or replacement lock or security device installed by Tenant. Upon the expiration of the Term or Tenant's right to possession, Tenant shall return all keys and pass cards to Landlord and shall disclose to Landlord the combination of any safes, cabinets or vaults left in the Premises. 21.5 Window Coverings. To designate and approve all window coverings used on the Property or any part thereof. 21.6 Placement of Loads. To approve the weight, size and location of safes, vaults and other heavy equipment and articles in and about the Premises and the Property so as not to exceed the legal load per square foot designated by the structural engineers for the Property (presently 70 pounds), and to require all such items and furniture and similar items to be moved into or out of the Property and Premises only at such times and in such manner as Landlord shall direct in writing. Tenant shall not install or operate machinery or any mechanical devices of a nature not directly related to Tenant's ordinary use, as limited by the Permitted Use, of the Premises without the prior written consent of Landlord, which shall not be unreasonably withheld or delayed. Movements of Tenant's property into or out of the Property or Premises are entirely at the risk and responsibility of Tenant, except as to damage caused solely by the negligence of Landlord or its agents. 21.7 Deliveries. To regulate delivery of supplies and the usage of the loading docks, receiving areas and freight elevators. 21.8 Entry to Premises. To enter the Premises in accordance with the terms of this Lease, and in the last year of the Term of this Lease, to show the Premises to prospective tenants at reasonable times upon twenty-four (24) hours prior notice (unless the parties agree to a shorter time) and accompanied by Tenant or Tenant's representative (provided that no such advance notice or accompaniment shall be required in an emergency) and, if vacated or abandoned, to view the Premises at any time. 21.9 Pipes, Conduits, and Wiring. To erect, use and maintain pipes, ducts, wiring and conduits, and appurtenances thereto, in and through the Premises at reasonable and concealed locations existing in the Premises or, if necessary, constructed by Landlord in reasonably inconspicuous locations having no material adverse effect upon Tenant's use of the Premises or the aesthetics thereof. If Landlord undertakes such construction, Landlord agrees to reasonably cooperate with Tenant or its design experts as to the location and finish of the work, to use materials comparable to and compatible with those adjacent to such new construction, and to perform all such construction at Landlord's sole cost and expense. 61 21.10 Inspection and Repair. To enter the Premises at any reasonable time upon twenty-four (24) hours prior written notice (unless the parties agree to a shorter time) and accompanied by Tenant or Tenant's representative (provided that no such advance notice or accompaniment shall be required in an emergency), to inspect the Premises and to make repairs or alterations as Landlord reasonably deems necessary, with due diligence and minimum disturbance. 21.11 Conduct of Other Business on the Property. To grant to any person or to reserve unto itself the exclusive right to conduct any business other than reinsurance or render any service in or on the Property. 21.12 Alterations to Property. To alter the layout, design and/or use of the Property (excluding the Premises) in such manner as Landlord, in its sole discretion, deems appropriate, so long as the character of the Property as a first-class office property is maintained. 21.13 Adjoining Areas. The use of and reasonable access thereto through the Premises, for the purposes of operation, maintenance, and repair, of (a) all walls, windows and doors bounding the Premises (including exterior walls of the Building, core corridor walls and doors and any core corridor entrance) except the surfaces thereof within the Premises , (b) any terraces or roofs adjacent to the Premises and (c) any space in or adjacent to the Premises used for shafts, pipes, conduits, fan rooms, ducts, electric or other utilities, sinks or other facilities. 22. Landlord's Security Interest. As additional security for the faithful performance and observance by Tenant of all of the terms, provisions and conditions of this Lease, Tenant hereby grants to and creates on behalf of Landlord a security interest in all of Tenant's equipment, fixtures, decorations, alterations, furniture, machinery, installations, additions, and improvements in the Premises. The security interest herein granted and any security interest of Landlord granted by statute shall be subordinate to any security interest given by Tenant in connection with the financing of the purchase or installation of the item in question. Upon the occurrence of any Event of Default Landlord may, at its option, foreclose on said security through judicial action and apply the proceeds of the sale of the property covered thereby for the payment of all Rent owing under this Lease or any other sum owing by Tenant under the terms of Section 17, above, including but not limited to any damages or deficiencies resulting from any reletting of the Premises, whether said damage or deficiency accrued before or after summary proceedings or other reentry by Landlord. Tenant covenants that it shall keep and maintain all fixtures, machinery, equipment, furnishings and other personalty at the Premises, whether or not the property of Tenant, in good, substantial and efficient operating condition (including replacement of same when necessary) at Tenant's sole cost and expense, at all times during the Term of this Lease. 62 23. Use and Occupancy Tax and Miscellaneous Taxes. Tenant shall pay prior to delinquency all taxes assessed against or levied upon its occupancy of the Premises or upon the fixtures, furnishings, equipment and all other personal property of Tenant located in the Premises and when possible Tenant shall cause said fixtures, furnishings, equipment and other personal property to be assessed and billed separately from the property of Landlord. In the event any or all of Tenant's fixtures, furnishings, equipment or other personal property or its occupancy of the Premises shall be assessed and taxed with the property of Landlord, Tenant shall pay to Landlord its share of such taxes, as reasonably and equitably allocated by Landlord if but not separately allocated on the face of the tax bill, within twenty (20) days after delivery to Tenant by Landlord of a statement in writing setting forth the amount of such taxes applicable to Tenant's fixtures, furnishings, equipment, personal property or occupancy. If, during the Term of this Lease or any renewal or extension thereof, any tax is imposed upon the privilege of renting or occupying the Premises, Tenant will pay each month, as Additional Rent, a sum equal to such tax or charge that is imposed for such month, but nothing herein shall be taken to require Tenant to pay any income, estate, inheritance or franchise tax imposed upon Landlord. In addition, Tenant will pay as additional rent all Philadelphia School District Business Use and Occupancy Tax applicable to Tenant and the Premises (if any) within the time set forth in any bill rendered by the City of Philadelphia or Landlord for said tax. 24. Excepted from Premises. Any hallways, passageways, stairways, elevators, or other means of access to and from the Premises or the Property, or the space occupied by the said hallways, passageways, stairways, elevators and other means of access, although such may be within the Premises as described hereinabove, shall be taken to be excepted therefrom, without being deemed to reduce the Rentable Area thereof, and reserved to Landlord or to the tenants of the Property in common and the same shall not be considered an exclusive portion of the Premises. All ducts, pipes, wires or other equipment used in the operation of the Property, or any part thereof, and any space occupied thereby, whether or not within the Premises description, shall also be excepted and reserved from the Premises, without being deemed to reduce the Rentable Area thereof, and Tenant shall not remove or tamper with or use the same and will permit Landlord to enter the Premises to service, replace, remove or repair the same in accordance with the provisions of this Lease. 25. Mechanics' and Other Liens. 25.1 Tenant covenants that it shall not (and has no authority to) create or allow any encumbrance against the Premises, the Property, or any part of any thereof or of Landlord's interest therein. 25.2 Tenant covenants that it shall not suffer or permit to be created, or to remain, any lien or claim thereof (arising out of any work done or services, material, equipment or supplies furnished for or at the request of Tenant or by or for any contractor or subcontractor of Tenant, other than work, materials, equipment or supplies 63 furnished by Landlord) which is or may become a lien upon the Premises, the Property, or any part of any thereof or the income therefrom or any fixture, equipment or similar property therein. 25.3 If any lien or claim shall be filed, Tenant shall within twenty (20) days after receiving notice of the filing thereof, cause the same to be discharged of record by payment, deposit, bond or otherwise. If Tenant shall fail to cause such lien or claim to be discharged and removed from record within that period, then, without obligation to investigate the validity thereof and in addition to any other right or remedy Landlord may have, Landlord may, but shall not be obligated to, contest the lien or claim or discharge it by payment, deposit, bond or otherwise; and Landlord shall be entitled, if Landlord so decides, to compel the prosecution of an action for the foreclosure of such lien by the lienor and to pay the amount of the judgment in favor of the lienor with interest and costs. Any amounts so paid by Landlord and all of Landlord's actual costs and expenses, including reasonable attorneys' fees, incurred by Landlord in connection therewith, together with interest at the Lease Interest Rate from the respective dates of Landlord's making of the payment or incurring of the cost or expense, shall constitute Additional Rent payable by Tenant under this Lease and shall be paid by Tenant to Landlord promptly on demand. 25.4 Notwithstanding anything to the contrary in this Lease or in any other writing signed by Landlord, neither this Lease nor any other writing signed by Landlord shall be construed as evidencing, indicating, or causing an appearance that any erection, construction, alteration or repair to be done, or caused to be done, by Tenant is or was in fact for the immediate use and benefit of Landlord. Further, notwithstanding anything contained herein to the contrary, nothing contained in or contemplated by this Lease shall be deemed or construed in any way to constitute the consent or request on the part of Landlord for the performance of any work or services or the furnishing of any materials for which any lien could be filed against the Premises or the Property or any part of any thereof, nor as giving Tenant any right, power, or authority to contract for or permit the performance of any work or services or the furnishing of any materials for which any lien could be filed against the Premises, the Property or any part of any thereof. 26. Estoppel Statement 26.1 Tenant from time to time, within ten (10) Business Days after request by Landlord, shall execute, acknowledge and deliver to Landlord a statement in a form reasonably acceptable to the Tenant, which may be relied upon by Landlord or any proposed assignee of Landlord's interest in this Lease or any existing or proposed mortgagee or ground lessor or purchaser of the Property or any interest therein, certifying (i) that this Lease is unmodified and in full force and effect (or that the same is in full force and effect as modified and listing the instruments of modification); (ii) the dates to which Minimum Rent and all other charges have been paid; (iii) whether or not Landlord is in default hereunder or whether Tenant has any claims or demands against Landlord (and, if so, the default, claim and/or demand shall be specified); (iv) if applicable, that Tenant has accepted possession and has entered into 64 occupancy of the Premises; (v) the Lease Commencement Date and the Termination Date; and (vi) certifying as to such other matters as Landlord may reasonably request. Tenant may reasonably modify the requested form of estoppel statement to the extent necessary to meaningfully address all matters intended to be responded to or certified therein, but shall not fail to respond to or certify any of such matters. Tenant acknowledges that any such statements so delivered by Tenant may be relied upon by Landlord, any landlord under any ground or underlying lease, or by any prospective partner, purchaser, mortgagee, lender, or any assignee of any mortgage. 26.2 Should Tenant fail to execute, acknowledge and deliver to Landlord a requested estoppel statement within the time required under Section 26.1 following Landlord's first request therefor, Landlord may deliver to Tenant a second request for such estoppel statement on or after the tenth (10th) Business Day following Tenant's receipt of the first such request. Should Tenant fail to execute, acknowledge and deliver to Landlord the requested estoppel statement within eight (8) days following receipt of Landlord's second request therefor, such failure shall constitute an Event of Default under this Lease. 27. Covenant of Quiet Enjoyment. Landlord covenants that Tenant shall, during the Term, peaceably and quietly have, hold and enjoy the Premises subject to the terms, covenants, conditions, provisions and agreements contained in this Lease on the part of Tenant to be kept, observed and performed (including, without limitation, the obligation to pay all Rent when due). 28. Brokers. Each of Landlord and Tenant represents and warrants to the other that it has not dealt with any broker, agent, finder or other person in the negotiation for or the obtaining of this Lease other than Binswanger Company ("Binswanger") and Agent, and each agrees to indemnify and hold the other harmless from any and all costs (including reasonable attorney's fees) and liability for commissions or other compensation claimed by any such broker, agent, finder or other person other than Binswanger and Agent, employed by the indemnifying party or claiming to have been engaged by the indemnifying party in connection with this Lease. Tenant acknowledges that Agent has acted only as an agent with respect to the procurement and negotiation of this Lease and agrees that Agent shall not be responsible or liable for any term, provision or condition of this Lease. Landlord agrees to pay any fee or commission owing Binswanger or Agent on account of this Lease. 29. Limitations on Liability. 29.1 The liabilities of the parties described below shall be qualified in accordance with this Section 29. 29.2 Tenant Liability. The word "Tenant" as used in this Lease shall be construed in the plural in all cases where there is more than one tenant (and in such cases the liability of such tenants shall be joint and several) and the necessary grammatical changes 65 required to make the provisions hereof apply to corporations, partnerships, or individuals, men or women, shall in all cases be assumed to have been made. Each provision hereof shall extend to and as the case may require, shall bind and inure to the benefit of Tenant and its successors and assigns, provided that this Lease shall not inure to the benefit of any assignee or successor of Tenant except upon the express written consent of Landlord pursuant to Section 12 hereof (unless not required pursuant to Subsection 12.1 above). 29.3 Landlord Liability 29.3.1 It is expressly understood and agreed by Tenant that none of Landlord's covenants, undertakings or agreements are made or intended as personal covenants, undertakings or agreements by Landlord or its partners, and any liability for damage or breach or nonperformance by Landlord shall be collectible only out of Landlord's interest in the Property and no personal liability is assumed by, nor at any time may be asserted against, Landlord or its partners or any of its or their officers, agents, employees, legal representatives, successors or assigns, if any, all such liability, if any, being expressly waived and released by Tenant, and in any proceeding or in the case of any judgment against Landlord, Tenant shall concurrently file a Praecipe to Limit Judgment Lien to reflect the exclusion from liability herein set forth . 29.3.2 The Landlord named on page 1 of this Lease and any subsequent owners of such Landlord's interest in the Property, as well as their respective heirs, personal representatives, successors and assigns shall each have the same rights, remedies, powers, authorities and privileges as it would have had it originally signed this Lease as Landlord, including the right to proceed in its own name to enter judgment by confession or otherwise, but any such person, whether or not named herein, shall have no liability hereunder after it ceases to hold such interest. 29.3.3 In the event of any sale or other conveyance or transfer of Landlord's interest in the Property, the transferor shall be and hereby is entirely free and relieved of all covenants and obligations of Landlord hereunder, and it shall be deemed and construed without further agreement between the parties or their successors in interest, or between the parties and the transferee at any such sale or conveyance or transfer that (subject to the limitation of Landlord's liability in this Section 29) the transferee has assumed and agreed to carry out any and all covenants and obligations of Landlord hereunder, including, without limitation, obligations for all defaults and claims (if any) arising prior to the date of such transfer. 29.4 Mortgagee Liability. No mortgagee or ground lessor which shall succeed to the interest of Landlord hereunder (either in terms of ownership or possessory rights) (a "Successor") shall be: (a) subject to any prepayments of Rent (except to the extent that any such prepayment is subject to clause (b) below, credits, offsets, prior defenses or claims or counterclaims which the Tenant may have against any prior Landlord including, without 66 limitation, claims against any such prior Landlord based upon the indemnities of such Landlord under this Lease and/or any other agreement, as the case may be; or (b) bound by any prepayment of Rent more than one month in advance (except for any such prepayment which is expressly permitted to be made under this Lease) and not actually delivered to the Successor; or (c) bound by an amendment or modification of this Lease made without its prior written consent, other than an amendment or modification of this Lease reflecting the exercise of options set forth in this Lease or acknowledging and/or confirming agreements and/or understandings between Landlord and Tenant as long as any such acknowledgement and/or confirmation does not have the effect of materially varying the obligations of the parties under this Lease or operate or purport to operate as a waiver, forbearance, satisfaction, discharge or compromise of such obligations; or (d) liable for any act, omission, misrepresentation or breach of any prior Landlord; provided, however, such Successor shall be obligated to perform the executory obligations of the Landlord under this Lease (subject to the terms of this Section 29.4) arising from and after the date that such Successor obtains title to and possession of the Property and becomes the Landlord under this Lease and, subject to the terms of this Section 29.4, to use reasonable efforts to perform the existing material obligations of the Landlord under this Lease relating to the occupancy of the Premises by the Tenant without any obligation, however, to expend funds or incur any liability or obligation beyond that required in order to perform such existing material obligations in accordance with this Lease; or (e) required to account for any security deposit other than any security deposit actually delivered to the Successor; or (f) liable for any payment to the Tenant of any sums, or the granting to the Tenant of any credit, in the nature of a contribution towards the cost of preparing, furnishing or moving into the Premises or any portion thereof; or (g) bound by any covenant to undertake or complete any improvement to the Premises or the Property. 30. Renewal Options. 30.1 Renewal Terms. Tenant is hereby granted the options to extend the initial Term of this Lease, with respect to all of the Premises as then constituted, for two (2) consecutive additional periods of five (5) years each (each of which periods is hereinafter referred to as a "Renewal Term"), provided that an Event of Default shall not have occurred and be continuing either at the time of exercising any such option or at the commencement of the respective Renewal Term. Tenant shall exercise the aforesaid options to renew, in each instance, 67 by giving Landlord written notice at least twelve (12) months prior to the Termination Date or at least twelve (12) months prior to the last day of the Renewal Term then in effect, as applicable. Each Renewal Term shall begin on the day immediately following either the Termination Date or the last day of the prior Renewal Term, as applicable. Each such renewal shall be on the same terms and conditions as specified for the initial Term of this Lease, except that (i) the Minimum Rent during each Renewal Term shall be as specified in Subsection 30.2 below, and (ii) Landlord shall have no obligation to improve or otherwise perform any work in the Premises, or to pay any allowances, unless explicitly required to do so during such Renewal Term elsewhere in this Lease or any amendment hereto. In the event that Tenant shall fail to timely exercise its option with regard to any Renewal Term, or an Event of Default shall have occurred and be continuing either at the time of exercising its option or at the commencement of any Renewal Term, Tenant's rights hereunder with regard to both that Renewal Term and any subsequent Renewal Term shall immediately and irrevocably terminate. 30.2 Renewal Rental. If Tenant exercises an option to extend the Term of this Lease as set forth in Subsection 30.1 hereof, the Minimum Rent for the Premises throughout a given Renewal Term shall equal ninety-five percent (95%) of the Market Rental Rate (as hereinafter defined) in effect at the commencement of that Renewal Term. For purposes of this Lease, the term "Market Rental Rate" shall be defined as the rate of annual minimum rent being quoted by Landlord to prospective tenants of the Building or being charged to tenants whose leases have commenced within the preceding six months, for terms of similar length for comparable space (considering size and location) in the Building (or which would be quoted if comparable space were available). Landlord shall determine the Market Rental Rate for the Renewal Term in question and give Tenant notice thereof (a "Rental Notice") in each case following Tenant's exercise of its option to renew (and not later than thirty (30) days following receipt of written request from Tenant following Tenant's exercise of its option to renew). Should Tenant disagree with Landlord's determination, Landlord and Tenant agree to negotiate reasonably and in good faith to attempt to reach agreement for a period of seventy five (75) days following Tenant's receipt of the Rental Notice; provided, however, that Tenant may elect, by written notice delivered to Landlord within seventy-five (75) days after receipt of the Rental Notice, to either rescind its election to enter into a Renewal Term or to have the Market Rental Rate for such Renewal Term determined by appraisal in accordance with the following procedures, the results of which shall be binding upon both Landlord and Tenant. Should Landlord and Tenant not reach agreement as to the Market Rental Rate, and Tenant fails to deliver written notice of such election to Landlord within such seventy-five (75) day period, Tenant shall be deemed to have irrevocably elected to rescind its election to enter into the Renewal Term. Within ten (10) days after Tenant notifies Landlord of Tenant's election to determine Market Rental Rate by appraisal, each of Landlord and Tenant shall, by written notice to the other, designate an appraiser having at least ten (10) years experience as a licensed Pennsylvania real estate broker or MAI appraiser doing a substantial amount of business in the Center City, Philadelphia area. Within ten (10) days following the appointment of the second of such appraisers, the two appraisers so appointed shall select a third appraiser meeting the same requirements as to experience. In the event that the two appraisers are unable timely to agree 68 upon the third appraiser, then Landlord and Tenant shall attempt to agree upon the third appraiser within ten (10) days thereafter, and if they fail to do so the third appraiser shall be an appraiser meeting the qualifications herein set forth and appointed under the commercial arbitration rules of the American Arbitration Association relating to appointment of arbitrators. The three appraisers so chosen shall render their decision as to the Market Rental Rate (as such term is hereinafter defined) within thirty (30) days following the appointment of the third appraiser. Should the three appraisers be unable to agree on the Market Rental Rate, the Market Rental Rate shall be the average of the three respective Market Rental Rates determined by the three appraisers, excluding from such computation, however, any Market Rental Rate which deviates by more than fifteen percent (15%) from the median of the three Market Rental Rates so determined. Landlord and Tenant shall each bear their own costs of such appraisal and equally share the cost of the third appraiser and any arbitration hereunder. Notwithstanding anything to the contrary hereinabove set forth in this Section 30.2, in the event Tenant shall elect the aforesaid appraisal determination of the Market Rental Rate for any Renewal Term, the term "Market Rental Rate" shall be defined as the rate of annual minimum rent being charged or quoted by Landlord for office space in the Building and by Landlord and other landlords for office space in those buildings commonly known as One Liberty Place, Two Liberty Place, Two Logan Square, One Commerce Square, Two Commerce Square, Bell Atlantic Tower and 1901 Market Street, to tenants whose leases have commenced within the six months preceding the time of appraisal, for terms similar in length to the Renewal Term in question, for comparable space (considering size and location) in such buildings (or which would be so charged if comparable space were available), taking into account "free rent" and other lease concessions then being commonly offered in such buildings. 31. Expansion Options 31.1 Third Year Option. Landlord hereby grants to Tenant an exclusive first option to lease from Landlord either (a) the 1,656 Rentable Square feet of space on the thirtieth (30th) floor of the Building shown cross-hatched on Exhibit N attached hereto ("Option Space A") or (b) that portion of the thirtieth (30th) floor of the Building not theretofore leased by Tenant, consisting of 9,705 Rentable Square Feet of space ("Option Space B"), on the terms herein set forth. Tenant shall exercise such option by delivery to Landlord of a written notice of such exercise not later than the first to occur of (a) October 31, 1996 or (b) the first day of the third Lease Year, and Landlord shall deliver possession of such space to Tenant on or about the first day of the fourth Lease Year, but in no event earlier than September 1, 1997. 31.2 Fifth Year Option. Landlord hereby grants to Tenant an exclusive first option to lease from Landlord either (a) Option Space B if not previously leased by Tenant pursuant to Section 31.1 above, or (b) if Tenant shall have leased Option Space A pursuant to Section 31.1 above, the remaining portion of the thirtieth (30th) floor of the Building not theretofore leased by Tenant, consisting of 8,049 Rentable Square Feet of space ("Option Space C"), on the terms herein set forth. Tenant shall exercise such option by delivery to Landlord of a written notice of such exercise not later than the first to occur of (a) October 31, 69 1998 or (b) the first day of the fifth Lease Year, and Landlord shall deliver possession of such space to Tenant on or about the first day of the sixth Lease Year, but in no event earlier than September 1, 1999. 31.3. Eighth Year Option. Landlord hereby grants to Tenant an exclusive first option to lease from Landlord either (a) Option Space B if not previously leased by Tenant pursuant to Sections 31.1 or 31.2 above, or (b) if Tenant shall have leased Option Space A pursuant to Section 31.1 above, and shall not have leased Option Space C pursuant to Section 31.2 above, Option Space C, on the terms herein set forth. Tenant shall exercise such option by delivery to Landlord of a written notice of such exercise not later than the first day of the eighth Lease Year, and Landlord shall deliver possession of such space to Tenant on or about the first day of the ninth Lease Year. 31.4 Option Terms 31.4.1 The respective space leased to Tenant pursuant to its exercise of any one of the options contained in Subsections 31.1 through 31.3, inclusive, hereof shall be referred to as an "Expansion Area". In the event that Tenant shall exercise an option granted to it under the terms of this Section 31, the Expansion Area shall be delivered to Tenant in "as is" condition, except that Landlord shall undertake demolition of partitions and other tenant improvements contained within the Expansion Area in accordance with Tenant's reasonable specifications, at Landlord's expense prior to delivering the Expansion Area to Tenant. Upon the date on which Landlord delivers possession of each Expansion Area to Tenant, the Expansion Area shall constitute a portion of the Premises (and Landlord shall inform Tenant in writing of the then current Rentable Area of the Premises, including the Expansion Area, and Tenant's Tax Share and Expense Share), Tenant shall promptly commence occupancy thereof and the Expansion Area shall be fully subject to the terms, conditions and agreements set forth in this Lease, including, without limitation, the payment of Minimum Rent, other Rent and all other charges payable on account of the Premises calculated as for the Premises, excepting only that the annual rate of Minimum Rent payable for the Expansion Area shall equal the Minimum Rent payable for the remainder of the Premises (as the same shall increase from time to time during the remainder of the Term) plus One Dollar Fifty Cents ($1.50) per Rentable Square Foot of the Expansion Area. Notwithstanding the foregoing, Landlord agrees that no Minimum Rent or monthly payments on account of Tenant's Tax Share or Tenant's Expense Share shall be payable or otherwise accrue on account of a given Expansion Area following the date on which Landlord delivers possession of such Expansion Area to Tenant until the first to occur of (a) the first day of the eighth (8th) week thereafter or (b) the date on which Tenant commences occupancy of the Premises for purposes of conducting its business therein. Landlord shall provide Tenant with an allowance equal to $22.00 per Rentable Square Foot of the Expansion Area, reduced in the amount of $2.20 for each Lease Year elapsed at the time Tenant takes possession of the Expansion Area (for example, if Tenant exercises the option contained in Section 31.2, above, such allowance shall equal $11.00 per Rentable Square Foot of the 70 Expansion Area), which allowance shall be payable to Tenant in the same manner and for the same purposes as the Construction Allowance and the Plans Allowance. 31.4.2 Failure of Tenant to deliver the prescribed notice of election to exercise its option to lease any Expansion Area on or before the date herein specified shall irrevocably and automatically extinguish any such option to lease the Expansion Area in question but shall not prejudice Tenant's rights respecting any other option to lease the Expansion Area. The exercise of an option to lease any Expansion Area shall not be effective or permissible if an Event of Default shall have occurred and be continuing either at the time such option is exercised or at the time possession of the Expansion Area is delivered, and in such event Tenant's option to lease the Expansion Area in question shall cease and be deemed rescinded by Tenant, and Landlord may freely lease such space to a third party of Landlord's choosing, subject to Tenant's subsequent options hereunder. 31.4.3 In the event that Landlord shall be unable to deliver possession of any Expansion Area to Tenant due to: the holding over of any other tenant, subtenant, licensee, or other person or entity claiming possession of all or any part of the Expansion Area, or any other reason beyond the control of Landlord, then Landlord shall not be liable in damages to the Tenant, and during the period that the Landlord is unable to give possession all rights and remedies of both parties hereunder shall be suspended insofar as they relate to the Expansion Area and the Expansion Area shall not be deemed to be a portion of the Premises; provided, however, that in the event that Landlord shall be able to deliver possession of the Expansion Area thereafter, then Tenant agrees that the exercise of its option shall be effective as of the date Landlord delivers possession of the Expansion Area to Tenant, and that the term of this Lease shall not be or be deemed to have been extended by virtue of such delay. Notwithstanding the foregoing, if Landlord is unable to deliver any Expansion Area on or before the ninetieth (90th) day of the Lease Year at the commencement of which Landlord is obligated to deliver such Expansion Area pursuant to this Section 31, Tenant may elect by notice delivered to Landlord prior to Landlord's delivery of such Expansion Area to Tenant to rescind Tenant's election to lease such Expansion Area. Such rescission shall not affect any of Tenant's subsequent options with respect to the Expansion Area hereunder, if any, and Landlord may thereupon freely lease the Expansion Area in question to a third party of Landlord's choosing subject to Tenant's subsequent options (if any) hereunder. 32. Right of First Refusal. Landlord hereby grants to Tenant, effective as of the Lease Commencement Date (but not before), a right of first refusal to lease from Landlord during the Term of this Lease, as extended, all (but not less than all) rentable space that becomes available for tenancy and for which Landlord has an Offer (as hereinafter defined) on the 27th and 30th floors of the Building during the Term of this Lease, as extended, excluding only rentable space (a) with respect to which the then existing tenant occupying same desires to exercise a renewal option or negotiate a new lease and (b) with respect to which a presently existing tenant of the Building on the date of this Lease has an expansion option, which shall be deemed to include, without limitation, a right of first refusal or a right of first offer pre-dating 71 this Lease, entitling it to lease such space (such rentable space being herein referred to as the "Available Space"), in "as is" condition, on the following terms and conditions: In the event that Landlord should receive a bona fide offer from any third party to rent all or any portion of the Available Space (an "Offer"), Landlord shall deliver a copy of the offer to Tenant. If Tenant does not execute and return to Landlord a letter agreeing to lease the Available Space on all the terms and conditions contained in the Offer within fifteen (15) Business Days following Tenant's receipt of the Offer, Landlord may thereafter complete the leasing of the Available Space to any third party in accordance with the terms of the Offer within a period not to exceed 180 days. If Landlord does not complete such leasing within one hundred eighty (180) days, Tenant's right of first refusal with respect to such portion of the Available Space shall be reinstated. Notwithstanding anything to the contrary contained herein, in the event that Landlord shall receive and present to Tenant Offers respecting more than one portion of the Available Space at the same time, Tenant may elect to accept any number or none of the Offers and shall not be deemed obligated to accept all of such Offers. Landlord hereby advises Tenant, for informational purposes only, that the leases of the tenants on the 27th floor of the Building on the date of this Lease do not contain any renewal or expansion rights. 33. Contraction Option. Landlord hereby grants to Tenant the option to terminate this Lease with respect to up to a maximum of seven thousand five hundred (7,500) Rentable Square Feet of space contained within the then current Premises on the 30th floor of the Building ("Contraction Space"), subject to Landlord's reasonable approval of the area, location and configuration of the space with respect to which this Lease is so terminated in order to insure the reasonable marketability thereof to third parties for office purposes, on the terms and subject to the conditions herein set forth. By written notice to Landlord on or before the first day of the fifth Lease Year, Tenant may terminate this Lease with respect to the Contraction Space effective at the close of the last day of the fifth Lease Year. In the event Tenant fails to exercise such option then Tenant shall also have the option, exercisable by written notice delivered to Landlord on or before the first day of the eighth Lease Year, to terminate this Lease with respect to the Contraction Space effective at the close of the last day of the eighth Lease Year. Failure to give timely notice of election shall be deemed a waiver of the respective option herein contained, but a waiver of or failure to timely exercise the first such option shall not preclude the timely exercise of the second such option. Tenant's exercise of the options herein contained shall be irrevocable and shall be absolutely subject to satisfaction of the following terms and conditions: 33.1 Contraction Fee. Tenant's notice of contraction must be accompanied by Tenant's good bank check or other payment acceptable to Landlord in an amount equal to the aggregate of (i) three monthly payments of Minimum Rent for the portion of the Premises with respect to which Tenant is terminating this Lease (pro rated on a per Rentable Square Foot basis) (which sum shall not be credited to Minimum Rent owing under this Lease), plus (ii) three monthly payments on account of Tenant's Tax Share and Tenant's Expense Share in the amounts Tenant is then paying as additional rent for the portion of the Premises with respect to which Tenant is terminating this Lease (pro rated on a per Rentable Square Foot basis) (which payments shall not be credited to Tenant's Tax Share or Tenant's Expense Share), plus 72 (iii) the sum derived by multiplying the then unamortized Landlord's Cost of Leasing (hereinafter defined) (assuming straight line amortization at a rate of 8% per annum over the Term, except with respect to the Construction Allowance, which shall be amortized at 6.5% per annum over the Term), by the percentage derived by dividing the Rentable Square Footage of the Contraction Space by the Rentable Square Footage of the entire Premises prior to such termination. The term "Landlord's Cost of Leasing" shall mean the aggregate cost to Landlord of Landlord's Work performed under Section 7.4, above, the Construction Allowance, the Plans Allowance, the Minimum Rent and additional rent Tenant was excused from paying under Section 4.1, above, and all real estate brokerage fees and commissions paid to Binswanger and Agent by Landlord and all reasonable legal fees paid by Landlord in connection with Tenant's execution of this Lease. 33.2 Vacation. Upon election hereunder to terminate this Lease with respect to the Contraction Space, Tenant shall vacate the Contraction Space on or before the effective date of the termination of this Lease with respect thereto, and such space shall be left in the condition in which the Premises is required to be left at the time of the termination of this Lease. 34. Termination Option. Notwithstanding anything to the contrary elsewhere contained in this Lease, Tenant is hereby given the option to terminate the Term effective at the close of the last day of the seventh Lease Year, the last day of the eighth Lease Year or the last day of the ninth Lease Year, as Tenant shall elect, provided Tenant gives Landlord at least twelve (12) months prior written notice of such election. Failure to give timely notice of termination shall be deemed a waiver of the option in question, but a waiver of or failure to timely exercise any single option shall not preclude the timely exercise of any subsequent option. Such termination shall be with respect to the entire Premises shall be irrevocable, and shall be absolutely subject to satisfaction of the following terms and conditions: 34.1 Termination Payment. Tenant's notice of termination must be accompanied by Tenant's good bank check or other payment acceptable to Landlord in an amount equal to the aggregate of (i) two monthly payments of Minimum Rent for the entire Premises as then constituted (which sum shall not be credited to Minimum Rent owing under this Lease), plus (ii) two monthly payments on account of Tenant's Tax Share and Tenant's Expense Share in the amounts Tenant is then paying as additional rent with respect to the entire Premises (which payments shall not be credited to Tenant's Tax Share or Tenant's Expense Share), plus (iii) the then unamortized Landlord's Cost of Leasing (assuming straight line amortization at a rate of 8% per annum over the Term, except with respect to the Construction Allowance, which shall be amortized at 6.5% per annum over the Term). 34.2 Vacation. Upon election hereunder to terminate this Lease, Tenant shall vacate the Premises on or before the effective date of the termination of this Lease, and shall leave same in the condition in which the Premises is required to be left on the Termination Date. 73 35. Miscellaneous 35.1 [INTENTIONALLY OMITTED.] 35.2 No Reservation or Option. The submission of this Lease for examination does not constitute an offer to lease, or a reservation of or option for the Premises, and this Lease becomes effective only upon execution and delivery thereof by both Landlord and Tenant. In consideration of Landlord's administrative expense in considering this Lease and the term of Tenant's proposed tenancy hereunder, Landlord's reservation of the leased Premises pending such consideration and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Tenant's submission to Landlord of this Lease, duly executed by Tenant, shall constitute Tenant's irrevocable offer to continue for twelve (12) Business Days from and after receipt by Landlord of the said Lease duly executed by Tenant or until Landlord shall deliver to Tenant written notice of rejection of Tenant's offer, whichever shall first occur. If within said twelve (12) Business Day period Landlord shall neither return the Lease duly executed by Landlord nor so advise Tenant of Landlord's rejection of Tenant's offer, then after said twelve (12) Business Day period Tenant shall be free to revoke its offer, provided, however, Tenant's offer shall continue until (a) ten (10) days after revoked by Tenant in writing or (b) accepted or rejected by Landlord, whichever shall first occur. 35.3 Non Waiver. The failure of either party hereto in any one or more instances to insist upon the strict performance of any one or more of the agreements, terms, covenants, conditions or obligations of this Lease, or to exercise any right, remedy or election herein contained, shall not be construed as a waiver or relinquishment of the right to insist upon such performance or exercise in the future, and such right shall continue and remain in full force and effect with respect to any subsequent breach, act or omission. 35.4 Partial Payment. No payment by Tenant or receipt by Landlord of a lesser amount than the correct Minimum Rent or Additional Rent due hereunder shall be deemed to be other than a payment on account, nor shall any endorsement or statement on any check or any letter accompanying any check or payment be deemed to effect or evidence an accord and satisfaction and Landlord may accept such check or payment without prejudice to Landlord's right to recover the balance or pursue any other remedy in this Lease or at law provided. 35.5 Prior Agreements; Amendments. This Lease constitutes the entire agreement between the parties relating to the subject matter contained herein. Neither party hereto has made any representations or promises to the other except as expressly contained herein. This Lease supersedes all prior negotiations, agreements, informational brochures, letters, promotional information and other statements and materials made or furnished by Landlord or its agents. No rights, easements or licenses are acquired in the Property or in any land adjacent thereto, by Tenant by implication or otherwise, except as expressly set forth in this 74 Lease. No agreement hereinafter made shall be effective to change, modify, discharge or effect an abandonment of this Lease, in whole or in part, unless such agreement is in writing and signed by the party against whom enforcement of the change, modification, discharge or abandonment is sought. 35.6 [INTENTIONALLY OMITTED] 35.7 Partial Invalidity. If any of the provisions of this Lease, or the application thereof to any person or circumstances, shall, to any extent, be invalid or unenforceable, the remainder of this Lease, or the application of such provision or provisions to persons or circumstances other than those as to whom or which it is held invalid or unenforceable, shall not be affected thereby, and every provision of this Lease shall be valid and enforceable to the fullest extent permitted by law. 35.8 Common Facilities. Tenant and its agents, employees and invitees, shall have the right to use, in common with all others granted such rights by Landlord, in a proper and lawful manner, the common walkways and sidewalks on the Property, the common entranceways, lobbies, elevators and stairways, furnishing access to the Premises, and (if the Premises includes less than a full floor) the common lobbies, hallways and toilet rooms on the floor on which the Premises is located. Such use shall be subject to such reasonable rules, regulations and requirements as Landlord may from time to time prescribe with respect thereto. 35.9 Choice of Law. This Lease has been executed and delivered in the Commonwealth of Pennsylvania and shall be construed in accordance with the laws of the Commonwealth of Pennsylvania. Any action brought to enforce or interpret this Lease shall be brought in the court of appropriate jurisdiction in the county in which the Building is located. Should any provision of this Lease require judicial interpretation, it is agreed that the court interpreting or considering same shall not apply the presumption that the terms hereof shall be more strictly construed against a party by reason of the rule or conclusion that a document should be construed more strictly against the party who itself or through its agent prepared the same. It is agreed and stipulated that all parties hereto have participated equally in the preparation of this Lease and that legal counsel was consulted by each responsible party before the execution of this Lease. 35.10 No Recordation. This Lease shall not be recorded in whole or in memorandum form by either party hereto without the prior written consent of the other. 35.11 Receipt of Money. No receipt of money by Landlord from Tenant after the termination of this Lease or after the service of any notice or after the commencement of any suit, or after final judgment for the possession of the Premises, shall reinstate, continue or extend the Term of this Lease or affect any such notice, demand or suit or imply consent for any action for which Landlord's consent is required. 75 35.12 No Joint Venture. This Lease shall create only the relationship of Landlord and Tenant between Landlord and Tenant and no fee estate shall pass out of Landlord. Nothing herein is intended to be construed as creating a joint venture or partnership relationship between the parties hereto. 35.13 No Third Party Beneficiaries. Notwithstanding anything to the contrary contained herein, no provision of this Lease is intended to benefit any party other than the signatories hereto and their permitted heirs, personal representatives, successors and assigns, and no provision of this Lease shall be enforceable by any other party. 35.14 Exhibits. All exhibits referred to in this Lease are attached hereto and shall be deemed an integral part hereof. 35.15 Captions. The captions included in this Lease, whether for sections, subsections, paragraphs, Table of Contents, Exhibits, or otherwise, are inserted and included solely for convenience and shall not be considered or given any effect in construing the provisions hereof, and are not to be used in interpreting this Lease or for any other purpose in the event of any controversy. 35.16 Representations. Landlord and Agent have made no representation, agreement, condition, warranty, understanding, or promise, either oral or written, other than as set forth herein, with respect to this Lease, the Property, the Premises, or otherwise. 35.17 Gender; Plural Terms; Persons. The masculine, feminine, or neuter pronoun shall each include the masculine, feminine, and neuter genders. A reference to person shall mean a natural person, a trustee, a corporation, a partnership and any other form of legal entity. All references (including pronouns) in the singular or plural number shall be deemed to have been made, respectively, in the plural or singular number as well, as the context may require. 35.18 Time. Time is of the essence of this Lease and all of its provisions. 35.19 Waiver of Jury Trial. It is mutually agreed by and between Landlord and Tenant that they hereby waive trial by jury in any action proceeding or counter-claim brought by either of the parties hereto against the other on any matter whatsoever arising out of or in any way connected with this Lease, the relationship of Landlord and Tenant, Tenant's use or occupancy of the Premises or claim of injury or damage. 35.20 Parking Spaces. Landlord shall make available to Tenant within 30 days of the Lease Commencement Date eighteen (18) monthly contract parking spaces on a non-reserved basis in the Garage Space. Thereupon, if Tenant so elects, Tenant may 76 contract at Tenant's expense with the Garage Space operator for the use of such spaces throughout the Term and any renewals thereof, or for such lesser period as Tenant may elect, and shall abide by all reasonable rules and regulations uniformly applicable to users of parking spaces in the Garage Space. Such parking spaces shall be for use solely by Tenant and Tenant's sublessees, agents and invitees. 35.21 Survival Notwithstanding any termination of the Term of this Lease for any reason, obligations of the parties hereunder which arose prior to such termination (such as the payment of Rent) or relate back to an event which occurred during the Term (such as releases and indemnities herein contained) shall survive such termination and remain fully enforceable thereafter for the period of the applicable statute of limitations. 35.22 Guaranty. As a material inducement to Landlord to enter into this Lease, Tenant agrees to cause PMA Reinsurance Corporation, a Pennsylvania corporation, to execute and deliver to Landlord an unconditional agreement to guarantee and become surety for the full performance of Tenant's obligations under this Lease, said agreement to be in the form attached hereto as Exhibit "I" and incorporated herein by reference, and to be delivered to Landlord, duly executed by said guarantor, simultaneously with Tenant's execution and delivery of this Lease to Landlord. 35.23 Time for Performance. In the event any performance of the obligations imposed by this Lease is required on a Saturday, Sunday or Holiday the time for such performance shall automatically extend until the next following Business Day. 35.24 Fire Stair Access. Notwithstanding anything contained in this Lease to the contrary, Tenant may utilize the fire stairways connecting the several floors of the Building on which the Premises are located for purposes of access between floors of the Premises by Tenant's employees and invitees, in the same manner as if such fire stairways were part of the Premises, on the following terms and conditions: 35.24.1 Subject to Tenant's compliance with the requirements of Sections 10.7 and 11.6 of this Lease and receipt of all necessary permits, licenses and approvals from governmental entities and agencies having jurisdiction, including without limitation the Philadelphia Fire Marshall's office (copies of which permits, licenses and approvals shall be delivered to Landlord prior to the commencement of any work in the fire stairways), Tenant may paint and install lighting in that portion of the fire stairways beginning on and including the landing serving the lowest floor of the Premises and ending on and including the landing serving the highest floor of the Premises (excluding any non-contiguous floors of the Premises), at Tenant's sole expense, provided that Tenant may not carpet such portion of the fire stairways. In connection with such work, and subject as aforesaid, Tenant shall install Weigand card readers compatible with the existing Building card access system and the Building fire alarm system in the stairwells to permit access through the fire stairway doors to the Premises. 77 35.24.2 Solely for purposes of Sections 10.6, 10.7, 14 and 15 of this Lease, those portions of the fire stairways so painted and lit by Tenant shall be deemed part of the Premises. Likewise, all rules and regulations applicable to the Premises shall be applicable to Tenant's use of the fire stairways. For all other purposes, the fire stairways shall not be part of the Premises. Tenant shall not be obligated to pay any Rent on account of its use of the fire stairways. 35.24.3 Tenant's use of the fire stairways shall be in common with Landlord and all other tenants of the Building, and their respective employees, agents, contractors and invitees. 35.24.4 The parties intend that the portion of the fire stairways decorated by Tenant hereunder shall not receive janitorial services of a different type or with greater frequency than the remainder of the fire stairways of the Building. 35.24.5 Tenant shall not allow Tenant's employees and invitees to utilize the remainder of the fire stairways in the Building except in the event of an emergency or Building fire drill. IN WITNESS WHEREOF, and intending to be legally bound hereby, the parties hereto have caused this Lease to be executed by their duly authorized representatives as of the day and year first above written. TENANT LORJO CORP. Attest: /s/ Paul T. Luber By: /s/ John W. Smithson - - - ----------------------------- ------------------------------- Name: Paul T. Luber Name: John W. Smithson Title: Assistant Secretary Title: Vice President [Corporate Seal] LANDLORD Witness: NINE PENN CENTER ASSOCIATES, L.P. By Transportation Associates, a Pennsylvania limited partnership, its managing general partner 78 By: /s/ Ronald Rubin -------------------------------- Name: Ronald Rubin Title: Managing General Partner By The Equitable Life Assurance Society of the United States, general partner By: /s/ Frederick F. Buchholz -------------------------------- Name: Frederick F. Buchholz Title: Investment Officer 79 EXHIBIT B [INTENTIONALLY OMITTED] -i- EXHIBIT C To Mellon Bank Center Lease MELLON BANK CENTER RULES AND REGULATIONS 1. The entrances, sidewalks, halls, passages, concourses, plaza, elevators, lobbies, stairways, and driveways shall not be obstructed by Tenant or used for any purpose other than for ingress to and egress from the Premises. The halls, passages, entrances, elevators, stairways, balconies and roof are not for the use of the general public, and Landlord shall in all cases retain the right to control and prevent access thereto of all persons whose presence in the judgment of Landlord shall be prejudicial to the safety, or interest of the Building or its tenants, provided that nothing herein contained shall be construed to prevent such access to persons with whom Tenant normally deals in the ordinary course of its business including Tenant's employees, agents, contractors, guests and invitees, unless such persons are engaged in illegal activities. 2. Tenant, its employees, contractors, agents, servants, visitors, and licensees shall not go upon the roof or mechanical floors of the Building without the written consent of Landlord which consent shall not be unreasonably withheld or delayed during the course of the Tenant Work. 3. The exterior windows and doors that reflect or admit light or air into the Premises or the halls, passageways or other public places in the Building or the Property, shall not be covered or obstructed by Tenant. No showcase or other articles shall be put in front or affixed to any part of the exterior of the Building or the Property, nor placed in the halls, corridors or vestibules, nor shall any article obstruct any air-conditioning supply or exhaust. 4. No awnings, air conditioning units, fans, aerials, antennas, or other projections or similar devices shall be attached to the Building, regardless of whether inside the Building or on its facade or its roof, without the prior written consent of Landlord. No curtains, blinds, shades or screens shall be attached to or hung in, or used in connection with, any window, transom or door of the Premises or the Building without the prior written consent of Landlord. All curtains, blinds, shades, screens, and other fixtures must be of a quality, type, design and color, and attached in the manner approved by Landlord. All electrical fixtures shall be fluorescent, of a quality, type, design, and color approved by Landlord unless the prior consent of Landlord has been obtained for any other lighting or lamping. 5. No Tenant or employees, contractors, agents, servants, visitors, or licensees of Tenant shall sweep or throw or permit to be placed, left or discarded from the Premises any -i- rubbish, paper, articles, objects or other substances into any of the corridors or halls, elevators, or out of the doors or stairways of the Building. 6. Tenant shall at all times keep the Premises neat and orderly. 7. Tenant shall not mark or in any other way deface any part of the Premises, Building or Property. The ceiling shall not be used for the suspension of any item or fixture, including, without limitation, plants and decorative items. No boring, drilling of nails or screws, cutting or stringing of wires shall be permitted within the Building or the Property (excluding the Premises), except with the prior written consent of Landlord and as Landlord may direct. Tenant shall not lay floor tile or other similar floor covering in the Premises, except with the prior approval of Landlord which approval shall not be unreasonably withheld, conditioned or delayed. Floor covering shall be affixed to the floor in a manner which permits easy removal and shall be subject to approval by Landlord prior to installation. 8. No freight, furniture of bulky matter of any description shall be received into the Building or carried into the passenger or service elevators except during hours and in a manner approved by Landlord. Any hand trucks, carryalls, or similar appliances used for delivery or receipt of merchandise or equipment shall be equipped with rubber tires, side guards and such other safeguards as Landlord shall reasonably require. 9. Tenant shall not permit any work to be done or service to be rendered in the Premises, including moving of goods into or out of the Premises, involving the employment of labor incompatible with the employees or contractors doing work or performing services by or on behalf of Landlord. 10. Any tenant deciding to move any equipment or office furniture into, out of, or within the Building, requiring more than two (2) elevator trips, must notify Landlord at least one (1) week in advance of intended move. Any move involving lesser use of the freight elevators or use on Saturday or Sunday shall require twenty-four (24) hours notice. Such notification shall include: (i) the date of the move, (ii) the time of move (which shall not be during normal working hours on Business Days without Landlord's consent), (iii) the number of elevators and operators required for the move, and (iv) an agreement by the Tenant to pay the then prevailing charge for the use of the elevators and operators. Upon receipt of the above information, Landlord, or its agent, will issue a letter of authorization to the Tenant to arrange for elevator operators. 11. The freight elevator shall not be used by Tenant without Landlord's prior approval. 12. Tenant shall not alter any lock or install a new or additional lock or any bolt or other security device on any door of the Premises without prior written consent of Landlord. -ii- If Landlord shall give its consent, Tenant shall in each case furnish Landlord with two keys for each such lock and security device. 13. Dock facilities are to be used only for loading and unloading procedures. No parking or storage privileges are extended. 14. No dumpsters are to be placed at the loading dock without prior notification and approval by Landlord which approval shall not be unreasonably withheld, conditioned or delayed. 15. If Tenant desires telecommunications signalling, telephonic, protective alarm, connections, or other such wires, apparatus, or devices, Landlord will direct electricians as to where and how the wires are to be introduced. No boring or cutting for wires or otherwise shall be made without directions and approval from Landlord, which shall not be unreasonably withheld, conditioned or delayed. All wires must be clearly tagged at the distributing boards and junction boxes, and elsewhere as reasonably required by Landlord, with the number of the office to which said wires lead, the purpose of the wires, and the name of the concern, if any, operating or servicing the same. 16. The electrical, mechanical, and telephone closets, water and wash closets, drinking fountains and other plumbing, electrical and mechanical fixtures shall not be used for any purposes other than those for which they were constructed, and no sweepings, rubbish, rags, coffee grounds, acids or other substances shall be deposited therein. No access to the electrical, mechanical and telephone closets will be permitted without the prior consent of Landlord which consent shall not be unreasonably withheld, conditioned or delayed. All damages resulting from any misuse of the fixtures shall be borne by the Tenant who, or whose servants, employees, agents, visitors or licensees, shall have caused the same. No person shall waste water by interfering or tampering with the faucets or otherwise. 17.Tenant shall not create, execute, or deliver any financing or security agreement of any kind that may be considered or give rise to any lien upon the Premises, the Building, or the Property. 18. No portion of the Premises, Building, or Property shall be used or occupied at any time for manufacturing, for the storage of merchandise, for the sale of merchandise, goods or property of any kind at auction or at retail, or as sleeping or lodging quarters. 19. In the design, layout, construction, renovation, and/or installation of Tenant's demising walls, partitions, furniture, fixtures, equipment, and all other improvements and betterments of or in the Premises, the live load of seventy (70) pounds per square foot shall not be exceeded at any time. -iii- 20. Tenant shall not engage or pay any employees on the Premises, except those actually working for such Tenant on said Premises, and Tenant shall not advertise for labor giving an address at said Premises. 21. No bicycles, vehicles, animals, or birds of any kind (other than a seeing-eye dog for a blind person), shall be brought into or kept by Tenant in or about the Premises, the Building, or the Property. 22. Tenant shall not do or commit, or suffer to be done or committed, any act or thing whereby, or in consequence whereof, the rights of other tenants will be materially obstructed or interfered with, or other tenants will in any other way be injured or annoyed, or whereby the Building will be damaged, nor shall Tenant cause or suffer to be caused any noise, vibrations, obnoxious odors, or electronic interference which disturbs other tenants, the operation of their equipment or the operation of any equipment in the Building (including, without limitation, radio, television reception). Tenant shall not suffer nor permit the Premises or any part thereof to be used in any manner or anything to be done therein nor suffer nor permit anything to be brought into or kept in the Premises which, in the reasonable judgment of Landlord, shall in any way impair or tend to materially impair the appearance of the Building. 23. Tenant shall not serve, nor permit the serving of alcoholic beverages in the Premises unless Tenant shall have procured Host Liquor Liability Insurance, issued by companies and in amounts reasonably satisfactory to Landlord, naming Landlord as an additional party insured. 24. Except as otherwise explicitly permitted in its lease, Tenant shall not allow any open flames, cooking, the operation or conduct of any restaurant, luncheonette or cafeteria for the sale or service of food or beverages to its employees or to others, except for food and beverage vending machines, microwave ovens and hot plates and, at catered affairs only, chafing dishes, or install or permit the installation or use of any cigarette, cigar or stamp dispensing machine. 25. Any person in the Building will be subject to identification by employees and agents of Landlord. All persons in or entering Building shall be required to comply with the security policies of the Building. Tenant shall keep doors to unattended areas locked, and shall otherwise exercise reasonable precautions to protect property from theft, loss or damage. 26. In case of invasion, mob, riot, public excitement, or other commotion, Landlord reserves the right to prevent access to the Building during the continuance of the same by closing the doors or otherwise for the safety of Tenants or Landlord and protection of property in the Building. 27. Landlord shall, in no case, be responsible for the admission or exclusion of any person to or from the Building for access or for invasion, hostile attack, insurrection, mob violence, riot, public excitement or other commotion. -iv- 28. Tenant shall immediately notify Landlord of any injury to a person or damage to property regardless of cause within the Premises and all public areas within the Building. 29. Canvassing, soliciting, and peddling in the Building is prohibited and Tenant shall cooperate in preventing the same, and report all such activity to Landlord. 30. Tenant, upon the termination of the tenancy, shall deliver to Landlord all of the keys, combinations to all locks, of offices, rooms and toilet rooms which shall have been furnished Tenant or which Tenant shall have made. 31. These Rules and Regulations shall be read in conjunction with the Lease and the Exhibits thereto. To the extent these Rules and Regulations are inconsistent with the remainder of the Lease and Exhibits, the Lease and other Exhibits shall control. 32. Landlord may, by ten (10) days written notice to Tenant, promulgate additional rules and regulations, and/or modifications of the rules and regulations which are, in Landlord's reasonable judgment, desirable for the general safety, comfort and convenience of occupants and tenants in the Building. All such rules and regulations shall be deemed a part of this Lease, with the same effect as though written herein. Landlord shall enforce all rules and regulations uniformly against all Office Space tenants in the Building (except the Pyramid Club). -v- EXHIBIT "D" To Mellon Bank Center Lease Index of Defined Terms Term Section in Which Defined ---- ------------------------ Additional Rent 1 Affiliate 1 Agent 1 Application for Payment 7.7.2 Base Building Plans 7.1 Building 2.1 Business Hours 1 Capital Expenditures 6.1.3.24 Confirmation Memorandum 3.6 Construction Allowance 1 Construction Documents 7.3.3 Deficiencies 5.2.5 -i- Design Development Documents 7.3.2 Expansion Area 31.3.1 Expense Share Date 6.2.1.2 First Lease Year 3.1 HVAC 8.1 Indemnify 14.2 Issued for Construction 7.3.4.4 Land 1 Landlord 1 Landlord's Cost 7.8.1 Lease Commencement Date 3.1 Lease Interest Rate 1 Lease Year 3.1 Minimum Rent 4 Monthly Operating Expense Estimate 6.2.1.1 Notifying Party 15.10 Office Space 2.1 Operating Expenses 6.1.3 Operating Expense Statement 6.1.8 Operating Year 6.1.1 Permitted Use 1 Pledge 12.1 Premises 2.1 Prime Rate 1 Profit 12.7 Property 1 Real Estate Taxes 5.1.1 Renewal Term 30.1 Rent 4.4 Rentable Area 1 Rentable Square Feet 1 Schematic Design Documents 7.3.1 Sublet Notice 12.4 Sublet Space 12.5 Tax Statement 5.1.5 Tax Year 5.1.4 Tenant 29.2 Tenant Work 7.5 Tenant's Construction Representative 7.2 Tenant's Expense Share 6.1.2 Tenant's Tax Share 5.1.3 Term 3.1.1 Termination Date 3.1 -ii- EXHIBIT E To Mellon Bank Center Lease TENANT'S CONTRACTORS' INSURANCE Prior to approving any contractor or subcontractor, Landlord may require each contractor and subcontractor to obtain the following insurance, at its own expense, in amounts not less than those specified below: 1. Worker's Compensation insurance in accordance with the laws of the Commonwealth of Pennsylvania. 2. Employer's Liability insurance in an amount not less than $1,000,000. 3. Commercial General Liability insurance on an occurrence form for: (a) bodily injury, and (b) property damage liability, with limits of $1,000,000 combined single limit, each occurrence. Such insurance policy shall include, but shall not be limited to: CGL Form, Premises - Operation, Explosion, Collapse, Underground Hazard, Products/Completed Operations Hazard , Blanket Contractual Coverage (including coverage for the Indemnity Clauses provided under this Contract), Broad Form Property Damage, Independent Contractors, Personal Injury. 4. Business Automobile Liability covering owned, hired, and non-owned vehicles with limits of $1,000,000 combined single limit each occurrence. The above insurances (#3 through #4) shall, without liability on the part of Landlord(s) and Agent for premiums thereof include the following: A. Endorsement as Additional Insureds of: a. Landlord(s) and Agent and their partners, directors, officers, employees, agents and representatives; and B. Thirty (30) day prior notice of cancellation to each named insured. -i- EXHIBIT "G" TO MELLON BANK CENTER LEASE CLEANING SPECIFICATIONS IT IS THE INTENT OF THIS EXHIBIT THAT THE BUILDING BE KEPT NEAT AND CLEAN AT ALL TIMES. THE SPECIFICATIONS OUTLINED BELOW SHOULD, THEREFORE, BE REFERRED TO AS A MINIMUM STANDARD. - - - ------------------------------------------------------------------------------ General Cleaning five (5) nights per week, Sunday through Thursday nights, unless excluded by Union contract, and further, excluding Union Holidays. NIGHTLY 1. Empty and damp wipe all ash trays. 2. Empty and dust wipe all waste receptacles. 3. Place waste in bags and leave in designated area off Tenant's premises. 4. Empty, clean and refill smoking urns as needed. 5. Dust all areas within hand high reach; this includes window sills, wall ledges, chairs, desks, tables, baseboards, file cabinets, radiators, pictures and all manner of office furniture. 6. Damp wipe all glass top desks and tables. 7. Damp wipe spillage on furniture in lounges and lunch room areas. 8. Sweep with treated cloths all composition tile flooring. 9. Vacuum all carpeted areas and remove spots. Spot vacuum one night, full vacuum every other night. 10. Sweep and wash rubber mats as necessary. -i- GENERAL OFFICE AREAS Quarterly Strip, scrub and wash all composition tile flooring. HIGH DUSTING Monthly 1. High dust all walls, ledges, pictures, anemostats and registers of public areas not reached in normal nightly cleaning. 2. High dust all walls, ledges, pictures, files, anemostats and registers of office areas not reached in normal nightly cleaning. LIGHTS Quarterly Dust all lighting fixtures in public areas. Yearly 1. Wash all lighting fixtures in public areas. (*) 2. Wash all lighting fixtures in office areas. (*) (*) We would expect lighting fixtures to be dusted on tube replacement. STAIRWAYS Weekly Sweep and dust stairways. Monthly 1. Wash all stairways other than fire tower. 2. Sweep and dust fire tower stairways. -ii- Semi-Annually Wash fire tower stairways. ELEVATOR & ESCALATORS Weekly 1. Clean Passenger elevator saddles. 2. Clean Freight elevator saddles. MISCELLANEOUS Yearly Wash marble walls. AS NECESSARY Snow removal. DAY PORTER SERVICE 1. Police all public areas and men's toilets in Tenant's Premises twice daily. 2. Refill toilet room dispensers in Tenant's Premises as needed twice daily. 3. Sweep sidewalks. 4. Remove fingermarks from entrance doors. 5. Set out foul weather mats when necessary. DAY MATRON SERVICES (Twice during daily working hours) 1. Police ladies' restrooms in Tenant's Premises. -iii- 2. Refill all toilet room dispensers in Tenant's Premises, including sanitary napkins. WINDOW CLEANING SERVICES (Weather and access permitting) Daily 1. Clean entrance doors. 2. Clean glass in directors. Every Three Months 1. Clean all windows inside and out. 2. Clean clear interior partition glass. (*) Every Six Months Clean frosted interior partition glass. (*) (*) Spot clean all glass, if needed, by night cleaning crew. -iv- EXHIBIT I To Mellon Bank Center Lease GUARANTY OF LEASE WHEREAS, a certain Lease of even date herewith has been or will be executed by and between Nine Penn Center Associates, L.P. ("Landlord"), and LORJO CORP., a Pennsylvania corporation ("Tenant"), covering certain premises in the building known as Mellon Bank Center, Philadelphia, Pennsylvania (the "Lease"); and WHEREAS, the Landlord requires as a condition to its execution of the Lease, that the undersigned unconditionally becomes a surety to Landlord for the obligations of Tenant under the Lease; and WHEREAS, the undersigned is a principal of Tenant and as such is desirous that Landlord enter into the Lease with Tenant. -i- NOW THEREFORE, in consideration of the execution of the Lease by Landlord and other good and valuable consideration and intending to be legally bound hereby, the undersigned hereby unconditionally becomes surety to Landlord, its successors and assigns for the full, faithful and punctual performance of each and all of the covenants, agreements and conditions of the Lease to be kept and performed by Tenant, in accordance with and within the times, terms and conditions prescribed by the Lease as well as all other liabilities now or hereafter contracted by Tenant with Landlord together with all reasonable costs and expenses (including reasonable attorney's fees) incurred by Landlord in connection with the enforcement or collection of any of the foregoing (hereinafter collectively referred to as the "Liabilities"). The undersigned further agrees as follows: 1. Landlord shall have the right from time to time, and at any time in its sole discretion, without notice to or consent from the undersigned, or without affecting, impairing or discharging in whole or in part, the Liabilities of the Tenant or the obligations of the undersigned hereunder, to modify, change, extend, alter, amend, or supplement in any respect whatever, the Lease, or any agreement or transaction between Landlord and Tenant or between Landlord and any other party liable for the Liabilities, or any portion or provision thereof; to grant extensions of time and other indulgences of any kind to Tenant; to compromise, release, substitute, exercise, enforce or fail to refuse to exercise or enforce any claims, rights, or remedies of any kind which Landlord may have at any time against Tenant or any other party liable for the Liabilities, or any thereof, or with respect to any security of any kind held by Landlord at any time under any agreement or otherwise. The obligations of the undersigned hereunder shall not be affected, impaired or discharged. in whole or in part, by reason of any action whatsoever taken by Landlord, including, without limitation, any sale, lease, disposition, liquidation or other realization (which may be negligent, willful or otherwise with respect to any security in which Landlord may at any time have any interest or against any other party liable for all or any part of the Liabilities). 2. The undersigned waives: (a) all notices, including but not limited to (i) notice of acceptance of this Guaranty; (ii) notice of presentment, demand for payment, or protest of any of the Liabilities, or the obligation of any person, firm, or corporation held by Landlord as collateral security; (b) all defenses, offsets and counterclaims which the undersigned may at any time have to any of the Liabilities; (c) trial by jury and the right thereto in any proceeding of any kind, whether arising on or out of, under or by reason of this Guaranty, or any other agreement or transaction between the undersigned, Landlord and/or Tenant; and (d) all notices of the financial condition or of any adverse or other change in the financial condition of Tenant. 3. Landlord may, without notice, assign this Guaranty in whole or in part, and no assignment of this Guaranty or assignment or transfer of the Lease or subletting of the Demised Premises shall operate to extinguish or diminish the liability of the undersigned hereunder. -ii- 4. The liability of the undersigned under this Guaranty shall be primary under any right of action which shall accrue to Landlord under the Lease and Landlord may, at its option, proceed against the undersigned without having to commence any action, or having obtained any judgment against Tenant. 5. All of the Liabilities and the obligations of the undersigned hereunder shall be immediately due and payable by the undersigned, anything contained herein to the contrary notwithstanding, immediately upon the occurrence of an Event of Default (as defined in the Lease) whether or not Landlord has exercised any option which it may have to require payment in full or acceleration of payment of the Liabilities from any other person liable for payment of the Liabilities. 6. The undersigned agrees and consents to the exclusive jurisdiction of the Courts of Common Pleas of Pennsylvania and/or the United States District Court for the Eastern District of Pennsylvania in any and all actions and proceedings whether arising hereunder or under any other agreement or undertaking between the undersigned, Landlord and/or Tenant and irrevocably agrees to service of process by certified mail, return receipt requested, to its address set forth herein. 7. The obligations of the undersigned hereunder shall not be affected, impaired or discharged, in whole or in part, by reason of: (a) the entry of an order for relief pursuant to the United States Bankruptcy Code by or against Tenant or the undersigned; (b) the proposal of or the consummation of a plan of reorganization concerning Tenant or the undersigned; or (c) the assignment of Tenant's obligations pursuant to (i) the Lease; (ii) an order of court; or (iii) by operation of law. 8. The waiver of any right by Landlord or its failure to exercise promptly any right shall not be construed as the waiver of any other right including the right to exercise the same at any time thereafter. No waiver of modification of any of the terms or conditions of this Guaranty shall be binding against Landlord unless such waiver or modification is in a writing signed by Landlord. 9. Any acknowledgement, new promise, payment of rent or other sums by Tenant or others with respect to the Liabilities of Tenant, shall be deemed to be made as agent of the undersigned for the purposes hereof, and shall, if the statute of limitations in favor of the undersigned against Landlord shall have commenced to run, toll the running of such statute of limitations, and if such statute of limitations shall have expired, prevent the operation of such statute. 10. The provisions of this Guaranty shall bind the successors and assigns of the undersigned and shall inure to the benefit of Landlord, its successors and assigns. -iii- 11. All rights and remedies of Landlord are cumulative and not alternative. This Guaranty is, and shall be deemed to be, a contract entered into under and pursuant to the laws of the Commonwealth of Pennsylvania and shall be in all respects governed, construed, applied and enforced in accordance with the laws of said Commonwealth. No defense given or allowed by the laws of any other state or country shall be interposed in any action or proceeding hereunder unless such defense is also given or allowed by the laws of the Commonwealth of Pennsylvania. 12. The undersigned represents that at the time of the execution and delivery of this Guaranty nothing exists to impair the effectiveness of the obligations of the undersigned to Landlord hereunder, or the immediate taking effect of this Guaranty between the undersigned and Landlord with respect to the undersigned becoming a surety for the Liabilities. 13. If less than all persons who were intended to sign this Guaranty do so, the same shall nevertheless be binding upon those who do sign and if one person shall sign, all plural references shall be read as singular. In the event the undersigned consists of more than one person or entity, the obligations of such persons and entities hereunder shall be joint and several. 14. Any notice or demand given or made under this Guaranty shall be given or made by mailing the same by certified mail to the party to whom the notice or demand is given or made at the following address of such party set forth in this Guaranty or at such other address as may be stipulated by notice given as aforesaid: If to Landlord: c/o The Rubin Organization The Bellevue, 3rd Floor 200 S. Broad Street Philadelphia, PA 19102 Attn: Director of Leasing With a copy to: Richard I. Rubin & Co., Inc. Management Office Concourse Level, Mellon Bank Center 1735 Market Street Philadelphia, PA 19103 Attn: Building Manager -iv- With a copy to: Banque Paribas The Equitable Tower 787 Seventh Avenue New York, New York 10019 Attention: Douglas Veasey With a copy to: Winston & Strawn 175 Water Street New York, New York 10038 Attention: Douglas L. Wisner, Esq. If to the undersigned: PMA Reinsurance Corporation Suite 2800 1735 Market Street Mellon Bank Center Philadelphia, PA 19103 Attn: Steve Tirney With a copy to: The PMA Building 380 Sentry Parkway Blue Bell, PA 19422 Attn: Paul T. Luber Banque Paribas The Equitable Tower 787 Seventh Avenue New York, New York 10019 Attention: Douglas Veasey With a copy to: Winston & Strawn 175 Water Street New York, New York 10038 Attention: Douglas L. Wisner, Esq. -v- IN WITNESS WHEREOF, the undersigned has caused this Guaranty to be executed and sealed this ____ day of ________________, 1994. Attest: PMA REINSURANCE CORPORATION _____________________________ By: _______________________________ Name: Name: Title: Title: (Corporate Seal) -vi- EXHIBIT J Salvaged Material 1. All 2x4 light fixtures to be removed from the ceiling, and stored in an area determined by Landlord. 2. All wood and hollow metal doors to be removed prior to the demolition of the walls and stored in an area determined by Landlord. All hardware i.e.: locksets, latchsets, hinges and closures designated by Tenant prior to demolition, will remain on the doors. 3. Flexible duct is to be removed and stacked on floor. All VAV boxes and supplemental air conditioning units are to remain in their existing Allocations. 4. All plumbing fixtures i.e.: sinksand faucets, are to be removed and stored in an area determined by Landlord. 5. All fire alarm equipment and devices i.e.: smoke detectors, fire horns, strobe lights, warden pull stations, etc., are to be tied up to the existing structure. 6. All decorative light fixtures to be removed and stored in an area determined by Landlord. 7. All french doors in elevator lobbies in the Premises to be removed and stored in an area determined by Landlord. -i- EXHIBIT L To Mellon Bank Center Lease CONFIRMATION OF LEASE TERM THIS IS AN AGREEMENT dated as of the _____ day of ______________ , 19__ by and between NINE PENN CENTER ASSOCIATES, L.P. ("Landlord") and ("Tenant"). W I T N E S S E T H: WHEREAS, by a lease dated as of ____________ , 1994, between the parties hereto (the "Lease") Landlord leased to Tenant and Tenant leased and took from Landlord, certain premises at Mellon Bank Center in Philadelphia, Pennsylvania for the term and upon the terms and conditions more specifically set forth therein (the "Premises"); WHEREAS, the Lease provides that the parties shall execute a confirmation of certain terms of the Lease when the Lease Commencement Date (as defined in the Lease) occurred; NOW THEREFORE, the parties hereto, intending to be legally bound hereby, agree as follows: A. The Lease has not been amended except as follows: B. The Tenant is now in possession of the Premises. C. The Tenant acknowledges that the Lease is in full force and effect. D. The Lease Commencement Date of the Lease and the Termination Date of the term of the Lease are as follows: E. Tenant's obligation to pay Rent commences on _________, being the first day after the Rent Free Period (as defined in the Lease). F. Nothing in this Agreement is intended to change or modify the rights of the parties under the Lease. -i- IN WITNESS WHEREOF, the parties hereto have caused these presents to be executed by their duly authorized representatives the day and year first above written. LANDLORD Witness: NINE PENN CENTER ASSOCIATES, L.P. By Transportation Associates, a Pennsylvania limited partnership, its managing general partner __________________________________ By: _______________________________ Name: Ronald Rubin Title: Managing General Partner TENANT Attest: __________________________________ By: _______________________________ Name: Title: -ii- FIRST AMENDMENT OF OFFICE LEASE THIS FIRST AMENDMENT OF OFFICE LEASE (this "Amendment") is made as of the 30th day of October, 1996, by and between NINE PENN CENTER ASSOCIATES, a Pennsylvania limited partnership (herein called "Landlord") and LORJO CORP., a Pennsylvania corporation (herein called "Tenant"). BACKGROUND A. Pursuant to that certain Office Lease dated as of May 26, 1994 (herein called the "Lease"), Landlord leased to Tenant, which rented from Landlord, approximately 57,914 Rentable Square Feet of office space located on the 28th, 29th and 30th floors of Mellon Bank Center, 1735 Market Street, Philadelphia, Pennsylvania. B. The parties now desire to amend the Lease as hereinafter provided. AGREEMENT NOW, THEREFORE, in consideration of the Background, the mutual covenants and agreements herein set forth, and other good, valuable and aufficient consideration received, and intending to be legally bound hereby, the parties hereto agree as follows: 1. Definitions. Unless otherwise herein defined, all terms defined in the Lease shall have the meanings ascribed to them in the Lease when used in this Amendment. 2. Expansion. Landlord hereby demises and leases unto Tenant, and Tenant hereby takes, leases and hires from Landlord, (a) all that certain portion of the 27th floor of the Building comprising 16,284 Rentable Square Feet of space, as shown on the floor plan attached hereto and marked Exhibit "A" (the "27th Floor Space"), and (b) that certain portion of the P-2 level of the Building comprising 3,362 Rentable Square Feet of space, being shown on the floor plan attached hereto and marked Exhibit "B" (the "P-2 Space"), on the terms and conditions hereinafter set forth. The 27th Floor Space and the P-2 Space are sometimes herein jointly referred to as the "Expansion Space". 3. Term. Except as otherwise provided in this Amendment, effective on the date of this Amendment the Expansion Space shall form a part of the Premises for all purposes under the Lease. 4. Rent. 4.1 Rent Commencement Date. Tenant shall commence to pay Rent with respect to the Expansion Space on January 1, 1997. Prior to January 1, 1997, Tenant shall not be obligated to pay Rent with respect to its use or occupancy of the Expansion Space, excepting only that (a) commencing on the date on which Landlord tenders possession of the Expansion Space, or any portion thereof, to Tenant, and continuing until completion of the Tenant Work, Tenant shall pay to Landlord the Additional Rent provided for in Section 7.11 below, and (b) upon Tenant's occupancy of any portion of the Expansion Space for purposes of conducting the Permitted Use therein following completion of the Tenant Work, through December 31, 1996, Tenant shall be obligated to pay all Rent on account of such space, excepting only Minimum Rent, payments on account of Tenant's Tax Share, and payments on account of Tenant's Expense Share. 4.2 Minimum Rent. Minimum Rent for the P-2 space shall be Two Dollars ($2.00) per Rentable Square Foot ($6,724 per annum, $560.34 per month). Minimum Rent for the 27th Floor Space shall be as follows: January 1, 1997 through December 31, 1998 $13.00 per Rentable Square Foot ($211,692 per annum, $17,641 per month) January 1, 1999 through December 31, 2000 $13.50 per Rentable Square Foot ($219,834 per annum, $18,319.50 per month) January 1, 2001 through December 31, 2002 $14.50 per Rentable Square Foot ($236,118 per annum, $19,676.50 per month) January 1, 2003 through December 31, 2004 $15.00 per Rentable Square Foot ($244,260 per annum, $20,355 per month) Minimum Rent shall be payable in equal monthly installments commencing on January 1, 1997 and thereafter due on the first day of each month during the Term without demand, deduction or set-off, at the offfice of Agent. 4.3 Real Estate Taxes. Effective January 1, 1997, and thereafter during the Term until the Expansion Area Termination Date, the Rentable Area of the Expansion Space shall be included in the Rentable Area of the Premises for purposes of computing Tenant's Tax Share. As of January 1, 1997, Tenant's Tax Share shall be 5.725%. 4.4 Operating Expenses. Effective January 1, 1997, and thereafter during the Term until the Expansion Area Termination Date, the Rentable Area of the Expansion Space shall be included in the Rentable Area of the Premises for purposes of computing Tenant's Expense Share. As of January 1, 1997, Tenant's Expense Share shall be 6.298%. 5. Permitted Use. The 27th Floor Space shall be used by Tenant solely for the Permitted Use. The P-2 Space shall be utilized by Tenant solely for storage purposes, mail handling and other administrative functions. 2 6. Expansion Construction Allowance. Landlord agrees to pay to Tenant, in accordance with the terms and conditions set forth in Section 7.8 below, the sum of $162,840 (the "Expansion Construction Allowance") in order to assist Tenant in defraying the cost of constructing the Tenant Work (hereinafter defined) within the Expansion Space. The Expansion Construction Allowance shall be Landlord's sole contribution to Tenant's cost of constructing such Tenant Work. 7. Improvement of Expansion Space. Except as otherwise herein specifically provided, the terms of this Section 7, and not the terms of Section 7 of the Lease, shall apply in connection with Tenant's initial improvement of the Expansion Space. 7.1 Base Building Plans. Landlord shall make available to Tenant for use by Tenant or its architect or engineer, such structural, electrical and mechanical drawings, specifications, and other information with respect to the Building ("Base Building Plans") reflecting Landlord's construction of the Core and Shell. Landlord shall also make available for Tenant's inspection all shop drawings and submittals respecting the construction of the Core and Shell. Tenant acknowledges that the Core and Shell were constructed to construction industry standard tolerances permitting limited deviations from the requirements of the Base Building Plans. Accordingly, promptly following the execution of this Amendment, and prior to commencement of preparation of the plans and documents which Tenant is obligated to produce under Section 7.3 below, Tenant will cause its architect or engineer to conduct a field survey of the Expansion Space to verify critical dimensions and ascertain any deviation from the Base Building Plans. 7.2 Tenant's Construction Representative. Tenant hereby designates Fred Harle as the "Tenant's Construction Representative," who Tenant agrees shall be available to meet and consult with Landlord on a continuing basis at the Expansion Space as Tenant's representative concerning the matters which are the subject of this Section 7 and who, as between Landlord and Tenant, shall have the power legally to bind Tenant in giving direction to Landlord respecting the Construction Documents and the Tenant Work, in giving approvals of design documents and work, and in making requests and approval for changes. Tenant may from time to time change the designation of Tenant's Construction Representative by written notice to Landlord, so long as there is at all times at least one individual designated to serve in such capacity. 7.3 Preparation, Review and Approval of Tenant's Schematic Design Documents, Design Development Documents and Construction Documents. Tenant shall, at its expense, consult with its architect, engineer, designer and such other consultants as it shall deem necessary for development and timely completion of certain documents as described in this Section 7, which documents shall conform to the Base Building Plans. 3 7.3.1 Schematic Design. Tenant shall prepare at its expense "Schematic Design Documents" reasonably satisfactory to Landlord which generally indicate functional and organizational relationships, the location and size of the Expansion Space, all demising and interior walls, and the locations and configurations of all offices and conference rooms, libraries, file rooms and other office areas and improvements to be contained in the Expansion Space. 7.3.2 Design Development. Subject to the procedural requirements set forth in Subsection 7.3.4 below, Tenant, at its expense, shall cause to be prepared and delivered to Landlord for its review and approval, which approval shall not be unreasonably withheld or delayed: one (l) complete reproducible set and two (2) blue-line print sets of "Design Development Documents" consisting of: architectural, mechanical, electrical, plumbing and structural drawings and other documents to fix and describe the size and character of the space, all commonly called "Space Plans", prepared by an architect or space planner approved by Landlord. Tenant shall deliver to Landlord in a timely manner the Schematic Design Documents and the Design Development Documents for approval, so that the Construction Documents are timely delivered and approved as set forth below. Tenant shall cause the Design Development Documents to be prepared in conformity with and consistent with the Schematic Design Documents. 7.3.3 Construction Documents. Tenant, at its expense, shall cause to be prepared and delivered to Landlord one (l) complete reproducible set and two (2) blue-line print sets of complete and final "Construction Documents" consisting of (a) working drawings; (b) two (2) copies of specifications, as approved by Landlord for the construction of the Expansion Space for Tenant's occupancy; and (c) a permit set. Tenant shall deliver the Construction Documents to Landlord not later than October 1, 1996. Tenant shall cause the Construction Documents to be prepared in conformity with and consistent with the Design Development Documents. 7.3.3.l Tenant's Construction Documents shall be signed and sealed by an architect or professional engineer (where applicable) licensed and registered in the Commonwealth of Pennsylvania. In addition to conforming to Landlord's Base Building Plans, Tenant's Construction Documents shall also conform to all applicable laws, ordinances, building codes and requirements of public authorities and insurance underwriters. Tenant's Construction Documents shall contain, at a minimum, floor plans, reflected ceiling plans, power and telephone plans, mechanical plans, electrical plans, fire protection plans and all other details and schedules which designate the locations and specifications for all mechanical, electrical, fire protection and life safety equipment to be installed in the Expansion Space, and all partitions, doors, lighting fixtures, electric receptacles and switches, telephone outlets, special air conditioning, and other improvements to be installed within the Expansion Space. 7.3.4 Landlord Approval. Tenant shall submit for Landlord's approval, Schematic Design Documents, Design Development Documents and Construction Documents, in accordance with the guidelines and time frames described above. The approval by Landlord of 4 Tenant's Schematic Design Documents, Design Development Documents and Construction Documents shall be subject to the following procedural requirements: 7.3.4.1 Landlord shall promptly review the applicable documents or any additional requested information, and either approve the same or return the same to Tenant with requested modifications. 7.3.4.2 If Landlord shall return the modified documents to Tenant with requested modifications, Landlord shall specify a reasonable period of time, not to exceed three (3) Business Days, within which such modifications shall be made and within which such modified plans shall be re-submitted to Landlord by Tenant, until the modified documents are finally approved by Landlord. 7.3.4.3 To the extent the Tenant's Schematic Design Documents, Design Development Documents or Construction Documents, as the case may be, in Landlord's sole judgment, involve any modification of, or impact upon, the Building's structural, mechanical, electrical or plumbing systems or components, then such approval may be withheld by Landlord in its absolute and sole discretion. 7.3.4.4 Tenant's Construction Documents, as approved by Landlord and as modified by Tenant to take account of any changes reasonably requested by Landlord, are hereinafter considered to be "Approved for Construction." 7.4 [INTENTIONALLY OMITTED]. 7.5 Tenant Work Defined. Tenant shall, in a good and workmanlike manner, cause the Expansion Space to be improved and completed at Tenant's expense (subject to the Expansion Construction Allowance hereinafter provided) and in accordance with Tenant's Construction Documents, which work (including materials, supplies, components, labor and services therefor) is herein referred to as the "Tenant Work". 7.6 Tenant's Contractor. 7.6.1 The Tenant Work is to be performed by Tenant's contractor, selected by Tenant subject to Landlord's written approval. Landlord will not unreasonably withhold or delay its approval of any contractor submitted by Tenant, and Landlord's disapproval shall not be considered unreasonable if the disapproved contractor may, in Landlord's sole opinion, prejudice Landlord's relationship with Landlord's contractors or subcontractors or the relationship between such contractors and their subcontractors or employees, or otherwise disturb harmonious labor relations in or about the Building. 7.6.2 Upon Landlord's approval of the Tenant's contractor, Tenant shall enter into a construction contract or construction management agreement for the Tenant Work 5 (the "Tenant Work Contract"). The Tenant Work Contract shall require that both Landlord and Tenant must approve the selection of each subcontractor and supplier furnishing goods or services costing over Fifty Thousand Dollars ($50,000.00) within three (3) Business days of written request for approval, such approval not to be unreasonably withheld, and shall require Tenant's contractor to comply with all requirements of Section 7.9 below. 7.6.3 Prior to commencement of that portion of the Tenant Work which requires a building permit, Tenant will provide Landlord with a copy of the building permit respecting the Tenant Work. Additionally, upon completion of the Tenant Work and prior to occupancy of the Expansion Space by Tenant, Tenant will deliver to Landlord a copy of the temporary or permanent Certificate of Occupancy respecting the Expansion Space; provided that if Tenant delivers a temporary Certificate of Occupancy, Tenant shall diligently and continuously pursue issuance of a permanent Certificate of Occupancy and shall deliver a copy of same to Landlord upon receipt. Should Tenant so request, Landlord agrees to provide reasonable assistance to Tenant, at no expense to Landlord, in Tenant's efforts to obtain a permanent Certificate of Occupancy for the Expansion Space. 7.7 [INTENTIONALLY OMITTED.] 7.8 Payment of Expansion Construction Allowance. 7.8.1 Tenant may draw upon the Expansion Construction Allowance to pay for labor and materials provided for the Tenant Work (and to pay Tenant's architect's and engineer's fees and other professional fees incurred in connection with the design and construction of the Tenant Work) (herein called "Tenant's Costs") in accordance with the terms of this Section 7.8. At the time Tenant's Construction Documents are finalized, Tenant will deliver to Landlord an estimated budget reasonably detailing the anticipated Tenant's Costs. Tenant shall submit to Landlord on or before the twenty-eighth (28th) day of each month, a voucher for Tenant's Costs executed by Tenant's Construction Representative and by a partner or officer of Tenant, setting forth in reasonable detail the amount of such Tenant's Costs and identifying in reasonable detail the material, labor, fees, and costs to which they relate. Landlord shall pay to Tenant the amount of each Tenant voucher within thirty (30) days after receipt of such voucher from Tenant. Notwithstanding anything set forth in this Section 7.8.1, any amounts held back as retainage under contracts for the Tenant Work shall not constitute a part of Tenant's Costs unless and until paid to the contractor under the terms of the subject contract. 7.8.2 Each voucher submitted to Landlord by Tenant (as set forth in Section 7.8.1) shall be accompanied by a certificate duly executed and shown to by Tenant's Construction Representative stating that: (i) based on site inspections and the data comprising the invoice submitted by Tenant for payment by Landlord, the Tenant Work has progressed to the point indicated and the quality and condition of the Tenant Work theretofore completed or in the process of completion as of the date of such certificate is in accordance with the Construction Documents; and (ii) that Tenant's contractor is entitled to the amount so certified. 6 7.9 Tenant's Contractors. In performing The Tenant Work or in performing alterations within any Expansion Area prior to to Tenant's beneficial occupancy thereof, the conditions set forth in Section 7.9 of the Lease shall be fulfilled, and Tenant, by undertaking to have such work performed by its contractor or contractors, shall be deemed to have agreed to cause such conditions to be fulfilled. 7.10 Condition of Expansion Space. Tenant accepts the Expansion Space in its "AS-IS" condition on the date of this Amendment. 7.11 Site Logistics and Procedures. Tenant's occupancy of the Expansion Space during performance of the Tenant Work shall be subject to all of the terms and conditions of the Lease, excepting only that no Rent shall be payable during such period except to the extent specifically required under this Section 7.11, and except that Landlord shall not be obligated to provide janitorial services pursuant to Section 8.4 of the Lease. During such period, Tenant shall comply with the Site Logistics and Procedures set forth on Exhibit "K" of the Lease. Any Tenant Work to be performed by Tenant in the elevator lobby and common corridors of the 27th floor of the Building shall be at Tenant's expense, shall be subject to Tenant's obtaining the prior approval of the other tenants of the 27th floor as to the nature and scope of such work, and shall be undertaken at such times and in such a manner as will not unreasonably disturb other tenants of such floor or unreasonably interfere with the conduct of their respective businesses, as reasonably determined by Landlord. Landlord shall bear the cost of electricity consumed by Tenant's contractors and subcontractors in the performance of the Tenant Work, as well as the cost of electricity consumed in the provision of HVAC service to the Expansion Space during such period. 8. P-2 Services. Landlord will furnish the P-2 Space with janitorial service and with heat, ventilation and electric lighting (the cost of which services and utilities shall be billed to Tenant as Additional Rent as provided in Section 8 of the Lease), but will not furnish any other utilities or services to the P-2 Space, notwithstanding anything to the contrary set forth in the Lease. 9. Brokers. Each of Landlord and Tenant represents and warrants to the other that it has not dealt with any broker, agent, finder or other person in the negotiation for or the obtaining of this Amendment other than Agent, and each agrees to indemnify and hold the other harmless from any and all costs (including reasonable attorneys' fees) and liability for commissions or other compensation claimed by any such broker, agent, finder or other person other than Agent, employed by the indemnifying party or claiming to have been engaged by the indemnifying party in connection with this Amendment. Tenant acknowledges that Agent has acted only as an agent with respect to the procurement and negotiation of this Amendment and agrees that Agent shall not be responsible or liable for any term, provision or condition of this Amendment. Landlord agrees to pay any fee or commission owing to Agent on account of this Amendment. 7 10. Effect of Amendment. As amended hereby, the Lease continues in full force and effect. In the event of any inconsistency between the terms of this Amendment and the terms of the Lease, the terms of this Amendment shall govern and control. Without limiting the generality of the foregoing, Tenant hereby ratifies and confirms the warrant of attorney set forth in Section 17.2 of the Lease to the same extent as if such warrant were fully set forth herein. Time remains of the essence of the Lease. IN WITNESS WHEREOF, this Amendment has been duly executed by the parties hereto as of the date first above written. TENANT LORJO CORP. By: /s/ John W. Smithson ------------------------------- Name: John W. Smithson Title: Vice President LANDLORD NINE PENN CENTER ASSOCIATES, a Pennsylvania limited partnership By Transporatation Associates, a Pennsylvania limited partnership, general partner By: /s/ Ronald Rubin ------------------------------- Name: Ronald Rubin Title: General Partner By The Equitable Life Assurance Society of the United States, general partner By: /s/ Dana J. Harrell ------------------------------- Name: Dana J. Harrell Title: Investment Officer 8 First Amendment to Sublease THIS FIRST AMENDMENT TO SUBLEASE (this "Amendment") is made as of the______________day of_______________1996, by and between Lorjo Corp., a Pennsylvania corporation (the "Sublandlord") and PMA Reinsurance Corporation, a Pennsylvania corporation (the "Subtenant"). Recitals A. Pursuant to that certain Sublease dated as of May 26, 1994 (herein called the "Sublease"), Sublandlord leased to Subtenant 57,914 Rentable Square Feet of space in the building (the "Building") known as Mellon Bank Center situated at 1735 Market Street, Philadelphia, Pennsylvania. B. Subtenant desires to sublease additional space in the Building from Sublandlord. C. Unless otherwise defined herein, all defined terms shall have the meanings ascribed to them in the Master Lease (as "Master Lease" is defined in the Sublease). D. The parties now desire to amend the Sublease as hereinafter provided. Agreements NOW, THEREFORE, in consideration of the mutual covenants and agreements herein set forth, and other good, valuable and sufficient consideration received, and intending to be legally bound hereby, the parties hereto agree as follows: 1. Expansion. Sublandlord hereby demises and subleases unto Subtenant, and Subtenant hereby takes, subleases and hires from Sublandlord, (a) all that certain portion of the 27th floor of the Building comprising 16,284 Rentable Square Feet of space and (b) that certain portion of the P-2 level of the Building comprising 3,362 Rentable Square Feet of space (herein called the "Expansion Space"). 2. Premises. Pursuant to this Amendment, the Premises shall consist of a total of 77,560 Rentable Square Feet. 3. Term. Effective on the date of this Amendment, the Expansion Space shall form a part of the Premises for all purposes under the Sublease; provided, however, that the term of this Sublease shall terminate one (1) day prior to the Termination Date under 1 the Master Lease or on such earlier date upon which this Sublease may expire or be terminated pursuant to any of the conditions of limitation or other provisions of the Sublease, the Master Lease, or pursuant to law. 4. Rent. Subtenant shall commence to pay Rent with respect to the Expansion Space on January 1, 1997 at the rates set forth in the Master Lease and the First Amendment thereto dated simultaneously herewith. 5. Incorporation by Reference. All of the terms, covenants and conditions of the Sublease are incorporated herein by reference so that, except to the extent that they are inapplicable or modified by the provisions of this First Amendment to Sublease, each and every term, covenant and condition of the Sublease shall be binding upon Sublandlord and Subtenant in relation to Subtenant's lease of the Expansion Space. IN WITNESS WHEREOF the parties hereto have duly executed this First Amendment to Sublease as of the date written above. SUBLANDLORD: LORJO CORP., a Pennsylvania corporation By: /s/ John W. Smithson ----------------------------------- SUBTENANT: PMA REINSURANCE CORPORATION, a Pennsylvania corporation By: /s/ Stephen Tirney ----------------------------------- EX-10.13 16 CREDIT AGREEMENT - - - -------------------------------------------------------------------------------- CREDIT AGREEMENT among PENNSYLVANIA MANUFACTURERS CORPORATION, THE LENDERS NAMED HEREIN, THE BANK OF NEW YORK, as Administrative Agent, and FIRST UNION NATIONAL BANK OF NORTH CAROLINA, as Documentation Agent $235,000,000 Revolving Credit Facility Dated as of March 14, 1997 - - - -------------------------------------------------------------------------------- TABLE OF CONTENTS Page RECITALS ................................................................1 ARTICLE I DEFINITIONS 1.1. Defined Terms..........................................................1 1.2. Accounting Terms......................................................17 1.3. Other Terms; Construction.............................................18 ARTICLE II AMOUNT AND TERMS OF THE LOANS 2.1. Commitments; Loans....................................................18 2.2. Committed Borrowings..................................................19 2.3. Bid Borrowings........................................................20 2.4. Disbursements; Funding Reliance; Domicile of Loans....................23 2.5. Notes.................................................................24 2.6. Termination and Reduction of Commitments..............................24 2.7. Mandatory Payment and Prepayment......................................25 2.8. Voluntary Prepayment..................................................26 2.9. Interest..............................................................26 2.10. Fees..................................................................27 2.11. Interest Periods......................................................28 2.12. Conversions and Continuations.........................................29 2.13. Method of Payments; Computations......................................29 2.14. Recovery of Payments..................................................31 2.15. Use of Proceeds.......................................................31 2.16. Pro Rata Treatment; Sharing of Payments...............................31 2.17. Increased Costs; Change in Circumstances; Illegality; etc.............32 2.18. Taxes.................................................................34 2.19. Compensation..........................................................35 2.20. Replacement of Lenders................................................36 ARTICLE III CONDITIONS OF BORROWING 3.1. Conditions of Initial Loans...........................................37 3.2. Conditions to All Loans...............................................39 -i- ARTICLE IV REPRESENTATIONS AND WARRANTIES 4.1. Corporate Organization and Power......................................40 4.2. Authorization; Enforceability.........................................40 4.3. No Violation..........................................................40 4.4. Governmental Authorization; Permits...................................41 4.5. Litigation............................................................41 4.6. Taxes.................................................................41 4.7. Subsidiaries..........................................................42 4.8. Full Disclosure.......................................................42 4.9. Margin Regulations....................................................42 4.10. No Material Adverse Change............................................42 4.11. Financial Matters.....................................................42 4.12. Ownership of Properties...............................................43 4.13. ERISA.................................................................43 4.14. Environmental Matters.................................................44 4.15. Compliance With Laws..................................................44 4.16. Regulated Industries..................................................44 4.17. Insurance.............................................................44 4.18. Certain Contracts.....................................................45 4.19. Reinsurance Agreements................................................45 4.20. Ranking of Obligations................................................45 ARTICLE V AFFIRMATIVE COVENANTS 5.1. GAAP Financial Statements.............................................46 5.2. Statutory Financial Statements........................................46 5.3. Other Business and Financial Information..............................47 5.4. Corporate Existence; Franchises; Maintenance of Properties............49 5.5. Compliance with Laws..................................................50 5.6. Payment of Obligations................................................50 5.7. Insurance.............................................................50 5.8. Maintenance of Books and Records; Inspection..........................50 5.9. Dividends.............................................................51 5.10. Ownership of Insurance Subsidiaries...................................51 5.11. Extinguishment of Senior Note Indebtedness............................51 5.12. Further Assurances....................................................51 ARTICLE VI FINANCIAL COVENANTS 6.1. Capitalization Ratio.................................................51 6.2. Cash Coverage Ratio..................................................51 -ii- 6.3. Statutory Surplus.....................................................51 6.4. Risk-Based Capital....................................................51 ARTICLE VII NEGATIVE COVENANTS 7.1. Merger; Consolidation; Disposition of Assets.........................52 7.2. Indebtedness.........................................................53 7.3. Liens................................................................53 7.4. Investments; Acquisitions............................................54 7.5. Restricted Payments..................................................55 7.6. Transactions with Affiliates.........................................55 7.7. Certain Amendments...................................................55 7.8. Lines of Business....................................................55 7.9. Limitation on Certain Restrictions...................................56 7.10. Fiscal Year..........................................................56 7.11. Accounting Changes...................................................56 7.12. Reinsurance Agreements...............................................56 ARTICLE VIII EVENTS OF DEFAULT 8.1. Events of Default....................................................57 8.2. Remedies: Termination of Commitment, Acceleration, etc...............59 8.3. Remedies: Set-Off....................................................59 ARTICLE IX THE AGENTS 9.1. Appointment.........................................................60 9.2. Nature of Duties....................................................60 9.3. Exculpatory Provisions..............................................60 9.4. Reliance by Agents..................................................60 9.5. Non-Reliance on Agents and Other Lenders............................61 9.6. Notice of Default...................................................61 9.7. Indemnification.....................................................62 9.8. Each Agent in its Individual Capacity...............................62 9.9. Successor Agents....................................................62 ARTICLE X MISCELLANEOUS 10.1. Fees and Expenses...................................................63 10.2. Indemnification.....................................................63 -iii- 10.3. Governing Law; Consent to Jurisdiction...............................64 10.4. Arbitration; Preservation and Limitation of Remedies.................64 10.5. Notices..............................................................65 10.6. Amendments, Waivers, etc.............................................66 10.7. Assignments, Participations..........................................66 10.8. No Waiver............................................................68 10.9. Successors and Assigns...............................................69 10.10. Survival.............................................................69 10.11. Severability.........................................................69 10.12. Construction.........................................................69 10.13. Confidentiality......................................................69 10.14. Counterparts.........................................................70 10.15. Entire Agreement.....................................................70 EXHIBITS Exhibit A-1 Form of Committed Loan Note Exhibit A-2 Form of Bid Loan Note Exhibit B-1 Form of Notice of Committed Borrowing Exhibit B-2 Form of Notice of Conversion/Continuation Exhibit C-1 Form of Bid Request Exhibit C-2 Form of Bid Exhibit C-3 Form of Bid Loan Confirmation Exhibit D Form of Assignment and Acceptance Exhibit E-1 Form of Compliance Certificate (GAAP Financial Statements) Exhibit E-2 Form of Compliance Certificate (Statutory Financial Statements) Exhibit F Form of Financial Condition Certificate Exhibit G Form of Opinion of Duane, Morris & Heckscher Exhibit H Form of Opinion of Robinson, Bradshaw & Hinson, P.A. SCHEDULES Schedule 1.1 Management Group Schedule 4.4 Licenses Schedule 4.6 Taxes Schedule 4.7 Subsidiaries Schedule 4.14 Environmental Matters Schedule 4.18 Material Contracts Schedule 4.19 Reinsurers and Collateral Securing Certain Reinsurers' Obligations Schedule 7.2 Indebtedness Schedule 7.3 Liens Schedule 7.6 Transactions with Affiliates -iv- CREDIT AGREEMENT THIS CREDIT AGREEMENT, dated as of the 14th day of March, 1997, is made among PENNSYLVANIA MANUFACTURERS CORPORATION, a Pennsylvania corporation with its principal offices in Philadelphia, Pennsylvania (the "Borrower"), the banks and financial institutions listed on the signature pages hereof or that become parties hereto after the date hereof (collectively, the "Lenders"), THE BANK OF NEW YORK ("The Bank of New York"), as administrative agent for the Lenders (in such capacity, the "Administrative Agent"), and FIRST UNION NATIONAL BANK OF NORTH CAROLINA ("First Union"), as documentation agent for the Lenders (in such capacity, the "Documentation Agent") (each of the Administrative Agent and Documentation Agent, an "Agent" and collectively, the "Agents"). RECITALS A. The Borrower has requested that the Lenders make available to the Borrower a revolving credit facility in the aggregate principal amount of $235,000,000 as reduced from time to time as provided herein. The Borrower will use the proceeds of this facility to refinance certain existing indebtedness and for working capital and general corporate purposes, all as more fully described herein. B. The Lenders are willing to make available to the Borrower the revolving credit facility described above subject to and on the terms and conditions set forth in this Agreement. AGREEMENT NOW, THEREFORE, in consideration of the mutual provisions, covenants and agreements herein contained, the parties hereto hereby agree as follows: ARTICLE I DEFINITIONS 1.1. Defined Terms. For purposes of this Agreement, in addition to the terms defined elsewhere herein, the following terms shall have the meanings set forth below (such meanings to be equally applicable to the singular and plural forms thereof): "Absolute Rate" shall have the meaning given to such term in Section 2.3(c)(v). "Absolute Rate Auction" shall mean a solicitation of Bids setting forth Absolute Rates pursuant to Section 2.3. "Absolute Rate Loan" shall mean, at any time, any Bid Loan that bears interest at such time at an Absolute Rate established pursuant to an Absolute Rate Auction. "Account Designation Letter" shall mean a letter from the Borrower to the Administrative Agent, duly completed and signed by an Authorized Officer of the Borrower and in form and substance satisfactory to the Administrative Agent, listing any one or more accounts to which the Borrower may from time to time request the Administrative Agent to forward the proceeds of any Loans made hereunder. "Administrative Agent" shall mean The Bank of New York in its capacity as Administrative Agent appointed under Article IX, and its successors and permitted assigns in such capacity. "Affiliate" shall mean, as to any Person, each other Person that directly, or indirectly through one or more intermediaries, owns or controls, is controlled by or under common control with, such Person or is a director or officer of such Person. For purposes of this definition, with respect to any Person "control" shall mean (i) the possession, direct or indirect, 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, or (ii) the beneficial ownership of securities or other ownership interests of such Person having ten percent (10%) or more of the combined voting power of the then outstanding securities or other ownership interests of such Person ordinarily (and apart from rights accruing under special circumstances) having the right to vote in the election of directors or other governing body of such Person. "Agents" shall mean the Administrative Agent and the Documentation Agent. "Aggregate Unutilized Commitments" shall mean, at any time, (i) the sum of the Commitments at such time less (ii) the sum of the aggregate principal amount of Committed Loans outstanding at such time and the aggregate principal amount of Bid Loans outstanding at such time. "Agreement" shall mean this Credit Agreement, as amended, modified or supplemented from time to time. "Annual Statement" shall mean, with respect to any Insurance Subsidiary for any fiscal year, the annual financial statements of such Insurance Subsidiary as required to be filed with the Insurance Regulatory Authority of its jurisdiction of domicile and in accordance with the laws of such jurisdiction, together with all exhibits, schedules, certificates and actuarial opinions required to be filed or delivered therewith. "Applicable Margin" shall mean, at any time with respect to any LIBOR Committed Loan or the Facility Fee, except as provided in the last two sentences of this definition, the applicable percentage as determined under the following matrix with reference to the Capitalization Ratio calculated as provided below: -2-
==================================================================================================== Capitalization Ratio LIBOR Committed Loans Facility Fee - - - ---------------------------------------------------------------------------------------------------- *.30 .425% .275% - - - ---------------------------------------------------------------------------------------------------- *.25 but **.30 .375% .225% - - - ---------------------------------------------------------------------------------------------------- *.20 but **.25 .325% .175% - - - ---------------------------------------------------------------------------------------------------- **.20 .250% .150% ====================================================================================================
* Greater to or less than ** less than The Applicable Margins shall be reset from time to time in accordance with the above matrix on the day of the delivery by the Borrower in accordance with Sections 5.1(a) and 5.1(b) of financial statements together with a Compliance Certificate attaching a Covenant Compliance Worksheet (reflecting the computation of the Capitalization Ratio as of the last day of the preceding fiscal quarter, beginning with the fiscal quarter ending December 31, 1996) that provides for a change in the Applicable Margins from that then in effect. Until the first effective date of any change in the Applicable Margins for LIBOR Committed Loans and the Facility Fee, such Applicable Margins shall be .425% and .275%, respectively. If the Borrower shall fail to deliver a Compliance Certificate attaching a Covenant Compliance Worksheet within sixty (60) days after the end of each of the first three fiscal quarters (or one hundred twenty (120) days after the end of the last fiscal quarter), the Applicable Margins for LIBOR Committed Loans and the Facility Fee shall be .425% and .275%, respectively, for the period from and including the 61st day (the 121st day in the case of the last quarter) after the end of such fiscal quarter to the date of the delivery by the Borrower to the Administrative Agent of a Compliance Certificate attaching a Covenant Compliance Worksheet demonstrating that a different Applicable Margin is applicable. "Assignee" shall have the meaning given to such term in Section 10.7(a). "Assignment and Acceptance" shall mean an Assignment and Acceptance entered into between a Lender and an Assignee and accepted by the Administrative Agent and the Borrower, in substantially the form of Exhibit D. "Authorized Officer" shall mean any officer of the Borrower authorized by resolution of the board of directors of the Borrower to take the action specified herein with respect to such officer and whose signature and incumbency shall have been certified to the Agents by the secretary or an assistant secretary of the Borrower. "Available Dividend Amount" shall mean, with respect to any Insurance Subsidiary for any period of four consecutive fiscal quarters, the aggregate maximum amount of dividends that is, or would be if such period were a fiscal year, permitted by the Insurance Regulatory Authority of its jurisdiction of domicile, under applicable Requirements of Law (without the necessity of any consent, approval or other action of such Insurance Regulatory Authority involving the granting of permission or the exercise of discretion by such Insurance Regulatory Authority), to be paid by such Insurance Subsidiary to the Borrower or another Subsidiary of the Borrower in respect of such four-quarter period as if such period were a fiscal year (whether or not any such dividends are actually paid). -3- "Bankruptcy Code" shall mean 11 U.S.C. (section)(section) 101 et seq., as amended from time to time, and any successor statute. "Base Rate" shall mean the higher of (i) the per annum interest rate publicly announced from time to time by The Bank of New York in New York, New York to be its prime or base rate (which may not necessarily be its best lending rate), as adjusted to conform to changes as of the opening of business on the date of any such change in such prime or base rate, or (ii) 0.5% per annum plus the Federal Funds Rate, as adjusted to conform to changes as of the opening of business on the date of any such change in the Federal Funds Rate; provided, however, that solely during the period from and including the Closing Date to but not including March 28, 1997, the "Base Rate" shall mean 0.550% per annum plus the Federal Funds Rate, as adjusted to conform to changes as of the opening of business on the date of any such change in the Federal Funds Rate. "Base Rate Loan" shall mean, at any time, any Committed Loan that bears interest at such time at the Base Rate as in effect at such time. "Benefit Arrangement" shall mean, at any time, an employee benefit plan within the meaning of Section 3(3) of ERISA which is not a Plan or a Multiemployer Plan and which is maintained or otherwise contributed to by any member of the ERISA Group. "Bid" shall mean an offer by a Lender to make one or more Bid Loans in accordance with the provisions of Section 2.3. "Bid Borrowing" shall mean the incurrence by the Borrower on a single date of any one or more Bid Loans of a single Type as to which a single Interest Period is in effect, in accordance with the provisions of Section 2.3. "Bid Loan Confirmation" shall have the meaning given to such term in Section 2.3(e). "Bid Loan Notes" shall mean the promissory notes of the Borrower in substantially the form of Exhibit A-2, together with any amendments, modifications and supplements thereto, substitutions therefor and restatements thereof. "Bid Loans" shall have the meaning given to such term in Section 2.1(b). "Bid Request" shall have the meaning given to such term in Section 2.3(a). "Borrowing" shall mean a Committed Borrowing or a Bid Borrowing. "Borrowing Date" shall mean, with respect to any Borrowing, the date upon which such Borrowing is made. "Business Day" shall mean (i) any day other than a Saturday or Sunday, a legal holiday or a day on which commercial banks in New York, New York are required or authorized by law to be closed and (ii) in respect of any determination relevant to a LIBOR Loan, any such day that is also a day on which tradings are conducted in the London interbank Eurodollar market. -4- "CMOs" shall mean any security or certificate representing any interest or participation in a pool of Mortgage Backed Securities (it being understood that Mortgage Backed Securities themselves are not CMOs). "Capitalization Ratio" shall mean, as of the last day of any fiscal quarter, the ratio of (i) Consolidated Indebtedness as of such date to (ii) the sum of Consolidated Indebtedness and Consolidated Net Worth, each as of such date. "Cash Coverage Ratio" shall mean, as of the last day of any period of four consecutive fiscal quarters (the "Measurement Period"), the ratio of: (i) the aggregate of (y) the Available Dividend Amount for the Measurement Period for the Insurance Subsidiaries, other than each Insurance Subsidiary that is a Subsidiary of another Insurance Subsidiary plus (z) the Net Tax Sharing Payments (whether a positive or negative number) for the Measurement Period, to (ii) the aggregate of (x) Interest Expense incurred during the Measurement Period, (y) the aggregate of all operating costs and expenses of the Borrower, including rent, utilities and payroll expenses paid by the Borrower during the Measurement Period, and (z) all dividends paid by the Borrower during the Measurement Period. "Cash Equivalents" shall mean (i) securities issued or unconditionally guaranteed by the United States of America or any agency or instrumentality thereof, backed by the full faith and credit of the United States of America and maturing within 180 days from the date of acquisition, (ii) commercial paper issued by any Person organized under the laws of the United States of America, maturing within 180 days from the date of acquisition and, at the time of acquisition, having a rating of at least A-1 or the equivalent thereof by Standard & Poor's and at least P-1 or the equivalent thereof by Moody's, (iii) time deposits, certificates of deposit and banker's acceptances maturing within 180 days from the date of issuance and issued by a bank or trust company organized under the laws of the United States of America or any state thereof that has combined capital and surplus of at least $500,000,000 and that has (or is a subsidiary of a bank holding company that has) a long-term unsecured debt rating of at least A or the equivalent thereof by Standard & Poor's or at least A2 or the equivalent thereof by Moody's, and (iv) repurchase obligations of a bank or trust company described in clause (iii) above and having a term not exceeding seven (7) days with respect to underlying securities of the types described in clause (i) above entered into with any bank or trust company meeting the qualifications specified in clause (iii) above. "Chestnut" shall mean Chestnut Insurance Company, Ltd., a Bermuda corporation. "Closing Date" shall mean the date upon which the initial funding is made pursuant to this Agreement. "Combined Annual Statement" shall mean, with respect to PMAIC and the Consolidated Affiliates, the combined annual statement of such entities on the Fire and Casualty form (or any successor form thereto) as required to be filed by any such entity with the Insurance Regulatory Authority of its jurisdiction of domicile in accordance with the laws of such jurisdiction, together with all exhibits, schedules, certificates and actuarial opinions required to be filed or delivered therewith. -5- "Committed Borrowing" shall mean the incurrence by the Borrower (including as a result of conversions and continuations of outstanding Committed Loans pursuant to Section 2.12) on a single date of a group of Committed Loans of a single Type and, in the case of LIBOR Committed Loans, as to which a single Interest Period is in effect. "Committed Loan Notes" shall mean the promissory notes of the Borrower in substantially the form of Exhibit A-1, together with any amendments, modifications and supplements thereto, substitutions therefor and restatements thereof. "Committed Loans" shall have the meaning given to such term in Section 2.1(a). "Commitment" shall mean, with respect to any Lender at any time, the amount set forth opposite such Lender's name on its signature page hereto under the caption "Commitment" or, if such Lender has entered into one or more Assignment and Acceptances, the amount set forth for such Lender at such time in the Register maintained by the Administrative Agent pursuant to Section 10.7(b) as such Lender's "Commitment," as such amount may be reduced at or prior to such time pursuant to the terms hereof. "Compliance Certificate" shall mean a fully completed and duly executed certificate in the form of Exhibit E-1 or Exhibit E-2, as applicable. "Consolidated Affiliates" shall mean, collectively, PMA Re, the PMA Group and any other fire and casualty insurance company that is or hereafter becomes an Affiliate of PMAIC and the accounts of which are prescribed or permitted by Statutory Accounting Practices to be consolidated with those of PMAIC for purposes of any Combined Annual Statements. "Consolidated Indebtedness" shall mean, as of the last day of any fiscal quarter, the aggregate (without duplication) of all Indebtedness of the Borrower and its Subsidiaries as of such date, determined on a consolidated basis in accordance with Generally Accepted Accounting Principles but excluding (i) reimbursement obligations with respect to letters of credit issued to secure the reinsurance obligations of one or more Insurance Subsidiaries under reinsurance agreements entered into as a reinsurer in the ordinary course of such Insurance Subsidiaries' business but only in each case to the extent of the cash and Treasury Securities provided to the issuer of such letter of credit by the Borrower or any Subsidiary as collateral for such reimbursement obligations, and (ii) the reimbursement obligations with respect to the letter of credit issued upon the Borrower's application for the benefit of PMAIC with PMA Cayman as an account party thereto, but only if the stated amount of such letter of credit is less than $28,000,000. "Consolidated Net Worth" shall mean, at any time, the net worth of the Borrower and its Subsidiaries at such time, determined on a consolidated basis in accordance with Generally Accepted Accounting Principles but (i) excluding any preferred stock or other class of equity securities that, by its stated terms (or by the terms of any class of equity securities issuable upon conversion thereof or in exchange therefor), or upon the occurrence of any event, matures or is mandatorily redeemable, or is redeemable at the option of the holders thereof, in whole or in part, and (ii) without regard to the requirements of Statement of Financial Accounting Standards No. 115 issued by the Financial Accounting Standards Board. "Consolidated Statutory Surplus" shall mean, as to all Insurance Subsidiaries, as of any date, the sum (without duplication) of the total amounts shown (i) with respect to each Insurance Subsidiary not legally domiciled in the United States, the shareholders' equity of such Insurance Subsidiary as -6- determined in accordance with Generally Accepted Accounting Principles (without regard to the requirements of Statement of Financial Accounting Standards No. 115 issued by the Financial Accounting Standards Board), (ii) with respect to each other Insurance Subsidiary that is a life and accident and health insurance company, on line 38, column 1, page 3 of the Annual Statement of such Insurance Subsidiary, and (iii) with respect to each other Insurance Subsidiary, on line 25, column 1, page 3 of the Annual Statement of such Insurance Subsidiary, excluding in each case under clauses (i), (ii) and (iii) any Insurance Subsidiary that is a Subsidiary of an Insurance Subsidiary, or the sum of amounts determined in a consistent manner for any date other than one as of which an Annual Statement is prepared. "Contingent Obligation" shall mean, with respect to any Person, (without duplication) any direct or indirect liability of such Person with respect to any Indebtedness, liability or other obligation (the "primary obligation") of another Person (the "primary obligor"), whether or not contingent, (a) to purchase, repurchase or otherwise acquire such primary obligation or any property constituting direct or indirect security therefor, (b) to advance or provide funds (i) for the payment or discharge of any such primary obligation or (ii) to maintain working capital or equity capital of the primary obligor or otherwise to maintain the net worth or solvency or any balance sheet item, level of income or financial condition of the primary obligor, (c) 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 in respect thereof to make payment of such primary obligation or (d) otherwise to assure or hold harmless the owner of any such primary obligation against loss or failure or inability to perform in respect thereof; provided, however, that, with respect to the Borrower and its Subsidiaries, the term Contingent Obligation shall not include (y) endorsements for collection or deposit in the ordinary course of business or (z) obligations entered into by an Insurance Subsidiary in the ordinary course of its business under insurance policies or contracts issued by it or to which it is a party, including reinsurance agreements (and security posted by any such Insurance Subsidiary in the ordinary course of its business to secure obligations thereunder). "Covenant Compliance Worksheet" shall mean a fully completed worksheet in the form of Attachment A to Exhibit E-1 or Exhibit E-2, as applicable. "Credit Documents" shall mean this Agreement, the Notes, the Fee Letter and all other agreements, instruments, documents and certificates now or hereafter executed and delivered to either Agent or any Lender by or on behalf of the Borrower or any of its Subsidiaries with respect to this Agreement and the transactions contemplated hereby, in each case as amended, modified, supplemented or restated from time to time. "Default" shall mean any event or condition that, with the passage of time or giving of notice, or both, would constitute an Event of Default. "Documentation Agent" shall mean First Union in its capacity as Documentation Agent appointed under Article IX, and its successors and permitted assigns in such capacity. "Dollar Roll Agreements" shall mean, as to any Person, an agreement pursuant to which such Person sells securities to another Person and agrees to repurchase "substantially the same" securities (as determined by the Public Securities Association and Generally Accepted Accounting Principles) at a described or specified date and price. "Dollars" or "$" shall mean the lawful currency of the United States of America. -7- "Duff & Phelps" shall mean Duff & Phelps Credit Rating Co., Inc., its successors and assigns. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time, and any successor statute, and all rules and regulations from time to time promulgated thereunder. "ERISA Group" shall mean the Borrower and all members of a controlled group of corporations and all trades or businesses (whether or not incorporated) under common control which, together with the Borrower, are treated as a single employer under Section 414 of the Internal Revenue Code. "Eligible Assignee" shall mean (i) a commercial bank organized under the laws of the United States or any state thereof and having total assets in excess of $1,000,000,000, (ii) a commercial bank organized under the laws of any other country that is a member of the Organization for Economic Cooperation and Development or any successor thereto (the "OECD") or a political subdivision of any such country and having total assets in excess of $1,000,000,000, provided that such bank or other financial institution is acting through a branch or agency located in the United States, in the country under the laws of which it is organized or in another country that is also a member of the OECD, (iii) the central bank of any country that is a member of the OECD, (iv) a finance company, insurance company or other financial institution or fund that is engaged in making, purchasing or otherwise investing in loans in the ordinary course of its business and having total assets in excess of $1,000,000,000, (v) any Affiliate of an existing Lender or (vi) any other Person approved by the Borrower and the Agents, which approvals shall not be unreasonably withheld. "Environmental Claims" shall mean any and all administrative, regulatory or judicial actions, suits, demands, demand letters, claims, liens, notices of noncompliance or violation, investigations (other than internal reports prepared by any Person in the ordinary course of its business and not in response to any third party action or request of any kind) or proceedings relating in any way to any Environmental Law or any permit issued, or any approval given, under any such Environmental Law (collectively, "Claims"), including, without limitation, (i) any and all Claims by Governmental Authorities for enforcement, cleanup, removal, response, remedial or other actions or damages pursuant to any applicable Environmental Law and (ii) any and all Claims by any third party seeking damages, contribution, indemnification, cost recovery, compensation or injunctive relief resulting from Hazardous Substances or arising from alleged injury or threat of injury to human health or the environment. "Environmental Laws" shall mean any and all federal, state and local laws, statutes, ordinances, rules, regulations, permits, licenses, approvals, interpretations, rules of common law and orders of courts or Governmental Authorities, relating to the protection of human health or occupational safety or the environment, now or hereafter in effect and in each case as amended from time to time, including, without limitation, requirements pertaining to the manufacture, processing, distribution, use, treatment, storage, disposal, transportation, handling, reporting, licensing, permitting, investigation or remediation of Hazardous Substances. "Event of Default" shall have the meaning given to such term in Section 8.1. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended from time to time, and any successor statute, and all rules and regulations from time to time promulgated thereunder. "Facility Fee" shall have the meaning given to such term in Section 2.10. -8- "Federal Funds Rate" shall mean, for any period, a fluctuating per annum interest rate (rounded upwards, if necessary, to the nearest 1/100 of one percentage point) equal for each day during such period to the weighted average of the rates on overnight federal funds transactions with members of the Federal Reserve System arranged by federal funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York, or if such rate is not so published for any day that is a Business Day, the average of the quotations for such day on such transactions received by the Administrative Agent from three federal funds brokers of recognized standing selected by the Administrative Agent. "Federal Reserve Board" shall mean the Board of Governors of the Federal Reserve System or any successor thereto. "Fee Letter" shall mean the letter from First Union and The Bank of New York to the Borrower, dated February 25, 1997, relating to the facility and administrative fees payable in respect of the transactions contemplated by this Agreement, as amended, modified or supplemented from time to time. "Generally Accepted Accounting Principles" shall mean generally accepted accounting principles, as followed in the United States and as set forth in the statements, opinions and pronouncements of the Accounting Principles Board, the American Institute of Certified Public Accountants and the Financial Accounting Standards Board (or, to the extent not so set forth in such statements, opinions and pronouncements, as generally followed by entities similar in size to the Borrower and engaged in generally similar lines of business), consistently applied and maintained and in conformity with those used in the preparation of the most recent financial statements of the Borrower referred to in Section 4.11(a). "Governmental Authority" shall mean any nation or government, any state or other political subdivision thereof and any central bank thereof, any municipal, local, city or county government, 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. "Hazardous Substances" shall mean any substances or materials (i) that are or become defined as hazardous wastes, hazardous substances, pollutants, contaminants or toxic substances under any Environmental Law, (ii) that are defined by any Environmental Law as toxic, explosive, corrosive, ignitable, infectious, radioactive, mutagenic or otherwise hazardous, (iii) the presence of which require investigation or response under any Environmental Law, (iv) that constitute a nuisance, trespass or health or safety hazard to Persons or neighboring properties, (v) that consist of underground or aboveground storage tanks, whether empty, filled or partially filled with any substance or (vi) that contain, without limitation, asbestos, polychlorinated biphenyls, urea formaldehyde foam insulation, petroleum hydrocarbons, petroleum derived substances or wastes, crude oil, nuclear fuel, natural gas or synthetic gas. "Hedge Agreement" shall mean any interest or foreign currency rate swap, cap, collar, option, hedge, forward rate or other similar agreement or arrangement designed to protect against fluctuations in interest rates or currency exchange rates. "Historical Statutory Statements" shall have the meaning given to such term in Section 4.11(b). -9- "Indebtedness" shall mean, with respect to any Person (without duplication), (i) all indebtedness of such Person for borrowed money or in respect of loans or advances, (ii) all obligations of such Person evidenced by notes, bonds, debentures or similar instruments, (iii) all reimbursement obligations of such Person with respect to surety bonds, letters of credit and bankers' acceptances (in each case, whether or not drawn or matured and in the stated amount thereof), (iv) all obligations of such Person to pay the deferred purchase price of property or services, (v) all indebtedness created or arising under any conditional sale or other title retention agreement with respect to property acquired by such Person, (vi) all obligations of such Person as lessee under leases that are or should be, in accordance with Generally Accepted Accounting Principles, recorded as capital leases, to the extent such obligations are required to be so recorded, (vii) all obligations of such Person to purchase, redeem, retire, defease or otherwise make any payment in respect of any capital stock or other equity securities that, by their stated terms (or by the terms of any equity securities issuable upon conversion thereof or in exchange therefor), or upon the occurrence of any event, mature or are mandatorily redeemable, or are redeemable at the option of the holder thereof, in whole or in part, (viii) the net termination obligations of such Person under any Hedge Agreements, other than any Hedge Agreement that qualifies as a hedge of an exposure to an indentifiable interest rate risk as determined in accordance with Statement of Financial Accounting Standards No. 80 issued by the Financial Accounting Standards Board, calculated as of any date as if such agreement or arrangement were terminated as of such date, (ix) all indebtedness of such Person in respect of Reverse Repurchase Agreements and Dollar Roll Agreements, (x) all Contingent Obligations of such Person and (xi) all indebtedness referred to in clauses (i) through (x) above secured by any Lien on any property or asset owned or held by such Person regardless of whether the indebtedness secured thereby shall have been assumed by such Person or is nonrecourse to the credit of such Person. "Insurance Regulatory Authority" shall mean, with respect to any Insurance Subsidiary, the insurance department or similar Governmental Authority charged with regulating insurance companies or insurance holding companies, in its jurisdiction of domicile and, to the extent that it has regulatory authority over such Insurance Subsidiary, in each other jurisdiction in which such Insurance Subsidiary conducts business or is licensed to conduct business. "Insurance Subsidiary" shall mean any Subsidiary of the Borrower the ability of which to pay dividends is regulated by an Insurance Regulatory Authority or that is otherwise required to be regulated thereby in accordance with the applicable Requirements of Law of its jurisdiction of domicile, and shall mean and include, without limitation, each of PMAIC and PMA Re. "Interest Expense" shall mean, for any period, total interest expense of the Borrower for such period in respect of Indebtedness of the Borrower and its Subsidiaries (including all such interest expense accrued or capitalized during such period, whether or not actually paid during such period, and such portion of finance leases properly characterized as interest), adjusted to give effect to all interest rate swap, cap or other interest rate hedging arrangements and fees and expenses paid in connection therewith, all as determined on a consolidated basis in accordance with Generally Accepted Accounting Principles. "Interest Period" shall have the meaning given to such term in Section 2.11. "Internal Revenue Code" shall mean the Internal Revenue Code of 1986, as amended from time to time, and any successor statute, and all rules and regulations from time to time promulgated thereunder. -10- "Invested Assets" shall mean, with respect to any Person, the amount, on a consolidated basis, of its investments, cash and cash equivalents as reflected on such Person's most recent balance sheet. "Investment Grade Securities" shall mean (i) non-equity securities (other than those issued by an Affiliate of the Borrower and other than CMOs and REMICs) that, if rated by the NAIC, are rated "NAIC 2" (or the equivalent thereof) or better by the NAIC, or, if not rated by the NAIC, are rated "BBB-" (or the equivalent thereof) or higher by Standard & Poor's, "Baa3" (or the equivalent thereof) or higher by Moody's, or "BBB-" (or the equivalent thereof) or higher by Duff & Phelps, (ii) municipal bonds that, if rated by the NAIC, are rated "NAIC 2" (or the equivalent thereof) or better by the NAIC, or if not rated by the NAIC, are rated "SP-2" (or the equivalent thereof) or higher by Standard & Poor's, "Baa3" or "MIG4" (or the equivalent thereof) or higher by Moody's, or "BBB-" (or the equivalent thereof) or higher by Duff & Phelps, and (iii) Permitted CMOs and Mortgage Backed Securities that, if rated by the NAIC, are rated "NAIC 2" (or the equivalent thereof) or higher by Standard & Poor's, "Baa3" (or the equivalent thereof) or higher by Moody's, or "BBB-" (or the equivalent thereof) or higher by Duff & Phelps (or, in the case of clauses (i), (ii) and (iii) above, in the event all such rating agencies cease to publish investment ratings, carrying an equivalent rating of a nationally recognized rating agency). "Invitation for Bids" shall have the meaning given to such term in Section 2.3(b). "LIBOR Auction" shall mean a solicitation of Bids setting forth LIBOR Bid Margins pursuant to Section 2.3. "LIBOR Bid Loan" shall mean, at any time, any Bid Loan that bears interest at such time at a rate equal to the LIBOR Rate as in effect at such time plus (or minus) a LIBOR Bid Margin established pursuant to a LIBOR Auction. "LIBOR Bid Margin" shall have the meaning given to such term in Section 2.3(c)(iv). "LIBOR Committed Loan" shall mean, at any time, any Committed Loan that bears interest at such time at a rate equal to the LIBOR Rate as in effect at such time plus the Applicable Margin as in effect at such time. "LIBOR Loans" shall mean the LIBOR Committed Loans and the LIBOR Bid Loans. "LIBOR Rate" shall mean, with respect to each LIBOR Loan comprising part of the same Borrowing for any Interest Period, a rate of interest per annum, as determined by the Administrative Agent, obtained by dividing (and then rounding to the nearest 1/16 of 1% or, if there is no nearest 1/16 of 1%, then to the next higher 1/16 of 1%) (i) the rate per annum for deposits having a maturity most nearly comparable to the Interest Period in respect of such LIBOR Loan in Dollars which appears on page 3750 of the Dow Jones Telerate Screen (or any successor page) as of 11:00 a.m. London time on the date that is two Business Days prior to the first day of such Interest Period, or if such a rate does not appear on page 3750 of the Dow Jones Telerate Screen, the rate of interest per annum quoted by The Bank of New York at approximately 11:00 a.m. London time (or as soon thereafter as practicable) two Business Days prior to the first day of such Interest Period to leading banks in the interbank eurodollar market as the rate at which The Bank of New York is offering Dollar deposits in an amount approximately equal to (x) in the case of a Committed LIBOR Loan, an amount equal to its share thereof or (y) in the case of a LIBOR Bid Loan, an amount equal to such LIBOR Bid Loan, in each case having a period to maturity approximately equal to such Interest Period, by (ii) an number equal to 1.00 minus the then applicable Reserve Requirement. -11- "Lender" shall mean each financial institution signatory hereto and each other financial institution that becomes a "Lender" hereunder pursuant to Section 10.7, and their respective successors and assigns. "Lending Office" shall mean, with respect to any Lender, the office of such Lender designated as its "Lending Office" on its signature page hereto or in an Assignment and Acceptance, or such other office as may be otherwise designated in writing from time to time by such Lender to the Borrower and the Administrative Agent. A Lender may designate separate Lending Offices as provided in the foregoing sentence for the purposes of making or maintaining different Types of Loans, and, with respect to LIBOR Loans, such office may be a domestic or foreign branch or Affiliate of such Lender. "Letter of Credit Exposure" shall mean, at any time, the sum at such time, without duplication, of (i) the aggregate undrawn face amount of the outstanding letters of credit issued under the Letter of Credit Facility, (ii) the aggregate amount of unpaid drafts drawn on all letters of credit issued under the Letter of Credit Facility, and (iii) the aggregate unpaid reimbursement obligations in respect of letters of credit issued under the Letter of Credit Facility. "Letter of Credit Facility" shall mean the Letter of Credit Agreement, dated November 10, 1995, between the Borrower, Corestates Bank, N.A., as co-agent, The Bank of New York (as agent and issuing bank) and certain other banks party thereto, as such agreement may be amended, modified, supplemented or restated from time to time. "Licenses" shall have the meaning given to such term in Section 4.4(c). "Lien" shall mean any mortgage, pledge, hypothecation, assignment, security interest, lien (statutory or otherwise), preference, priority, charge or other encumbrance of any nature, whether voluntary or involuntary, including, without limitation, the interest of any vendor or lessor under any conditional sale agreement, title retention agreement, capital lease or any other lease or arrangement having substantially the same effect as any of the foregoing. "Loans" shall mean the Committed Loans and the Bid Loans. "MASCCO" shall mean Mid-Atlantic States Casualty Company, a Pennsylvania insurance corporation. "Management Group" shall mean, collectively, the individuals listed on Schedule 1.1, provided, however, each individual shall be included in the Management Group only so long as such individual is a member of the Borrower's Board of Directors or is employed by the Borrower or any Material Insurance Subsidiary in a senior management position. "Margin Stock" shall have the meaning given to such term in Regulation U. "Material Adverse Change" shall mean a material adverse change in the condition (financial or otherwise), operations, business, properties or financial prospects of the Borrower or the Borrower and its Subsidiaries, taken as a whole. -12- "Material Adverse Effect" shall mean a material adverse effect upon (i) the condition (financial or otherwise), operations, business, properties or financial prospects of the Borrower or the Borrower and its Subsidiaries, taken as a whole, (ii) the ability of the Borrower to perform its obligations under this Agreement or any of the other Credit Documents or (iii) the legality, validity or enforceability of this Agreement or any of the other Credit Documents. "Material Insurance Subsidiary" shall mean any Insurance Subsidiary that is a Material Subsidiary. "Material Plan" shall mean, at any time, a Plan or Plans having aggregate Unfunded Liabilities in excess of $1,000,000. "Material Subsidiary" shall mean each of (i) MASCCO, (ii) PMA Cayman, (iii) the members of the PMA Group, (iv) PMA Re, (v) at the relevant time of determination, any Subsidiary of the Borrower having (after the elimination of intercompany accounts) (y) assets constituting at least ten percent (10%) of the total assets of the Borrower and its Subsidiaries on a consolidated basis, or (z) revenues constituting at least ten percent (10%) of the total revenues of the Borrower and its Subsidiaries on a consolidated basis, in each case as determined as of the date of the financial statements of the Borrower and its Subsidiaries most recently delivered under Section 5.1 prior to such time (or, with regard to determinations at any time prior to the initial delivery of financial statements under Section 5.1, as of the date of the most recent financial statements referred to in Section 4.11(a)), and (vi) any Subsidiary that has one of the foregoing as a Subsidiary. "Maturity Date" shall mean December 31, 2002. "Maximum Bid Loan Amount" shall mean, at any time, the amount equal to fifty percent (50%) of the aggregate Commitments at such time. "Moody's" shall mean Moody's Investors Service, Inc., its successors and assigns. "Mortgage Backed Securities" shall mean investment securities representing any undivided interest or participation in, or which are secured by, a pool of loans secured by mortgages or deeds of trust. "Multiemployer Plan" shall mean, at any time, an employee pension benefit plan within the meaning of Section 4001(a)(3) of ERISA to which any member of the ERISA Group is then making or accruing an obligation to make contributions or has within the preceding five plan years made contributions, including for these purposes any Person which ceased to be a member of the ERISA Group during such five year period. "NAIC" shall mean the National Association of Insurance Commissioners and any successor thereto. "Net Tax Sharing Payments" shall mean, for any period, (i) the aggregate (without duplication) of all payments made or to be made to the Borrower by its Subsidiaries pursuant to tax sharing or tax allocation agreements or arrangements or otherwise in respect of taxable income realized during such period, minus (ii) the aggregate (without duplication) of all foreign, federal, state or local income, franchise and other tax payments made or to be made by the Borrower in respect of taxable income realized during such period and any payments made or to be made by the Borrower during such period pursuant to such tax sharing or tax allocation agreement or arrangement. -13- "Notes" shall mean the Committed Loan Notes and the Bid Loan Notes. "Notice of Committed Borrowing" shall have the meaning given to such term in Section 2.2(a). "Notice of Conversion/Continuation" shall have the meaning given to such term in Section 2.12(b). "Obligations" shall mean all principal of and interest (including, to the greatest extent permitted by law, post-petition interest) on the Loans and all fees, expenses, indemnities and other obligations owing, due or payable at any time by the Borrower to either Agent, any Lender or any other Person entitled thereto, under this Agreement or any of the other Credit Documents. "PAC I" shall mean a planned amortization class bond which is a tranche or class of CMO or REMIC that is retired according to a predetermined amortization schedule independent of the prepayment rate on the underlying collateral and which has the highest level of protection within the pool against prepayment or extension. "PBGC" shall mean the Pension Benefit Guaranty Corporation and any successor thereto. "PMA Cayman" shall mean PMA Insurance Cayman, Ltd., a Cayman Islands corporation. "PMA Group" shall mean PMAIC, Manufacturers Alliance Insurance Company, a Pennsylvania insurance corporation, and Pennsylvania Manufacturers Indemnity Company, a Pennsylvania insurance corporation. "PMA Re" shall mean PMA Reinsurance Corporation, a Pennsylvania insurance corporation. "PMAIC" shall mean Pennsylvania Manufacturers' Association Insurance Company, a Pennsylvania insurance corporation. "Participant" shall have the meaning given to such term in Section 10.7(d). "Permitted CMOs and Mortgage Backed Securities" shall mean (i) mortgage participation certificates issued by the Federal Home Loan Mortgage Corporation, (ii) mortgage backed securities issued by the Federal National Mortgage Association, (iii) securities guaranteed by the Government National Mortgage Association, and (iv) other securities and certificates representing participations in any CMO or REMIC which are PAC I's or which have comparable priority in respect of the repayment thereof. "Permitted Liens" shall have the meaning given to such term in Section 7.3. "Person" shall mean any corporation, association, joint venture, partnership, limited liability company, organization, business, individual, trust, government or agency or political subdivision thereof or any other legal entity. -14- "Plan" shall mean, at any time, an employee pension benefit plan (other than a Multiemployer Plan) which is covered by Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Internal Revenue Code and either (i) is maintained, or contributed to, by any member of the ERISA Group for employees of any member of the ERISA Group or (ii) has at any time within the preceding five years been maintained, or contributed to, by any Person which was at such time a member of the ERISA Group for employees of any Person which was at such time a member of the ERISA Group. "Quarterly Statement" shall mean, with respect to any Insurance Subsidiary for any fiscal quarter, the quarterly financial statements of such Insurance Subsidiary as required to be filed with the Insurance Regulatory Authority of its jurisdiction of domicile, together with all exhibits, schedules, certificates and actuarial opinions required to be filed or delivered therewith. "REMIC" shall mean a real estate mortgage investment conduit. "Register" shall have the meaning given to such term in Section 10.7(b). "Regulations D, G, T, U and X" shall mean Regulations D, G, T, U and X, respectively, of the Federal Reserve Board, and any successor regulations. "Reinsurance Agreement" shall mean any agreement, contract, treaty, certificate or other arrangement whereby any Insurance Subsidiary agrees to transfer, cede or retrocede to another insurer or reinsurer all or part of the liability assumed or assets held by such Insurance Subsidiary under a policy or policies of insurance issued by such Insurance Subsidiary or under a reinsurance agreement assumed by such Insurance Subsidiary. "Required Lenders" shall mean (i) at any time prior to the Termination Date, the Lenders having more than or equal to fifty-one percent (51%) of the aggregate Commitments at such time, and (ii) on and after the Termination Date, the Lenders having more than or equal to fifty-one percent (51%) of the aggregate principal amount of the Loans outstanding at such time (or, if at any time on or after the Termination Date at which no Loans are outstanding, the Lenders having more than or equal to fifty-one percent (51%) of the aggregate Commitments immediately prior to the termination of the Commitments). "Requirement of Law" shall mean, with respect to any Person, the charter, articles or certificate of organization or incorporation and bylaws or other organizational or governing documents of such Person, and any statute, law, treaty, rule, regulation, order, decree, writ, injunction or determination of any arbitrator or court or other Governmental Authority, 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 or otherwise pertaining to any or all of the transactions contemplated by this Agreement and the other Credit Documents. "Reserve Adjustment" shall mean the non-recurring expense charged, in accordance with Generally Accepted Accounting Principles, during the fourth quarter of 1996 to the statements of earnings for Chestnut, MASCCO and the relevant members of the PMA Group in the aggregate amount of $190,000,000 and the corresponding adjustment in accordance with Statutory Accounting Practices. "Reserve Requirement" shall mean, with respect to any Interest Period, the aggregate of the then stated maximum rates during such Interest Period of all reserve requirements (including, without limitation, marginal, emergency, supplemental and special reserves), expressed as a decimal, established by the Board of Governors of the Federal Reserve System and any other banking authority to which The Bank of New York, First Union and other major United States money center banks are subject, in respect of eurocurrency funding (currently referred to as "Eurocurrency liabilities" in Regulation D of the Board of Governors of the Federal Reserve System) or in respect of any other category of liabilities including deposits by reference to which the interest rate on LIBOR Loans is determined or any category of extensions of credit or other assets which includes loans by non-domestic offices of any Lender to United States residents. Such reserve requirements shall include, without limitation, those imposed under such Regulation D. The LIBOR Rate shall be adjusted automatically on and as of the effective date of any change in any such reserve requirement. -15- "Reverse Repurchase Agreement" shall mean, as to any Person, an agreement pursuant to which such Person sells securities to another Person (the "Counterparty") and agrees to repurchase such securities at a described or specified date and price, provided, however, that "Reverse Repurchase Agreements" shall not include any agreement pursuant to which such Person lends securities pursuant to a securities lending arrangement to a Counterparty who collateralizes such borrowing with cash, Cash Equivalents, letters of credit or other collateral acceptable to the Required Lenders, and agrees to return such securities to such Person at a described or specified date. "Special 1996 Charges" shall mean the non-recurring expense charged with respect to receivables, equipment write-offs and other restructuring charges, in accordance with Generally Accepted Accounting Principles, during the fourth quarter of 1996 to the statements of earnings for the Borrower in the aggregate amount of $31,000,000. "Standard & Poor's" shall mean Standard & Poor's Ratings Services, a division of McGraw-Hill Companies, Inc., its successors and assigns. "Statutory Accounting Practices" shall mean, with respect to any Insurance Subsidiary, the statutory accounting practices prescribed or permitted by the relevant Insurance Regulatory Authority of its state of domicile, consistently applied and maintained and in conformity with those used in the preparation of the most recent Historical Financial Statements. "Subsidiary" shall mean, with respect to any Person, any corporation or other Person of which more than fifty percent (50%) of the outstanding capital stock having ordinary voting power to elect a majority of the board of directors, in the case of a corporation, or of the ownership or beneficial interests, in the case of a Person not a corporation, is at the time, directly or indirectly, owned or controlled by such Person and one or more of its other Subsidiaries or a combination thereof (irrespective of whether, at the time, securities of any other class or classes of any such corporation or other Person shall or might have voting power by reason of the happening of any contingency). When used without reference to a parent entity, the term "Subsidiary" shall be deemed to refer to a Subsidiary of the Borrower. "Surplus Relief Reinsurance Agreement" shall mean any agreement or other arrangement whereby any Insurance Subsidiary cedes business under a reinsurance agreement that would not be considered a transaction that indemnifies an insurer against loss or liability relating to insurance risk, as determined in accordance with Statement of Financial Accounting Standards No. 113 ("FAS 113") issued by the Financial Accounting Standards Board (without regard to the effective date of FAS 113). "Surviving Senior Note Indebtedness" shall mean the Indebtedness of the Borrower outstanding from time to time in respect of the Surviving Senior Notes. "Surviving Senior Notes" shall mean the $7,143,000 principal amount of the Borrower's 9.53% Senior Notes, dated June 17, 1987, due June 30, 1997, together with any amendment, modification, replacement, substitutes, supplements thereto, and renewals or extensions thereof, in whole or in part. "Terminating Indebtedness" shall mean the Terminating Revolving Credit Indebtedness and the Terminating Senior Note Indebtedness. "Terminating Revolving Credit Indebtedness" shall mean all indebtedness and other monetary obligations of the Borrower under the Credit Agreement, dated as of August 11, 1995, as amended, between the Borrower, the lenders and financial institutions named therein and The Bank of New York, as agent for the lenders. -16- "Terminating Senior Note Indebtedness" shall mean the aggregate Indebtedness of the Borrower outstanding from time to time in respect to the (i) $46,428,000 principal amount of the Borrower's 9.60% Senior Notes, dated September 26, 1991, due October 1, 2001, (ii) the $71,000,000 principal amount of the Borrower's 7.62% Senior Notes, dated July 19, 1995, due July 15, 2001, and (iii) the $36,000,000 principal amount of the Borrower's 7.62% Senior Notes, dated July 19, 1995, due July 15, 2000, together with any amendments, modification, replacement, substitute, supplements thereto, and renewals or extensions thereof, in whole or in part. "Termination Date" shall mean the Maturity Date or such earlier date of termination of the Commitments pursuant to Section 2.6 or Section 8.2. "Treasury Security" shall mean any "Treasury security" under, and as such term is defined in, 31 C.F.R. part 306, subpart O, as amended. "Type" shall have the meaning given to such term in Section 2.1(c). "Unfunded Liabilities" shall mean, with respect to any Plan at any time, the amount (if any) by which (i) the present value of all benefits under such Plan exceeds (ii) the fair market value of all Plan assets allocable to such benefits (excluding any accrued but unpaid contributions), all determined as of the then most recent valuation date for such Plan, but only to the extent that such excess represents a potential liability of a member of the ERISA Group to the PBGC or any other Person under Title IV of ERISA. "Wholly Owned" shall mean, with respect to any Subsidiary of any Person, that 100% of the outstanding capital stock or other ownership interests of such Subsidiary is owned, directly or indirectly, by such Person. 1.2. Accounting Terms. Except as specifically provided otherwise in this Agreement, all accounting terms used herein that are not specifically defined shall have the meanings customarily given them, and all financial computations hereunder shall be made, in accordance with Generally Accepted Accounting Principles (or, to the extent that such terms apply solely to any Insurance Subsidiary or if otherwise expressly required, Statutory Accounting Practices). Notwithstanding the foregoing, in the event that any changes in Generally Accepted Accounting Principles or Statutory Accounting Practices after the date hereof are required to be applied to the transactions described herein and would affect the computation of the financial covenants contained in Sections 6.1 through 6.4, as applicable, such changes shall be followed in the computation of such financial covenants only from and after the date this Agreement shall have been amended to take into account any such changes, provided the parties agree to negotiate in good faith to so amend this Agreement as soon as practicable after such a change. References to amounts on particular exhibits, schedules, lines, pages and columns of any Annual Statement or Quarterly Statement are based on the format promulgated by the NAIC for the 1995 Annual Statements and Quarterly Statements. In the event such format is changed in future years so that different information is contained in such items or they no longer exist, or if the Annual Statement or Quarterly Statement is replaced by the NAIC or by any Insurance Regulatory Authority after the date hereof such that different forms of financial statements are required to be furnished by the Insurance Subsidiaries in lieu thereof, such references shall be to information consistent with that reported in the referenced item in the 1995 Annual Statements or Quarterly Statements, as the case may be. -17- 1.3. Other Terms; Construction. Unless otherwise specified or unless the context otherwise requires, all references herein to sections, annexes, schedules and exhibits are references to sections, annexes, schedules and exhibits in and to this Agreement, and all terms defined in this Agreement shall have the defined meanings when used in any other Credit Document or any certificate or other document made or delivered pursuant hereto. ARTICLE II AMOUNT AND TERMS OF THE LOANS 2.1. Commitments; Loans. (a) Each Lender severally agrees, subject to and on the terms and conditions of this Agreement, to make loans (each, a "Committed Loan," and collectively, the "Committed Loans") to the Borrower, from time to time on any Business Day during the period from and including the Closing Date to but not including the Termination Date, in an aggregate principal amount at any time outstanding not exceeding its Commitment at such time, provided that no Committed Borrowing shall be made if, immediately after giving effect thereto, the sum of the aggregate principal amount of Committed Loans outstanding at such time and the aggregate principal amount of Bid Loans outstanding at such time would exceed the aggregate Commitments at such time. Subject to and on the terms and conditions of this Agreement, the Borrower may borrow, repay and reborrow Committed Loans. (b) In addition to Committed Borrowings pursuant to subsection (a) above, each Lender severally agrees that the Borrower may, subject to and on the terms and conditions of this Agreement and as more particularly set forth in Section 2.3, request the Lenders to submit offers to make loans (each, a "Bid Loan," and collectively, the "Bid Loans") to the Borrower, from time to time on any Business Day during the period from and including the fifth (5th) Business Day after the Closing Date to but not including the earlier of (i) the date that is one (1) Business Day prior to the seventh (7th) day prior to the Maturity Date or (ii) the Termination Date; provided, however, that the Lenders may, but shall have no obligation to, submit such offers and the Borrower may, but shall have no obligation to, accept any such offers; provided further that no Bid Borrowing shall be made if, immediately after giving effect thereto, (y) the aggregate principal amount of Bid Loans outstanding at such time would exceed the Maximum Bid Loan Amount at such time, or (z) the sum of the aggregate principal amount of Bid Loans outstanding at such time and the aggregate principal amount of Committed Loans outstanding at such time would exceed the aggregate Commitments at such time. (c) The Loans shall, at the option of the Borrower and subject to the terms and conditions of this Agreement, be (i) in the case of Committed Loans, either Base Rate Loans or LIBOR Committed Loans, or (ii) in the case of Bid Loans, either Absolute Rate Loans or LIBOR Bid Loans (Base Rate Loans, LIBOR Committed Loans, Absolute Rate Loans and LIBOR Bid Loans, each, a "Type" of Loan), provided that all Loans comprising the same Borrowing shall, unless otherwise specifically provided herein, be of the same Type. -18- 2.2. Committed Borrowings. (a) In order to make a Committed Borrowing (other than Committed Borrowings involving continuations or conversions of outstanding Committed Loans, which shall be requested pursuant to Section 2.12), the Borrower will give the Administrative Agent written notice by the delivery of a Notice of Committed Borrowing, which shall be sent by telecopy (confirmed promptly, and in any event within five Business Days, by the delivery to the Administrative Agent of a Notice of Committed Borrowing manually signed by the Borrower), not later than 10:00 a.m., New York City time, three (3) Business Days prior to each Committed Borrowing to be comprised of LIBOR Committed Loans and one (1) Business Day prior to each Committed Borrowing to be comprised of Base Rate Loans; provided, however, that a request for a Committed Borrowing to be made on the Closing Date may, at the discretion of the Administrative Agent, be given later than the times specified hereinabove, but any Loans made on the Closing Date shall be made initially as Base Rate Loans; and provided further that the Borrower may, on any proposed Borrowing Date for a Bid Borrowing duly requested in accordance with Section 2.3, give a request not later than 12:00 noon, New York City time, for a Committed Borrowing on such date to be comprised of Base Rate Loans. Each such notice (each, a "Notice of Committed Borrowing") shall be irrevocable, shall be given in the form of Exhibit B-1 and shall specify (a) the aggregate principal amount and initial Type of the Committed Loans to be made pursuant to such Committed Borrowing, (b) in the case of a Committed Borrowing of LIBOR Committed Loans, the initial Interest Period to be applicable thereto, and (c) the requested Borrowing Date, which shall be a Business Day. Notwithstanding anything to the contrary contained herein: (i) the aggregate principal amount of each Committed Borrowing comprised of Base Rate Loans shall not be less than $3,000,000 or, if greater, an integral multiple of $1,000,000 in excess thereof (or, if less, in the amount of the Aggregate Unutilized Commitments), and the aggregate principal amount of each Committed Borrowing comprised of LIBOR Committed Loans shall not be less than $3,000,000 or, if greater, an integral multiple of $1,000,000 in excess thereof; (ii) if the Borrower shall have failed to designate the Type of Committed Loans comprising a Committed Borrowing, the Borrower shall be deemed to have requested a Committed Borrowing comprised of Base Rate Loans; and (iii) if the Borrower shall have failed to select the duration of the Interest Period to be applicable to any Committed Borrowing of LIBOR Committed Loans, then the Borrower shall be deemed to have selected an Interest Period with a duration of one month. (b) Upon its receipt of a Notice of Committed Borrowing, the Administrative Agent will promptly notify each Lender of the proposed Committed Borrowing. Not later than 2:00 p.m., New York City time, on the requested Borrowing Date, each Lender will make available to the Administrative Agent at its office referred to in Section 10.5 (or at such other location as the Administrative Agent may designate) an amount, in Dollars and in immediately available funds, equal to the amount of the Committed Loan to be made by such Lender. To the extent the Lenders have made such amounts available to the Administrative Agent as provided hereinabove, subject to the satisfaction of the terms and conditions of this Agreement, as determined by the Administrative Agent, the Administrative Agent will make the aggregate of such amounts available to the Borrower in accordance with Section 2.4(a) and in like funds as received by the Administrative Agent. -19- 2.3. Bid Borrowings. (a) In order to request the Lenders to submit Bids to make Bid Loans hereunder, the Borrower will give the Administrative Agent written notice by the delivery of a Bid Request, which shall be sent by telecopy (confirmed promptly, and in any event within five Business Days, by the delivery to the Administrative Agent of a Bid Request manually signed by the Borrower), not later than 10:00 a.m., New York City time, (y) five (5) Business Days prior to the requested Bid Borrowing, in the case of a LIBOR Auction, or (z) two (2) Business Days prior to the requested Bid Borrowing, in the case of an Absolute Rate Auction. The Borrower may request offers to make Bid Loans for up to three (3) separate Interest Periods in a single notice, and each such request for offers for a separate Interest Period shall be deemed a request for a separate Bid Borrowing. Each such notice (each, a "Bid Request") shall be given in the form of Exhibit C-1 and shall specify, with respect to each requested Bid Borrowing for a particular Interest Period: (i) the Interest Period to be applicable to such Bid Borrowing; (ii) the aggregate amount of such requested Bid Borrowing, which shall not (with respect to any single Interest Period) be less than $5,000,000 or, if greater, an integral multiple of $1,000,000 in excess thereof, but shall not cause the limits specified in Section 2.1(b) to be exceeded; (iii) whether the Bid Borrowing requested for a particular Interest Period is to be comprised of LIBOR Bid Loans or Absolute Rate Loans; and (iv) the requested Borrowing Date, which shall be a Business Day; provided, however, that (x) no Interest Period applicable to any Bid Borrowing shall expire on a date later than the first (1st) Business Day prior to the Maturity Date, (y) the Borrower may not submit a Bid Request within five (5) Business Days after the date of submission of any previous Bid Request, and (z) no Bid Borrowing shall be made if, immediately after giving effect thereto, there would be outstanding Bid Loans and LIBOR Committed Loans in violation of the restrictions set forth in clause (iv) of Section 2.11. A Bid Request not given in the form of Exhibit C-1 or otherwise not given in compliance with the requirements of this subsection (a) may be rejected by the Administrative Agent in its sole discretion, and the Administrative Agent shall promptly notify the Borrower of any such rejection. (b) Upon receipt of a Bid Request that is not rejected as aforesaid, the Administrative Agent will promptly deliver to the Lenders a copy of the Bid Request, the delivery of which shall constitute an invitation by the Borrower to each Lender to submit Bids (each such Bid Request so delivered, an "Invitation for Bids"), on the terms and subject to the conditions of this Agreement, offering to make Bid Loans pursuant to such Bid Request. -20- (c) Each Lender may, at its discretion, submit a Bid containing an offer or offers to make Bid Loans in response to any Invitation for Bids; provided that such Lender may submit a single Bid containing an offer or offers to make up to three (3) separate Bid Loans for each Interest Period specified in the relevant Bid Request. Each Bid must comply with the requirements of this subsection (c) and must be submitted to the Administrative Agent in writing (by facsimile transmission or otherwise) not later than 10:00 a.m., New York City time, (y) three (3) Business Days prior to the requested Borrowing Date, in the case of a LIBOR Auction, or (z) on the requested Borrowing Date, in the case of an Absolute Rate Auction; provided, however, that Bids submitted by the Administrative Agent (or any Affiliate of the Administrative Agent) in its capacity as a Lender may be submitted only if the Administrative Agent or such Affiliate notifies the Borrower of the terms of the offer or offers contained therein not later than 9:30 a.m., New York City time, (y) three (3) Business Days prior to the requested Bid Borrowing, in the case of a LIBOR Auction, or (z) on the requested Borrowing Date, in the case of an Absolute Rate Auction. Each Bid by a Lender shall (subject to Sections 3.2 and 8.1) be irrevocable, shall be submitted in substantially the form of Exhibit C-2 and shall specify: (i) the identity of such Lender; (ii) the Interest Period with respect to each Bid Loan for which such Bid is being made; (iii) with respect to each such Interest Period, the principal amount of each Bid Loan for which such Bid is being made, which principal amounts shall, in the aggregate with respect to each such Interest Period, be not less than $5,000,000 or, if greater, in an integral multiple of $1,000,000 in excess thereof, provided that (y) the aggregate principal amount of all Bid Loans for which a Bid is submitted may be equal to, greater than or less than the Commitment of such Lender, and (z) the aggregate principal amount of all Bid Loans offered by such Lender for a single Interest Period shall not exceed the requested principal amount of the Bid Borrowing for such Interest Period; (iv) in the case of a LIBOR Auction, the margin above or below the applicable LIBOR Rate (the "LIBOR Bid Margin") offered for each such Bid Loan, expressed as a percentage (rounded to the nearest 1/1000 of 1%) to be added to or subtracted from the applicable LIBOR Rate; (v) in the case of an Absolute Rate Auction, the fixed rate of interest per annum (rounded to the nearest 1/1000th of 1%) offered for each such Bid Loan (the "Absolute Rate"); and (vi) the proposed Borrowing Date. A Bid may contain up to three separate offers by the quoting Lender with respect to each Interest Period specified in the related Invitation for Bids. A Bid shall be disregarded by the Administrative Agent if it (w) is not given substantially in the form of Exhibit C-2 or fails to specify all of the information required by this subsection (c), (x) contains qualifying, conditional or similar language, (y) proposes terms other than or in addition to those set forth in the applicable Invitation for Bids (other than setting forth separate offers for any Interest Period as contemplated by the preceding sentence), or (z) is submitted to the Administrative Agent after 10:00 a.m., New York City time, on the applicable requested Borrowing Date. (d) Promptly upon receipt thereof and in any event not later than 11:00 a.m., New York City time, (y) three (3) Business Days prior to the requested Borrowing Date, in the case of a LIBOR Auction, or (z) on the requested Borrowing Date, in the case of an Absolute Rate Auction, the Administrative Agent will notify the Borrower of the terms (i) of each Bid, if any, submitted by a Lender in compliance with the provisions of subsection (c) above, and (ii) of each Bid, if any, submitted by a Lender that amends, modifies or is otherwise inconsistent with a previous Bid submitted by such Lender with respect to the same Bid Request. Any such subsequent Bid shall be disregarded by the Administrative Agent unless such subsequent Bid is submitted solely to correct a manifest error in such former Bid and is timely received as provided in subsection (c) above. The Administrative Agent's notice to the Borrower shall specify the aggregate principal amount of each Bid Borrowing in respect of which Bids were made for each Interest Period specified in the relevant Bid Request, the respective principal amounts and LIBOR Bid Margins or Absolute Rates, as the case may be, so offered, and the identity of the Lender that made each such Bid. -21- (e) Not later than 12:00 noon, New York City time, (y) three (3) Business Days prior to the requested Borrowing Date, in the case of a LIBOR Auction, or (z) on the requested Borrowing Date, in the case of an Absolute Rate Auction, the Borrower shall, subject to the terms of this subsection (e), irrevocably accept or reject each of the Bids by written notice (each such notice, a "Bid Loan Confirmation") to the Administrative Agent in the form of Exhibit C-3. The Borrower shall be under no obligation to accept any offer and may choose to reject all offers, provided that the failure by the Borrower to give such notice in a timely manner shall be deemed to constitute a rejection of all Bids. In the case of acceptance, the Bid Loan Confirmation shall specify the aggregate principal amount of offers for each Interest Period that are accepted. The Borrower may accept any Bid in whole or in part, subject to the limitations on the aggregate outstanding principal amount of Bid Loans set forth in Section 2.1(b) and provided that: (i) the aggregate principal amount of each Bid Borrowing with regard to each Interest Period shall not exceed the applicable amount set forth in the related Bid Request; (ii) the aggregate principal amount of each Bid Borrowing shall not be less than $5,000,000 or, if greater, an integral multiple of $1,000,000 in excess thereof (subject to the provisions of clause (v) below); (iii) acceptance of Bids may be made only on the basis of ascending (i.e., from the lowest effective yield to the highest) LIBOR Bid Margins or Absolute Rates within each Interest Period, as the case may be; (iv) the Borrower may not accept any Bid that is required to be disregarded under the provisions of subsection (c) above or that otherwise fails to comply with the terms and conditions of this Section 2.3; and (v) if offers are made by two or more Lenders with the same LIBOR Bid Margins or Absolute Rates, as the case may be, for a greater aggregate principal amount than the amount in respect of which such offers are permitted to be accepted for the related Interest Period, then if the Borrower elects to accept any such offers, the aggregate principal amount of Bid Loans in respect of which such offers are accepted shall be allocated by the Borrower among such Lenders as nearly as practicable (in such integral multiples of not less than $1,000,000 as the Borrower, after consultation with the Administrative Agent, may deem appropriate) in proportion to the respective aggregate principal amounts of such offers. Determinations by the Borrower of the allocations of amounts of Bid Loans shall be conclusive absent manifest error. (f) The Administrative Agent will promptly notify each Lender having submitted a Bid in response to an Invitation to Bid (i) whether its offer has been accepted or rejected, and (ii) with respect to each Bid Loan made pursuant to such Invitation to Bid, the amount, Absolute Rate or LIBOR Bid Margin (as the case may be), and Interest Period applicable to such Bid Loan. Not later than 2:00 p.m., New York City time, on the requested Borrowing Date, each Lender that has received notice that its offer has been accepted will make available to the Administrative Agent at its office referred to in Section 10.5 (or at such other location as the Administrative Agent may designate) an amount, in Dollars and in immediately available funds, equal to the amount of the Bid Loan or Bid Loans required to be made by such Lender. To the extent the relevant Lenders have made such amounts available to the Administrative Agent as provided hereinabove, subject to the satisfaction of the terms and conditions of this Agreement, as determined by the Administrative Agent, the Administrative Agent will make the aggregate of such amounts available to the Borrower in accordance with Section 2.4(a) and in like funds as received by the Administrative Agent. (g) In respect of each Bid Request received by the Administrative Agent hereunder (regardless of whether any Bid Loans shall be offered or made in response thereto), the Borrower will pay to the Administrative Agent, on the date of receipt by the Administrative Agent of such Bid Request, a fee in the amount set forth in the Fee Letter. -22- 2.4. Disbursements; Funding Reliance; Domicile of Loans. (a) The Borrower hereby authorizes the Administrative Agent to disburse the proceeds of each Borrowing in accordance with the terms of any written instructions from any of the Authorized Officers, provided that the Administrative Agent shall not be obligated under any circumstances to forward amounts to any account not listed in an Account Designation Letter. The Borrower may at any time deliver to the Administrative Agent an Account Designation Letter listing any additional accounts or deleting any accounts listed in a previous Account Designation Letter. (b) Unless the Administrative Agent has received, prior to 2:00 p.m., New York City time, on the relevant Borrowing Date, written notice from a Lender that such Lender will not make available to the Administrative Agent such Lender's ratable portion, if any, of the relevant Borrowing, the Administrative Agent may assume that such Lender has made such portion available to the Administrative Agent in immediately available funds on such Borrowing Date in accordance with the relevant provisions of Section 2.2 or Section 2.3, as applicable, and the Administrative Agent may, in reliance upon such assumption, but shall not be obligated to, make a corresponding amount available to the Borrower on such Borrowing Date. If and to the extent that such Lender shall not have made such portion available to the Administrative Agent, and the Administrative Agent shall have made such corresponding amount available to the Borrower, such Lender, on the one hand, and the Borrower, on the other, severally agree to pay to the Administrative Agent forthwith on demand such corresponding amount, together with interest thereon for each day from the date such amount is made available to the Borrower until the date such amount is repaid to the Administrative Agent, (i) in the case of such Lender, at a rate of interest per annum equal to the Federal Funds Rate for the first three days after the due date of such payment and the Federal Funds Rate plus 2% thereafter until the date such payment is received by the Administrative Agent, and (ii) in the case of the Borrower, at a rate per annum equal to the Base Rate. If such Lender shall repay to the Administrative Agent such corresponding amount, such amount shall constitute such Lender's Loan as part of such Borrowing for purposes of this Agreement. The failure of any Lender to make any Loan required to be made by it as part of any Borrowing shall not relieve any other Lender of its obligation, if any, hereunder to make its Loan as part of such Borrowing, but no Lender shall be responsible for the failure of any other Lender to make the Loan to be made by such other Lender as part of any Borrowing. (c) Each Lender may, at its option, make and maintain any Loan at, to or for the account of any of its Lending Offices, provided that any exercise of such option shall not affect the obligation of the Borrower to repay such Loan to or for the account of such Lender in accordance with the terms of this Agreement. (d) If a Lender makes a new Committed Loan on a Borrowing Date on which the Borrower is to repay a Committed Loan from such Lender, such Lender shall apply the proceeds of such new Committed Loan to make such repayment, and only the excess of the proceeds of such new Committed Loan over the Committed Loan being repaid need be made available to the Administrative Agent. 2.5. Notes. (a) The Loans made by each Lender shall be evidenced (i) in the case of Committed Loans, by a Committed Loan Note appropriately completed in substantially the form of Exhibit A-1, and (ii) in the case of Bid Loans, by a Bid Loan Note appropriately completed in substantially the form of Exhibit A-2. -23- (b) Each Committed Loan Note issued to a Lender shall (i) be executed by the Borrower, (ii) be payable to the order of such Lender, (iii) be dated as of the Closing Date, (iv) be in a stated principal amount equal to such Lender's Commitment, (v) bear interest in accordance with the provisions of Section 2.9, as the same may be applicable to the Committed Loans made by such Lender from time to time, and (vi) be entitled to all of the benefits of this Agreement and the other Credit Documents and subject to the provisions hereof and thereof. (c) Each Bid Loan Note issued to a Lender shall (i) be executed by the Borrower, (ii) be payable to the order of such Lender, (iii) be dated as of the Closing Date, (iv) be in a stated principal amount equal to the Maximum Bid Loan Amount, (v) bear interest in accordance with the provisions of Section 2.9, as the same may be applicable to the Bid Loans made by such Lender from time to time, and (vi) be entitled to all of the benefits of this Agreement and the other Credit Documents and subject to the provisions hereof and thereof. (d) Each Lender will record on its internal records the amount of each Loan made by it and each payment received by it in respect thereof and will, in the event of any transfer of any of its Notes, either endorse on the reverse side thereof or on a schedule attached thereto (or any continuation thereof) the outstanding principal amount of the Loans evidenced thereby as of the date of transfer or provide such information on a schedule to the Assignment and Acceptance relating to such transfer; provided, however, that the failure of any Lender to make any such recordation or provide any such information, or any error therein, shall not affect the Borrower's obligations under this Agreement or the Notes. The Lenders' records as set forth above shall be presumed to be correct absent manifest error. 2.6. Termination and Reduction of Commitments. (a) The Commitments shall be automatically and permanently terminated on the Maturity Date unless sooner terminated pursuant to subsection (b) below or Section 8.2. (b) At any time and from time to time after the date hereof, upon not less than five (5) Business Days' prior written notice to the Administrative Agent, the Borrower may terminate in whole or reduce in part the aggregate Commitments, provided that any such partial reduction shall be in an aggregate amount of not less than $10,000,000 or, if greater, an integral multiple thereof. Promptly upon receipt of such notice, the Administrative Agent shall provide the Lenders a copy thereof. (c) On each date set forth below, the aggregate Commitments shall automatically be permanently reduced to the lower of (i) the amount set forth below opposite such date or (ii) the amount to which the aggregate Commitments have been previously reduced pursuant to Sections 2.6(a) or (b): Date Aggregate Commitments ---- --------------------- December 31, 1999 $187,500,000 December 31, 2000 125,000,000 December 31, 2001 62,500,000 December 31, 2002 0 (d) The amount of any termination or reduction made under this Section 2.6 may not thereafter be reinstated. Each reduction of the Commitments pursuant to this Section 2.6 shall be applied ratably among the Lenders according to their respective Commitments. Simultaneously with each reduction of the aggregate Commitments under this Section, the Borrower shall pay the Facility Fee accrued on the amount by which the aggregate Commitments have been reduced. -24- 2.7. Mandatory Payment and Prepayment. (a) Except to the extent due or made sooner pursuant to the provisions of this Agreement, (i) the Borrower will repay the aggregate outstanding principal amount of the Loans in full on the Maturity Date, and (ii) the Borrower will repay each Bid Loan on the last day of the Interest Period applicable thereto. (b) In the event that, at any time, the sum of the aggregate principal amount of Committed Loans outstanding at such time and the aggregate principal amount of Bid Loans outstanding at such time shall exceed the aggregate Commitments at such time (after giving effect to any concurrent termination or reduction thereof), the Borrower will immediately prepay the outstanding principal amount of the Loans in the amount of such excess. Each such prepayment shall be applied (i) first, to the outstanding principal amount of the Committed Loans, and (ii) second, to the outstanding principal amount of the Bid Loans, ratably among the Lenders holding Bid Loans in proportion to the aggregate principal amount of Bid Loans held by each. (c) In the event that, at any time, the sum of the aggregate principal amount of Bid Loans outstanding at such time shall exceed the Maximum Bid Loan Amount at such time (after giving effect to any concurrent termination or reduction of the Commitments), the Borrower will immediately prepay the outstanding principal amount of the Bid Loans in the amount of such excess. Each such prepayment shall be applied to the outstanding principal amount of the Bid Loans, ratably among the Lenders holding Bid Loans in proportion to the aggregate principal amount of Bid Loans held by each. (d) Each payment or prepayment of a LIBOR Committed Loan or a Bid Loan made pursuant to the provisions of this Section 2.7 on a day other than the last day of the Interest Period applicable thereto shall be made together with all amounts required under Section 2.19 to be paid as a consequence thereof. 2.8. Voluntary Prepayment. (a) At any time and from time to time, the Borrower shall have the right to prepay the Committed Loans, in whole or in part, without premium or penalty (except as provided in clause (iii) below), upon written notice to the Administrative Agent given not later than 10:00 a.m., New York City time, three (3) Business Days prior to each intended prepayment of LIBOR Committed Loans and one (1) Business Day prior to each intended prepayment of Base Rate Loans, provided that (i) each partial prepayment shall be in an aggregate principal amount of not less than $3,000,000 or, if greater, an integral multiple of $1,000,000 in excess thereof, (ii) no partial prepayment of LIBOR Committed Loans made pursuant to any single Committed Borrowing shall reduce the aggregate outstanding principal amount of the remaining LIBOR Committed Loans under such Committed Borrowing to less than $3,000,000 or to any greater amount not an integral multiple of $1,000,000 in excess thereof, and (iii) unless made together with all amounts required under Section 2.19 to be paid as a consequence of such prepayment, a prepayment of a LIBOR Committed Loan may be made only on the last day of the Interest Period applicable thereto. Each such notice shall specify the proposed date of such prepayment and the aggregate principal amount and the Types of the Committed Loans to be prepaid (and, in the case of LIBOR Committed Loans, the specific Committed Borrowing or Borrowings pursuant to which made) and shall be irrevocable and shall bind the Borrower to make such prepayment on the terms specified therein. Promptly upon receipt of such notice, the Administrative Agent shall notify the Lenders thereof. Amounts prepaid pursuant to this subsection (a) may be reborrowed, subject to the terms and conditions of this Agreement. (b) The Borrower shall not have the right to prepay the Bid Loans on a date other than the last day of the Interest Period applicable thereto. -25- 2.9. Interest. (a) The Borrower will pay interest in respect of the unpaid principal amount of each Loan, from the date of Borrowing thereof until such principal amount shall be paid in full: (i) in respect of each Committed Loan, (y) at the Base Rate, as in effect from time to time during such periods as such Committed Loan is a Base Rate Loan, and (z) at a rate per annum equal to the LIBOR Rate plus the Applicable Margin for LIBOR Committed Loans, each as in effect from time to time during such periods as such Committed Loan is a LIBOR Committed Loan; and (ii) in respect of each Bid Loan, (y) at the applicable Absolute Rate established in accordance with the provisions of Section 2.3, if such Loan is an Absolute Rate Loan, and (z) at a rate per annum equal to the LIBOR Rate, as in effect from time to time during the applicable Interest Period, plus (or minus) the applicable LIBOR Bid Margin, if such Loan is a LIBOR Bid Loan. (b) Any principal amounts of the Loans not paid when due and, to the greatest extent permitted by law, all interest accrued on the Loans and all other fees and amounts hereunder not paid when due (whether at maturity, pursuant to acceleration or otherwise), shall bear interest at a rate per annum equal to the interest rate applicable under subsection (a) above from time to time thereafter to such Loans plus 2% (or, in the case of fees and other amounts, at the Base Rate plus 2%), and, in each case, such default interest shall be payable on demand. To the greatest extent permitted by law, interest shall continue to accrue after the filing by or against the Borrower of any petition seeking any relief in bankruptcy or under any law pertaining to insolvency or debtor relief. (c) Accrued (and theretofore unpaid) interest shall be payable as follows: (i) in respect of each Base Rate Loan, in arrears on the last Business Day of each calendar quarter; (ii) in respect of each LIBOR Committed Loan or Bid Loan, in arrears (x) on the last day of the Interest Period applicable thereto (subject to the provisions of clause (v) in Section 2.11), (y) in the case of a LIBOR Committed Loan or LIBOR Bid Loan having an Interest Period of more than three months, on the date three months after the first day of such Interest Period, and (z) in the case of a Absolute Rate Loan having an Interest Period of more than 90 days, the day which is 90 days after the first day of such Interest Period; and (iii) in respect of any Loan, (x) on the date of any repayment or prepayment thereof (in respect of the amount so repaid or prepaid), (y) at maturity (whether pursuant to acceleration or otherwise) and, (z) after maturity, on demand. (d) Nothing contained in this Agreement or in any other Credit Document shall be deemed to establish or require the payment of interest to any Lender at a rate in excess of the maximum rate permitted by applicable law. If the amount of interest payable for the account of any Lender on any interest payment date would exceed the maximum amount permitted by applicable law to be charged by such Lender, the amount of interest payable for its account on such interest payment date shall be automatically reduced to such maximum permissible amount. In the event of any such reduction affecting any Lender, if from time to time thereafter the amount of interest payable for the account of such Lender on any interest payment date would be less than the maximum amount permitted by applicable law to be charged by such Lender, then the amount of interest payable for its account on such subsequent interest payment date shall be automatically increased to such maximum permissible amount, provided that at no time shall the aggregate amount by -26- which interest paid for the account of any Lender has been increased pursuant to this sentence exceed the aggregate amount by which interest paid for its account has theretofore been reduced pursuant to the previous sentence. (e) The Administrative Agent shall promptly notify the Borrower and the Lenders upon determining the interest rate for each Committed Borrowing of LIBOR Committed Loans after its receipt of the relevant Notice of Committed Borrowing or Notice of Conversion/Continuation; provided, however, that the failure of the Administrative Agent to provide the Borrower or the Lenders with any such notice shall neither affect any obligations of the Borrower or the Lenders hereunder nor result in any liability on the part of the Administrative Agent to the Borrower or any Lender. Each such determination (including each determination of the Reserve Requirement) shall, absent manifest error, be final and conclusive and binding on all parties hereto. 2.10. Fees. The Borrower agrees to pay: (a) To each of The Bank of New York and First Union, for its own respective account, on the date of this Agreement, the fees described in paragraph (i) of the Fee Letter, in the amounts set forth therein as due and payable on the date of this Agreement to each such party and to the extent not theretofore paid to the appropriate party; (b) To the Administrative Agent, for the account of each Lender, pro rata according to its Commitment, a facility fee (the "Facility Fee") for the period from the date of this Agreement to the Termination Date, at a rate per annum equal to the Applicable Margin for a Facility Fee on the average daily Commitment of such Lender (whether or not used), payable in arrears (i) on the last Business Day of each fiscal quarter, beginning with the first such day to occur after the Closing Date, and (ii) on the Termination Date; and (c) To each Agent, for its own account, the annual administrative fee described in paragraph (ii) of the Fee Letter as payable to such Agent, on the terms, in the amounts and at the times set forth therein. 2.11. Interest Periods. Concurrently with the giving of a Notice of Committed Borrowing or Notice of Conversion/Continuation in respect of any Committed Borrowing comprised of LIBOR Committed Loans, and concurrently with the giving of a Bid Request in respect of any requested Bid Loans, the Borrower shall have the right to elect, pursuant to such notice, the interest period (each, an "Interest Period") to be applicable to such LIBOR Committed Loans or Bid Loans, as the case may be, which Interest Period (x) in the case of any LIBOR Committed Loan and at the option of the Borrower, shall be a one, two, three or six-month period commencing on the date of the Borrowing of such LIBOR Committed Loan (including the date of any continuation of, or conversion into, such LIBOR Committed Loan) and (as to any successive Interest Period applicable to such LIBOR Committed Loan) on the day on which the next preceding Interest Period applicable thereto expires, (y) in the case of any LIBOR Bid Loan and as agreed to by the Borrower and the Lender making such LIBOR Bid Loan, shall be a one, two, three or six-month period commencing on the date of the Borrowing of such LIBOR Bid Loan, or (z) in the case of any Absolute Rate Loan and as agreed to by the Borrower and the Lender making such Absolute Rate Loan, shall be a period of not less than seven (7) nor more than one hundred eighty (180) days commencing on the date of the Borrowing of such Absolute Rate Loan; provided, however, that: (i) all LIBOR Loans comprising a single Borrowing shall at all times have the same Interest Period; -27- (ii) the Borrower may not select any Interest Period applicable to a Committed Loan that expires after the Maturity Date; (iii) the Borrower may not select any Interest Period applicable to a Bid Loan that expires after the first (1st) Business Day prior to the Maturity Date; (iv) Bid Loans may not be outstanding under more than three (3) separate Interest Periods at any one time, and LIBOR Committed Loans and Bid Loans together may not be outstanding under more than eight (8) separate Interest Periods at any one time (for which purpose Interest Periods applicable to LIBOR Committed Loans and Interest Periods applicable to Bid Loans shall be deemed to be separate Interest Periods even if they are coterminous); (v) subject to clauses (ii) and (iii) above, if any Interest Period otherwise would expire on a day that is not a Business Day, such Interest Period shall expire on the next succeeding Business Day, provided that, in the case of an Interest Period applicable to LIBOR Loans, if such next succeeding Business Day falls in another calendar month, then such Interest Period shall expire on the next preceding Business Day; (vi) if any Interest Period applicable to LIBOR Loans begins on a day for which there is no numerically corresponding day in the calendar month during which such Interest Period would otherwise expire, such Interest Period shall expire on the last Business Day of such calendar month; and (vii) if, upon the expiration of any Interest Period applicable to LIBOR Committed Loans, the Borrower shall have failed to elect a new Interest Period to be applicable to such LIBOR Committed Loans, then the Borrower shall be deemed to have elected to convert such LIBOR Committed Loans into Base Rate Loans as of the expiration of the then current Interest Period applicable thereto. 2.12. Conversions and Continuations. (a) The Borrower shall have the right on any Business Day to elect (i) to convert all or a portion of the outstanding principal amount of any Base Rate Loans into LIBOR Committed Loans, or to convert any LIBOR Committed Loans the Interest Periods for which end on the same day into Base Rate Loans, or (ii) to continue all or a portion of the outstanding principal amount of any LIBOR Committed Loans, the Interest Periods for which end on the same day for an additional Interest Period, provided that (x) any such conversion or continuation shall involve an aggregate principal amount of not less than $3,000,000 or, if greater, an integral multiple of $1,000,000 in excess thereof, and no partial conversion of LIBOR Committed Loans made pursuant to a single Borrowing shall reduce the outstanding principal amount of such LIBOR Committed Loans to less than $3,000,000 or to any greater amount not an integral multiple of $1,000,000 in excess thereof, (y) except as otherwise provided in Section 2.17(d), LIBOR Committed Loans may be converted into Base Rate Loans only on the last day of the Interest Period applicable thereto (and, in any event, if a LIBOR Committed Loan is converted into a Base Rate Loan on any day other than the last day of the Interest Period applicable thereto, the Borrower will pay, upon such conversion, all amounts required under Section 2.19 to be paid as a consequence thereof) and (z) no conversion of Base Rate Loans into LIBOR Committed Loans or continuation of LIBOR Committed Loans shall be permitted during the continuance of a Default or Event of Default. (b) The Borrower shall make each such election by giving the Administrative Agent written notice by the delivery of a Notice of Conversion, which shall be sent by telecopy (confirmed promptly, and -28- in any event within five Business Days, by the delivery to the Administrative Agent of a Notice of Conversion manually signed by the Borrower), not later than 10:00 a.m., New York City time, three (3) Business Days prior to the effective date of any conversion of Base Rate Loans into, or continuation of, LIBOR Committed Loans and one (1) Business Day prior to the effective date of any conversion of LIBOR Committed Loans into Base Rate Loans. Each such notice (each, a "Notice of Conversion/Continuation") shall be irrevocable, shall be given in the form of Exhibit B-2 and shall specify (x) the date of such conversion or continuation (which shall be a Business Day), (y) in the case of a conversion into, or a continuation of, LIBOR Committed Loans, the Interest Period to be applicable thereto, and (z) the aggregate amount and Type of the Loans being converted or continued. Upon the receipt of a Notice of Conversion/Continuation, the Administrative Agent will promptly notify each Lender of the proposed conversion or continuation. In the event that the Borrower shall fail to deliver a Notice of Conversion/Continuation as provided herein with respect to any outstanding LIBOR Committed Loans, such LIBOR Committed Loans shall automatically be converted to Base Rate Loans upon the expiration of the then current Interest Period applicable thereto (unless repaid pursuant to the terms hereof). 2.13. Method of Payments; Computations. (a) All payments by the Borrower hereunder shall be made without setoff, counterclaim or other defense, in Dollars and in immediately available funds to the Administrative Agent, for the account of the Lenders (except as otherwise expressly provided herein as to payments required to be made directly to the Lenders) at its office referred to in Section 10.5, prior to 11:00 a.m., New York City time, on the date payment is due. Any payment made as required hereinabove, but after 11:00 a.m., New York City time, shall be deemed to have been made on the next succeeding Business Day for purposes of calculating interest. If any payment falls due on a day that is not a Business Day, then such due date shall be extended to the next succeeding Business Day (except that in the case of LIBOR Loans to which the proviso of clause (v) in Section 2.11 is applicable, such due date shall be the next preceding Business Day), and such extension of time shall then be included in the computation of payment of interest, fees or other applicable amounts, provided, however, that if such next Business Day is after the Maturity Date, such payment shall be due on the preceding Business Day. (b) The Administrative Agent will distribute to the Lenders like amounts relating to payments made to the Administrative Agent for the account of the Lenders as follows: (i) if the payment is received by 11:00 a.m., New York City time, in immediately available funds, the Administrative Agent will make available to each relevant Lender on the same date, by wire transfer of immediately available funds, such Lender's ratable share of such payment (based on the percentage that the amount of the relevant payment owing to such Lender bears to the total amount of such payment owing to all of the relevant Lenders), and (ii) if such payment is received after 11:00 a.m., New York City time, or in other than immediately available funds, the Administrative Agent will make available to each such Lender its ratable share of such payment by wire transfer of immediately available funds on the next succeeding Business Day (or in the case of uncollected funds, as soon as practicable after collected). (c) Unless the Administrative Agent shall have received written notice from the Borrower prior to the date on which any payment is due to any Lender hereunder that such payment will not be made in full, the Administrative Agent may assume that the Borrower has made such payment in full to the Administrative Agent on such date, and the Administrative Agent may, in reliance on such assumption, but shall not be obligated to, cause to be distributed to such Lender on such due date an amount equal to the amount then due to such Lender. If and to the extent the Borrower shall not have so made such payment in full to the Administrative Agent, and without limiting the obligation of the Borrower to make such payment in accordance with the terms hereof, such Lender shall repay to the Administrative Agent forthwith on demand such -29- amount so distributed to such Lender, together with interest thereon for each day from the date such amount is so distributed to such Lender until the date repaid to the Administrative Agent, at a rate of interest per annum equal to the Federal Funds Rate for the first three days after the due date of such payment and the Federal Funds Rate plus 2% thereafter until the date such payment is received by the Administrative Agent. (d) Subject to Section 2.16(b), each Lender for whose account any payment is to be made hereunder may, but shall not be obligated to, debit the amount of any such payment not made as and when required hereunder to any ordinary deposit account of the Borrower with such Lender (with prompt notice to the Administrative Agent and the Borrower); provided, however, that the failure to give such notice shall not affect the validity of such debit by such Lender. (e) With respect to each payment hereunder, except as specifically provided otherwise herein or in any of the other Credit Documents, the Borrower may designate by written notice to the Administrative Agent prior to or concurrently with such payment the specific Loans or other Obligations that are to be paid, repaid or prepaid, provided that (i) unless made together with all amounts required under Section 2.19 to be paid as a consequence thereof, a prepayment of a LIBOR Committed Loan or Bid may be made only on the last day of the Interest Period applicable thereto, and (ii) each payment on account of any Obligations to or for the account of any one or more Lenders shall be apportioned ratably among such Lenders in proportion to the amounts of such Obligations owed to them respectively. In the absence of any such designation by the Borrower, or if an Event of Default has occurred and is continuing, such payment shall be applied by the Administrative Agent in the following manner and order: (i) first, to the payment of interest on, and then the principal portion of, any Base Rate Loans; (ii) second, to the payment of interest on, and then the principal portion of, any Committed LIBOR Loans; (iii) third, to the payment of interest on, and then the principal portion of, any Bid Loans; (iv) fourth, to the payment of any other Obligations as directed by the Required Lenders. (f) All computations of interest and fees hereunder (including computations of the Reserve Requirement) shall be made on the basis of a year consisting of 365 or 366 days, as the case may be (in the case of interest on Base Rate Loans based upon the Administrative Agent's prime rate or base rate), or 360 days (in all other instances), and the actual number of days (including the first day, but excluding the last day) elapsed. Any change in the interest rate on Committed Loans resulting from a change in the Base Rate or reserve requirements shall become effective as of the opening of business on the day on which such change shall become 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 the Base Rate, but any failure to so notify shall not in any manner affect the obligation of the Borrower to pay interest on the Loans in the amounts and on the dates required. Each determination of the Base Rate or a LIBOR Rate by the Administrative Agent pursuant to this Agreement shall be conclusive and binding on all parties hereto absent manifest error. The Borrower acknowledges that to the extent interest payable on Base Rate Loans is based on the prime rate (described in clause (i) of the definition of Base Rate), such rate is only one of the bases for computing interest on loans made by the Lenders, and by basing interest payable on Base Rate Loans on such prime rate, the Lenders have not committed to charge, and the Borrower has not in any way bargained for, interest based on a lower or the lowest rate at which the Lenders may now or in the future make loans to other borrowers. 2.14. Recovery of Payments. (a) The Borrower agrees that to the extent the Borrower makes a payment or payments to or for the account of either Agent or any Lender, which payment or payments or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside or required to be repaid to a trustee, receiver or any other party under any bankruptcy, insolvency or similar state or federal law, common law or equitable cause, then, to the extent of such payment or repayment, the Obligation -30- intended to be satisfied shall be revived and continued in full force and effect as if such payment had not been received. (b) If any amounts distributed by either Agent to any Lender are subsequently returned or repaid by such Agent to the Borrower or its representative or successor in interest, whether by court order or by settlement approved by the Lender in question, such Lender will, promptly upon receipt of notice thereof from such Agent, pay such Agent such amount. If any such amounts are recovered by such Agent from the Borrower or its representative or successor in interest, such Agent will redistribute such amounts to the Lenders on the same basis as such amounts were originally distributed. 2.15. Use of Proceeds. The proceeds of the Loans shall be used solely (i) to repay the Terminating Indebtedness in full and (ii) for working capital and general corporate purposes. 2.16. Pro Rata Treatment; Sharing of Payments. (a) All fundings, continuations and conversions of Committed Loans shall be made by the Lenders pro rata on the basis of their respective Commitments (in the case of the initial funding of Committed Loans pursuant to Section 2.2) or Committed Loans (in the case of continuations and conversions of Committed Loans pursuant to Section 2.12), as applicable from time to time. (b) Each Lender agrees that if it shall receive any amount hereunder (whether by voluntary payment, realization upon security, exercise of the right of setoff or banker's lien, counterclaim or cross action, or otherwise, other than pursuant to Section 2.20 or Section 10.7) applicable to the payment of any of the Obligations that exceeds its ratable share (according to the proportion of (i) the amount of such Obligations due and payable to such Lender at such time to (ii) the aggregate amount of such Obligations due and payable to all Lenders at such time) of payments on account of such Obligations then or therewith obtained by all the Lenders to which such payments are required to have been made, such Lender shall forthwith purchase from the other Lenders such participations in such Obligations as shall be necessary to cause such purchasing Lender to share the excess payment or other recovery ratably with each of them; provided, however, that if all or any portion of such excess payment is thereafter recovered from such purchasing Lender, such purchase from each such other Lender shall be rescinded and each such other Lender shall repay to the purchasing Lender the purchase price to the extent of such recovery, together with an amount equal to such other Lender's ratable share (according to the proportion of (i) the amount of such other Lender's required repayment to (ii) the total amount so recovered from the purchasing Lender) of any interest or other amount paid or payable by the purchasing Lender in respect of the total amount so recovered. The Borrower agrees that any Lender so purchasing a participation from another Lender pursuant to the provisions of this subsection may, to the fullest extent permitted by law, exercise any and all rights of payment (including, without limitation, setoff, banker's lien or counterclaim) with respect to such participation as fully as if such participant were a direct creditor of the Borrower in the amount of such participation. If under any applicable bankruptcy, insolvency or similar law, any Lender receives a secured claim in lieu of a setoff to which this subsection applies, such Lender shall, to the extent practicable, exercise its rights in respect of such secured claim in a manner consistent with the rights of the Lenders entitled under this subsection to share in the benefits of any recovery on such secured claim. If at any time any Lender having outstanding both Committed Loans and Bid Loans exercises a right of setoff, such Lender shall apply the proceeds of such setoff first to its Committed Loans until reduced to zero, and thereafter to its Bid Loans. 2.17. Increased Costs; Change in Circumstances; Illegality; etc. (a) If, at any time after the date hereof and from time to time, the enactment of, or any change in, any applicable law, rule or regulation or in the interpretation or administration thereof by any Governmental Authority charged with the interpretation -31- or administration thereof, or compliance by any Lender with any guideline or request from any such Governmental Authority (whether or not having the force of law), shall (i) subject such Lender to any tax or other charge, or change the basis of taxation of payments to such Lender, in respect of any of its LIBOR Committed Loans or LIBOR Bid Loans or any other amounts payable hereunder or its obligation to make, fund or maintain any LIBOR Committed Loans or LIBOR Bid Loans (other than any change in the rate or basis of tax on the overall net income of such Lender or its applicable Lending Office), (ii) impose, modify or deem applicable any reserve, special deposit or similar requirement (other than as a result of any change in the Reserve Requirement) against assets of, deposits with or for the account of, or credit extended by, such Lender or its applicable Lending Office, or (iii) impose on such Lender or its applicable Lending Office any other condition affecting its LIBOR Committed Loans or LIBOR Bid Loans, and the result of any of the foregoing shall be to increase the cost to such Lender of making or maintaining any LIBOR Committed Loans or LIBOR Bid Loans or to reduce the amount of any sum received or receivable by such Lender hereunder, the Borrower will, within fifteen (15) days after delivery to the Borrower by such Lender of written demand therefor (which shall set forth the basis for such demand in reasonable detail), pay to such Lender such additional amounts as shall compensate such Lender for such increase in costs or reduction in return. Each Lender will promptly, but in no event later than ninety (90) days after the officer of such Lender having primary responsibility for this Agreement has knowledge thereof, notify the Borrower of any event occurring after the date hereof that would entitle such Lender to compensation pursuant to this subsection (a). (b) If, at any time after the date hereof and from time to time, any Lender shall have reasonably determined that the enactment of, or any change in, any applicable law, rule or regulation regarding capital adequacy or in the interpretation or administration thereof by any Governmental Authority charged with the interpretation or administration thereof, or compliance by such Lender with any guideline or request from any such Governmental Authority (whether or not having the force of law), has or would have the effect, as a consequence of such Lender's Commitment or Loans hereunder, of reducing the rate of return on the capital of such Lender or any Person controlling such Lender to a level below that which such Lender or controlling Person could have achieved but for such introduction, change or compliance (taking into account such Lender's or controlling Person's policies with respect to capital adequacy), the Borrower will, within fifteen (15) days after delivery to the Borrower by such Lender of written demand therefor (which shall set forth the basis for such demand in reasonable detail), pay to such Lender such additional amounts as will compensate such Lender or controlling Person for such reduction in return. Each Lender will promptly, but in no event later than ninety (90) days after the officer of such Lender having primary responsibility for this Agreement has knowledge thereof, notify the Borrower of any event occurring after the date hereof that would entitle such Lender to compensation pursuant to this subsection (b). (c) If, on or prior to the first day of any Interest Period, (y) the Administrative Agent shall have determined that adequate and reasonable means do not exist for ascertaining the applicable LIBOR Rate for such Interest Period or (z) the Administrative Agent shall have received written notice from the Required Lenders of their determination that the rate of interest referred to in the definition of "LIBOR Rate" upon the basis of which the applicable interest rate for LIBOR Loans for such Interest Period is to be determined will not adequately and fairly reflect the cost to such Lenders of making or maintaining LIBOR Loans during such Interest Period, the Administrative Agent will forthwith so notify the Borrower and the Lenders. Upon such notice, (i) all then outstanding LIBOR Committed Loans shall automatically, on the expiration date of the respective Interest Periods applicable thereto (unless then repaid in full), be converted into Base Rate Loans, (ii) the obligation of the Lenders to make LIBOR Bid Loans or to make, to convert Base Rate Loans into, or to continue, LIBOR Committed Loans shall be suspended (including pursuant to the Committed Borrowing to which such Interest Period applies), and (iii) any Notice of Committed Borrowing, Bid Request or Notice of Conversion/Continuation given at any time thereafter with respect to LIBOR Committed Loans -32- shall be deemed to be a request for Base Rate Loans (or, in the case of a Bid Borrowing, Absolute Rate Loans), in each case until the Administrative Agent or the Required Lenders, as the case may be, shall have determined that the circumstances giving rise to such suspension no longer exist (and the Required Lenders, if making such determination, shall have so notified the Administrative Agent), and the Administrative Agent shall have so notified the Borrower and the Lenders. Notwithstanding the foregoing, the Administrative Agent and each Lender will take any reasonable actions available to it (including designation of a different Lending Office), consistent with legal and regulatory restrictions, that will avoid the need to take the steps described in this subsection (c) and that will not, in the reasonable judgment of the Administrative Agent or such Lender, be materially disadvantageous to it. (d) Notwithstanding any other provision in this Agreement, if, at any time after the date hereof and from time to time, any Lender shall have determined in good faith that the enactment of, or any change in, any applicable law, rule or regulation or in the interpretation or administration thereof by any Governmental Authority charged with the interpretation or administration thereof, or compliance with any guideline or request from any such Governmental Authority (whether or not having the force of law), has or would have the effect of making it unlawful for such Lender to make or to continue to make or maintain LIBOR Loans, such Lender will forthwith so notify the Administrative Agent and the Borrower. Upon such notice, (i) each of such Lender's then outstanding LIBOR Committed Loans shall automatically, on the expiration date of the respective Interest Period applicable thereto (or, to the extent any such LIBOR Committed Loan may not lawfully be maintained as a LIBOR Committed Loan until such expiration date, upon such notice), be converted into a Base Rate Loan, (ii) the obligation of such Lender to make LIBOR Bid Loans or to make, to convert Base Rate Loans into, or to continue, LIBOR Committed Loans shall be suspended (including pursuant to any Committed Borrowing for which the Administrative Agent has received a Notice of Committed Borrowing or Bid Request but for which the Borrowing Date has not arrived), and (iii) any Notice of Committed Borrowing, Bid Request or Notice of Conversion/Continuation given at any time thereafter with respect to LIBOR Committed Loans shall, as to such Lender, be deemed to be a request for a Base Rate Loan (or, in the case of a Bid Borrowing, an Absolute Rate Loan), in each case until such Lender shall have determined that the circumstances giving rise to such suspension no longer exist and shall have so notified the Administrative Agent, and the Administrative Agent shall have so notified the Borrower. Notwithstanding the foregoing, the Agents and each Lender will take any reasonable actions available to it (including designation of a different Lending Office), consistent with legal and regulatory restrictions, that will avoid the need to take the steps described in this subsection (d) and that will not, in the reasonable judgment of such Agent or such Lender, be materially disadvantageous to it. (e) Determinations by the Administrative Agent or any Lender for purposes of this Section 2.17 of any increased costs, reduction in return, market contingencies, illegality or any other matter shall, absent manifest error, be conclusive, provided that such determinations are made in good faith. Nothing in this Section 2.17 shall require or be construed to require the Borrower to pay any interest, fees, costs or other amounts in excess of that permitted by applicable law. 2.18. Taxes. (a) Any and all payments by the Borrower hereunder or under any Note shall be made, in accordance with the terms hereof and thereof, free and clear of and without deduction for any and all present or future taxes, levies, imposts, deductions, charges or withholdings, and all liabilities with respect thereto, other than net income and franchise taxes imposed on either Agent or any Lender by the United States or by the jurisdiction under the laws of which either Agent or such Lender, as the case may be, is organized or in which its principal office or (in the case of a Lender) its applicable Lending Office is located, or any political subdivision or taxing authority thereof (all such nonexcluded taxes, levies, imposts, deductions, charges, withholdings and liabilities being hereinafter referred to as "Taxes"). If the Borrower -33- shall be required by law to deduct any Taxes from or in respect of any sum payable hereunder or under any Note to either Agent or any Lender, (i) the sum payable shall be increased as may be necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section 2.18), such Agent or such Lender, as the case may be, receives an amount equal to the sum it would have received had no such deductions been made, (ii) the Borrower will make such deductions, (iii) the Borrower will pay the full amount deducted to the relevant taxation authority or other authority in accordance with applicable law and (iv) the Borrower will deliver to such Agent or such Lender, as the case may be, evidence of such payment. (b) The Borrower will indemnify the Agents and each Lender for the full amount of Taxes (including, without limitation, any Taxes imposed by any jurisdiction on amounts payable under this Section 2.18) paid by such Agent or such Lender, as the case may be, and any liability (including penalties, interest and expenses) arising therefrom or with respect thereto, whether or not such Taxes were correctly or legally asserted. This indemnification shall be made within 30 days from the date the such Agent or such Lender, as the case may be, makes written demand therefor. (c) If any Lender is a "foreign corporation, partnership or trust" within the meaning of the Internal Revenue Code, and such Lender claims exemption from United States withholding tax under Section 1441 or 1442 of the Internal Revenue Code, such Lender will deliver to each of the Administrative Agent and the Borrower, on or prior to the date of any payment by the Borrower to such Lender under this Agreement or the Notes, a properly completed Internal Revenue Service Form 4224 or 1001, as applicable (or successor forms), certifying that such Lender is entitled to an exemption from or a reduction of withholding or deduction for or on account of United States federal income taxes in connection with payments under this Agreement or any of the Notes, together with a properly completed Internal Revenue Service Form W-8 or W-9, as applicable (or successor forms). Each such Lender further agrees to deliver to each of the Administrative Agent and the Borrower an additional copy of each such relevant form on or before the date that such form expires (currently, three successive calendar years for Form 1001 and one calendar year for Form 4224) or becomes obsolete or after the occurrence of any event requiring a change in the most recent forms so delivered by it, in each case certifying that such Lender is entitled to an exemption from or a reduction of withholding or deduction for or on account of United States federal income taxes in connection with payments under this Agreement or any of the Notes, unless an event (including, without limitation, any change in treaty, law or regulation) has occurred prior to the date on which any such delivery would otherwise be required, which event renders all such forms inapplicable or the exemption to which such forms relate unavailable and such Lender notifies the Administrative Agent and the Borrower that it is not entitled to receive payments without deduction or withholding of United States federal income taxes. Each such Lender will promptly notify the Administrative Agent and the Borrower of any changes in circumstances that would modify or render invalid any claimed exemption or reduction. (d) If any Lender is entitled to a reduction in (and not a complete exemption from) the applicable withholding tax, the Borrower and the Administrative Agent may withhold from any interest payment to such Lender an amount equivalent to the applicable withholding tax after taking into account such reduction. If any of the forms or other documentation required under subsection (d) above are not delivered to the Administrative Agent as therein required, then the Borrower and the Administrative Agent may withhold from any interest payment to such Lender not providing such forms or other documentation an amount equivalent to the applicable withholding tax. 2.19. Compensation. The Borrower will compensate each Lender, upon its written request (which request shall be made within three (3) Business Days after receipt of notice of any payment or -34- proposed payment by the Borrower under this Agreement giving rise to compensation under this Section 2.19, and shall be accompanied by a statement setting forth the basis for requesting such compensation in reasonable detail and, calculated using any method chosen by such Lender which is customarily used by such Lender for such purposes), for all losses, expenses (including any internal processing charges customarily charged by such Lender) and liabilities (including, without limitation, any loss, expense or liability incurred by reason of the liquidation or reemployment of deposits or other funds required by such Lender to fund or maintain LIBOR Loans) that such Lender may incur or sustain (i) if for any reason (other than a default by such Lender) a borrowing or continuation of, or conversion into, a LIBOR Committed Loan, or a borrowing of a Bid Loan, does not occur on a date specified therefor in a Notice of Committed Borrowing, Notice of Conversion/Continuation or Bid Request, (ii) if any repayment, prepayment or conversion of any LIBOR Committed Loan, or repayment of any Bid Loan, occurs on a date other than the last day of an Interest Period applicable thereto (including as a consequence of acceleration of the maturity of the Loans pursuant to Section 8.2), (iii) if any prepayment of any LIBOR Committed Loan or Bid Loan is not made on any date specified in a notice of prepayment given by the Borrower or (iv) as a consequence of any other failure by the Borrower to make any payments with respect to any LIBOR Committed Loan or Bid Loan when due hereunder. Calculation of all amounts payable to a Lender under this Section 2.19 in respect of LIBOR Loans shall be made as though such Lender had actually funded its relevant LIBOR Loan through the purchase of a Eurodollar deposit bearing interest at the LIBOR Rate in an amount equal to the amount of such LIBOR Loan, having a maturity comparable to the relevant Interest Period; provided, however, that each Lender may fund its LIBOR Loans in any manner it sees fit and the foregoing assumption shall be utilized only for the calculation of amounts payable under this Section 2.19. Determinations by any Lender for purposes of this Section 2.19 of any such losses, expenses or liabilities shall, absent manifest error, be conclusive, provided that such determinations are made in good faith. 2.20. Replacement of Lenders. The Borrower may, at any time and so long as no Default or Event of Default has then occurred and is continuing, replace any Lender (i) that has requested compensation from the Borrower under Section 2.17(a) or 2.17(b) in an aggregate amount in excess of $10,000, (ii) the obligation of which to make or maintain LIBOR Loans has been suspended under Section 2.17(c) or (iii) that shall refuse to fund, or otherwise default in the funding, of its ratable share of any Borrowing requested and permitted to be made hereunder and such refusal has not been withdrawn or such default has not been cured within three (3) Business Days after the Borrower has given such Lender written notice thereof, in any case under clauses (i) through (iii) above by written notice to such Lender and the Administrative Agent given not more than thirty (30) days after any such event and identifying one or more Persons each of which shall be an Eligible Assignee and reasonably acceptable to the Administrative Agent (each, a "Replacement Lender," and collectively, the "Replacement Lenders") to replace such Lender (the "Replaced Lender"), provided that (i) the notice from the Borrower to the Replaced Lender and the Agents provided for hereinabove shall specify an effective date for such replacement (the "Replacement Effective Date"), which shall be at least five (5) Business Days after such notice is given, (ii) as of the relevant Replacement Effective Date, each Replacement Lender shall enter into an Assignment and Acceptance with the Replaced Lender pursuant to Section 10.7(a) (but shall not be required to pay the processing fee otherwise payable to the Administrative Agent pursuant to Section 10.7(a)), pursuant to which such Replacement Lenders collectively shall acquire, in such proportion among them as they may agree with the Borrower and the Agents, all (but not less than all) of the Commitment and outstanding Loans of the Replaced Lender, and, in connection therewith, shall pay (y) to the Replaced Lender, as the purchase price in respect thereof, an amount equal to the sum as of the Replacement Effective Date (without duplication) of (1) the unpaid principal amount of, and all accrued but unpaid interest on, all outstanding Loans of the Replaced Lender and (2) the Replaced Lender's ratable share of all accrued but unpaid fees owing to the Replaced Lender under Section 2.10(b), -35- and (z) to the Administrative Agent, for its own account, any amounts owing to the Administrative Agent by the Replaced Lender under Section 2.4(b), (iii) all other obligations of the Borrower owing to the Replaced Lender (other than those specifically described in clause (ii) above in respect of which the assignment purchase price has been, or is concurrently being, paid), including, without limitation, amounts payable under Section 2.17(a) and (b) which give rise to the replacement of such Replaced Lender and amounts payable under Section 2.19 as a result of the actions required to be taken under this Section 2.20, shall be paid in full by the Borrower to the Replaced Lender on or prior to the Replacement Effective Date, and (iv) the Borrower shall pay to the Administrative Agent the processing fee provided for in Section 10.7(a). ARTICLE III CONDITIONS OF BORROWING 3.1. Conditions of Initial Loans. The obligation of each Lender to make Loans in connection with the initial Borrowing hereunder is subject to the satisfaction of the following conditions precedent (provided that in no event shall the Lenders be obligated to make any Loans hereunder if the initial Borrowing does not occur on or prior to March 14, 1997): (a) The Documentation Agent shall have received the following, each dated as of the Closing Date (unless otherwise specified) and, except for the Notes, in sufficient copies for each Lender: (i) a Committed Loan Note for each Lender that is a party hereto as of the Closing Date, in the amount of such Lender's Commitment and duly completed and executed by the Borrower; (ii) a Bid Loan Note for each Lender that is a party hereto as of the Closing Date, in the amount of the Maximum Bid Loan Amount and duly completed and executed by the Borrower; (iii) a certificate, signed by the chief executive officer, chief financial officer or an executive vice president of the Borrower, in form and substance satisfactory to the Agents, certifying that (A) all representations and warranties of the Borrower contained in this Agreement and the other Credit Documents are true and correct as of the Closing Date, both immediately before and after giving effect to the initial Loans hereunder and the application of the proceeds thereof, (B) no Default or Event of Default has occurred and is continuing, both immediately before and after giving effect to the initial Loans hereunder and the application of the proceeds thereof, (C) there are no insurance regulatory proceedings pending or, to such individual's knowledge, threatened against any of the Insurance Subsidiaries in any jurisdiction that, if adversely determined, would be reasonably likely to have a Material Adverse Effect, and (D) both immediately before and after giving effect to the consummation of the transactions contemplated by this Agreement, no Material Adverse Change has occurred since December 31, 1995, and there exists no event, condition or state of facts that could reasonably be expected to result in a Material Adverse Change, other than the Reserve Adjustment and the Special 1996 Charges; (iv) a certificate of the secretary or an assistant secretary of each of the Borrower and its Material Subsidiaries, in form and substance satisfactory to the Agents, certifying (A) that attached thereto is a true and complete copy of the articles or certificate of incorporation and all -36- amendments thereto of the Borrower or such Subsidiary, as the case may be, certified as of a recent date by the Secretary of State (or comparable Governmental Authority) of its jurisdiction of organization, and that the same has not been amended since the date of such certification, (B) that attached thereto is a true and complete copy of the bylaws of the Borrower or such Subsidiary, as the case may be, as then in effect and as in effect at all times from the date on which the resolutions referred to in clause (C) below were adopted to and including the date of such certificate, and (C) as to the Borrower only, that attached thereto is a true and complete copy of resolutions adopted by the board of directors of the Borrower authorizing the execution, delivery and performance of this Agreement and the other Credit Documents to which it is a party, and as to the incumbency and genuineness of the signature of each officer of the Borrower executing this Agreement or any of the other Credit Documents, and attaching all such copies of the documents described above; (v) a certificate of the Borrower's chief financial officer as to the financial condition of the Borrower in the form of Exhibit F; (vi) a favorable opinion of Duane, Morris & Heckscher, counsel to the Borrower, addressed to Agents and the Lenders, in substantially the form of Exhibit G and addressing such other matters as either Agent or any Lender may reasonably request; and (vii) a favorable opinion of Robinson, Bradshaw & Hinson, P.A., counsel to the Documentation Agent, addressed to the Agents and the Lenders, in substantially the form of Exhibit H. (b) The Documentation Agent shall have received (i) a certificate as of a recent date of the good standing of each of the Borrower and its Material Subsidiaries under the laws of its jurisdiction of organization, from the Secretary of State (or comparable Governmental Authority) of such jurisdiction, and (ii) as to each Material Insurance Subsidiary, a certificate of compliance as of a recent date, issued by the Insurance Regulatory Authority of its jurisdiction of legal domicile and any other jurisdiction in which such Insurance Subsidiary is reasonably likely to be commercially domiciled as defined under the laws and regulations of such jurisdiction. (c) All approvals, permits and consents of any Governmental Authorities (including, without limitation, all relevant Insurance Regulatory Authorities) or other Persons required in connection with the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby shall have been obtained (without the imposition of conditions that are not reasonably acceptable to the Agents), and all related filings, if any, shall have been made, and all such approvals, permits, consents and filings shall be in full force and effect and the Agents shall have received such copies thereof as it shall have requested; all applicable waiting periods shall have expired without any adverse action being taken by any Governmental Authority having jurisdiction; and no action, proceeding, investigation, regulation or legislation shall have been instituted, threatened or proposed before, and no order, injunction or decree shall have been entered by, any court or other Governmental Authority, in each case to enjoin, restrain or prohibit, to obtain substantial damages in respect of, or that is otherwise related to or arises out of, this Agreement or the consummation of the transactions contemplated hereby, or that, in the opinion of the Agents, would otherwise be reasonably likely to have a Material Adverse Effect. (d) Since December 31, 1995, both immediately before and after giving effect to the consummation of the transactions contemplated by this Agreement, other than the Reserve Adjustment and -37- the Special 1996 Charges, there shall not have occurred any Material Adverse Change or any event, condition or state of facts that could reasonably be expected to result in a Material Adverse Change. (e) The Documentation Agent shall have received evidence satisfactory to the Agents that, concurrently with the making of the initial Loans hereunder, (i) all principal, interest and other amounts outstanding with respect to the Terminating Indebtedness shall be repaid and satisfied in full and that all agreements relating thereto have been terminated, and (ii) the Letter of Credit Facility shall have been amended, or the Borrower shall have provided proper notice, to reduce the maximum principal amount of the facility to $50,000,000 by an amendment, or notice from the Borrower, in form and substance satisfactory to the Agents. (f) The Documentation Agent shall have received evidence satisfactory to the Agents that the Reserve Adjustment has been made to the relevant financial statements of MASCCO, Chestnut and the members of the PMA Group. (g) The Agents shall be satisfied with the actuarial review and valuation statement of, and opinion as to the adequacy of, each Insurance Subsidiary's loss and loss adjustment expense reserve positions as of December 31, 1996, with respect to the insurance business then in force, prepared and given by an independent actuarial firm satisfactory to the Agents. (h) The Documentation Agent shall have received the following at least five (5) days prior to the Closing Date, each of which shall be made no earlier than thirty (30) days prior to the Closing Date and be in form and substance satisfactory to the Agents: (i) certified search reports from an independent search service satisfactory to the Agents listing any tax lien, judgment or pending suit that names the Borrower or any Material Subsidiary as debtor or defendant, as appropriate, in any jurisdiction or judicial district (either state or federal) in or containing Montgomery County, Pennsylvania or Philadelphia County, Pennsylvania including, without limitation, the Pennsylvania Secretary of the Commonwealth, and (ii) the results of a search of all filings made against the Borrower and any Material Subsidiary under the Uniform Commercial Code as in effect in Pennsylvania in the Pennsylvania Secretary of the Commonwealth, Montgomery County, Pennsylvania and Philadelphia County, Pennsylvania. (i) The Borrower shall have paid (i) to The Bank of New York and First Union, the unpaid balance of the fees described in paragraph (i) of the Fee Letter, (ii) if the primary syndication of the Credit Agreement shall have occurred, to each Agent, the initial payment of the annual administrative fee described in paragraph (ii) of the Fee Letter, and (iii) all other fees and expenses of the Agents and the Lenders required hereunder or under any other Credit Document to be paid on or prior to the Closing Date (including fees and expenses of counsel) in connection with this Agreement and the transactions contemplated hereby. (j) The Documentation Agent shall have received Compliance Certificates together with Covenant Compliance Worksheets (prepared on a pro-forma basis after giving effect to the consummation of the transactions contemplated by the Credit Documents) satisfactory to the Agents and certified by the chief financial officer of the Borrower. (k) The Administrative Agent shall have received an Account Designation Letter, together with written instructions from an Authorized Officer of the Borrower, including wire transfer information, directing the payment of the proceeds of the initial Loans to be made hereunder. -38- (l) The Agents and each Lender shall have received such other documents, certificates, opinions and instruments as it shall have reasonably requested. 3.2. Conditions to All Loans. The obligation of each Lender to make any Loans hereunder, including the initial Loans, is subject to the satisfaction of the following conditions precedent on the relevant Borrowing Date: (a) The Administrative Agent shall have received a Notice of Committed Borrowing in accordance with Section 2.2(a) or a Bid Request in accordance with Section 2.3(a), as applicable; (b) Each of the representations and warranties contained in Article IV and in the other Credit Documents shall be true and correct on and as of the Closing Date (in the case of the initial Loans made hereunder) and as of any such later Borrowing Date (in the case of all subsequent Loans) with the same effect as if made on and as of such date, both immediately before and after giving effect to the Loans to be made on such date (except to the extent any such representation or warranty is expressly stated to have been made as of a specific date, in which case such representation or warranty shall be true and correct as of such date); and (c) No Default or Event of Default shall have occurred and be continuing on such date, both immediately before and after giving effect to the Loans to be made on such date. Each giving of a Notice of Committed Borrowing or a Bid Request, and the consummation of each Borrowing, shall be deemed to constitute a representation by the Borrower that the statements contained in subsections (b) and (c) above are true, both as of the date of such notice or request and as of the relevant Borrowing Date. ARTICLE IV REPRESENTATIONS AND WARRANTIES To induce the Agents and the Lenders to enter into this Agreement and to induce the Lenders to extend the credit contemplated hereby, the Borrower represents and warrants to the Agents and the Lenders as follows: 4.1. Corporate Organization and Power. Each of the Borrower and its Material Subsidiaries (i) is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation, (ii) has the full corporate power and authority to execute, deliver and perform the Credit Documents to which it is or will be a party, to own and hold its property and to engage in its business as presently conducted, and (iii) is duly qualified to do business as a foreign corporation and is in good standing in each jurisdiction where the nature of its business or the ownership of its properties requires it to be so qualified except where the failure to be so qualified would not have a Material Adverse Effect. 4.2. Authorization; Enforceability. The Borrower has taken all necessary corporate action to execute, deliver and perform each of the Credit Documents to which it is or will be a party, and has, or on the Closing Date (or any later date of execution and delivery) will have, validly executed and delivered each of the Credit Documents to which it is or will be a party. This Agreement constitutes, and each of the other Credit Documents upon execution and delivery by the Borrower will constitute, the legal, valid and binding -39- obligation of the Borrower, enforceable against it in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting creditors' rights generally or by general equitable principles. 4.3. No Violation. The execution, delivery and performance by the Borrower of this Agreement and each of the other Credit Documents, and compliance by it with the terms hereof and thereof, do not and will not (i) contravene any Requirement of Law applicable to the Borrower, (ii) conflict with, result in a breach of or constitute (with notice, lapse of time or both) a default under any material indenture, agreement or other instrument to which it is a party, by which it or any of its properties is bound or to which it is subject, or (iii) result in or require the creation or imposition of any Lien upon any of its properties or assets. No Subsidiary is subject to any restriction or encumbrance on its ability to make dividend payments or other distributions in respect of its capital stock, to make loans or advances to the Borrower or any other Subsidiary, or to transfer any of its assets or properties to the Borrower or any other Subsidiary, in each case other than such restrictions or encumbrances existing under or by reason of the Credit Documents or applicable Requirements of Law. 4.4. Governmental Authorization; Permits. (a) No consent, approval, authorization or other action by, notice to, or registration or filing with, any Governmental Authority or other Person is or will be required as a condition to or otherwise in connection with the due execution, delivery and performance by the Borrower of this Agreement or any of the other Credit Documents or the legality, validity or enforceability hereof or thereof. (b) Each of the Borrower and its Subsidiaries has, and is in good standing with respect to, all governmental approvals, licenses, permits and authorizations necessary to conduct its business as presently conducted and to own or lease and operate its properties except where the failure to do so would not have a Material Adverse Effect. (c) Schedule 4.4 lists with respect to each Material Insurance Subsidiary, as of the Closing Date, all of the jurisdictions in which such Material Insurance Subsidiary holds licenses (including, without limitation, licenses or certificates of authority from relevant Insurance Regulatory Authorities), permits or authorizations to transact insurance and reinsurance business (collectively, the "Licenses"), and indicates the line or lines of insurance in which each such Material Insurance Subsidiary is permitted to be engaged with respect to each License therein listed. To the knowledge of the Borrower, (i) no such License is the subject of a proceeding for suspension, revocation or limitation or any similar proceedings, (ii) there is no sustainable basis for such a suspension, revocation or limitation, and (iii) no such suspension, revocation or limitation is threatened by any relevant Insurance Regulatory Authority. No Material Insurance Subsidiary transacts any insurance business, directly or indirectly, in any jurisdiction other than those listed on Schedule 4.4, where such business requires any license, permit or other authorization of an Insurance Regulatory Authority of such jurisdiction. 4.5. Litigation. There are no actions, investigations, suits or proceedings pending or, to the knowledge of the Borrower, threatened, at law, in equity or in arbitration, before any court, other Governmental Authority or other Person, (i) against or affecting the Borrower, any of its Subsidiaries or any of their respective properties that would, if adversely determined, be reasonably likely to have a Material Adverse Effect or (ii) with respect to this Agreement or any of the other Credit Documents. 4.6. Taxes. Each of the Borrower and its Subsidiaries has timely filed all federal and all material state and local tax returns and reports required to be filed by it and has paid all taxes, assessments, fees and -40- other charges levied upon it or upon its properties that are shown thereon as due and payable, other than those that are being contested in good faith and by proper proceedings and for which adequate reserves have been established in accordance with Generally Accepted Accounting Principles. Such returns accurately reflect in all material respects all liability for taxes of the Borrower and its Subsidiaries for the periods covered thereby. Except as set forth on Schedule 4.6, there is no ongoing audit or examination or, to the knowledge of the Borrower, other investigation by any Governmental Authority of the tax liability of the Borrower or any of its Subsidiaries; and there is no unresolved claim by any Governmental Authority concerning the tax liability of the Borrower or any of its Subsidiaries for any period for which tax returns have been or were required to have been filed, other than claims for which adequate reserves have been established in accordance with Generally Accepted Accounting Principles. 4.7. Subsidiaries. Schedule 4.7 sets forth a list, as of the Closing Date, of all of the Subsidiaries of the Borrower and, as to each such Subsidiary, the percentage ownership (direct and indirect) of the Borrower in each class of its capital stock and each direct owner thereof, and indicates in each case whether such Subsidiary is a Material Subsidiary. 4.8. Full Disclosure. All factual information heretofore or contemporaneously furnished to either Agent or any Lender in writing by or on behalf of the Borrower or any of its Subsidiaries for purposes of or in connection with this Agreement and the transactions contemplated hereby is, and all other such factual information hereafter furnished to either Agent or any Lender in writing by or on behalf of the Borrower or any of its Subsidiaries will be, true and accurate in all material respects on the date as of which such information is dated or certified (or, if such information has been amended or supplemented, on the date as of which any such amendment or supplement is dated or certified) and not made incomplete by omitting to state a material fact necessary to make the statements contained therein, in light of the circumstances under which such information was provided, not misleading. 4.9. Margin Regulations. Neither the Borrower nor any of its Subsidiaries is engaged principally, or as one of its important activities, in the business of extending credit for the purpose of purchasing or carrying Margin Stock. No proceeds of the Loans will be used, directly or indirectly, to purchase or carry any Margin Stock, to extend credit for such purpose or for any other purpose that would violate or be inconsistent with Regulations G, T, U or X or any provision of the Exchange Act. 4.10. No Material Adverse Change. Other than the Reserve Adjustment and the Special 1996 Charges, there has been no Material Adverse Change since December 31, 1995, and there exists no event, condition or state of facts that could reasonably be expected to result in a Material Adverse Change. 4.11. Financial Matters. (a) The Borrower has heretofore furnished to the Agents copies of (i) the audited consolidated balance sheets of the Borrower and its Subsidiaries as of December 31, 1995, 1994, and 1993, and the related statements of income, stockholders' equity and cash flows for the fiscal years then ended, together with the opinion of Coopers & Lybrand, L.L.P. thereon, and (ii) the unaudited consolidated balance sheet of the Borrower and its Subsidiaries as of December 31, 1996, and the related statements of income, stockholders' equity and cash flows for the fiscal year then ended. Such financial statements have been prepared in accordance with Generally Accepted Accounting Principles (subject, with respect to the unaudited financial statements, to the absence of notes required by Generally Accepted Accounting Principles and to normal year-end audit adjustments) and present fairly the financial condition of the Borrower and its Subsidiaries on a consolidated basis as of the respective dates thereof and the consolidated results of operations of the Borrower and its Subsidiaries for the respective periods then ended. Except as fully reflected in the most recent financial statements referred to above and the notes thereto, there -41- are no material liabilities or obligations with respect to the Borrower or any of its Subsidiaries of any nature whatsoever (whether absolute, contingent or otherwise and whether or not due). (b) The Borrower has heretofore furnished to the Agents copies of (i) the Annual Statements of each of the Insurance Subsidiaries as of December 31, 1996, 1995 and 1994, and for the fiscal years then ended, each as filed with the relevant Insurance Regulatory Authority (collectively, the "Historical Statutory Statements"). The Historical Statutory Statements (including, without limitation, the provisions made therein for investments and the valuation thereof, reserves, policy and contract claims and statutory liabilities) have been prepared in accordance with Statutory Accounting Practices (except as may be reflected in the notes thereto and subject, with respect to the Quarterly Statements, to the absence of notes required by Statutory Accounting Practices and to normal year-end adjustments), were in compliance with applicable Requirements of Law when filed and present fairly the financial condition of the respective Insurance Subsidiaries covered thereby as of the respective dates thereof and the results of operations, changes in capital and surplus and cash flow of the respective Insurance Subsidiaries covered thereby for the respective periods then ended. Except for liabilities and obligations disclosed or provided for in the Historical Statutory Statements (including, without limitation, reserves, policy and contract claims and statutory liabilities), no Insurance Subsidiary had, as of the date of its respective Historical Statutory Statements, any material liabilities or obligations of any nature whatsoever (whether absolute, contingent or otherwise and whether or not due) that, in accordance with Statutory Accounting Practices, would have been required to have been disclosed or provided for in such Historical Statutory Statements. All books of account of each Insurance Subsidiary fully and fairly disclose all of its material transactions, properties, assets, investments, liabilities and obligations, are in its possession and are true, correct and complete in all material respects. (c) Each of the Borrower and its Material Subsidiaries, after giving effect to the consummation of the transactions contemplated hereby, (i) will have capital sufficient to carry on its businesses as conducted and as proposed to be conducted, (ii) will have assets with a fair saleable value, determined on a going concern basis, (y) not less than the amount required to pay the probable liability on its existing debts as they become absolute and matured and (z) greater than the total amount of its liabilities (including identified contingent liabilities, valued at the amount that can reasonably be expected to become absolute and matured), and (iii) will not intend to, and will not believe that it will, incur debts or liabilities beyond its ability to pay such debts and liabilities as they mature. 4.12. Ownership of Properties. Each of the Borrower and its Material Subsidiaries (i) has good and marketable title to all real property owned by it, (ii) holds interests as lessee under valid leases in full force and effect with respect to all material leased real and personal property used in connection with its business, and (iii) has good title to all of its other properties and assets reflected in the most recent financial statements referred to in Section 4.11(a) (except as sold or otherwise disposed of since the date thereof in the ordinary course of business), in each case under (i), (ii) and (iii) above free and clear of all Liens other than Permitted Liens. 4.13. ERISA. Each member of the ERISA Group has fulfilled its obligations under the minimum funding standards of ERISA and the Internal Revenue Code with respect to each Plan and is in compliance in all material respects with the presently applicable provisions of ERISA and the Internal Revenue Code with respect to each Plan. No member of the ERISA Group has (i) sought a waiver of the minimum funding standard under Section 412 of the Internal Revenue Code in respect of any Plan, (ii) failed to make any contribution or payment to any Plan or Multiemployer Plan or in respect of any Benefit Arrangement, or made any amendment to any Plan or Benefit Arrangement, which has resulted or could result in the imposition of a Lien or the posting of a bond or other security under ERISA or the Internal Revenue Code or (iii) incurred any liability under Title IV of ERISA other than a liability to the PBGC for premiums under Section 4007 of ERISA. -42- 4.14. Environmental Matters. (a) No Hazardous Substances are or have been generated, used, located, released, treated, disposed of or stored by the Borrower or any of its Subsidiaries or, to the knowledge of the Borrower, by any other Person or otherwise, in, on or under any portion of any real property, leased or owned, of the Borrower or any of its Subsidiaries, except in material compliance with all applicable Environmental Laws, and no portion of any such real property or, to the knowledge of the Borrower, any other real property at any time leased, owned or operated by the Borrower or any of its Subsidiaries, has been contaminated by any Hazardous Substance; and no portion of any real property, leased or owned, of the Borrower or any of its Subsidiaries has been or, to the knowledge of the Borrower, is presently the subject of an environmental audit, assessment or remedial action. (b) Except as set forth of Schedule 4.14, to the knowledge of the Borrower, (i) no portion of any real property, leased or owned, of the Borrower or any of its Subsidiaries has been used as or for a mine, a landfill, a dump or other disposal facility, a gasoline service station, or (other than for petroleum substances stored in the ordinary course of business) a petroleum products storage facility, (ii) no portion of such real property or any other real property at any time leased, owned or operated by the Borrower or any of its Subsidiaries has, pursuant to any Environmental Law, been placed on the "National Priorities List" or "CERCLIS List" (or any similar federal, state or local list) of sites subject to possible environmental problems, and (iii) there are not and have never been any underground storage tanks situated on any real property, leased or owned, of the Borrower or any of its Subsidiaries. (c) All activities and operations of the Borrower and its Subsidiaries are in compliance with the requirements of all applicable Environmental Laws, except to the extent the failure so to comply, individually or in the aggregate, would not be reasonably likely to have a Material Adverse Effect. Other than normal claims in the ordinary course of business pursuant to insurance policies written by an Insurance Subsidiary, neither the Borrower nor any of its Subsidiaries is involved in any suit, action or proceeding, or has received any notice, complaint or other request for information from any Governmental Authority or other Person, with respect to any actual or alleged Environmental Claims that, if adversely determined, would be reasonably likely, individually or in the aggregate, to have a Material Adverse Effect; and, to the knowledge of the Borrower, there are no threatened actions, suits, proceedings or investigations with respect to any such Environmental Claims, nor any basis therefor. 4.15. Compliance With Laws. Each of the Borrower and its Subsidiaries has timely filed all material reports, documents and other materials required to be filed by it under all applicable Requirements of Law with any Governmental Authority, has retained all material records and documents required to be retained by it under all applicable Requirements of Law, and is otherwise in compliance with all applicable Requirements of Law in respect of the conduct of its business and the ownership and operation of its properties, except for such Requirements of Law the failure to comply with which, individually or in the aggregate, would not be reasonably likely to have a Material Adverse Effect. 4.16. Regulated Industries. Neither the Borrower nor any of its Subsidiaries is (i) an "investment company," a company "controlled" by an "investment company," or an "investment advisor," within the meaning of the Investment Company Act of 1940, as amended, or (ii) a "holding company," a "subsidiary company" of a "holding company," or an "affiliate" of a "holding company" or of a "subsidiary company" of a "holding company," within the meaning of the Public Utility Holding Company Act of 1935, as amended. -43- 4.17. Insurance. The assets, properties and business of the Borrower and its Subsidiaries are insured against such hazards and liabilities (other than normal life insurance risk), under such coverages and in such amounts, as are customarily maintained by prudent companies similarly situated and under policies issued by insurers of recognized responsibility. No notice of any pending or threatened cancellation or material premium increase has been received by the Borrower or any of its Subsidiaries with respect to any such insurance policies, and the Borrower and each of its Subsidiaries are in substantial compliance with all conditions contained therein. 4.18. Certain Contracts. Schedule 4.18 lists, as of the Closing Date, each material contract, agreement or commitment, written or oral, other than Reinsurance Agreements, to which the Borrower or any of its Subsidiaries is a party, by which any of them or their respective properties is bound or to which any of them is subject (other than insurance policies written in the ordinary course of business) and that (i) relates to employment or labor matters, (ii) involves aggregate consideration payable to or by any party thereto of $1,000,000 or more or (iii) is otherwise material to the business, condition (financial or otherwise), operations, performance or properties of the Borrower or any of its Subsidiaries, and also indicates the parties, subject matter and term thereof. As of the Closing Date, each such contract is in full force and effect, and neither the Borrower nor any of its Subsidiaries or, to the knowledge of the Borrower, any other party thereto, is in breach of or default under any such contract. As of the Closing Date, none of such other parties has any presently exercisable right to terminate any such contract nor will any such other party have any right to terminate any such contract on account of the execution, delivery and performance of the Credit Documents. 4.19. Reinsurance Agreements. (a) Except as set forth on Schedule F to the Annual Statements for the Insurance Subsidiaries for the fiscal year ending December 31, 1996, there are no material liabilities outstanding as of the Closing Date under any Reinsurance Agreement. Each Reinsurance Agreement is in full force and effect; none of the Insurance Subsidiaries or, to the knowledge of the Borrower, any other party thereto, is in breach of or default under any such contract; and the Borrower has no reason to believe that the financial condition of any other party to any such contract is impaired such that a default thereunder by such party could reasonably be anticipated. Each Reinsurance Agreement is qualified under all applicable Requirements of Law to receive the statutory credit assigned to such Reinsurance Agreement in the relevant Annual Statement or Quarterly Statement at the time prepared. Except as set forth on Schedule 4.19, each Person to whom any of the Insurance Subsidiaries has ceded any material liability pursuant to any Reinsurance Agreement on the Closing Date either (i) has a rating of "A-" or better by A.M. Best & Company or (ii) has provided collateral in favor of the applicable Insurance Subsidiary of the type and in an amount described in Schedule 4.19. (b) As of the Closing Date, no Insurance Subsidiary is a party to any Surplus Relief Reinsurance Agreement. 4.20. Ranking of Obligations. So long as any of the Surviving Senior Notes remain unpaid and outstanding, the Obligations rank pari passu with the obligations of the Borrower in respect of the Surviving Senior Notes. -44- ARTICLE V AFFIRMATIVE COVENANTS The Borrower covenants and agrees that, until the termination of the Commitments and the payment in full of all principal and interest with respect to the Loans together with all other amounts then due and owing hereunder: 5.1. GAAP Financial Statements. The Borrower will deliver to each Lender: (a) As soon as available and in any event within sixty (60) days after the end of each of the first three fiscal quarters of each fiscal year, beginning with the first fiscal quarter ending after the date hereof, unaudited consolidated and consolidating balance sheets of the Borrower and its Subsidiaries as of the end of such fiscal quarter and unaudited consolidated and consolidating statements of income, stockholders' equity and cash flows for the Borrower and its Subsidiaries for the fiscal quarter then ended and for that portion of the fiscal year then ended, in each case setting forth comparative consolidated figures as of the end of and for the corresponding period in the preceding fiscal year, all prepared in accordance with Generally Accepted Accounting Principles (subject to the absence of notes required by Generally Accepted Accounting Principles and subject to normal year-end audit adjustments) applied on a basis consistent with that of the preceding quarter or containing disclosure of the effect on the financial condition or results of operations of any change in the application of accounting principles and practices during such quarter; and (b) As soon as available and in any event within one-hundred twenty (120) days after the end of each fiscal year, beginning with the fiscal year ended December 31, 1996, (i) an audited consolidated balance sheet of the Borrower and its Subsidiaries as of the end of such fiscal year and audited consolidated statements of income, stockholders' equity and cash flows for the Borrower and its Subsidiaries for the fiscal year then ended, including the applicable notes, in each case setting forth comparative figures as of the end of and for the preceding fiscal year, certified by the independent certified public accounting firm regularly retained by the Borrower or another independent certified public accounting firm of recognized national standing reasonably acceptable to the Required Lenders, together with a report thereon by such accountants that is not qualified as to going concern or scope of audit and to the effect that such financial statements present fairly the consolidated financial condition and results of operations of the Borrower and its Subsidiaries as of the dates and for the periods indicated in accordance with generally accepted accounting principles, (ii) an unaudited consolidating balance sheet of the Borrower and its Subsidiaries as of the end of such fiscal year and unaudited consolidating statements of income, stockholders' equity and cash flows for the Borrower and its Subsidiaries for the fiscal year then ended, all in reasonable detail, and (iii) an unaudited balance sheet of PMA Cayman as of the end of such fiscal year and unaudited statements of income, stockholders' equity and cash flows for PMA Cayman for the fiscal year then ended, all prepared in accordance with Generally Accepted Accounting Principles applied on a consistent basis with that of the preceding fiscal year or containing disclosure to the effect on the financial condition or results of operations of any change in the application of accounting principles and practices during such fiscal year. 5.2. Statutory Financial Statements. The Borrower will deliver to each Lender: (a) As soon as available and in any event within forty-five (45) days after the end of each of the first three fiscal quarters of each fiscal year, beginning with the first fiscal quarter ending after the date hereof, a Quarterly Statement of each Insurance Subsidiary as of the end of such fiscal quarter and for that -45- portion of the fiscal year then ended, in the form filed with the relevant Insurance Regulatory Authority, prepared in accordance with Statutory Accounting Practices; (b) As soon as available and in any event within sixty (60) days after the end of each fiscal year, beginning with the fiscal year ended December 31, 1996, an Annual Statement of each Insurance Subsidiary as of the end of such fiscal year and for the fiscal year then ended, in the form filed with the relevant Insurance Regulatory Authority, prepared in accordance with Statutory Accounting Practices; and (c) As soon as available and in any event within one hundred twenty-one (121) days after the end of each fiscal year, beginning with the fiscal year ended December 31, 1996, a Combined Annual Statement of PMAIC and its Consolidated Affiliates as of the end of such fiscal year and for the fiscal year then ended, in the form filed with the relevant Insurance Regulatory Authority, prepared in accordance with Statutory Accounting Practices. 5.3. Other Business and Financial Information. The Borrower will deliver to each Lender: (a) Concurrently with each delivery of the financial statements described in Sections 5.1 and 5.2, a Compliance Certificate in the form of Exhibit E-1 (in the case of the financial statements described in Section 5.1) or Exhibit E-2 (in the case of the financial statements described in Section 5.2) with respect to the period covered by the financial statements then being delivered, executed by the chief financial officer of the Borrower (or a vice president of the Borrower having significant responsibility for financial matters), together, in the case of the financial statements described in Section 5.1, with a Covenant Compliance Worksheet reflecting the computation of the financial covenants set forth in Sections 6.1 and 6.2 as of the last day of the period covered by such financial statements, and in the case of the financial statements described in Section 5.2, with a Covenant Compliance Worksheet reflecting the computation of the financial covenants set forth in Sections 6.3 and 6.4 as of the last day of the period covered by such financial statements; (b) Promptly upon filing with the relevant Insurance Regulatory Authority and in any event within ninety (90) days after the end of each fiscal year, beginning with the fiscal year ended December 31, 1996, a copy of each Insurance Subsidiary's "Statement of Actuarial Opinion" (or equivalent information should the relevant Insurance Regulatory Authority not require such a statement) as to the adequacy of such Insurance Subsidiary's loss reserves for such fiscal year, together with a copy of its management discussion and analysis in connection therewith, each in the format prescribed by the applicable insurance laws of such Insurance Subsidiary's jurisdiction of domicile; (c) Promptly upon the sending or filing thereof, copies of any "internal control" letter filed by on behalf of the Borrower or any of its Subsidiaries with any Insurance Regulatory Authority; (d) Promptly upon the sending, filing or receipt thereof, copies of (i) all financial statements, reports, notices and proxy statements that the Borrower or any of its Subsidiaries shall send or make available generally to its shareholders, (ii) all regular, periodic and special reports, registration statements and prospectuses that the Borrower or any of its Subsidiaries shall render to or file with the Securities and Exchange Commission, the National Association of Securities Dealers, Inc. or any national securities exchange, (iii) all significant reports on examination or similar significant reports, financial examination reports or market conduct examination reports by the NAIC or any Insurance Regulatory Authority or other Governmental Authority with respect to any Insurance Subsidiary's insurance business, and -46- (iv) all significant filings made under applicable state insurance holding company acts by the Borrower or any of its Subsidiaries, including, without limitation, filings seeking approval of transactions with Affiliates; (e) Promptly upon (and in any event within three (3) Business Days after) an officer of the Borrower obtaining knowledge thereof, written notice of any of the following: (i) the occurrence of any Default or Event of Default, together with a written statement of the chief executive officer or chief financial officer of the Borrower specifying the nature of such Default or Event of Default, the period of existence thereof and the action that the Borrower has taken and proposes to take with respect thereto; (ii) the institution or threatened institution of any action, suit, investigation or proceeding against or affecting the Borrower or any of its Subsidiaries, including any such investigation or proceeding by any Insurance Regulatory Authority or other Governmental Authority (other than routine periodic inquiries, investigations or reviews), that would, if adversely determined, be reasonably likely, individually or in the aggregate, to have a Material Adverse Effect, and any material development in any litigation or other proceeding previously reported pursuant to Section 4.5 or this Section 5.3(e)(ii); (iii) the receipt by the Borrower or any of its Subsidiaries from any Insurance Regulatory Authority or other Governmental Authority of (i) any notice asserting any failure by the Borrower or any of its Subsidiaries to be in compliance with applicable Requirements of Law or that threatens the taking of any action against the Borrower or such Subsidiary or sets forth circumstances that, if taken or adversely determined, would be reasonably likely to have a Material Adverse Effect, or (ii) any notice of any actual or threatened suspension, limitation or revocation of, failure to renew, or imposition of any restraining order, escrow or impoundment of funds in connection with, any license, permit, accreditation or authorization of the Borrower or any of its Subsidiaries, where such action would be reasonably likely to have a Material Adverse Effect; (iv) the occurrence of any of the following, together with a reasonably detailed description thereof and copies of any filings, communications, reports or other information relating thereto made available to the Borrower or any of its Subsidiaries: (A) the assertion of any Environmental Claim against or affecting the Borrower, any of its Subsidiaries or any of their respective real property, leased or owned; (B) the receipt by the Borrower or any of its Subsidiaries of notice of any alleged violation of or noncompliance with any Environmental Laws by the Borrower or any of its Subsidiaries; or (C) the taking of any remedial action by the Borrower, any of its Subsidiaries or any other Person in response to the actual or alleged generation, storage, release, disposal or discharge of any Hazardous Substances on, to, upon or from any real property leased or owned by the Borrower or any of its Subsidiaries; but in each case under clauses (A), (B) and (C) above, only to the extent the same would be reasonably likely to have a Material Adverse Effect; (v) the occurrence of any actual changes in any insurance statute or regulation governing the investment or dividend practices of any Insurance Subsidiary that would be reasonably likely to have a Material Adverse Effect; -47- (vi) if and when any member of the ERISA Group gives or is required to give notice to the PBGC of any "reportable event" (as defined in section 4043 of ERISA) with respect to any Plan which might constitute grounds for a termination of such Plan under Title IV of ERISA, or knows that the plan administrator of any Plan has given or is required to give notice of any such reportable event, a copy of the notice of such reportable event given or required to be given to the PBGC; (ii) receives notice of complete or partial withdrawal liability under Title IV of ERISA or notice that any Multiemployer Plan is in reorganization, is insolvent or has been terminated, a copy of such notice; (iii) receives notice from the PBGC under Title IV of ERISA of an intent to terminate, impose liability (other than for premiums under Section 4007 of ERISA) in respect of, or appoint a trustee to administer any Plan, a copy of such notice; (iv) applies for a waiver of the minimum funding standard under Section 412 of the Internal Revenue Code, a copy of such application; (v) gives notice of intent to terminate any Plan under Section 4041(c) of ERISA, a copy of such notice and other information filed with the PBGC; (vi) gives notice of withdrawal from any Plan pursuant to Section 4063 of ERISA, a copy of such notice; or (vii) fails to make any payment or contribution to any Plan or Multiemployer Plan or in respect of any Benefit Arrangement or makes any amendment to any Plan or Benefit Arrangement which has resulted or could result in the imposition of a Lien or the posting of a bond or other security, a certificate of the chief financial officer or the chief accounting officer of the Borrower setting forth details as to such occurrence and action, if any, which the Borrower or applicable member of the ERISA Group is required or proposes to take; and (vii) any other matter or event that has, or would be reasonably likely to have, a Material Adverse Effect, together with a written statement of the chief executive officer or chief financial officer of the Borrower setting forth the nature and period of existence thereof and the action that the Borrower has taken and proposes to take with respect thereto; (f) Promptly, notice of (i) the occurrence of any material amendment or modification to any Reinsurance Agreement (whether entered into before or after the Closing Date), including any such agreements that are in a runoff mode on the Closing Date, which amendment or modification would be reasonably likely to have a Material Adverse Effect, or (ii) the receipt by the Borrower or any of its Subsidiaries of any written notice of any denial of coverage, litigation, claim or arbitration arising out of any Reinsurance Agreement to which it is a party which would be reasonably likely to have a Material Adverse Effect; (g) As promptly as reasonably possible, such other information about the business, condition (financial or otherwise), operations or properties of the Borrower or any of its Subsidiaries (including, without limitation, financial, actuarial and other information with respect to Reinsurance Agreements) as either Agent or any Lender may from time to time reasonably request; and (h) Upon the request of either Agent at the direction of the Required Lenders (which absent a showing of good cause shall not be more often than one time during any twelve-month period), at the Borrower's expense, deliver to each Lender within sixty (60) days of such request an actuarial review of the liabilities and other items of each Insurance Subsidiary prepared by an actuary or a firm of actuaries reasonably acceptable to the Agents, such actuarial review to be in form and substance reasonably acceptable to the Required Lenders. 5.4. Corporate Existence; Franchises; Maintenance of Properties. The Borrower will, and will cause each of its Subsidiaries to, maintain and preserve in full force and effect its corporate existence, except as expressly permitted otherwise by Section 7.1. The Borrower will, and will cause each of its Subsidiaries to, (i) obtain, maintain and preserve in full force and effect all other rights, franchises, licenses, permits, certifications, approvals and authorizations required by Governmental Authorities and necessary to the -48- ownership, occupation or use of its properties or the conduct of its business, except to the extent the failure to do so would not be reasonably likely to have a Material Adverse Effect, and (ii) keep all material properties in good working order and condition (normal wear and tear excepted) and from time to time make all necessary repairs to and renewals and replacements of such properties, except to the extent that any of such properties are obsolete or are being replaced. 5.5. Compliance with Laws. The Borrower will, and will cause each of its Subsidiaries to, comply in all respects with all Requirements of Law applicable in respect of the conduct of its business and the ownership and operation of its properties, except to the extent the failure so to comply would not be reasonably likely to have a Material Adverse Effect. 5.6. Payment of Obligations. The Borrower will, and will cause each of its Subsidiaries to, (i) pay all liabilities and obligations as and when due (subject to any applicable subordination provisions), except to the extent failure to do so would not be reasonably likely to have a Material Adverse Effect, and (ii) pay and discharge all taxes, assessments and governmental charges or levies imposed upon it, upon its income or profits or upon any of its properties, prior to the date on which penalties would attach thereto, and all lawful claims that, if unpaid, might become a Lien upon any of the properties of the Borrower or any of its Subsidiaries; provided, however, that neither the Borrower nor any of its Subsidiaries shall be required to pay any such tax, assessment, charge, levy or claim that is being contested in good faith and by proper proceedings and as to which the Borrower or such Subsidiary is maintaining adequate reserves with respect thereto in accordance with Generally Accepted Accounting Principles. 5.7. Insurance. The Borrower will, and will cause each of its Subsidiaries to, maintain with financially sound and reputable insurance companies insurance with respect to its assets, properties and business, against such hazards and liabilities (other than normal life insurance risk), of such types and in such amounts, as is customarily maintained by companies in the same or similar businesses similarly situated. 5.8. Maintenance of Books and Records; Inspection. The Borrower will, and will cause each of its Subsidiaries to, (i) maintain adequate books, accounts and records, in which full, true and correct entries shall be made of all financial transactions in relation to its business and properties, and prepare all financial statements required under this Agreement, in each case in accordance with Generally Accepted Accounting Principles or Statutory Accounting Practices, as applicable, and in compliance with the requirements of any Governmental Authority having jurisdiction over it, and (ii) permit employees or agents of either Agent or any Lender, at such Agent's or Lender's expense (except as provided in Section 10.1), to inspect its properties and examine or audit its books, records, working papers and accounts and make copies and memoranda of them, and to discuss its affairs, finances and accounts with its officers and employees and, with the prior consent of the Borrower (such consent not to be unreasonably withheld), the independent public accountants of the Borrower and its Subsidiaries (and by this provision the Borrower authorizes such accountants to discuss the finances of the Borrower and its Subsidiaries), all at such times and from time to time, upon reasonable notice and during business hours, as may be reasonably requested. 5.9. Dividends. The Borrower will take all action necessary to cause its Subsidiaries to make such dividends, distributions or other payments to the Borrower as shall be necessary for the Borrower to make payments of the principal of and interest on the Loans in accordance with this Agreement. In the event the approval of any Governmental Authority or other Person is required in order for any such Subsidiary to make any such dividends, distributions or other payments to the Borrower, or for the Borrower to make any such principal or interest payments, the Borrower will forthwith exercise its best efforts and take all actions permitted by law and necessary to obtain such approval. -49- 5.10. Ownership of Insurance Subsidiaries. The Borrower will cause each of its Insurance Subsidiaries to remain at all times a Wholly Owned Subsidiary of the Borrower, except as expressly permitted otherwise by Section 7.1. 5.11. Extinguishment of Senior Note Indebtedness. The Borrower, on or before June 30, 1997, will cause the Surviving Senior Note Indebtedness, including all fees and interest accrued thereon, to be extinguished and paid in full and the Surviving Senior Notes to be cancelled. 5.12. Further Assurances. The Borrower will, and will cause each of its Subsidiaries to, make, execute, endorse, acknowledge and deliver any amendments, modifications or supplements hereto and restatements hereof and any other agreements, instruments or documents, and take any and all such other actions, as may from time to time be reasonably requested by either Agent or the Required Lenders to effect, confirm or further assure or protect and preserve the interests, rights and remedies of the Agents and the Lenders under this Agreement and the other Credit Documents. ARTICLE VI FINANCIAL COVENANTS The Borrower covenants and agrees that, until the termination of the Commitments and the payment in full of all principal and interest with respect to the Loans together with all other amounts then due and owing hereunder: 6.1. Capitalization Ratio. The Borrower will not permit the Capitalization Ratio to be greater than 0.35 to 1.0 as of the last day of any fiscal quarter, beginning with the fiscal quarter ending December 31, 1996. 6.2. Cash Coverage Ratio. The Borrower will not permit the Cash Coverage Ratio to be less than (i) with respect to any four fiscal quarter period ending on or after December 31, 1996 or ending on or before December 31, 1999, 2.50 to 1.0, and (ii) with respect to any four fiscal quarter period ending thereafter, 2.75 to 1.0. 6.3. Statutory Surplus. The Borrower will cause the Consolidated Statutory Surplus of the Insurance Subsidiaries to be not less than $450,000,000 at all times from and after the Closing Date. 6.4. Risk-Based Capital. The Borrower will not permit "total adjusted capital" (within the meaning of the Risk-Based Capital for Insurers Model Act as promulgated by the NAIC as of the date hereof (the "Model Act")) of the following Insurance Subsidiaries to be less than the percentages set forth below, as of the dates set forth below, of the applicable "Company Action Level RBC" (within the meaning of the Model Act): (i) with respect to PMA Re, as of the last day of any fiscal year, beginning with the fiscal year ending December 31, 1996, not less than 150%; (ii) with respect to any other Insurance Subsidiary (other than an Insurance Subsidiary not required by the relevant Insurance Regulatory Authority to meet any RBC requirements), not less than (w) as of December 31, 1996, 100% (x) as of December 31, 1997, 110%, and (y) as of December 31, 1998, 115%, and (z) as of December 31, 1999 and the last day of any fiscal year thereafter, 120%. -50- ARTICLE VII NEGATIVE COVENANTS The Borrower covenants and agrees that, until the termination of the Commitments and the payment in full of all principal and interest with respect to the Loans together with all other amounts then due and owing hereunder: 7.1. Merger; Consolidation; Disposition of Assets. The Borrower will not, and will not permit or cause any of its Subsidiaries to, liquidate, wind up or dissolve, enter into any consolidation, merger or other combination, or sell, assign, lease, convey, transfer, assumption reinsure or otherwise dispose of (whether in one or a series of transactions) all or any portion of its assets, business or properties outside of the ordinary course of its business, or agree to do any of the foregoing; provided, however, that: (i) any Subsidiary may merge or consolidate with, or sell or otherwise dispose of assets to, another Subsidiary or the Borrower so long as (y) the surviving or transferee corporation is the Borrower or a Wholly Owned Subsidiary and (z) immediately after giving effect thereto, no Default or Event of Default would exist; (ii) the Borrower and its Subsidiaries may sell or exchange used or obsolete equipment to the extent (y) the proceeds of such sale are applied towards, or such equipment is exchanged for, similar replacement equipment or (z) such equipment is no longer necessary for the operations of the Borrower or its applicable Subsidiary in the ordinary course of business; and (iii) the Borrower and its Subsidiaries may sell (y) the capital stock or all or any portion of the assets, business or properties of a Subsidiary that is not a Material Subsidiary, and (z) any asset or group of assets constituting less than (A) in any single transaction or series or related transactions, ten percent (10%) of Consolidated Statutory Surplus as of the last day of the fiscal quarter ending on or immediately prior to the date of such sale, and (B) during the term of this Agreement, in the aggregate with all such other sales pursuant to this clause (iii), thirty percent (30%) of Consolidated Statutory Surplus as of the end of the immediately preceding fiscal year. 7.2. Indebtedness. The Borrower will not, and will not permit or cause any of its Subsidiaries to, directly or indirectly, create, incur, assume or suffer to exist, any Indebtedness other than: (i) Indebtedness in respect of the Letter of Credit Facility, provided the aggregate amount of the Letter of Credit Exposure does not exceed $50,000,000; (ii) accrued expenses, current trade or other accounts payable and other current liabilities arising in the ordinary course of business and not incurred through the borrowing of money, provided that the same shall be paid when due except to the extent being contested in good faith and by appropriate proceedings; -51- (iii) Indebtedness of any Wholly Owned Subsidiary of the Borrower to the Borrower or to another Wholly Owned Subsidiary; (iv) Indebtedness due under the Credit Documents; (v) subject to Section 5.11, the Surviving Senior Note Indebtedness; (vi) the Terminating Indebtedness but only until the initial Borrowing hereunder shall have occurred; (vii) Indebtedness existing on the Closing Date as set forth on Schedule 7.2; (viii) Indebtedness in respect of any Hedge Agreement covering a notional principal amount not in excess of the amount of the aggregate Commitments; and (ix) Indebtedness (other than Indebtedness specified in clauses (i) through (viii) above) in the aggregate principal amount outstanding not exceeding $10,000,000 at any time and constituting (y) unsecured Indebtedness of the Borrower or (z) reimbursement obligations under letters of credit (whether or not drawn or matured and in the stated amount thereof) issued on behalf of an Insurance Subsidiary in the ordinary course of such Insurance Subsidiary's business. 7.3. Liens. The Borrower will not, and will not permit or cause any of its Subsidiaries to, directly or indirectly, make, create, incur, assume or suffer to exist, or enter into or suffer to exist any agreement or restriction that prohibits or conditions the creation, incurrence or assumption of, any Lien upon or with respect to any part of its property or assets, whether now owned or hereafter acquired, or agree to do any of the foregoing, other than the following (collectively, "Permitted Liens"): (i) Liens (y) in existence on the Closing Date and set forth on Schedule 7.3 and (z) arising out of the refinancing, extension, renewal or refunding of any Indebtedness secured by any such Lien provided that such Indebtedness is not increased and is not secured by any additional assets; (ii) Liens imposed by law, such as Liens of carriers, warehousemen, mechanics, materialmen and landlords, and other similar Liens incurred in the ordinary course of business for sums not constituting borrowed money that are not overdue for a period of more than thirty (30) days or that are being contested in good faith by appropriate proceedings and for which adequate reserves have been established in accordance with Generally Accepted Accounting Principles; (iii) Liens (other than any Lien imposed by ERISA, the creation or incurrence of which would result in an Event of Default under Section 8.1(i)) incurred in the ordinary course of business in connection with worker's compensation, unemployment insurance or other forms of governmental insurance or benefits, or to secure the performance of letters of credit, bids, tenders, statutory obligations, surety and appeal bonds, leases, government contracts and other similar obligations (other than obligations for borrowed money) entered into in the ordinary course of business; -52- (iv) Liens for taxes, assessments or other governmental charges or statutory obligations that are not delinquent or remain payable without any penalty or that are being contested in good faith by appropriate proceedings and for which adequate reserves have been established in accordance with Generally Accepted Accounting Principles; (v) Liens in connection with pledges and deposits made pursuant to statutory and regulatory requirements of Insurance Regulatory Authorities by an Insurance Subsidiary in the ordinary course of its business, for the purpose of securing regulatory capital or satisfying other financial responsibility requirements; (vi) with respect to any real property occupied by the Borrower or any of its Subsidiaries, all easements, rights of way, licenses and similar encumbrances on title that do not materially impair the use of such property for its intended purposes; (vii) Liens with respect to cash and Treasury Securities of the Borrower or any Subsidiary conveyed pursuant to and in accordance with the Letter of Credit Facility to secure the Borrower's or any Subsidiary's reimbursement obligations thereunder; and (viii) Liens (other than Liens specified in clauses (i) through (vii) above) securing obligations in the aggregate principal amount not exceeding, at any time, the greater of (y) five percent (5%) of Consolidated Net Worth as of the end of the immediately preceding fiscal year or (z) $20,000,000. 7.4. Investments; Acquisitions. The Borrower will not, and will not permit or cause any of its Subsidiaries to, directly or indirectly, purchase, own, invest in or otherwise acquire any capital stock, evidence of indebtedness or other obligation or security or any interest whatsoever in any other Person, or make or permit to exist any loans, advances or extensions of credit to, or any investment in cash or by delivery of property in, any other Person, or purchase or otherwise acquire (whether in one or a series of related transactions) any portion of the assets, business or properties of another Person, or create or acquire any Subsidiary, or become a partner or joint venturer in any partnership or joint venture (collectively, "Investments"), or make a commitment or otherwise agree to do any of the foregoing, if, immediately after any such Investment, the amount of the cash, Cash Equivalents and Investment Grade Securities owned by the Borrower and its Subsidiaries, on a consolidated basis, would be less than eighty-five percent (85%) of the total Invested Assets of the Borrower and its Subsidiaries determined as of the end of the most recent fiscal quarter. 7.5. Restricted Payments. (a) The Borrower will not, and will not permit or cause any of its Subsidiaries to, directly or indirectly, declare or make any dividend payment, or make any other distribution of cash, property or assets, in respect of any of its capital stock or any warrants, rights or options to acquire its capital stock, or purchase, redeem, retire or otherwise acquire for value any shares of its capital stock or any warrants, rights or options to acquire its capital stock, or set aside funds for any of the foregoing, except that: (i) each Wholly Owned Subsidiary may declare and make dividend payments or other distributions to the Borrower or another Wholly Owned Subsidiary to the extent permitted under applicable Requirements of Law and, as to the Insurance Subsidiaries, by each relevant Insurance Regulatory Authority; and -53- (ii) the Borrower may declare and make dividend payments or other distributions, and may purchase, redeem, retire or otherwise acquire shares of its capital stock, in cash or in-kind, in each case provided that, immediately after giving effect thereto, no Default or Event of Default would exist. (b) The Borrower will not, and will not permit or cause any of its Subsidiaries to, other than with respect to the Surviving Senior Note Indebtedness and the Terminating Indebtedness, make (or give any notice in respect of) any voluntary or optional payment or prepayment on any Indebtedness (other than the Loans) or, directly or indirectly, make any redemption (including pursuant to any change of control provision), retirement, defeasance or other acquisition for value of any Indebtedness, or make any deposit or otherwise set aside funds for any of the foregoing purposes. 7.6. Transactions with Affiliates. The Borrower will not, and will not permit or cause any of its Subsidiaries to, enter into any transaction with any officer, director, stockholder or other Affiliate of the Borrower or any Subsidiary, except in the ordinary course of its business and upon fair and reasonable terms that are no less favorable to it than would obtain in a comparable arm's length transaction with a Person other than an Affiliate of the Borrower or such Subsidiary; provided, however, that nothing contained in this Section shall prohibit: (i) transactions described on Schedule 7.6 or otherwise expressly permitted hereunder; and (ii) the payment by the Borrower of reasonable and customary fees to members of its board of directors. 7.7. Certain Amendments. The Borrower will not, and will not permit or cause any of its Subsidiaries to, (i) amend, modify or waive, or permit the amendment, modification or waiver of, any provision of any agreement or instrument evidencing or governing any Indebtedness, including, without limitation, the Letter of Credit Facility and the Surviving Senior Notes, or (ii) amend or modify its articles or certificate of incorporation or bylaws, in each case under clauses (i) and (ii) other than any amendments or modifications that could not reasonably be expected to affect the Lenders adversely. 7.8. Lines of Business. The Borrower will not, and will not permit or cause any of its Subsidiaries to, engage to any substantial degree in any business other than the lines of property and casualty insurance business and other businesses engaged in by the Borrower and its Subsidiaries on the date hereof or a business reasonably related thereto. 7.9. Limitation on Certain Restrictions. The Borrower will not, and will not permit or cause any of its Subsidiaries to, directly or indirectly, create or otherwise cause or suffer to exist or become effective any restriction or encumbrance on (i) the ability of the Borrower and its Subsidiaries to perform and comply with their respective obligations under the Credit Documents or the Letter of Credit Facility, (ii) the ability of the Borrower or any Subsidiary to grant, assume or permit to exist any Lien upon any of its assets or properties as security, directly or indirectly, for the Obligations, other than the restrictions set forth in the Credit Documents or Letter of Credit Facility, or (iii) the ability of any Subsidiary of the Borrower to make any dividend payments or other distributions in respect of its capital stock, to make loans or advances to the Borrower or any other Subsidiary, or to transfer any of its assets or properties to the Borrower or any other Subsidiary, in each case other than such restrictions or encumbrances existing under or by reason of the Credit Documents or applicable Requirements of Law. -54- 7.10. Fiscal Year. The Borrower will not, and will not permit or cause any of its Subsidiaries to, change the ending date of its fiscal year to a date other than December 31 unless (i) the Borrower shall have given the Lenders written notice of its intention to change such ending date at least sixty (60) days prior to the effective date thereof and (ii) prior to such effective date this Agreement shall have been amended to make any changes in the financial covenants and other terms and conditions to the extent necessary, in the reasonable determination of the Required Lenders, to reflect the new fiscal year ending date. 7.11. Accounting Changes. The Borrower will not, and will not permit or cause any of its Subsidiaries to, make or permit any material change in its accounting policies or reporting practices, except as may be required by Generally Accepted Accounting Principles or Statutory Accounting Practices, as applicable, and any change to an accounting principle that can be demonstrated by the Borrower to be "preferable" in accordance with Statements on Auditing Standards No. 58 as promulgated by the Auditing Standards Board. 7.12. Reinsurance Agreements. The Borrower will not, and will not permit or cause any of its Insurance Subsidiaries to, (i) except for the Reinsurance Agreements existing on the Closing Date with the reinsurers set forth on Schedule 4.19, be or become a party to any Reinsurance Agreement (whether in effect as of the Closing Date or at any time thereafter) with any reinsurer not rated "A-" or better by A.M. Best & Company unless such reinsurer has either (x) provided a letter of credit issued by a United States bank having a long term senior debt rating of A or better by Standard & Poor's Ratings Group and Moody's Investors Services, Inc., in favor of the Borrower or the applicable Insurance Subsidiary in an amount equal to or greater than the obligations transferred pursuant to such Reinsurance Agreement, (y) placed the assets transferred by the Insurance Subsidiary pursuant to such Reinsurance Agreement in a trust with a fiduciary and under terms, including investment restrictions consistent with this Agreement, satisfactory to the Agent, or (z) otherwise provided collateral in favor of the Borrower or the applicable Insurance Subsidiary in form and amount satisfactory to the Required Lenders, (ii) enter into any Reinsurance Agreements, or make any amendment or modification to or waiver of any Reinsurance Agreements, that would, individually or in the aggregate, be reasonably likely to have a Material Adverse Effect, or (iii) be or become a party to any Surplus Relief Reinsurance Agreement if the increase in Consolidated Statutory Surplus as a result of or arising from such Surplus Relief Reinsurance Agreement, when added to the increase in Consolidated Statutory Surplus as a result of or arising from all other Surplus Relief Reinsurance Agreements theretofore entered into by any Insurance Subsidiary, net of any surplus relief recaptured in respect of such Surplus Relief Reinsurance Agreements, exceeds the lesser of (y) ten percent (10%) of Consolidated Statutory Surplus as of the most recent fiscal year end, or (z) $45,000,000. ARTICLE VIII EVENTS OF DEFAULT 8.1. Events of Default. The occurrence of any one or more of the following events shall constitute an "Event of Default": (a) The Borrower shall fail to pay when due any principal on any Loan, or shall fail to pay within five (5) days of the due date thereof interest on any Loan, fees or any other Obligation; (b) The Borrower shall fail to observe, perform or comply with any condition, covenant or agreement contained in any of Sections 2.15, 5.3, 5.4(i), or 5.11, or in Article VI or Article VII; -55- (c) The Borrower or any of its Subsidiaries shall fail to observe, perform or comply with any condition, covenant or agreement contained in this Agreement or any of the other Credit Documents other than those enumerated in subsections (a) and (b) above, and such failure shall continue unremedied for any grace period specifically applicable thereto or, if no such grace period is applicable, for a period after the Borrower acquires knowledge thereof of (i) five (5) days with respect to covenants set forth in Sections 5.1 or 5.2 or (ii) thirty (30) days with respect to any other condition, covenant or agreement; (d) Any representation or warranty made or deemed made by or on behalf of the Borrower or any of its Subsidiaries in this Agreement, any of the other Credit Documents or in any certificate, instrument, report or other document furnished in connection herewith or therewith or in connection with the transactions contemplated hereby or thereby shall prove to have been false or misleading in any material respect as of the time made, deemed made or furnished; (e) The Borrower or any of its Subsidiaries shall (i) fail to pay when due (whether by scheduled maturity, acceleration or otherwise and after giving effect to any applicable grace period) any principal of or interest on any Indebtedness (other than the Indebtedness incurred pursuant to this Agreement) having an aggregate principal amount of at least $1,000,000; or (ii) fail to observe, perform or comply with any condition, covenant or agreement contained in any agreement or instrument evidencing or relating to any such Indebtedness, or any other event shall occur or condition exist in respect thereof, and the effect of such failure, event or condition is to cause, or permit the holder or holders of such Indebtedness (or a trustee or agent on its or their behalf) to cause (with the giving of notice, lapse of time, or both), such Indebtedness to become due, or to be prepaid, redeemed, purchased or defeased, prior to its stated maturity; (f) The Borrower or any of its Subsidiaries shall (i) file a voluntary petition or commence a voluntary case seeking liquidation, winding-up, reorganization, dissolution, arrangement, readjustment of debts or any other relief under the Bankruptcy Code or under any other applicable bankruptcy, insolvency or similar law now or hereafter in effect, (ii) consent to the institution of, or fail to controvert in a timely and appropriate manner, any petition or case of the type described in subsection (g) below, (iii) apply for or consent to the appointment of or taking possession by a custodian, trustee, receiver or similar official for or of itself or all or a substantial part of its properties or assets, (iv) fail generally, or admit in writing its inability, to pay its debts generally as they become due, (v) make a general assignment for the benefit of creditors or (vi) take any corporate action to authorize or approve any of the foregoing; (g) Any involuntary petition or case shall be filed or commenced against the Borrower or any of its Subsidiaries seeking liquidation, winding-up, reorganization, dissolution, arrangement, readjustment of debts, the appointment of a custodian, trustee, receiver or similar official for it or all or a substantial part of its properties or any other relief under the Bankruptcy Code or under any other applicable bankruptcy, insolvency or similar law now or hereafter in effect, and such petition or case shall continue undismissed and unstayed for a period of sixty (60) days; or an order, judgment or decree approving or ordering any of the foregoing shall be entered in any such proceeding; (h) Any one or more money judgments, writs or warrants of attachment, executions or similar processes involving an aggregate amount (exclusive of amounts fully bonded or covered by insurance as to which the surety or insurer, as the case may be, has acknowledged its liability in writing) in excess of $1,000,000 (other than a liability of an Insurance Subsidiary under an insurance contract written in the ordinary course of business) shall be entered or filed against the Borrower or any of its Subsidiaries or any of their respective properties and the same shall not be dismissed, stayed or discharged for a period of thirty (30) days; -56- (i) Any member of the ERISA Group shall fail to pay when due an amount or amounts aggregating in excess of $1,000,000 which it shall have become liable to pay under Title IV of ERISA; or notice of intent to terminate a Material Plan shall be filed under Title IV of ERISA by any member of the ERISA Group, any plan administrator or any combination of the foregoing; or the PBGC shall institute proceedings under Title IV of ERISA to terminate, to impose liability (other than for premiums under Section 4007 of ERISA) in respect of, or to cause a trustee to be appointed to administer any Material Plan; or a condition shall exist by reason of which the PBGC would be entitled to obtain a decree adjudicating that any Material Plan must be terminated; or there shall occur a complete or partial withdrawal from, or a default, within the meaning of Section 4219(c)(5) of ERISA, with respect to, one or more Multiemployer Plans which could cause one or more members of the ERISA Group to incur a current payment obligation in excess of $1,000,000; (j) Any Insurance Regulatory Authority or other Governmental Authority having jurisdiction shall issue any order of conservation, supervision, rehabilitation or liquidation or any other order of similar effect in respect of any Insurance Subsidiary, and such action, individually or in the aggregate, would be reasonably likely to have a Material Adverse Effect; (k) Any one or more licenses, permits, accreditations or authorizations of the Borrower or any of its Subsidiaries shall be suspended, limited or terminated or shall not be renewed, or any other action shall be taken, by any Governmental Authority in response to any alleged failure by the Borrower or any of its Subsidiaries to be in compliance with applicable Requirements of Law, and such action, individually or in the aggregate, would be reasonably likely to have a Material Adverse Effect; or (l) Any of the following shall occur: (i) any Person, including, without limitation, any individual member of the Management Group, or group of Persons acting in concert as a partnership or other group shall, as a result of a tender or exchange offer, open market purchases, privately negotiated purchases or otherwise, have become, after the date hereof, the "beneficial owner" (within the meaning of such term under Rule 13d-3 under the Exchange Act) of securities of the Borrower representing thirty percent (30%) or more of the combined voting power of the then outstanding securities of the Borrower ordinarily (and apart from rights accruing under special circumstances) having the right to vote in the election of directors, provided, however, The PMA Foundation, a Pennsylvania non-profit corporation, may become the beneficial owner of securities of the Borrower representing fifty percent (50%) or less of the combined voting power of the then outstanding securities of the Borrower so long as it remains a non-profit corporation that has no members with voting rights and the Management Group collectively may become the beneficial owner of securities of the Borrower representing fifty percent (50%) or less of the combined voting power of the then outstanding securities of the Borrower, or (ii) the Board of Directors of the Borrower shall cease to consist of a majority of the individuals who constituted the Board of Directors of the Borrower as of the date hereof or who shall have become a member thereof subsequent to the date hereof after having been nominated, or otherwise approved in writing, by at least a majority of individuals who constituted the Board of Directors of the Borrower as of the date hereof (or their replacements approved as herein required). 8.2. Remedies: Termination of Commitment, Acceleration, etc. Upon and at any time after the occurrence and during the continuance of any Event of Default, the Agents, acting jointly, shall at the direction, or may with the consent, of the Required Lenders, take any or all of the following actions at the same or different times: -57- (a) Declare the Commitments to be terminated, whereupon the same shall terminate (provided that, upon the occurrence of an Event of Default pursuant to Section 8.1(f) or Section 8.1(g), the Commitments shall automatically be terminated); (b) Declare all or any part of the outstanding principal amount of the Loans to be immediately due and payable, whereupon the principal amount so declared to be immediately due and payable, together with all interest accrued thereon and all other amounts payable under this Agreement, the Notes and the other Credit Documents, shall become immediately due and payable without presentment, demand, protest, notice of intent to accelerate or other notice or legal process of any kind, all of which are hereby knowingly and expressly waived by the Borrower (provided that, upon the occurrence of an Event of Default pursuant to Section 8.1(f) or Section 8.1(g), all of the outstanding principal amount of the Loans and all other amounts described in this subsection (b) shall automatically become immediately due and payable without presentment, demand, protest, notice of intent to accelerate or other notice or legal process of any kind, all of which are hereby knowingly and expressly waived by the Borrower); and (c) Exercise all rights and remedies available to it under this Agreement, the other Credit Documents and applicable law. 8.3. Remedies: Set-Off. Subject to Section 2.16(b), in addition to all other rights and remedies available under the Credit Documents or applicable law or otherwise, upon and at any time after the occurrence and during the continuance of any Event of Default, each Lender may, and each is hereby authorized by the Borrower, at any such time and from time to time, to the fullest extent permitted by applicable law, without presentment, demand, protest or other notice of any kind, all of which are hereby knowingly and expressly waived by the Borrower, to set off and to apply any and all deposits (general or special, time or demand, provisional or final) and any other property at any time held (including at any branches or agencies, wherever located), and any other indebtedness at any time owing, by such Lender to or for the credit or the account of the Borrower against any or all of the Obligations to such Lender now or hereafter existing, whether or not such Obligations may be contingent or unmatured, the Borrower hereby granting to each Lender a continuing security interest in and Lien upon all such deposits and other property as security for such Obligations. Each Lender agrees to notify the Borrower promptly after any such set-off and application; provided, however, that the failure to give such notice shall not affect the validity of such set-off and application. ARTICLE IX THE AGENTS 9.1. Appointment. Each Lender hereby irrevocably appoints and authorizes The Bank of New York to act as Administrative Agent, First Union to act as Documentation Agent, and both to act jointly as Agents hereunder and under the other Credit Documents and to take such actions as agent on its behalf hereunder and under the other Credit Documents, and to exercise such powers and to perform such duties, as are specifically delegated to the Administrative Agent or the Documentation Agent, as appropriate, by the terms hereof or thereof, together with such other powers and duties as are reasonably incidental thereto. 9.2. Nature of Duties. Neither Agent shall have any duties or responsibilities other than those expressly set forth as applicable to such Agent in this Agreement and the other Credit Documents. Neither Agent shall have, by reason of this Agreement or any other Credit Document, a fiduciary relationship in -58- respect of any Lender; and nothing in this Agreement or any other Credit Document, express or implied, is intended to or shall be so construed as to impose upon either Agent any obligations or liabilities in respect of this Agreement or any other Credit Document except as expressly set forth herein or therein. Each Agent may execute any of its duties under this Agreement or any other Credit Document by or through agents or attorneys-in-fact and shall not be responsible for the negligence or misconduct of any agents or attorneys-in-fact that it selects with reasonable care. Each Agent shall be entitled to consult with legal counsel, independent public accountants and other experts selected by it with respect to all matters pertaining to this Agreement and the other Credit Documents and its duties hereunder and thereunder and shall not be liable for any action taken or omitted to be taken in good faith by it in accordance with the advice of such counsel, accountants or experts. The Lenders hereby acknowledge that neither Agent shall be under any duty to take any discretionary action permitted to be taken by it pursuant to the provisions of this Agreement or any other Credit Document unless it shall be requested in writing to do so by the Required Lenders (or, where a higher percentage of the Lenders is expressly required hereunder, such Lenders). 9.3. Exculpatory Provisions. Neither Agent nor any of their officers, directors, employees, agents, attorneys-in-fact or Affiliates shall be (i) liable for any action taken or omitted to be taken by it or such Person under or in connection with the Credit Documents, except for its or such Person's own gross negligence or willful misconduct, (ii) responsible in any manner to any Lender for any recitals, statements, information, representations or warranties herein or in any other Credit Document or in any document, instrument, certificate, report or other writing delivered in connection herewith or therewith, for the execution, effectiveness, genuineness, validity, enforceability or sufficiency of this Agreement or any other Credit Document, or for the financial condition of the Borrower, its Subsidiaries or any other Person, or (iii) required to ascertain or make any inquiry concerning the performance or observance of any of the terms, provisions or conditions of this Agreement or any other Credit Document or the existence or possible existence of any Default or Event of Default, or to inspect the properties, books or records of the Borrower or any of its Subsidiaries. 9.4. Reliance by Agents. Each Agent shall be entitled to rely, and shall be fully protected in relying, upon any notice, statement, consent or other communication (including, without limitation, any thereof by telephone, telecopy, telex, telegram or cable) believed by it in good faith to be genuine and correct and to have been signed, sent or made by the proper Person or Persons. Each Agent may deem and treat each Lender as the owner of its interest hereunder for all purposes hereof unless and until a written notice of the assignment, negotiation or transfer thereof shall have been given to such Agent in accordance with the provisions of this Agreement. Each Agent shall be entitled to refrain from taking or omitting to take any action in connection with this Agreement or any other Credit Document (i) if such action or omission would, in the reasonable opinion of such Agent, violate any applicable law or any provision of this Agreement or any other Credit Document or (ii) unless and until it shall have received such advice or concurrence of the Required Lenders (or, where a higher percentage of the Lenders is expressly required hereunder, such Lenders) as it deems appropriate or it shall first have been indemnified to its satisfaction by the Lenders against any and all liability and expense (other than liability and expense arising from its own gross negligence or willful misconduct) that may be incurred by it by reason of taking, continuing to take or omitting to take any such action. Without limiting the foregoing, no Lender shall have any right of action whatsoever against either Agent as a result of such Agent's acting or refraining from acting hereunder or under any other Credit Document in accordance with the instructions of the Required Lenders (or, where a higher percentage of the Lenders is expressly required hereunder, such Lenders), and such instructions and any action taken or failure to act pursuant thereto shall be binding upon all of the Lenders (including all subsequent Lenders). -59- 9.5. Non-Reliance on Agents and Other Lenders. Each Lender expressly acknowledges that neither Agent nor any of respective their officers, directors, employees, agents, attorneys-in-fact or Affiliates has made any representation or warranty to it and that no act by either Agent or any such Person hereafter taken, including any review of the affairs of the Borrower and its Subsidiaries, shall be deemed to constitute any representation or warranty by either Agent to any Lender. Each Lender represents to the Agents that (i) it has, independently and without reliance upon the Agents or any other Lender and based on such documents and information as it has deemed appropriate, made its own appraisal of and investigation into the business, prospects, operations, properties, financial and other condition and creditworthiness of the Borrower and its Subsidiaries and made its own decision to enter into this Agreement and extend credit to the Borrower hereunder, and (ii) it will, independently and without reliance upon the Agents 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 analysis, appraisals and decisions in taking or not taking action hereunder and under the other Credit Documents and to make such investigation as it deems necessary to inform itself as to the business, prospects, operations, properties, financial and other condition and creditworthiness of the Borrower and its Subsidiaries. Except as expressly provided in this Agreement and the other Credit Documents, neither Agent shall have any duty or responsibility, either initially or on a continuing basis, to provide any Lender with any credit or other information concerning the business, prospects, operations, properties, financial or other condition or creditworthiness of the Borrower, its Subsidiaries or any other Person that may at any time come into the possession of either Agent or any of their officers, directors, employees, agents, attorneys-in-fact or Affiliates. 9.6. Notice of Default. Neither Agent shall be deemed to have knowledge or notice of the occurrence of any Default or Event of Default unless such Agent shall have received written notice from the Borrower or a Lender referring to this Agreement, describing such Default or Event of Default and stating that such notice is a "notice of default." In the event that either Agent receives such a notice, such Agent will give notice thereof to the Lenders as soon as reasonably practicable; provided, however, that if any such notice has also been furnished to the Lenders, such Agent shall have no obligation to notify the Lenders with respect thereto. The Agents shall (subject to Sections 9.4 and 10.6) take such action with respect to such Default or Event of Default as shall reasonably be directed by the Required Lenders; provided that, unless and until the Agents shall have received such directions, the Agents may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default or Event of Default as it shall deem advisable in the best interests of the Lenders. 9.7. Indemnification. To the extent either Agent is not reimbursed by or on behalf of the Borrower, and without limiting the obligation of the Borrower to do so, the Lenders agree (i) to indemnify each Agent and its officers, directors, employees, agents, attorneys-in-fact and Affiliates, ratably in proportion to their respective percentages as used in determining the Required Lenders as of the date of determination, from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses (including, without limitation, reasonable attorneys' fees and expenses) or disbursements of any kind or nature whatsoever that may at any time (including at any time following the repayment in full of the Loans and the termination of the Commitments) be imposed on, incurred by or asserted against such Agent in any way relating to or arising out of this Agreement or any other Credit Document or any documents contemplated by or referred to herein or the transactions contemplated hereby or thereby or any action taken or omitted by such Agent under or in connection with any of the foregoing, and (ii) to reimburse each Agent upon demand, ratably in proportion to their respective percentages as used in determining the Required Lenders as of the date of determination, for any expenses incurred by such Agent in connection with the preparation, negotiation, execution, delivery, administration, amendment, modification, waiver or enforcement (whether through negotiations, legal proceedings or otherwise) of, or -60- legal advice in respect of rights or responsibilities under, this Agreement or any of the other Credit Documents (including, without limitation, reasonable attorneys' fees and expenses and compensation of agents and employees paid for services rendered on behalf of the Lenders); provided, however, that no Lender shall be liable for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements to the extent resulting from the finally adjudicated gross negligence or willful misconduct of the party to be indemnified. 9.8. Each Agent in its Individual Capacity. With respect to its Commitment, the Loans made by it and the Note or Notes issued to it, each Agent in its individual capacity and not as an Agent shall have the same rights and powers under the Credit Documents as any other Lender and may exercise the same as though it were not performing the agency duties specified herein; and the terms "Lenders," "Required Lenders," "holders of Notes" and any similar terms shall, unless the context clearly otherwise indicates, include each Agent in its individual capacity. Each Agent and its Affiliates may accept deposits from, lend money to and generally engage in any kind of banking, trust, financial advisory or other business with the Borrower, any of its Subsidiaries or any of their respective Affiliates as if such Agent were not performing the agency duties specified herein, and may accept fees and other consideration from any of them for services in connection with this Agreement and otherwise without having to account for the same to the Lenders. 9.9. Successor Agents. Either Agent may resign at any time by giving thirty (30) days' prior written notice to the Borrower and the Lenders. Upon any such notice of resignation, the other Agent shall have the right to succeed to the responsibilities and authority of the resigning Agent. If such other Agent does not provide written notice to the Lenders of its election to succeed the resigning Agent prior to the effectiveness of such resignation, or if no other Agent shall exist, the Required Lenders will, with the prior written consent of the Borrower (which consent shall not be unreasonably withheld), appoint from among the Lenders a successor to the Administrative or Documentation Agent, as appropriate (provided that the Borrower's consent shall not be required in the event a Default or Event of Default shall have occurred and be continuing). If no such successor Agent shall have been so appointed by the Required Lenders and shall have accepted such appointment within such thirty-day period, then the resigning Agent may, on behalf of the Lenders and after consulting with the Lenders and the Borrower, appoint a successor Administrative or Documentation Agent, as appropriate, from among the Lenders. Upon the acceptance of any appointment as an Agent by a successor Agent, such successor Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the resigning Agent, and the resigning Agent shall be discharged from its duties and obligations hereunder and under the other Credit Documents. After any resigning Agent's resignation as an Agent, the provisions of this Article shall inure to its benefit as to any actions taken or omitted to be taken by it while it was an Agent. If no successor to an Administrative or Documentation Agent, as appropriate, has accepted appointment as such Agent by the thirtieth (30th) day following a resigning Agent's notice of resignation, the resigning Agent's resignation shall nevertheless thereupon become effective, and the Lenders shall thereafter perform all of the duties of such Agent hereunder and under the other Credit Documents until such time, if any, as the Required Lenders appoint a successor Agent as provided for hereinabove. ARTICLE X MISCELLANEOUS 10.1. Fees and Expenses. The Borrower agrees (i) whether or not the transactions contemplated by this Agreement shall be consummated, to pay upon demand all reasonable out-of-pocket costs and -61- expenses of each Agent (including, without limitation, the reasonable fees and expenses of counsel to each Agent) in connection with the preparation, negotiation, execution, delivery and syndication of this Agreement and the other Credit Documents, and any amendment, modification or waiver hereof or thereof or consent with respect hereto or thereto, (ii) to pay upon demand all reasonable out-of-pocket costs and expenses of each Agent and Lender (including, without limitation, the reasonable fees and expenses of counsel to either Agent or any Lender) in connection with (y) any refinancing or restructuring of the credit arrangement provided under this Agreement, whether in the nature of a "work-out," in any insolvency or bankruptcy proceeding or otherwise and whether or not consummated, and (z) the enforcement, attempted enforcement or preservation of any rights or remedies under this Agreement or any of the other Credit Documents, whether in any action, suit or proceeding (including any bankruptcy or insolvency proceeding) or otherwise, and (iii) to pay and hold harmless each Agent and Lender from and against all liability for any intangibles, documentary, stamp or other similar taxes, fees and excises, if any, including any interest and penalties, and any finder's or brokerage fees, commissions and expenses (other than any fees, commissions or expenses of finders or brokers engaged by the either Agent or any Lender), that may be payable in connection with the transactions contemplated by this Agreement and the other Credit Documents. 10.2. Indemnification. The Borrower agrees, whether or not the transactions contemplated by this Agreement shall be consummated, to indemnify and hold harmless each Agent and Lender and each of their respective directors, officers, employees, agents and Affiliates (each, an "Indemnified Person") from and against any and all claims, losses, damages, obligations, liabilities, penalties, costs and expenses (including, without limitation, reasonable attorneys' fees and expenses) of any kind or nature whatsoever, whether direct, indirect or consequential (collectively, "Indemnified Costs"), that may at any time be imposed on, incurred by or asserted against any such Indemnified Person as a result of, arising from or in any way relating to the preparation, execution, performance or enforcement of this Agreement or any of the other Credit Documents, any of the transactions contemplated herein or therein or any transaction financed or to be financed in whole or in part, directly or indirectly, with the proceeds of any Loans, or any action, suit or proceeding (including any inquiry or investigation) by any Person, whether threatened or initiated, related to any of the foregoing, and in any case whether or not such Indemnified Person is a party to any such action, proceeding or suit or a subject of any such inquiry or investigation; provided, however, that no Indemnified Person shall have the right to be indemnified hereunder for any Indemnified Costs to the extent resulting from the gross negligence or willful misconduct of such Indemnified Person. All of the foregoing Indemnified Costs of any Indemnified Person shall be paid or reimbursed by the Borrower, as and when incurred and upon demand. 10.3. Governing Law; Consent to Jurisdiction. THIS AGREEMENT AND THE OTHER CREDIT DOCUMENTS HAVE BEEN EXECUTED, DELIVERED AND ACCEPTED IN, AND SHALL BE DEEMED TO HAVE BEEN MADE IN, NORTH CAROLINA AND SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NORTH CAROLINA (WITHOUT REGARD TO THE CONFLICTS OF LAW PROVISIONS THEREOF); PROVIDED, HOWEVER, THAT THE OBLIGATIONS AND LIABILITY OF THE ADMINISTRATIVE AGENT EXPRESSLY SET FORTH IN THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO PRINCIPLES OF CONFLICT OF LAWS, BUT INCLUDING SECTION 5-1401 OF THE GENERAL OBLIGATIONS LAW. THE BORROWER HEREBY CONSENTS TO THE NONEXCLUSIVE JURISDICTION OF ANY STATE COURT WITHIN MECKLENBURG COUNTY, NORTH CAROLINA OR NEW YORK COUNTY, NEW YORK OR ANY -62- FEDERAL COURT LOCATED WITHIN THE WESTERN DISTRICT OF THE STATE OF NORTH CAROLINA OR THE SOUTHERN DISTRICT OF THE STATE OF NEW YORK FOR ANY PROCEEDING INSTITUTED HEREUNDER OR UNDER ANY OF THE OTHER CREDIT DOCUMENTS, OR ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT OR ANY OF THE OTHER CREDIT DOCUMENTS, OR ANY PROCEEDING TO WHICH EITHER AGENT OR ANY LENDER OR THE BORROWER IS A PARTY, INCLUDING ANY ACTIONS BASED UPON, ARISING OUT OF, OR IN CONNECTION WITH, ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENT (WHETHER ORAL OR WRITTEN) OR ACTIONS OF EITHER AGENT OR ANY LENDER OR THE BORROWER. THE BORROWER IRREVOCABLY AGREES TO BE BOUND (SUBJECT TO ANY AVAILABLE RIGHT OF APPEAL) BY ANY JUDGMENT RENDERED OR RELIEF GRANTED THEREBY AND FURTHER WAIVES ANY OBJECTION THAT IT MAY HAVE BASED ON LACK OF JURISDICTION OR IMPROPER VENUE OR FORUM NON CONVENIENS TO THE CONDUCT OF ANY SUCH PROCEEDING. THE BORROWER CONSENTS THAT ALL SERVICE OF PROCESS BE MADE BY REGISTERED OR CERTIFIED MAIL DIRECTED TO IT AT ITS ADDRESS SET FORTH HEREINBELOW, AND SERVICE SO MADE SHALL BE DEEMED TO BE COMPLETED UPON THE EARLIER OF ACTUAL RECEIPT THEREOF OR THREE (3) DAYS AFTER DEPOSIT IN THE UNITED STATES MAILS, PROPER POSTAGE PREPAID AND PROPERLY ADDRESSED. NOTHING IN THIS SECTION SHALL AFFECT THE RIGHT TO SERVE LEGAL PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR AFFECT THE RIGHT OF ANY PARTY TO BRING ANY ACTION OR PROCEEDING AGAINST ANY OTHER PARTY IN THE COURTS OF ANY OTHER JURISDICTION. 10.4. Arbitration; Preservation and Limitation of Remedies. (a) Upon demand of any party hereto, whether made before or after institution of any judicial proceeding, any dispute, claim or controversy arising out of, connected with or relating to this Agreement or any other Credit Document ("Disputes") between or among the Borrower, the Agents and the Lenders, or any of them, shall be resolved by binding arbitration as provided herein. Institution of a judicial proceeding by a party does not waive the right of that party to demand arbitration hereunder. Disputes may include, without limitation, tort claims, counterclaims, claims brought as class actions, claims arising from documents executed in the future, or claims arising out of or connected with the transactions contemplated by this Agreement and the other Credit Documents. Arbitration shall be conducted under and governed by the Commercial Financial Disputes Arbitration Rules (the "Arbitration Rules") of the American Arbitration Association (the "AAA"), as in effect from time to time, and Title 9 of the U.S. Code, as amended. All arbitration hearings shall be conducted in the city in which the principal office of the Documentation Agent is located. The expedited procedures set forth in Rule 51 et seq. of the Arbitration Rules shall be applicable to claims of less than $1,000,000. All applicable statutes of limitation shall apply to any Dispute. A judgment upon the award may be entered in any court having jurisdiction. The panel from which all arbitrators are selected shall be comprised of licensed attorneys. The single arbitrator selected for expedited procedure shall be a retired judge from the highest court of general jurisdiction, state or federal, of the state where the hearing will be conducted. Notwithstanding the foregoing, this arbitration provision does not apply to Disputes under or related to Hedge Agreements or Disputes to which the Borrower is not a party. (b) Notwithstanding the preceding binding arbitration provisions, the parties hereto agree to preserve, without diminution, certain remedies that any party hereto may employ or exercise freely, either alone, in conjunction with or during a Dispute. Any party hereto shall have the right to proceed in any court of proper jurisdiction or by self-help to exercise or prosecute the following remedies, as applicable: (i) all rights of self-help, including peaceful occupation of real property and collection of rents, set-off, and peaceful possession of personal property; (ii) obtaining provisional or ancillary remedies, including injunctive relief, sequestration, garnishment, attachment, appointment of a receiver and filing an involuntary -63- bankruptcy proceeding; and (iii) when applicable, a judgment by confession of judgment. Preservation of these remedies does not limit the power of an arbitrator to grant similar remedies that may be requested by a party in a Dispute. The parties hereto agree that no party shall have a remedy of punitive or exemplary damages against any other party in any Dispute, and each party hereby waives any right or claim to punitive or exemplary damages that it has now or that may arise in the future in connection with any Dispute, whether such Dispute is resolved by arbitration or judicially. 10.5. Notices. All notices and other communications provided for hereunder shall be in writing (including telegraphic, telex, facsimile transmission or cable communication) and mailed, telegraphed, telexed, telecopied, cabled or delivered to the party to be notified at the following addresses: (a) if to the Borrower, to Pennsylvania Manufacturers Corporation, Mellon Bank Center, 1735 Market Street, Philadelphia, Pennsylvania 19103-7590, Attention: Francis W. McDonnell, Telecopy no. (215) 665-5061; (b) if to the Administrative Agent, to The Bank of New York, One Wall Street, Agency Function Administration, 18th Floor, New York, New York 10286, Attention: Ramona Washington, Telecopy No. (212) 635-6365 or 6366 or 6367, with a copy to The Bank of New York, One Wall Street, Insurance Division, 17th Floor, New York, New York 10286, Attention: Lizanne T. Eberle, Vice President, Telecopy No. (212) 809-9520; (c) if to the Documentation Agent, to First Union National Bank of North Carolina, One First Union Center, DC-5, 301 South College Street, Charlotte, North Carolina 28288-0608, Attention: Jay S. Bullock, Telecopy No. (704) 383-7611; and (d) if to any Lender, to it at the address for notices set forth on its signature page hereto (or if to any Lender not a party hereto as of the date hereof, at the address for notices set forth in its Assignment and Acceptance); or in each case, to such other address as any party may designate for itself by like notice to all other parties hereto. All such notices and communications shall be deemed to have been given (i) if mailed as provided above by any method other than overnight delivery service, on the third Business Day after deposit in the mails, (ii) if mailed by overnight delivery service, telegraphed, telexed, telecopied or cabled, when delivered for overnight delivery, delivered to the telegraph company, confirmed by telex answerback, transmitted by telecopier or delivered to the cable company, respectively, or (iii) if delivered by hand, upon delivery; provided that notices and communications to each Agent shall not be effective until received by such Agent. 10.6. Amendments, Waivers, etc. No amendment, modification, waiver or discharge or termination of, or consent to any departure by the Borrower from, any provision of this Agreement or any other Credit Document, shall be effective unless in a writing signed by the Required Lenders (or by the Documentation Agent at the direction or with the consent of the Required Lenders), and then the same shall be effective only in the specific instance and for the specific purpose for which given; provided, however, that no such amendment, modification, waiver, discharge, termination or consent shall: (a) unless agreed to by all of the Lenders, (i) reduce or forgive the principal amount of, or rate of interest on, any Loan, or reduce or forgive any fees or other Obligations (other than fees payable to the Agents for their own account), (ii) extend any date (including the Maturity Date) fixed for the payment of any principal of or interest on any Loan, any fees (other than fees payable to the Agents for their own -64- account) or any other Obligations; (iii) increase or extend the Commitment of any Lender (it being understood that a waiver of any Event of Default, if agreed to by the requisite Lenders hereunder, shall not constitute such an increase or extension), (iv) change the percentage of the Commitments or of the aggregate unpaid principal amount of the Loans, or the number or percentage of Lenders, that shall be required for the Lenders or any of them to take or approve, or direct either Agent to take or approve, any action hereunder (including as set forth in the definition of "Required Lenders"), or (v) change any provision of Sections 2.16 or this Section 10.6; and (b) unless agreed to by the Agents in addition to the Lenders required as provided hereinabove to take such action, affect the rights or obligations of either Agent hereunder or under any of the other Credit Documents; and provided further that the Fee Letter and any Hedge Agreement to which any Lender is a party may be amended or modified, and any rights thereunder waived, in a writing signed by the parties thereto. 10.7. Assignments, Participations. (a) Each Lender may assign to one or more other Eligible Assignees (each, an "Assignee") all or a portion of its rights and obligations under this Agreement (including, without limitation, all or a portion of its Commitment, the outstanding Loans made by it and the Note or Notes held by it); provided, however, that (i) any such assignment (other than an assignment to a Lender or an Affiliate of a Lender) shall not be made without the prior written consent of the Administrative Agent and the Borrower (to be evidenced by their counterexecution of the relevant Assignment and Acceptance), which consent shall not be unreasonably withheld or delayed and, in the case of the Borrower, shall not be required during the continuance of an Event of Default, (ii) except in the case of an assignment to a Lender or an Affiliate of a Lender, the amount of the Commitment of the assigning Lender being assigned pursuant to each such assignment (determined as of the date of the Assignment and Acceptance with respect to each such assignment) shall in no event be less than the lesser of (y) the entire Commitment of such Lender immediately prior to such assignment or (z) $5,000,000, and (iii) the parties to each such assignment will execute and deliver to the Administrative Agent, for its acceptance and recording in the Register, an Assignment and Acceptance, together with any Note or Notes subject to such assignment, and will pay a nonrefundable processing fee of $3,000 to the Administrative Agent for its own account. Upon such execution, delivery, acceptance and recording of the Assignment and Acceptance, from and after the effective date specified therein, which effective date shall be at least five (5) Business Days after the execution thereof (unless the Administrative Agent shall otherwise agree), (A) the Assignee thereunder shall be a party hereto and, to the extent that rights and obligations hereunder have been assigned to it pursuant to such Assignment and Acceptance, shall have the rights and obligations of the assigning Lender hereunder with respect thereto and (B) the assigning Lender shall, to the extent that rights and obligations hereunder have been assigned by it pursuant to such Assignment and Acceptance, relinquish its rights (other than rights under the provisions of this Agreement and the other Credit Documents relating to indemnification or payment of fees, costs and expenses, to the extent such rights relate to the time prior to the effective date of such Assignment and Acceptance) and be released from its obligations under this Agreement (and, in the case of an Assignment and Acceptance covering all or the remaining portion of such assigning Lender's rights and obligations under this Agreement, such Lender shall cease to be a party hereto). The terms and provisions of each Assignment and Acceptance shall, upon the effectiveness thereof, be incorporated into and made a part of this Agreement, and the covenants, agreements and obligations of each Lender set forth therein shall be deemed made to and for the benefit of the Agents and the other parties hereto as if set forth at length herein. -65- (b) The Administrative Agent will maintain at its address for notices referred to herein a copy of each Assignment and Acceptance delivered to and accepted by it and a register for the recordation of the names and addresses of the Lenders and the Commitments of, and principal amount of the Loans owing to, each Lender from time to time (the "Register"). The entries in the Register shall be conclusive and binding for all purposes, absent manifest error, and the Borrower, the Agents and the Lenders may treat each Person whose name is recorded in the Register as a Lender hereunder for all purposes of this Agreement. The Register shall be available for inspection by the Borrower and each Lender at any reasonable time and from time to time upon reasonable prior notice. (c) Upon its receipt of a duly completed Assignment and Acceptance executed by an assigning Lender and an Assignee and counterexecuted by the Borrower (if required), together with the Notes subject to such assignment and the processing fee referred to in subsection (a) above, the Administrative Agent will (i) accept such Assignment and Acceptance, (ii) on the effective date thereof, record the information contained therein in the Register and (iii) give notice thereof to the Borrower, the Documentation Agent and the Lenders. Within five (5) Business Days after its receipt of such notice, the Borrower, at its own expense, will execute and deliver to the Administrative Agent in exchange for the surrendered Notes (y) a new Committed Loan Note to the order of such Assignee in a principal amount equal to the principal amount of the Commitment (or, if the Commitments have been terminated, the principal amount of the Committed Loans) assumed by it pursuant to such Assignment and Acceptance and, to the extent the assigning Lender has retained its Committed Loans and/or Commitment hereunder, a new Committed Loan Note to the order of the assigning Lender in an amount equal to the principal amount of the Commitment (or, if the Commitments have been terminated, the principal amount of the Committed Loans) retained by it hereunder, and (z) a new Bid Loan Note to the order of such Assignee in a principal amount equal to the Maximum Bid Loan Amount. Such new Notes shall be dated the date of the replaced Notes and shall otherwise be in substantially the forms of Exhibits A-1 and A-2, as applicable. The Administrative Agent will return cancelled Notes to the Borrower. (d) Each Lender may, without the consent of the Borrower, either Agent or any other Lender, sell to one or more other Persons (each, a "Participant") participations in any portion comprising less than all of its rights and obligations under this Agreement (including, without limitation, a portion of its Commitment, the outstanding Loans made by it and the Note or Notes held by it); provided, however, that (i) such Lender's obligations under this Agreement shall remain unchanged and such Lender shall remain solely responsible for the performance of such obligations, (ii) no Lender shall sell any participation that, when taken together with all other participations, if any, sold by such Lender, covers all of such Lender's rights and obligations under this Agreement, (iii) the Borrower, the Agents and the other Lenders shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this Agreement, and no Lender shall permit any Participant to have any voting rights or any right to control the vote of such Lender with respect to any amendment, modification, waiver, consent or other action hereunder or under any other Credit Document (except as to actions that would (x) reduce or forgive the principal amount of, or rate of interest on, any Loan, or reduce or forgive any fees or other Obligations, (y) extend any date (including the Maturity Date) fixed for the payment of any principal of or interest on any Loan, any fees or any other Obligations, or (z) increase any Commitment of any Lender), and (iv) no Participant shall have any rights under this Agreement or any of the other Credit Documents, each Participant's rights against the granting Lender in respect of any participation to be those set forth in the participation agreement, and all amounts payable by the Borrower hereunder shall be determined as if such Lender had not granted such participation. Notwithstanding the foregoing, each Participant shall have the rights of a Lender for purposes of Sections 2.17(a), 2.17(b), 2.18, 2.19 and 8.3, and shall be entitled to the benefits thereto, to the extent that the Lender granting such participation would be entitled to such benefits -66- if the participation had not been made, provided that no Participant shall be entitled to receive any greater amount pursuant to any of such Sections than the Lender granting such participation would have been entitled to receive in respect of the amount of the participation made by such Lender to such Participant had such participation not been made. (e) Nothing in this Agreement shall be construed to prohibit any Lender from pledging or assigning all or any portion of its rights and interest hereunder or under any Note to any Federal Reserve Bank as security for borrowings therefrom; provided, however, that no such pledge or assignment shall release a Lender from any of its obligations hereunder. (f) Any Lender may, in connection with any assignment or participation or proposed assignment or participation pursuant to this Section, disclose to the Assignee or Participant or proposed Assignee or Participant any information relating to the Borrower and its Subsidiaries furnished to it by or on behalf of any other party hereto, provided that such Assignee or Participant or proposed Assignee or Participant agrees in writing to keep such information confidential to the same extent required of the Lenders under Section 10.13. 10.8. No Waiver. The rights and remedies of the Agents and the Lenders expressly set forth in this Agreement and the other Credit Documents are cumulative and in addition to, and not exclusive of, all other rights and remedies available at law, in equity or otherwise. No failure or delay on the part of either Agent or any Lender in exercising any right, power or privilege shall operate as a waiver thereof, nor shall any single or partial exercise of any such right, power or privilege preclude any other or further exercise thereof or the exercise of any other right, power or privilege or be construed to be a waiver of any Default or Event of Default. No course of dealing between any of the Borrower and either Agent or the Lenders or their agents or employees shall be effective to amend, modify or discharge any provision of this Agreement or any other Credit Document or to constitute a waiver of any Default or Event of Default. No notice to or demand upon the Borrower in any case shall entitle the Borrower to any other or further notice or demand in similar or other circumstances or constitute a waiver of the right of either Agent or any Lender to exercise any right or remedy or take any other or further action in any circumstances without notice or demand. 10.9. Successors and Assigns. This Agreement shall be binding upon, inure to the benefit of and be enforceable by the respective successors and assigns of the parties hereto, and all references herein to any party shall be deemed to include its successors and assigns; provided, however, that (i) the Borrower shall not sell, assign or transfer any of its rights, interests, duties or obligations under this Agreement or any other Credit Document without the prior written consent of all of the Lenders and (ii) any Assignees shall have such rights and obligations with respect to this Agreement and the other Credit Documents as are provided for under and pursuant to the provisions of Section 10.7. 10.10. Survival. All representations, warranties and agreements made by or on behalf of the Borrower or any of its Subsidiaries in this Agreement and in the other Credit Documents shall survive the execution and delivery hereof or thereof and the making and repayment of the Loans. In addition, notwithstanding anything herein or under applicable law to the contrary, the provisions of this Agreement and the other Credit Documents relating to indemnification or payment of fees, costs and expenses, including, without limitation, the provisions of Sections 2.17(a), 2.17(b), 2.18, 2.19, 9.7, 10.1 and 10.2, shall survive the payment in full of the Loans, the termination of the Commitments and any termination of this Agreement or any of the other Credit Documents. -67- 10.11. Severability. To the extent any provision of this Agreement is prohibited by or invalid under the applicable law of any jurisdiction, such provision shall be ineffective only to the extent of such prohibition or invalidity and only in such jurisdiction, without prohibiting or invalidating such provision in any other jurisdiction or the remaining provisions of this Agreement in any jurisdiction. 10.12. Construction. The headings of the various articles, sections and subsections of this Agreement have been inserted for convenience only and shall not in any way affect the meaning or construction of any of the provisions hereof. Except as otherwise expressly provided herein and in the other Credit Documents, in the event of any inconsistency or conflict between any provision of this Agreement and any provision of any of the other Credit Documents, the provision of this Agreement shall control. 10.13. Confidentiality. Each Lender agrees to keep confidential, pursuant to its customary procedures for handling confidential information of a similar nature and in accordance with safe and sound banking practices, all nonpublic information provided to it by or on behalf of the Borrower or any of its Subsidiaries in connection with this Agreement or any other Credit Document; provided, however, that any Lender may disclose such information (i) to its directors, employees and agents and to its auditors, counsel and other professional advisors, (ii) at the demand or request of any bank regulatory authority, court or other Governmental Authority having or asserting jurisdiction over such Lender, as may be required pursuant to subpoena or other legal process, or otherwise in order to comply with any applicable Requirement of Law, (iii) in connection with any proceeding to enforce its rights hereunder or under any other Credit Document or any other litigation or proceeding related hereto or to which it is a party, (iv) to either Agent or any other Lender, (v) to the extent the same has become publicly available other than as a result of a breach of this Agreement and (vi) pursuant to and in accordance with the provisions of Section 10.7(f). 10.14. Counterparts. This Agreement may be executed in any number of counterparts and by different parties hereto on separate counterparts, each of which when so executed and delivered shall be an original, but all of which shall together constitute one and the same instrument. This Agreement shall become effective upon the execution of a counterpart hereof by each of the parties hereto and receipt by the Agents and the Borrower of written or telephonic notification of such execution and authorization of delivery thereof. 10.15. Entire Agreement. THIS AGREEMENT AND THE OTHER DOCUMENTS AND INSTRUMENTS EXECUTED AND DELIVERED IN CONNECTION HEREWITH (A) EMBODY THE ENTIRE AGREEMENT AND UNDERSTANDING BETWEEN THE PARTIES HERETO AND THERETO RELATING TO THE SUBJECT MATTER HEREOF AND THEREOF, (B) SUPERSEDE ANY AND ALL PRIOR AGREEMENTS AND UNDERSTANDINGS OF SUCH PERSONS, ORAL OR WRITTEN, RELATING TO THE SUBJECT MATTER HEREOF AND THEREOF, INCLUDING, WITHOUT LIMITATION, THE COMMITMENT LETTER FROM FIRST UNION AND THE BANK OF NEW YORK TO THE BORROWER DATED JANUARY 15, 1997, BUT SPECIFICALLY EXCLUDING THE FEE LETTER, AND (C) MAY NOT BE AMENDED, SUPPLEMENTED, CONTRADICTED OR OTHERWISE MODIFIED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. -68- [The remainder of this page is intentionally left blank.] -69- IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their duly authorized officers as of the date first above written. PENNSYLVANIA MANUFACTURERS CORPORATION By: /s/ Francis W. McDonnell ---------------------------------- Title: Chief Financial Officer ---------------------------------- (signatures continued) ADMINISTRATIVE AGENT: THE BANK OF NEW YORK, as an Agent, the Administrative Agent, and Lender Commitment: By: /s/ Lizanne T. Eberle ---------------------------------- Title: Vice President ---------------------------------- Instructions for wire transfers to the Administrative Agent: The Bank of New York ABA Routing No. 0210-0001-8 New York, New York A/C 803-329-7689 Attention: William Fahey Special Financial Products Re: Pennsylvania Manufacturers Corporation Address for notices: The Bank of New York One Wall Street Insurance Division 17th Floor New York, New York 10286 Attention: Lizanne T. Eberle, Vice President Telephone: (212) 635-6475 Telecopy: (212) 809-9520 Lending Office: The Bank of New York One Wall Street Agency Function Administration 18th Floor New York, New York 10286 Attention: Ramona Washington Telephone: (212) 635-4699 Telecopy: (212) 635-6365 or 6366 or 6367 (signatures continued) DOCUMENTATION AGENT: FIRST UNION NATIONAL BANK OF NORTH CAROLINA, as an Agent, the Documentation Agent and Lender Commitment: By: /s/ Gail M. Golightly ---------------------------------- Title: Senior Vice President ---------------------------------- Address for notices: First Union National Bank of North Carolina Financial Institutions Group One First Union Center 301 South College Street Charlotte, North Carolina 28288-0735 Attention: Jay S. Bullock Telephone: (704) 383-3789 Telecopy: (704) 383-7611 Lending Office: First Union National Bank of North Carolina Financial Institutions Group One First Union Center 301 South College Street Charlotte, North Carolina 28288-0735 Attention: Jay S. Bullock Telephone: (704) 383-3789 Telecopy: (704) 383-7611 (signatures continued) FLEET NATIONAL BANK Commitment: $35,000,000 By: /s/ Michael M. Sinisgalli ---------------------------------- Title: Vice President ---------------------------------- Address for notices: Fleet National Bank 777 Main Street, CT/MO/0250 Insurance Industry Department Hartford, Connecticut 06115 Attention: Michael Sinisgalli or Carla Balesano Telephone: (860) 986-2645 or (860) 986-5603 Telecopy: (860) 986-1264 Lending Office: Fleet National Bank 777 Main Street, CT/MO/0250 Insurance Industry Department Hartford, Connecticut 06115 Attention: Michael Sinisgalli or Carla Balesano Telephone: (860) 986-2645 or (860) 986-5603 Telecopy: (860) 986-1264 (signatures continued) PNC BANK, NATIONAL ASSOCIATION Commitment: $25,000,000 By: /s/ Kirk Seagers ---------------------------------- Title: Vice President ---------------------------------- Address for notices: PNC Bank, National Association 1600 Market Street, 21st Floor Philadelphia, Pennsylvania 19103 Attention: Kirk Seagers Telephone: (215) 585-6036 Telecopy: (215) 585-7615 Lending Office: PNC Bank, National Association 1600 Market Street, 21st Floor Philadelphia, Pennsylvania 19103 Attention: Kirk Seagers Telephone: (215) 585-6036 Telecopy: (215) 585-7615 (signatures continued) MELLON BANK N.A. Commitment: $25,000,000 By: /s/ Susan M. Whitewood ---------------------------------- Title: Assistant Vice President ---------------------------------- Address for notices: Mellon Bank N.A. One Mellon Bank Center Room 370 Pittsburgh, Pennsylvania 15258 Attention: Susan Whitewood Telephone: (412) 234-7112 Telecopy: (412) 234-8087 Lending Office: Mellon Bank N.A. One Mellon Bank Center Room 370 Pittsburgh, Pennsylvania 15258 Attention: Susan Whitewood Telephone: (412) 234-7112 Telecopy: (412) 234-8087 (signatures continued) CORESTATES BANK, N.A. Commitment: $25,000,000 By: /s/ John M. Hayes ---------------------------------- Title: Vice President ---------------------------------- Address for notices: CoreStates Bank, N.A. 1339 Chestnut Street FC 1-8-8-4 Philadelphia, Pennsylvania 19101-7618 Attention: John M. Hayes Telephone: (215) 973-2767 Telecopy: (215) 786-4114 Lending Office: CoreStates Bank, N.A. 1339 Chestnut Street FC 1-8-8-4 Philadelphia, Pennsylvania 19101-7618 Attention: John M. Hayes Telephone: (215) 973-2767 Telecopy: (215) 786-4114 (signatures continued) DRESDNER BANK AG, NEW YORK BRANCH AND GRAND CAYMAN BRANCH Commitment: $25,000,000 By: /s/ Thomas J. Nodramia ---------------------------------- Title: Vice President ---------------------------------- By: /s/ Bridgitte Sacin ---------------------------------- Title: Assistant Treasurer ---------------------------------- Address for notices: Dresdner Bank AG New York Branch 75 Wall Street New York, New York 10005-2889 Attention: Lora Lam Telephone: (212) 429-2288 Telecopy: (212) 429-2130 Lending Office: Dresdner Bank AG New York Branch 75 Wall Street New York, New York 10005-2889 Attention: Tony Valencourt Telephone: (212) 429-2286 Telecopy: (212) 429-2524 Exhibit A-1 to Credit Agreement The Bank of New York, as Administrative Agent First Union National Bank of North Carolina, as Documentation Agent Pennsylvania Manufacturers Corporation March 14, 1997 / $235,000,000 Borrower's Taxpayer Identification No. ________ FORM OF COMMITTED LOAN NOTE $__________________ ___________________, 1997 Charlotte, North Carolina FOR VALUE RECEIVED, PENNSYLVANIA MANUFACTURERS CORPORATION, a Pennsylvania corporation (the "Borrower"), hereby promises to pay to the order of _____________________ (the "Lender"), at the offices of The Bank of New York (the "Administrative Agent") located at One Wall Street, New York, New York (or at such other place or places as the Administrative Agent may designate), at the times and in the manner provided in the Credit Agreement, dated as of March __, 1997 (as amended, modified or supplemented from time to time, the "Credit Agreement"), among the Borrower, the Lenders from time to time parties thereto, the Administrative Agent and First Union National Bank of North Carolina, as Documentation Agent, the principal sum of up to ________________________ DOLLARS ($______), or such lesser amount as may constitute the unpaid principal amount of the Committed Loans made by the Lender, under the terms and conditions of this promissory note (this "Committed Loan Note") and the Credit Agreement. The defined terms in the Credit Agreement are used herein with the same meaning. The Borrower also unconditionally promises to pay interest on the aggregate unpaid principal amount of this Committed Loan Note at the rates provided in the Credit Agreement. This Committed Loan Note is one of a series of Committed Loan Notes issued to evidence the Committed Loans made from time to time under the Credit Agreement. All of the terms, conditions and covenants of the Credit Agreement are expressly made a part of this Committed Loan Note by reference in the same manner and with the same effect as if set forth herein at length, and any holder of this Committed Loan Note permitted under the Credit Agreement is entitled to the benefits of and remedies provided in the Credit Agreement and the other Credit Documents. Reference is made to the Credit Agreement for provisions relating to the interest rate, maturity, payment, prepayment and acceleration of this Committed Loan Note. In the event of an acceleration of the maturity of this Committed Loan Note pursuant to the Credit Agreement, this Committed Loan Note, and all other indebtedness of the Borrower to the Lender under the Credit Agreement, shall become immediately due and payable, without presentment, demand, protest or notice of any kind, all of which are hereby waived by the Borrower. In the event this Committed Loan Note is not paid when due at any stated or accelerated maturity, the Borrower agrees to pay, in addition to the principal and interest, all costs of collection, including reasonable attorneys' fees. This Committed Loan Note shall be governed by and construed in accordance with the laws of the State of North Carolina (without regard to the conflicts of law provisions thereof). The Borrower hereby submits to the nonexclusive jurisdiction and venue of the federal and state courts located in Mecklenburg County, North Carolina and New York County, New York, although the Lender shall not be limited to bringing an action in such courts. IN WITNESS WHEREOF, the Borrower has caused this Committed Loan Note to be executed under seal by its duly authorized corporate officer as of the day and year first above written. PENNSYLVANIA MANUFACTURERS CORPORATION By: ---------------------------------- Title: ------------------------------- -2- Exhibit A-2 to Credit Agreement The Bank of New York, as Administrative Agent First Union National Bank of North Carolina, as Documentation Agent Pennsylvania Manufacturers Corporation March 14, 1997 / $235,000,000 Borrower's Taxpayer Identification No. ________ FORM OF BID LOAN NOTE $117,500,000 ___________________, 1997 Charlotte, North Carolina FOR VALUE RECEIVED, PENNSYLVANIA MANUFACTURERS CORPORATION, a Pennsylvania corporation (the "Borrower"), hereby promises to pay to the order of ____________________________________ (the "Lender"), at the offices of The Bank of New York (the "Administrative Agent") located at One Wall Street, New York, New York (or at such other place or places as the Administrative Agent may designate), at the times and in the manner provided in the Credit Agreement, dated as of March __, 1997 (as amended, modified or supplemented from time to time, the "Credit Agreement"), among the Borrower, the Lenders from time to time parties thereto, the Administrative Agent and First Union National Bank of North Carolina, as Documentation Agent, the principal sum of up to ONE HUNDRED TWENTY-FIVE MILLION DOLLARS ($125,000,000), or such lesser amount as may constitute the unpaid principal amount of the Bid Loans made by the Lender, under the terms and conditions of this promissory note (this "Bid Loan Note") and the Credit Agreement. The defined terms in the Credit Agreement are used herein with the same meaning. The Borrower also unconditionally promises to pay interest on the aggregate unpaid principal amount of this Bid Loan Note at the rates provided in the Credit Agreement. This Bid Loan Note is one of a series of Bid Loan Notes issued to evidence the Bid Loans made from time to time under the Credit Agreement. All of the terms, conditions and covenants of the Credit Agreement are expressly made a part of this Bid Loan Note by reference in the same manner and with the same effect as if set forth herein at length, and any holder of this Bid Loan Note permitted under the Credit Agreement is entitled to the benefits of and remedies provided in the Credit Agreement and the other Credit Documents. Reference is made to the Credit Agreement for provisions relating to the interest rate, maturity, payment, prepayment and acceleration of this Bid Loan Note. In the event of an acceleration of the maturity of this Bid Loan Note pursuant to the Credit Agreement, this Bid Loan Note, and all other indebtedness of the Borrower to the Lender under the Credit Agreement, shall become immediately due and payable, without presentment, demand, protest or notice of any kind, all of which are hereby waived by the Borrower. In the event this Bid Loan Note is not paid when due at any stated or accelerated maturity, the Borrower agrees to pay, in addition to the principal and interest, all costs of collection, including reasonable attorneys' fees. This Bid Loan Note shall be governed by and construed in accordance with the laws of the State of North Carolina (without regard to conflicts of law provisions thereof). The Borrower hereby submits to the nonexclusive jurisdiction and venue of the federal and state courts located in Mecklenburg County, North Carolina and New York County, New York, although the Lender shall not be limited to bringing an action in such courts. IN WITNESS WHEREOF, the Borrower has caused this Bid Loan Note to be executed under seal by its duly authorized corporate officer as of the day and year first above written. PENNSYLVANIA MANUFACTURERS CORPORATION By: ---------------------------------- Title: ------------------------------- -2- Exhibit B-1 to Credit Agreement The Bank of New York, as Administrative Agent First Union National Bank of North Carolina, as Documentation Agent Pennsylvania Manufacturers Corporation March 14, 1997 / $235,000,000 FORM OF NOTICE OF COMMITTED BORROWING [Date] The Bank of New York, as Administrative Agent One Wall Street, 18th Floor New York, New York 10286 Attention: Ramona Washington Agency Function Administration The Bank of New York, as Administrative Agent One Wall Street, 17th Floor New York, New York 10286 Attention: Lizanne T. Eberle Vice President Ladies and Gentlemen: The undersigned, Pennsylvania Manufacturers Corporation (the "Borrower"), refers to the Credit Agreement, dated as of March __, 1997, among the Borrower, certain banks and other financial institutions from time to time parties thereto (the "Lenders"), you, as Administrative Agent for the Lenders, and First Union National Bank of North Carolina, as Documentation Agent for the Lenders (as amended, modified or supplemented from time to time, the "Credit Agreement," the terms defined therein being used herein as therein defined), and, pursuant to Section 2.2(a) of the Credit Agreement, hereby gives you irrevocable notice that the Borrower requests one or more Committed Borrowings under the Credit Agreement, and to that end sets forth below the information relating to each such Committed Borrowing (each, a "Proposed Committed Borrowing") as required by Section 2.2(a) of the Credit Agreement. The Interest Period applicable to each Proposed Committed Borrowing, the aggregate principal amount, the Type of Committed Loans, and the date on which the Proposed Committed Borrowing is requested to be made (each such date, a "Borrowing Date"), shall be as follows: Principal Amount(1) Type(2) [Interest Period](3) Borrowing Date(4) __________ __________ [One/two/three/six months] __________ __________ __________ [One/two/three/six months] __________ __________ __________ [One/two/three/six months] __________ The Borrower hereby certifies that the following statements are true on and as of the date hereof and will be true on and as of each Borrowing Date: (A) Each of the representations and warranties contained in Article IV of the Credit Agreement and in the other Credit Documents is and will be true and correct on and as of each such date, with the same effect as if made on and as of each such date, both immediately before and after giving effect to the Proposed Committed Borrowing and to the application of the proceeds therefrom (except to the extent any such representation or warranty is expressly stated to have been made as of a specific date, in which case such representation or warranty shall be true and correct as of such date); (B) No Default or Event of Default has occurred and is continuing or would result from the Proposed Committed Borrowing or from the application of the proceeds therefrom; and (C) After giving effect to the Proposed Committed Borrowing, the sum of the aggregate principal amount of Committed Loans outstanding and the aggregate principal amount of Bid Loans outstanding will not exceed the aggregate Commitments. Very truly yours, PENNSYLVANIA MANUFACTURERS CORPORATION By: ---------------------------------- Title: ------------------------------- - - - ---------- (1) Shall be an amount (i) with respect to Base Rate Loans, not less than $3,000,000 or, if greater, an integral multiple of $1,000,000 in excess thereof or, if less, in the amount of the Aggregate Unutilized Commitments or (ii) with respect to LlBOR Committed Loans, not less than $3,000,000 or, if greater, an integral multiple of $1,000,000 in excess thereof. (2) Insert either Base Rate Loans or LIBOR Committed Loans. (3) Include this column in the case of a Proposed Committed Borrowing comprised of LIBOR Committed Loans, and select the applicable Interest Period. (4) Shall be a Business Day at least one Business Day after the date hereof (in the case of Base Rate Loans) or at least three Business Days after the date hereof (in the case of LIBOR Committed Loans). -2- Exhibit B-2 to Credit Agreement The Bank of New York, as Administrative Agent First Union National Bank of North Carolina, as Documentation Agent Pennsylvania Manufacturers Corporation March 14, 1997 / $235,000,000 FORM OF NOTICE OF CONVERSION/CONTINUATION [Date] The Bank of New York, as Administrative Agent One Wall Street, 18th Floor New York, New York 10286 Attention: Ramona Washington Agency Function Administration The Bank of New York, as Administrative Agent One Wall Street, 17th Floor New York, New York 10286 Attention: Lizanne T. Eberle Vice President Ladies and Gentlemen: The undersigned, Pennsylvania Manufacturers Corporation (the "Borrower"), refers to the Restated Credit Agreement, dated as of March __, 1997, among the Borrower, certain banks and other financial institutions from time to time parties thereto (the "Lenders"), you, as Administrative Agent for the Lenders, and First Union National Bank of North Carolina, as Documentation Agent for the Lenders (as amended, modified or supplemented from time to time, the "Credit Agreement," the terms defined therein being used herein as therein defined), and, pursuant to Section 2.12(b) of the Credit Agreement, hereby gives you irrevocable notice that the Borrower requests a [conversion] [continuation](1) of Committed Loans under the Credit Agreement, and to that end sets forth below the information relating to such [conversion] [continuation] (the "Proposed [Conversion] [Continuation]") as required by Section 2.12(b) of the Credit Agreement: (i) The Proposed [Conversion] [Continuation] is requested to be made on ________________________.(2) (ii) The Proposed [Conversion] [Continuation] involves $________ (3) in aggregate principal amount of Committed Loans made pursuant to a Committed Borrowing on __________,(4) which Committed Loans are presently maintained as [Base Rate] [LIBOR Committed] Loans and are proposed hereby to be [converted into Base Rate Loans] [converted into LIBOR Committed Loans] [continued as LIBOR Committed Loans].(5) [(iii) The initial Interest Period for the Committed Loans being [converted into] [continued as] LIBOR Committed Loans pursuant to the Proposed [Conversion] [Continuation] shall be [one/two/three/six months].](6) The Borrower hereby certifies that the following statement is true both on and as of the date hereof and will be true on and as of the effective date of the Proposed [Conversion] [Continuation]: no Default or Event of Default has occurred and is continuing or would result from the Proposed [Conversion] [Continuation]. Very truly yours, PENNSYLVANIA MANUFACTURERS CORPORATION By: ---------------------------------- Title: ------------------------------- - - - ---------- (1) Insert "conversion" or "continuation" throughout the notice, as applicable. (2) Shall be a Business Day at least one Business Day after the date hereof (in the case of any conversion of LIBOR Committed Loans into Base Rate Loans) or at least three-Business Days after the date hereof (in the case of any conversion of Base Rate Loans into, or continuation of, LIBOR Committed Loans), and additionally, in the case of any conversion of LIBOR Committed Loans into Base Rate Loans, or continuation of LIBOR Committed Loans, shall be the last day of the Interest Period applicable to such LIBOR Committed Loans. (3) Shall be an amount not less than $3,000,000 or, if greater, an integral multiple of $1,000,000 in excess thereof. (4) Insert the applicable Borrowing Date for the Committed Loans being converted or continued. (5) Complete with the applicable bracketed language. (6) Include this clause in the case of a Proposed Conversion or Continuation involving a conversion of Base Rate Loans into, or continuation of, LIBOR Committed Loans, and select the applicable Interest Period. -2- Exhibit C-1 to Credit Agreement The Bank of New York, as Administrative Agent First Union National Bank of North Carolina, as Documentation Agent Pennsylvania Manufacturers Corporation March 14, 1997 / $235,000,000 FORM OF BID REQUEST [Date] The Bank of New York, as Administrative Agent One Wall Street, 18th Floor New York, New York 10286 Attention: Ramona Washington Agency Function Administration The Bank of New York, as Administrative Agent One Wall Street, 17th Floor New York, New York 10286 Attention: Lizanne T. Eberle Vice President Ladies and Gentlemen: The undersigned, Pennsylvania Manufacturers Corporation (the "Borrower"), refers to the Credit Agreement, dated as of March __, 1997, among the Borrower, certain banks and other financial institutions from time to time parties thereto (the "Lenders"), you, as Administrative Agent for the Lenders, and First Union National Bank of North Carolina, as Documentation Agent for the Lenders (as amended, modified or supplemented from time to time, the "Credit Agreement," the terms defined therein being used herein as therein defined), and, pursuant to Section 2.3(a) of the Credit Agreement, hereby gives you notice that the Borrower requests one or more Bid Borrowings under the Credit Agreement, and to that end sets forth below the information relating to each such Bid Borrowing (each, a "Proposed Bid Borrowing") as required by Section 2.3(a) of the Credit Agreement. The Interest Period applicable to each Proposed Bid Borrowing, the aggregate principal amount, the Type of Bid Loans requested to be made for each such Interest Period, and the date on which the Proposed Bid Borrowing is requested to be made (each such date, a "Borrowing Date"), shall be as follows: Interest Interest Borrowing Period Principal Period(1) Date Ending Date Amount(2) Type(3) _____[days][months] _________ ___________ $_________ _______ _____[days][months] _________ ___________ $_________ _______ _____[days][months] _________ ___________ $_________ _______ The Borrower hereby certifies that the following statements are true on and as of the date hereof and will be true on and as of each Borrowing Date: (A) Each of the representations and warranties contained in Article IV of the Credit Agreement and in the other Credit Documents is and will be true and correct on and as of each such date, with the same effect as if made on and as of each such date, both immediately before and after giving effect to the Proposed Bid Borrowing[s] and to the application of the proceeds therefrom (except to the extent any such representation or warranty is expressly stated to have been made as of a specific date, in which case such representation or warranty shall be true and correct as of such date); (B) No Default or Event of Default has occurred and is continuing or would result from the Proposed Bid Borrowing[s] or from the application of the proceeds therefrom; and (C) After giving effect to the Proposed Bid Borrowing[s], (1) the aggregate principal amount of Bid Loans outstanding will not exceed the Maximum Bid Loan Amount, and (2) the sum of the aggregate principal amount of Bid Loans outstanding and the aggregate principal amount of Committed Loans outstanding will not exceed the aggregate Commitments. - - - ---------- (1) Select up to three separate Interest Periods, each of which shall not be less than seven nor more than one hundred eighty days (in the case of a Bid Borrowing comprised of Absolute Rate Loans) or shall be a period of one, two, three or six months (in the case of a Bid Borrowing comprised of LIBOR Bid Loans). (2) Shall be an amount for each Interest Period not less than $5,000,000 or, if greater, an integral multiple of $1,000,000 in excess thereof. (3) Insert either "LIBOR" or "Absolute Rate." -2- Very truly yours, PENNSYLVANIA MANUFACTURERS CORPORATION By: _____________________________ Title:___________________________ -3- Exhibit C-2 to Credit Agreement The Bank of New York, as Administrative Agent First Union National Bank of North Carolina, as Documentation Agent Pennsylvania Manufacturers Corporation March 14, 1997 / $235,000,000 -------------------------------------- FORM OF BID [Date] The Bank of New York, as Administrative Agent One Wall Street, 18th Floor New York, New York 10286 Attention: Ramona Washington Agency Function Administration The Bank of New York, as Administrative Agent One Wall Street, 17th Floor New York, New York 10286 Attention: Lizanne T. Eberle Vice President Ladies and Gentlemen: The undersigned refers to the Credit Agreement, dated as of March __, 1997, among Pennsylvania Manufacturers Corporation (the "Borrower"), certain banks and other financial institutions from time to time parties thereto (the "Lenders"), you, as Administrative Agent for the Lenders, and First Union National Bank of North Carolina, as Documentation Agent for the Lenders (as amended, modified or supplemented from time to time, the "Credit Agreement," the terms defined therein being used herein as therein defined), and, in response to the Bid Request made by the Borrower on ____________________(1) and pursuant to Section 2.3(c) of the Credit Agreement, hereby irrevocably offers to make one or more Bid Loans thereunder, and to that end sets forth below the information relating thereto as required by Section 2.3(c) of the Credit Agreement: - - - ----------------------------- (1) Insert date of applicable Bid Request.
Interest Borrowing Interest Period Principal [Absolute LIBOR Period(2) Date Ending Date Amount(3) Rate(4) Bid Margin(4)](5) --------- --------- ---------------- --------- --------- ----------------- _____[days][months] _________ ___________ $______________ ____% ____% $______________ ____% ____% $______________ ____% ____% _____[days][months] _________ ___________ $______________ ____% ____% $______________ ____% ____% $______________ ____% ____% _____[days][months] _________ ___________ $______________ ____% ____% $______________ ____% ____% $______________ ____% ____%
The undersigned agrees that the offer or group of offers set forth above irrevocably obligates the undersigned, on the terms and subject to the conditions of the Credit Agreement, to make the Bid Loan or Bid Loans for which any such offer or offers is or are accepted, in whole or in part. - - - ---------------------- (2) Each Interest Period shall not be less than seven nor more than one hundred eighty days (in the case of a Bid Borrowing comprised of Absolute Rate Loans) or shall be a period of one, two, three or six months (in the case of a Bid Borrowing comprised of LIBOR Bid Loans). (3) Shall be an aggregate amount for each Interest Period not less than $5,000,000 or, if greater, an integral multiple of $1,000,000 in excess thereof. (4) At the discretion of the bidding Lender, amounts for each Interest Period may be offered at up to three separate quotes. (5) Complete the applicable column (Absolute Rate or LIBOR Bid Margin) for each Interest Period, and round all quotes to the nearest 1/1000th of 1%. -2 - Very truly yours, [NAME OF LENDER] By:________________________________ Title:_____________________________ -3- Exhibit C-3 to Credit Agreement The Bank of New York, as Administrative Agent First Union National Bank of North Carolina, as Documentation Agent Pennsylvania Manufacturers Corporation March 14, 1997 / $235,000,000 -------------------------------------- FORM OF BID LOAN CONFIRMATION The Bank of New York, as Administrative Agent One Wall Street, 18th Floor New York, New York 10286 Attention: Ramona Washington Agency Function Administration The Bank of New York, as Administrative Agent One Wall Street, 17th Floor New York, New York 10286 Attention: Lizanne T. Eberle Vice President Ladies and Gentlemen: The undersigned, Pennsylvania Manufacturers Corporation (the "Borrower"), refers to the Credit Agreement, dated as of March ___, 1997, among the Borrower, certain banks and other financial institutions from time to time parties thereto (the "Lenders"), you, as Administrative Agent for the Lenders, and First Union National Bank of North Carolina, as Documentation Agent for the Lenders (as amended, modified or supplemented from time to time, the "Credit Agreement," the terms defined therein being used herein as therein defined), and, with respect to the Bid Request made by the Borrower on ___________________(1) (the "Applicable Bid Request") and pursuant to Section 2.3(e) of the Credit Agreement, hereby irrevocably accepts the offers to make Bid Loans of the following Lenders and in the following amounts(2): - - - ---------------------- (1) Insert date of applicable Bid Request. (2) Acceptance of an offer to make a Bid Loan may be in whole or in part, subject to the restrictions set forth in footnote 4.
[Absolute Borrowing Interest Period Rate][LIBOR Lender Interest Period(3) Date Ending Date Principal Amount(4) Bid Margin](5) ------ ------------------ --------- ---------------- ------------------- -------------- _________ _____[days][months] _________ ___________ $______________ ____% _________ _____[days][months] _________ ___________ $______________ ____% _________ _____[days][months] _________ ___________ $______________ ____% _________ _____[days][months] _________ ___________ $______________ ____%
[continue as needed] The Borrower hereby rejects all other offers to make Bid Loans in response to the Applicable Bid Request. The Borrower agreees that the Bid Loans shall be on the terms and subject to the conditions of the Credit Agreement. Very truly yours, PENNSYLVANIA MANUFACTURERS CORPORATION By:______________________________ Title:___________________________ - - - ---------------------------- (3) Each Interest Period shall not be less than seven nor more than one hundred eighty days (in the case of a Bid Borrowing comprised of Absolute Rate Loans) or shall be a period of one, two, three, or six months (in the case of a Bid Borrowing comprised of LIBOR Bid Loans). (4) Shall be an aggregate amount for each Interest Period not less than $5,000,000 or, if greater, an integral multiple of $1,000,000 in excess thereof. (5) Insert Absolute Rate or LIBOR Bid Margin, as applicable. -2- Exhibit D to Credit Agreement The Bank of New York, as Administrative Agent First Union National Bank of North Carolina, as Documentation Agent Pennsylvania Manufacturers Corporation March 14, 1997 / $235,000,000 -------------------------------------- FORM OF ASSIGNMENT AND ACCEPTANCE THIS ASSIGNMENT AND ACCEPTANCE (this "Assignment and Acceptance") is made this ______ day of _______________, _____, by and between _________________ (the "Assignor") and __________________ (the "Assignee"). Reference is made to the Credit Agreement, dated as of March __, 1997 (as amended, modified or supplemented from time to time, the "Credit Agreement"), among Pennsylvania Manufacturers Corporation (the "Borrower"), certain banks and other financial institutions from time to time parties thereto (the "Lenders"), The Bank of New York, as Administrative Agent for the Lenders (the "Administrative Agent"), and First Union National Bank of North Carolina, as Documentation Agent for the Lenders (the "Documentation Agent"). Unless otherwise defined herein, capitalized terms used herein without definition shall have the meanings given to them in the Credit Agreement. The Assignor and the Assignee hereby agree as follows: 1. Assignment and Assumption. Subject to the terms and conditions hereof, the Assignor hereby sells and assigns to the Assignee, and the Assignee hereby purchases and assumes from the Assignor, without recourse to the Assignor and, except as expressly provided herein, without representation or warranty by the Assignor, that interest as of the Effective Date (as hereinafter defined) in and to all of the Assignor's rights and obligations under the Credit Agreement and the other Credit Documents (in its capacity as a Lender thereunder) represented by the percentage interest specified in Item 4(a) of Annex I (the "Assigned Share"), including, without limitation, the Assigned Share of (i) the Assignor's Commitment and (ii) the outstanding Committed Loans made by the Assignor. Notwithstanding anything herein to the contrary, such sale and assignment shall not include any interest of the Assignor in any outstanding Bid Loans made by the Assignor, or in any rights or obligations of the Assignor under the Credit Agreement and the other Credit Documents with respect thereto, unless the Assignor and the Assignee shall specify otherwise in Annex I (in which instance the percentage of such outstanding Bid Loans so assigned (y) may, at the election of the Assignor and the Assignee, be different from the percentage specified in Item 4(a) of Annex I, and (z) shall be deemed, for purposes of this Assignment and Acceptance, to be the "Assigned Share" of the Assignor's interest in such outstanding Bid Loans and all such rights and obligations relating thereto). 2. The Assignor. The Assignor (i) represents and warrants that it is the legal and beneficial owner of the interest being assigned by it hereunder, that such interest is free and clear of any adverse claim, that as of the date hereof the amount of its Commitment and outstanding Committed Loans (and, if so specified in Item 4 of Annex I, outstanding Bid Loans) is as set forth in Item 4 of Annex I, and that after giving effect to the assignment provided for herein the respective Commitments of the Assignor and the Assignee will, be as set forth in Item 4(a) of Annex I, (ii) except as set forth in clause (i) above, makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with the Credit Agreement, any other Credit Document or any other instrument or document furnished pursuant thereto or the execution, legality, validity, enforceability, genuineness, sufficiency or value of the Credit Agreement, any other Credit Document or any other instrument or document furnished pursuant thereto, and (iii) makes no representation or warranty and assumes no responsibility with respect to the financial condition of the Borrower or any of its Subsidiaries or the performance or observance by the Borrower or any of its Subsidiaries of any of their respective obligations under the Credit Agreement, any other Credit Document or any other instrument or document furnished pursuant thereto. 3. The Assignee. The Assignee (i) represents and warrants that it is legally authorized to enter into this Assignment and Acceptance, (ii) confirms that it has received a copy of the Credit Agreement, together with copies of the financial statements most recently required to have been delivered under Sections 5.1 and 5.2 of the Credit Agreement and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into this Assignment and Acceptance, (iii) agrees that it will, independently and without reliance upon either 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 Credit Agreement, (iv) confirms that it is an Eligible Assignee, (v) appoints and authorizes each Agent to take such actions as agent on its behalf under the Credit Agreement and the other Credit Documents, and to exercise such powers and to perform such duties, as are specifically delegated to such Agent by the terms thereof, together with such other powers and duties as are reasonably incidental thereto, and (vi) agrees that it will perform in accordance with their respective terms all of the obligations that by the terms of the Credit Agreement are required to be performed by it as a Lender. [To the extent legally entitled to do so, the Assignee will deliver to the Administrative Agent, as and when required to be delivered under the Credit Agreement, duly completed and executed originals of the applicable tax withholding forms described in Section 2.18(d) of the Credit Agreement].(1) 4. Effective Date. Following the execution of this Assignment and Acceptance by the Assignor and the Assignee, an executed original hereof, together with all attachments hereto, shall be delivered to the Administrative Agent and the Borrower (and also to the Administrative Agent, the processing fee referred to in Section 10.7(a) of the Credit Agreement). The effective date of this Assignment and Acceptance (the "Effective Date") shall be the earlier of (i) the date of acceptance hereof by the Administrative Agent and the Borrower or (ii) the date, if any, designated as the Effective Date in Item 5 of Annex I (which date shall be not less than five (5) Business Days after the date of execution hereof by the Assignor and the Assignee). As of the Effective Date, (y) the Assignee shall be a party to the Credit Agreement and, to the extent provided in this Assignment and Acceptance, shall have the rights and obligations of a Lender thereunder and under the other Credit Documents, and (z) the Assignor shall, to the extent provided in this Assignment and Acceptance, relinquish its rights (other than rights under the provisions of the Credit Agreement and the other Credit Documents relating to indemnification or payment of fees, costs and expenses, to the extent such rights relate to the time prior to the Effective Date) and be released from its obligations under the Credit Agreement and the other Credit Documents. 5. Payments: Settlement. On or prior to the Effective Date, in consideration of the sale and assignment provided for herein and as a condition to the effectiveness of this Assignment and Acceptance, the Assignee will pay to the Assignor an amount (to be confirmed between the Assignor and the Assignee) that represents the Assigned Share of the principal amount of the Committed Loans (and, if so specified - - - ---------------------- (1)Insert if the Assignee is organized under the laws of a jurisdiction outside the United States. -2- in Item 4 of Annex I, the Bid Loans) made by the Assignor and outstanding on the Effective Date (together, if and to the extent the Assignor and the Assignee so elect, with the Assigned Share of any related accrued but unpaid interest, fees and other amounts). From and after the Effective Date, the Administrative Agent will make all payments required to be made by it under the Credit Agreement in respect of the interest assigned hereunder (including, without limitation, all payments of principal, interest and fees in respect of the Assigned Share of the Assignor's Commitment and Loans assigned hereunder) directly to the Assignee. The Assignor and the Assignee shall be responsible for making between themselves all appropriate adjustments in payments due under the Credit Agreement in respect of the period prior to the Effective Date. All payments required to be made hereunder or in connection herewith shall be made in Dollars by wire transfer of immediately available funds to the appropriate party at its address for payments designated in Annex I. 6. Governing Law. This Assignment and Acceptance shall be governed by, and construed in accordance with, the internal laws of the State of North Carolina (without regard to the conflicts of Laws principles thereof). 7. Entire Agreement. This Assignment and Acceptance, together with the Credit Agreement and the other Credit Documents, embody the entire agreement and understanding between the parties hereto and supersede all prior agreements and understandings of the parties, verbal or written, relating to the subject matter hereof. 8. Successors and Assigns. This Assignment and Acceptance shall be binding upon, inure to the benefit of and be enforceable by the parties hereto and their respective successors and assigns. 9. Counterparts. This Assignment and Acceptance may be executed in any number of counterparts and by different parties hereto on separate counterparts, each of which, when so executed and delivered shall be an original, but all of which shall together constitute one and the same instrument. -3- IN WITNESS WHEREOF, the parties have caused this Assignment and Acceptance to be executed by their duly authorized officers as of the date first above written. ASSIGNOR: _______________________________ By:____________________________________ Title:_________________________________ ASSIGNEE: ________________________________ By:____________________________________ Title:_________________________________ Accepted this ___ day of _________, 19__: THE BANK OF NEW YORK, as Administrative Agent By:______________________________________ Title:___________________________________ Consented and agreed to: PENNSYLVANIA MANUFACTURERS CORPORATION By:______________________________________ Title:___________________________________ -4- ANNEX I ------- 1. Borrower: Pennsylvania Manufacturers Corporation 2. Name and Date of Credit Agreement: Credit Agreement, dated as of March __, 1997, among Pennsylvania Manufacturers Corporation, certain Lenders from time to time parties thereto, The Bank of New York, as Administrative Agent, and First Union National Bank of North Carolina, as Documentation Agent. 3. Date of Assignment and Acceptance: __________________, 19___. 4. Amounts: Amount of Aggregate for Assigned Assigned Assignor Share(2) Share (a) Commitment $____________ ____% $_________ (b) Committed Loans(3) $____________ ____% (c) Bid Loans(3) $____________ ____% 5. Effective Date: _____________________(4) 6. Addresses for Payments: Assignor: __________________________________ __________________________________ __________________________________ Attention: _________________ Telephone: _________________ Telecopy: __________________ Reference: _________________ Assignee: __________________________________ __________________________________ __________________________________ Attention: _______________________ ___________________ (2)Percentage taken to up to ten decimal places, if necessary. (3)Insert outstanding amounts as of the date of the Assignment and Acceptance. (4)Shall be a date not less than five Business Days after the date of the Assignment and Acceptance. -5- Telephone: _________________ Telecopy: __________________ Reference: _________________ 7. Addresses for Notices: Assignor: ___________________________________ ___________________________________ ___________________________________ Attention: _________________ Telephone: _________________ Telecopy: __________________ Assignee: ___________________________________ ___________________________________ ___________________________________ Attention:__________________ Telephone: _________________ Telecopy: __________________ 8. Lending Office of Assignee: ____________________________________ ____________________________________ ____________________________________ Attention: ____________________ Telephone: ____________________ Telecopy: _____________________ Exhibit E-1 to Credit Agreement The Bank of New York, as Administrative Agent First Union National Bank of North Carolina, as Documentation Agent Pennsylvania Manufacturers Corporation March 14, 1997 / $235,000,000 -------------------------------------- FORM OF COMPLIANCE CERTIFICATE (GAAP Financial Statements) THIS CERTIFICATE is given pursuant to Section 5.3(a) of the Credit Agreement, dated as of March ___, 1997 (as amended, modified or supplemented from time to time, the "Credit Agreement," the terms defined therein being used herein as therein defined), among Pennsylvania Manufacturers Corporation (the "Borrower"), certain banks and other financial institutions from time to time parties thereto (the "Lenders"), The Bank of New York, as Administrative Agent for the Lenders, and First Union National Bank of North Carolina, as Documentation Agent for the Lenders. The undersigned hereby certifies that:(1) 1. He is [the duly appointed chief financial officer of the Borrower] [a duly appointed vice president of the Borrower having significant responsibility for financial matters]. 2. Enclosed with this Certificate are copies of the financial statements of the Borrower and its Subsidiaries as of ____________________, and for the [________-month period] [year] then ended, required to be delivered under Section [5.1(a)] [5.1(b)] of the Credit Agreement. Such financial statements have been prepared in accordance with generally accepted accounting principles [(subject to the absence of notes required by generally accepted accounting principles and subject to normal year-end audit adjustments)](2) and present fairly the financial condition of the Borrower and its Subsidiaries on a consolidated basis as of the date indicated and the results of operations of the Borrower and its Subsidiaries on a consolidated basis for the period covered thereby. 3. The undersigned has reviewed the terms of the Credit Agreement and has made, or caused to be made under the supervision of the undersigned, a review in reasonable detail of the activities of the Borrower and its Subsidiaries during the accounting period covered by such financial statements with a view to determining whether the Borrower has performed and maintained all of its obligations under the Credit Agreement. - - - ------------------------- (1)Insert applicable bracketed language throughout the Certificate. (2)Insert in the case of quarterly financial statements. 4. Based upon the review described in paragraph 3 above, the undersigned has no knowledge of the existence of any Default or Event of Default during or at the end of the accounting period covered by such financial statements or as of the date of this Certificate [, except as set forth herein].(1) 5. Attached to this Certificate as Attachment A is a Covenant Compliance Worksheet reflecting the computation of the financial covenants set forth in Sections 6.1 and 6.2 of the Credit Agreement, as of the last day of the period covered by the financial statements enclosed herewith. IN WITNESS WHEREOF, the undersigned has executed and delivered this Certificate as of the ________ day of ______________, _______. [signature]________________________________ Name: _____________________________________ Title: _____________________________________ - - - ------------------------ (1) Insert if applicable and describe in the Certificate or in a separate attachment any exceptions to paragraph 4 above by listing, in reasonable detail, the nature of the Default or Event of Default, the period during which it existed and the action that the Borrower has taken or proposes to take with respect thereto. -2- ATTACHMENT A TO GAAP COMPLIANCE CERTIFICATE COVENANT COMPLIANCE WORKSHEET Capitalization Ratio (Section 6.1 of the Credit Agreement): Not greater than 0.35 to 1.0 (1) Consolidated Indebtedness: (a) Indebtedness of Borrower and Subsidiaries as of ___________, _____ (the "Measurement Date") $_________ (b) Reimbursement obligations with respect to letters of credit to secure the reinsurance obligations of Insurance Subsidiaries under reinsurance agreements entered into as a reinsurer in the ordinary course of business to the extent that such reimbursement obligations are secured by cash and Treasury Securities delivered to the issuers of such letters of credit as of the Measurement Date _________ (c) Reimbursement obligations with respect to PMA Insurance Cayman, Ltd. letter of credit as of the Measurement Date(1) _________ (d) Consolidated Indebtedness: Subtract lines 1(b) and 1(c) from 1(a) $ ========= (2) Capitalization: (a) Consolidated Indebtedness as of the Measurement Date (from Line 1(d)) $_________ (b) Consolidated Net Worth as of the Measurement Date _________ (c) Capitalization: Add Lines 2(a) and 2(b) $ ========== (3) Ratio of Consolidated Indebtedness to Total Capitalization: Divide Line 1(d) by Line 2(c) _____ to 1.0 Applicable Margin for LIBOR Committed Loans (pursuant to the matrix set forth in the definition of Applicable Margin in the Credit Agreement): ____% Applicable Margin for the Facility Fee (pursuant to the matrix set forth in the definition of Applicable Margin in the Credit Agreement): ____% - - - -------------------- (1) Reimbursement obligations with respect to the letter of credit issued upon the Borrower's application for the benefit of PMAIC with PMA Insurance Cayman, Ltd. as account party thereto, but only if the stated amount of such letter of credit is less than $28,000,000. -i- Cash Coverage Ratio (Section 6.2 of the Credit Agreement): Not less than ____ to 1.0(1) (1) Cash Available: (a) Aggregate Available Dividend Amount for the Insurance Subsidiaries(2) for the Measurement Period(3) $______________ (b) Net Tax Sharing Payments for the Measurement Period (i) Tax sharing payments received by Borrower $_____________ (ii) Tax sharing payments estimated to be received by Borrower in respect of Measurement Period _____________ (iii) Taxes paid by Borrower (_____________) (iv) Taxes estimated to be paid by Borrower in respect of Measurement Period (______________) (v) Other payments, if any, paid or to be paid by Borrower under tax sharing agreements or arrangements during Measurement Period (______________) (vi) Net Amount (lines (i) + (ii) minus lines (iii) + (iv) + (v)) _______________ (c) Cash Available: Add lines l(a) and l(b)(v) $ =============== (2) Cash Uses: (a) Interest Expense incurred during the Measurement Period $______________ (b) Operating expenses paid by the Borrower during the Measurement Period _______________ (c) Dividends paid by the Borrower during the Measurement Period _______________ (d) Cash Uses: Add lines 2(a), 2(b) and 2(c) $ =========== (3) Cash Coverage Ratio: Divide line 1(c) by line 2(d) ____ to 1.0 - - - ------------------- (1) Insert (i) with respect to a Measurement Date occurring on or before December 31, 1999, 2.5, and (ii) a Measurement Date occurring thereafter, 2.75. (2) Other than each Insurance Subsidiary that is a Subsidiary of another Insurance Subsidiary and determined as if the four fiscal quarters measured constitute a fiscal year for regulatory purposes. (3) The four fiscal quarters immediately preceding the Measurement Date. -ii- Exhibit E-2 to Credit Agreement The Bank of New York, as Administrative Agent First Union National Bank of North Carolina, as Documentation Agent Pennsylvania Manufacturers Corporation March 14, 1997 / $235,000,000 -------------------------------------- FORM OF COMPLIANCE CERTIFICATE (Statutory Financial Statements) THIS CERTIFICATE is given pursuant to Section 5.3(a) of the Credit Agreement, dated as of March __, 1997 (as amended, modified or supplemented from time to time, the "Credit Agreement," the terms defined therein being used herein as therein defined), among Pennsylvania Manufacturers Corporation (the "Borrower"), certain banks and other financial institutions from time to time parties thereto (the "Lenders"), The Bank of New York, as Administrative Agent for the Lenders, and First Union National Bank of North Carolina, as Documentation Agent for the Lenders. The undersigned hereby certifies that:(1) 1. He is [the duly appointed chief financial officer of the Borrower] [a duly appointed vice president of the Borrower having significant responsibility for financial matters]. 2. Enclosed with this Certificate are copies of the financial statements of the Borrower and its Subsidiaries as of _______________, and for the [__________-month period] [year] then ended, required to be delivered under Section [5.2(a)] [5.2(b)] of the Credit Agreement. Such financial statements have been prepared in accordance with Statutory Accounting Principles and present fairly the financial condition of the Borrower and its Subsidiaries on a consolidated basis as of the date indicated and the results of operations of the Borrower and its Subsidiaries on a consolidated basis for the period covered thereby. 3. Attached to this Certificate as Attachment A is a Covenant Compliance Worksheet reflecting the computation of the financial covenants set forth in Sections 6.3 and 6.4 of the Credit Agreement as of the last day of the period covered by the financial statements enclosed herewith. - - - ----------------- (1) Insert applicable bracketed language throughout the Certificate. IN WITNESS WHEREOF, the undersigned has executed and delivered this Certificate as of the ___________ day of ______________,_______. [signature]________________________________ Name: _____________________________________ Title: ____________________________________ -2- ATTACHMENT A TO STATUTORY COMPLIANCE CERTIFICATE COVENANT COMPLIANCE WORKSHEET Statutory Surplus (Section 6.3 of the Credit Agreement: Not less than $450,000,000 (l) Statutory Surplus of each Insurance Subsidiary(1) as of ______________, _________ (the "Measurement Date"): (a) PMA Re $__________ (b) PMAIC $__________ (c) Pennsylvania Manufacturers Indemnity Company $__________ (d) Manufacturers Alliance Insurance Company $__________ (e) MASCCO $__________ (f) PMA Life Insurance Company $__________ (g) [Other Insurance Subsidiaries legally domiciled in the United States](2) $__________ (h) PMA Cayman(3) $__________ (i) Chestnut(3) $__________ (j) Pennsylvania Manufacturers International Insurance, Ltd.(3) $__________ (k) [Other Insurance Subsidiaries not legally domiciled in the United States(3)](2) $__________ (2) Consolidated Statutory Surplus -- Sum of lines in item (1) $ ========== - - - ---------------- (1) Do not include any Insurance Subsidiary whose Statutory Surplus is included in the Statutory Surplus of another Insurance Subsidiary. (2) List each such Insurance Subsidiary individually. (3) Include the shareholders' equity of such Insurance Subsidiary as determined in accordance with Generally Accepted Accounting Principles (without regard to the requirements of Statement of Financial Accounting Standards No. 115 issues by the Financial Accounting Standards Board). -i- Risk-Based Capital For each Insurance Subsidiary, as appropriate, (Section 6.4 of the Credit Agreement):(1) line (a) to be not less than line (d) (1) PMA Re (a) Total adjusted capital as of the Measurement Date $ ========== (b) Company Action Level RBC(2) as of the Measurement Date $__________ (c) Required Multiple 150% (d) Required total adjusted capital as of the Measurement Date: Multiply Line 1(b) by 1(c) $ ========== (2) Other Insurance Subsidiaries(3) (a) Total adjusted capital as of the Measurement Date $ ========== (b) Company Action Level RBC(2) as of the Measurement Date $__________ (c) Required Percentage(3): December 31, 1996, 100%: December 31, 1997, 110%; December 31, 1998, 115%; December 31, 1999 and thereafter, 120% % (d) Required total adjusted capital as of the Measurement Date: Multiply Line 3(b) by 3(c) $ =========== - - - ------------------ (1) To be calculated and submitted annually. (2) As defined by the Risk-Based Capital for Insurers Model Act of the NAIC. (3) Complete different schedule for each Insurance Subsidiary required by the relevant Insurance Regulatory Authority to meet any RBC requirements. -ii- Exhibit F to Credit Agreement The Bank of New York, as Administrative Agent First Union National Bank of North Carolina, as Documentation Agent Pennsylvania Manufacturers Corporation March 14, 1997 / $235,000,000 FORM OF FINANCIAL CONDITION CERTIFICATE THIS FINANCIAL CONDITION CERTIFICATE is delivered pursuant to Section 3.1(a)(v) of the Credit Agreement, dated as of March __, 1997 (the "Credit Agreement"), among Pennsylvania Manufacturers Corporation, a Pennsylvania corporation (the "Borrower"), certain banks and other financial institutions from time to time parties thereto (the "Lenders"), The Bank of New York, as Administrative Agent, and First Union National Bank of North Carolina, Documentation Agent. Capitalized terms used herein without definition shall have the meanings given to such terms in the Credit Agreement. The undersigned hereby certifies for and on behalf of the Borrower as follows: 1. Capacity. The undersigned is, and at all pertinent times mentioned herein has been, the Borrower's duly qualified and acting chief financial officer (and in such capacity has responsibility for the management of the Borrower's financial affairs) and senior accounting officer (and in such capacity has responsibility for the preparation of the Borrower's financial statements). The undersigned has, together with other officers of the Borrower, acted on behalf of the Borrower in connection with the negotiation and consummation of the Credit Agreement and the transactions contemplated thereby. 2. Procedures. For purposes of this Certificate, the undersigned, or officers or other personnel of the Borrower under the direction and supervision of the undersigned, have, as of or prior to the date hereof, undertaken the following activities in connection herewith: 2.1 The undersigned has carefully reviewed the following: (a) the contents of this Certificate; (b) the Credit Agreement (including the exhibits and schedules thereto); (c) the audited consolidated balance sheets of the Borrower for the fiscal years ended December 31, 1993, 1994 and 1995, and the related consolidated statements of income, stockholders equity and cash flows of the Borrower for the three-year period ended December 31, 1995, each certified by Coopers & Lybrand, L.L.P.; and (d) the unaudited consolidated balance sheet of the Borrower as of December 31, 1996, and the related consolidated statements of income, stockholders equity and cash flows of the Borrower for the fiscal year then ended. 2.2 The undersigned has made inquiries of certain other officers and personnel of the Borrower with responsibility for financial and accounting matters regarding whether the unaudited financial statements described in paragraph 2.1(d) above are in conformity with Generally Accepted Accounting Principles applied on a basis substantially consistent with that of the audited financial statements described in paragraph 2.1(c) above, and whether notes omitted from the unaudited consolidated financial statements would have disclosed any new information that would be necessary to make such materials not misleading. 2.3 With respect to any Contingent Obligations of the Borrower, the undersigned: (a) has inquired of certain officers and other personnel of the Borrower who have responsibility for the legal, financial and accounting affairs of the Borrower, as to the existence and estimated amounts of all Contingent Obligations known to them; (b) has confirmed with senior officers of the Borrower that, to the best of such officers' knowledge, (i) all appropriate items have been included in the Contingent Obligations made known to the undersigned in the course of the inquiry of the undersigned in connection herewith, and (ii) the amounts relating thereto were the maximum estimated amounts of liability reasonably likely to result therefrom as of the date hereof; and (c) confirms that, to the best of his knowledge, all material Contingent Obligations that may arise from any pending litigation, asserted claims and assessments, guarantees, uninsured risks, and other Contingent Obligations of the Borrower have been considered in making the certification set forth herein, and with respect to each such Contingent Obligation the estimable maximum estimated of liability with respect thereto was used in making such certification. 2.4 In connection with the preparation for consummation of the transactions contemplated by the Credit Agreement, the undersigned has caused the preparation of and has reviewed projected financial statements consisting of balance sheets and statements of income of the Borrower giving effect to the transactions contemplated by the Credit Agreement. The assumptions upon which such projections are based were, in the opinion of the undersigned, reasonable when made and continue to be reasonable as of the date hereof, subject to the uncertainties and approximations inherent in any projections. 2.5 The undersigned has inquired of certain officer of the Borrower having responsibility for financial reporting and accounting matters regarding whether such persons were aware of any events or conditions that, as of the date hereof, would cause the statements made in Section 3 below to be untrue. 2.6 The undersigned has conferred with counsel to the Borrower for the purpose of discussing the meaning of the contents of this Certificate (including, without limitation, Sections 3.1, 3.3 and 3.4 below). 3. Certifications. Based on the foregoing, the undersigned hereby certifies as follows: -2- 3.1 The Borrower is not now, nor will consummation of the transactions contemplated by the Credit Agreement and the incurrence of the Obligations under the Credit Agreement render the Borrower, "insolvent" (as hereinafter defined). The undersigned understands that, in this context, "insolvent" means that the present fair saleable value of assets is less than the amount that will be required to be paid on or in respect of the existing debts and other liabilities as such debts and liabilities of the Borrower mature. The undersigned understands that the term "debts" includes any legal liability, whether matured or unmatured, liquidated or unliquidated, absolute, fixed or contingent, including any guaranty obligations. A valuation of the Borrower, on the basis thereof, with reasonable allowance for error, would reflect the net worth of the Borrower in the aggregate (excess of fair value of assets over liabilities) as not less than $________. 3.2 After giving effect to the transaction contemplated by the Credit Agreement, all accounts and other liabilities of the Borrower are current and not past due. 3.3 The undersigned believes that, by incurring the Obligations pursuant to the Credit Agreement, the Borrower will not incur debts beyond its ability to pay as such obligations mature (taking into account the timing and amounts of cash to be payable on or in respect of the Borrower's Indebtedness). The foregoing conclusion is based in part on the projections, which demonstrate that the cash flow of the Borrower, after taking into account all anticipated uses of the cash of the Borrower, will at all times be sufficient to pay all amounts on or in respect of Indebtedness of the Borrower when such amounts are required to be paid (including without limitation, scheduled payments pursuant to the Credit Agreement). 3.4 As of the date hereof, the consummation of the transactions contemplated by the Credit Agreement will not leave the Borrower with "unreasonably small capital" within the meaning of Section 548(a) of the Bankruptcy Code or with remaining assets that are unreasonably small. In reaching this conclusion, the undersigned understands that "unreasonably small capital" depends upon the nature of the particular business or businesses conducted or to be conducted, and has reached this conclusion based on the needs and anticipated needs for capital of the businesses conducted or anticipated to be conducted by the Borrower in light of the Borrower's available credit capacity. 3.5 The Borrower has not executed the Credit Agreement, or any documents mentioned herein, or made any transfer or incurred any obligations thereunder, with intent to hinder, delay or defraud either present or future creditors of the Borrower. 3.6 The undersigned understands that the Lenders have performed their own review and analysis of the financial condition of the Borrower, but that the Lenders are relying on the foregoing statements in connection with the extension of credit to the Borrower pursuant to the Credit Agreement. Executed this ________ day of March, 1997. -------------------------------------- Chief Financial Officer Pennsylvania Manufacturers Corporation -3- Exhibit G to Credit Agreement The Bank of New York, as Administrative Agent First Union National Bank of North Carolina, as Documentation Agent Pennsylvania Manufacturers Corporation March 14, 1997 / $235,000,000 FORM OF OPINION OF DUANE, MORRIS & HECKSCHER __________, 1997 The Bank of New York, as Administrative Agent, First Union National Bank of North Carolina, as Documentation Agent, and the Lenders Party to the Credit Agreement Referenced Below Ladies and Gentlemen: We have acted as counsel to Pennsylvania Manufacturers Corporation, a Pennsylvania corporation (the "Borrower") in connection with the execution and delivery of and the consummation of the transactions contemplated by the Credit Agreement, dated as of March __, 1997 (the "Credit Agreement") among the Borrower, the banks and other financial institutions from time to time parties thereto (collectively, the "Lenders"), The Bank of New York, as Administrative Agent for the Lenders, and First Union National Bank of North Carolina, as Documentation Agent for the Lenders. Unless otherwise defined herein, capitalized terms used herein have the meanings assigned to them in the Credit Agreement. In this connection, we have examined a copy of the executed Credit Agreement and the Notes (together, the "Credit Documents") and such certificates of public officials, certificates of officers of the Borrower and copies certified to our satisfaction of corporate documents and records of the Borrower and of other papers, and have made such other investigations as we have deemed relevant and necessary as a basis for our opinion hereinafter set forth. We have relied upon such certificates of public officials and of officers of the Borrower with respect to the accuracy of material factual matters contained therein which were not independently established. In addition, we have assumed and relied upon the accuracy, completeness, authenticity and genuineness of all documents and certificates examined and all signatures thereon, other than the signatures of representatives of the Borrower. In rendering this opinion, we have assumed that the Lenders and the Agents have all requisite authority and have taken all necessary corporate or other action to enter into and perform their obligations under the Credit Documents and that the Credit Documents are valid and binding upon the Lenders and The Bank of New York, as Administrative Agent, First Union National Bank of North Carolina, as Documentation Agent, and the Lenders Party to the Credit Agreement Referenced Below March __, 1997 Page 2 the Agents and enforceable against them in accordance with their respective terms. We have also assumed that the Lenders' and the Agents' actions in connection with the enforcement of the Credit Document will be commercially reasonable and taken in good faith. Any opinion expressed "to the best of our knowledge" is made on the basis of our actual knowledge only of the attorneys of this firm who have participated in the legal representation of the Borrower in connection with the Credit Documents, without having conducted an independent investigation as to the matters stated therein. Based upon and subject to the foregoing and the further limitations, qualifications and exceptions herein set forth, we are of the opinion that: 1. Each of the Borrower and its Materials Subsidiaries is a corporation duly organized and validly existing under the laws of the jurisdiction of its incorporation and is duly qualified to do business as a foreign corporation and is in good standing in each jurisdiction where the nature of its business or the ownership of its properties requires it to be so qualified, except where the failure to be so qualified would not have a Material Adverse Effect. 2. Each of the Borrower and its Subsidiaries has the full corporate power and authority to execute, deliver and perform the Credit Documents to which it is a party, to own and hold its property and to engage in its business as presently conducted. 3. The Borrower has taken all necessary corporate action to execute, deliver and perform each Credit Document, and each Credit Document has been validly executed and delivered by, and constitutes the legal, valid and binding obligation of the Borrower, enforceable against it in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance or other similar laws affecting creditors' rights generally or by general equitable principles which may limit rights of acceleration, self-help and the availability of equitable remedies, including (without limitation) concepts of materiality, reasonableness, good faith and fair dealing (regardless of whether considered in a proceeding in equity or at law). 4. No consent, approval, authorization, exemption or other action by, notice to, or declaration or filing with, any governmental or regulatory authority of the United States or the Commonwealth of Pennsylvania is required in connection with the due execution, delivery and performance by the Borrower of the Credit Documents, the legality, validity or enforceability thereof or the consummation of the transactions contemplated thereby. -2- The Bank of New York, as Administrative Agent, First Union National Bank of North Carolina, as Documentation Agent, and the Lenders Party to the Credit Agreement Referenced Below March __, 1997 Page 3 5. The execution, delivery and performance by the Borrower of the Credit Documents, and compliance by it therewith, do not and will not (i) violate any provision of its certificate of incorporation or bylaws, (ii) contravene any provisions of any applicable law, rule or regulation or, to the best of our knowledge, any judgment, order, writ, injunction or decree to which it is subject, (iii) to the best of our knowledge, conflict with, result in a breach of or constitute (with notice, lapse of time or both) a default under any material indenture, agreement or other instrument to which it is a party, by which it or any of its properties is bound or to which it may be subject, or (iv) result in the creation or imposition of any Lien (except for Permitted Liens) arising under any of the documents or instruments referred to in clause (iii), upon any property or assets of the Borrower. 6. To the best of our knowledge, there are no actions, investigations, suits or proceedings pending or threatened, at law, in equity or in arbitration, before any court, other Governmental Authority or other Person, against or affecting the Borrower and its Subsidiaries or any of their respective properties that, if adversely determined, would be reasonably likely to have a Material Adverse Effect. 7. The Surviving Senior Note Indebtedness does not have any priority or preference senior in any respect to the Obligations. 8. In any proceeding taken for the enforcement of the Credit Documents, the provisions therein specifying that the internal laws of the State of North Carolina will govern such documents would more likely than not be given effect by a state court or federal court sitting in the Commonwealth of Pennsylvania and applying the laws of the Commonwealth of Pennsylvania concerning conflicts of law, subject to the exceptions and limitations referred to below, Pennsylvania courts have followed Section 187 of the Restatement 2nd Conflict of Laws (See: In re Allegheny International. Inc., 954 F.2d 167 (3rd Cir. 1992) and Smith v. Commonwealth National Bank, 557 A2d 775 (Pa. Super 1989)). However, even in the case where financing documents have included an express choice of law provision identifying that a foreign state's laws shall govern the documents, this general rule has not been followed by a Pennsylvania court in instances where the court was asked to apply the procedural law of another state (See: Unisys Finance Corporation v. U S Vision. Inc., 630 A2d 55 (Pa. Super 1993)) such as on a question of the applicable statute of limitations on a claim, or where the action involved the enforcement of debts or recovery of collateral given as security for a loan (See: Howard Savings Bank v. Cohen, 607 A2d 1077 (Pa. Super 1992)). Furthermore, we call your attention to the existence of Fuller Co. v Campagnie Des Bauxites De Guinee, 421 F. Supp. 938 (W.D.Pa. 1976), in which the court rejected a contractual choice of law provision primarily because the only nexus between the transaction and the designated state was the retention by one party of counsel in such state. The Bank of New York, as Administrative Agent, First Union National Bank of North Carolina, as Documentation Agent, and the Lenders Party to the Credit Agreement Referenced Below March __, 1997 Page 4 9. Neither the Borrower nor any of its Subsidiaries is an "investment company," a company "controlled" by an "investment company," or an "investment advisor," within the meaning of the Investment Company Act of 1940, as amended. 10. Neither the Borrower nor any of its Subsidiaries is engaged in the business of extending credit for the purpose of purchasing or carrying Margin Stock, and the consummation of the transactions contemplated by the Credit Agreement will not violate Regulations G, T, U or X of the Board of Governors of the Federal Reserve System. 11. The fees, interest and other charges payable under the Credit Documents do not violate any usury or similar laws of the Commonwealth of Pennsylvania. 12. No transfer, filing, stamp, privilege, franchise, indebtedness or other taxes of the Commonwealth of Pennsylvania are required to be paid in connection with the execution and delivery of the Credit Documents. 13. Neither Agent nor any Lender is required to comply with the requirements of any foreign lender statute in the Commonwealth of Pennsylvania in order to carry out the transactions contemplated by the Credit Documents or to avail itself of the remedies provided thereby. The foregoing opinions are limited to the laws of the Commonwealth of Pennsylvania, and, to the extent applicable, the laws of the United States and we express no opinion with respect to the laws of any other state or jurisdiction. We note that the Credit Documents are expressly governed by the laws of the State of North Carolina and we have assumed, with your permission and without investigation, that the substantive laws of the State of North Carolina are identical to those of the Commonwealth of Pennsylvania. The opinions given herein are as of the date hereof, and we assume no obligation to update or supplement this opinion to reflect any facts or circumstances which may hereafter come to our attention or any changes in laws which may hereafter occur: This opinion is furnished solely in connection with the transactions contemplated by the Credit Agreement, may be relied upon only by each of you and any of your successors and Assignees under the -3- The Bank of New York, as Administrative Agent, First Union National Bank of North Carolina, as Documentation Agent, and the Lenders Party to the Credit Agreement Referenced Below March __, 1997 Page 5 Credit Agreement, and may not be used or relied upon by you or any other person in any other manner or for any other purpose without our prior written consent. Very truly yours, DUANE, MORRIS & HECKSCHER RLP:efm Exhibit H to Credit Agreement The Bank of New York, as Administrative Agent First Union National Bank of North Carolina, as Documentation Agent Pennsylvania Manufacturers Corporation March 14, 1997 / $235,000,000 FORM OF OPINION OF ROBINSON, BRADSHAW & HINSON, P.A. _____________, 1997 The Bank of New York, as Administrative Agent First Union National Bank of North Carolina, as Documentation Agent, and the Lenders Party to the Credit Agreement Referenced Below Ladies and Gentlemen: We have acted as special counsel to First Union National Bank of North Carolina ("First Union") in connection with the preparation, execution and delivery of the Credit Agreement, dated as of March _, 1997 (the "Credit Agreement"), among Pennsylvania Manufacturers Corporation, a Pennsylvania corporation (the "Borrower"), the banks and other financial institutions from time to time parties thereto (collectively, the "Lenders"), The Bank of New York, as Administrative Agent for the Lenders, and First Union, as Documentation Agent for the Lenders. Unless otherwise defined herein, capitalized terms used herein have the meanings assigned to them in the Credit Agreement. In such capacity, we have examined originals of the Credit Agreement and the Notes (together, the "Relevant Credit Documents") and originals, or copies certified to our satisfaction, of such corporate records, certificates of public officials, certificates of officers of the Borrower and its Subsidiaries and such other documents, records and matters of law as we have deemed necessary or appropriate for purposes of delivering this opinion. We have also relied, with your permission, upon the opinions set forth in the opinion of Duane, Morris & Heckscher of even date herewith and the assumptions on which such opinions were based, other than the assumption that the laws of the State 'of North Carolina are identical to the those of the Commonwealth of Pennsylvania. In rendering this opinion, we have assumed the legal capacity of all natural persons, the genuineness of all signatures, the authenticity of all documents submitted to us as originals, the conformity to the originals of all documents submitted to us as copies, and the due authorization, The Bank of New York, as Administrative Agent, et. al, _____________, 1997 Page 2 ____________________ execution and delivery of the Credit Documents by the parties thereto. We have further assumed that the Borrower is duly organized and validly existing under the laws of the Commonwealth of Pennsylvania and has the full corporate power and authority to execute, deliver and perform the Credit Documents. Based upon and subject to the foregoing and the further limitations, qualifications and exceptions herein set forth, we are of the opinion that each of the Relevant Credit Documents constitutes the legal, valid and binding obligation of the Borrower, enforceable against it in accordance with its terms. Our opinion set forth herein is subject to the following limitations and qualifications: 1. The enforceability of the Relevant Credit Documents may be limited by applicable bankruptcy, insolvency, moratorium, fraudulent transfer, reorganization or other laws relating to or affecting creditors' rights generally and by general principles of equity (including, without limitation, concepts of materiality, reasonableness, good faith and fair dealing) by which a court with proper jurisdiction may deny rights of specific performance, injunction, self-help or other remedies, whether considered in an action or proceeding at law or in equity. 2. Under Section 6-21.2 of the General Statutes of North Carolina, in the enforcement or collection of a note or other evidence of indebtedness providing for payment by the debtor of "reasonable attorneys' fees" in the enforcement or collection thereof, a creditor is permitted (after specified written notice to the debtor) to collect attorneys' fees up to but not exceeding 15% of the amount outstanding. 3. No opinion is expressed as to provisions, if any, contained in the Relevant Credit Documents that purport to excuse a party for liability for its own gross negligence, willful misconduct or unlawful conduct, purport to authorize a party to act in its sole discretion, require amendments or waivers to be made only in writing, or purport to effect waivers of constitutional, statutory or equitable rights or the effect of applicable laws. The foregoing opinions are limited to the federal laws of the United States and the laws of the State of North Carolina, and we express no opinion with respect to the laws of any other state or jurisdiction. Without limiting the generality of the foregoing, we express no opinion as to the effect of the law of any jurisdiction (other than the State of North Carolina) wherein any Lender (or its applicable Lending Office) may be located that limits the rates of interest legally chargeable or collectible by such Lender. This opinion is furnished solely in connection with the transactions contemplated by the Credit Agreement, may be relied upon only by each of you and any of your successors and assigns under the Credit Agreement, and may not be used or relied upon by you or any other person in any other manner The Bank of New York, as Administrative Agent, et. al, _____________, 1997 Page 3 ____________________ or for any other purpose without our prior written consent. This opinion speaks only as of the date hereof, and we have no obligation to advise you or any other person of any changes in law or fact that may occur after the date hereof. Very truly yours, ROBINSON, BRADSHAW & HINSON, P.A. PMC SCHEDULE 1.1 TO THE CREDIT AGREEMENT DATED AS OF MARCH 14, 1997 LIST OF MEMBERS OF CURRENT MANAGEMENT GROUP ------------------------------------------- Board of Directors - - - ------------------ Frederick W. Anton III Paul I. Detwiler, Jr. Joseph H. Foster Anne S. Genter James F. Malone III A. John May Louis N. McCarter III John W. Miller, Jr., M.D. Edward H. Owlett Louis I. Pollock L.J. Rowell, Jr. Roderic H. Ross John W. Smithson Management - - - ---------- Frederick W. Anton III John W. Smithson Francis W. McDonnell Vincent T. Donnelly Stephen G. Tirney Richard DeCoux James J. Fleming, Jr. Anthony J. Grosso Stephen F. Litz David C. Snow PMC SCHEDULE 4.14 TO THE CREDIT AGREEMENT DATED AS OF MARCH 14, 1997 ENVIRONMENTAL MATTERS There is presently a 10,000 gallon underground fuel oil storage tank located at Gulph Industries, Inc.'s property, 1025 W. Eighth Street, King of Prussia, PA. Two other tanks for gasoline and waste oil storage were formerly located at this facility, but have been removed. PMC SCHEDULE 4.18 TO THE CREDIT AGREEMENT DATED AS OF MARCH 14, 1997 LIST OF CERTAIN CONTRACTS ------------------------- Obligation to: Description: Scudder, Stevens, & Clark Investment advisory services Nine Penn Center Associates, L.P. Building lease IBM Equipment PNC Leasing Corporation Furniture, fixtures, and equipment Cap Gemini Consulting Decision One Management and maintenance of data processing equipment AT&T Frame relay, private line, and local channel service CoreStates Sale of accounts receivable Frederick W. Anton III Employment agreement John W. Smithson Employment agreement PMC SCHEDULE 4.19 TO THE CREDIT AGREEMENT DATED AS OF MARCH 14, 1997 PMA REINSURANCE CORPORATION UNSECURED RECOVERABLES RATED LESS THAN A- BY AM BEST AS OF DECEMBER 31, 1996 - - - -------------------------------------------------------------------------------- (1) LOC AM BEST TICK NAME (000's) RATING MARKS - - - -------------------------------------------------------------------------------- AUTHORIZED US Aegon Reinsurance Company (Ennia) NR-3 American Fuji Fire & Marine B++ Baltica-Skandinavia Re Co C- Cigna Reinsurance Co B+g Covenant Mutual Ins Co NR-2 (3) MONY Reinsurance Corp NR-3 Philadelphia Reins Corp NR-3 Republic Ins Co B++g AUTHORIZED POOLS Associated A&H Re Underwriters NA UNAUTHORIZED US Constellation Re NA (2) Delta America Re Ins Co (Elkhorn) NA Mead Reinsurance Corp. NR-3 Universal Reins Co NA AUTHORIZED - OTHER NON-U.S. INSURERS Sphere Drake Ins plc B++ Zurich Re (UK) Ltd NA UNAUTHORIZED - OTHER NON-U.S. INSURERS Baloise Insurance Co. NR-5 Beneficial American NA Bishopsgate Ins Ltd 1 NA Bryanston Ins Co NA Compagnie Europeene de Reassurances, S.A. 26 NA Dai-Tokyo Ins Co (UK) Ltd NA Eagle Star Reinsurance Company Ltd. NA Eisen Und Stahl Ruckversicherungs NA English & American Ins Co Ltd(New Zealand) F Excess Insurance Co Ltd 2 NR-5 Fremont Ins Co (UK) Ltd 1 NR-5 GAN Incendie Accidents NR-5 GI0 (UK) Ltd NA Hansa International 1 NA Municipal General Ins Ltd 8 NA River Thames Ins Co Ltd 85 NR-5 Sampo Ins Co (UK) Ltd 1 NR-5 Sparkassen-Versicherung Allgemeine 6 NA Stockholm Reins Co Ltd NR-5 Taisei Fire & Marine Ins Co NA Traders General NA Transcontinentale NA 1997 REINSURERS Monde Re NA - - - -------------------------------------------------------------------------------- NA -- Not available (1) AM Best rating was obtained from the 1997 edition and 1996 edition for foreign companies and domestic companies, respectively. (2) Company is in liquidation (3) Company demutualized and is now Covenant Insurance Company (NR-2) PMC SCHEDULE 4.19 TO THE CREDIT AGREEMENT DATED AS OF MARCH 14, 1997 PMAIC AND OTHER INSURANCE SUBSIDIARIES UNSECURED RECOVERABLES RATED LESS THAN A- BY AM BEST ---------------------------------------------------- AS OF DECEMBER 31,1996 - - - -------------------------------------------------------------------------------- (1) LOC AM BEST TICK NAME (000's) RATING MARKS - - - -------------------------------------------------------------------------------- UNAUTHORIZED - OTHER US Classie Fire & Marine Insurance Co. NR-4 Constellation Reinsurance Co. NA (2) Farm Bureau Mutual Ins. Co. of Michigan B--g Hamburg International Reinsurance Co. NR-3 Mead Reinsurance Corp. NR-3 AUTHORIZED US American Fuji Fire & Marine Ins. Co. B-+ CIGNA Reinsurance Co. B-g Cologne Reinsurance Co. of America NR-3 Folksamerica National Reinsurance NR-3 John Hancock Property and Casualty Co. B-+p New England Reinsurance Corp. NR-3 Signet Star Reinsurance Corp. NR-3 SAFR Reinsurance Corp. of the US B++ US International Reins. Co. B-r Unione Italiana Reins. Co. of America NR-3 Netherlands Reins. Group US Branch NA Reliance Insurance Co. NA AUTHORIZED MANDATORY POOLS American Accident Re Group NA Excess & Casualty Reins. Association NA IRM NA NCCI NA UNAUTHORIZED-AFFILIATES-NON US Pennsylvania Manufacturers Intrnl. Ins. NA PMA Insurance Cayman Ltd. NA UNAUTHORIZED-OTHER NON US Albingia Venicherungs NR-5 Allianz International Ins Co. Ltd. NA Ancon Insurance Co. (UK) Ltd. FPR-7 Anglo American Insurance Co. Ltd NR-5 British National Insurance Co. Ltd. NA Cie Europeene De Reass Internationale NA Colonia Ins. Co. (UK) Ltd. B++ Compagnie Europeenne D'Assurances NR-5 Dai-Tokyo Insurance Co. (UK) Ltd. NA D.N.H. Reinsurance Company NA Eagle Star Reinsurance Co., Ltd. NA Excess Insurance Co. Ltd. NR-5 Fuji International Insurance Co. Ltd NA G.T.E. Reinsurance Co. Ltd. 37 NR-5 Harleysville Ins. Co. (UK) Ltd. NA LAT Syndicate 65 NA INSCO, Ltd. NA J & H Syndicate B, Inc. 62 NA Laurentian General Insurance Co. NA Mitsui Marine & Fire Ins. Co. (Europe) Ltd. NR-5 MML Syndicate 125 NA NW Reins. Corp. Ltd. NR-5 Scan Reinsurance Co. Ltd. NR-5 Security Insurance Co (UK) Ltd. NA Sovereign Marine & General Ins. Co. Ltd. NR-5 Spear, Leeds. & Kellogg Re Corp. NA Storebrand Ins. Co. (UK) Ltd. NA Toa Reinsurance Co. (UK) Ltd. NA Tokio Marine & Fire Ins. Co. (UK) Ltd. FPR-6 Turegum Insurance Co. (UK) Ltd, 136 NA Yusuda Fire & Marine Ins. of Europe NR-5 - - - -------------------------------------------------------------------------------- NA -- Not available (1) AM Best rating was obtained from the 1997 edition and 1996 edition for foreign companies and domestic companies, respectively. (2) Company is in liquidation PMC SCHEDULE 4.4 TO THE CREDIT AGREEMENT DATED AS OF MARCH 14, 1997 LIST OF LICENSES, PERMITS, AND AUTHORIZATIONS --------------------------------------------- STATE PMAIC PMIC MAICO MASCCO PMA LIFE PMA Re - - - ----- ----- ---- ----- ------ -------- ------ AL XR AK X XR AZ X XR AR A CA X XR CO X A CT X XR DE X X X XR DC X X X XR FL X XR GA X XR Hl X A ID X XR IL X XR IN X XR IA X XR KS XR KY X XR LA X XR ME X A MD X X X XR MA X XR Ml X XR MN XR MS X XR MO X XR MT X XR NE X XR NV X XR NH X A NJ X X X XR NM X XR NY X X X XR NC X X X XR ND X XR OH X X X XR OK X XR OR X X X XR PA X X X X X XR Rl X XR SC X X X XR SD X XR TN X XR TX X XR UT X XR VT X A VA X X X A WA X XR WV X WI X XR WY A A - Accredited Reinsurer X - Licensed Insurer XR - Licensed Reinsurer PMC SCHEDULE 4.6 TO THE CREDIT AGREEMENT DATED AS OF MARCH 14, 1997 TAXES ----- Year Audits/Examinations ---- ------------------- 1992 Claim for refund under examination by the Internal Revenue Service. 1993 Claim for refund under examination by the Internal Revenue Service. 1994 Tax year under audit by the Internal Revenue Service. 1995 Tax year under audit by the Internal Revenue Service. PMC SCHEDULE 4.7 TO THE CREDIT AGREEMENT DATED AS OF MARCH 14, 1997 LIST OF SUBSIDIARIES --------------------
PERCENT OWNED PERCENT OWNED BY THE BY THE BORROWER BORROWER Name of Subsidiary DIRECTLY INDIRECTLY ------------------ ------------- ------------- Pennsylvania Manufacturers' Association Insurance Company * 100% Manufacturers Alliance Insurance Company * 100% PMA Reinsurance Corporation * 100% Pennsylvania Manufacturers Indemnity Company * 100% Chestnut Insurance Company, Ltd. 100% PMA Holdings, Inc. 100% DP Corporation 100% REM Corporation 100% Pennsylvania Manufacturers Association Finance Company 100% 925 Chestnut, Inc 100% Mid-Atlantic States Investment Company * 100% PMA Life Insurance Company 100% Ajon, Inc. 15% 85% Sarfred, Inc. 15% 85% Wisteve, Inc. 15% 85% Rosemarie, Inc. 15% 85% Aud-Evad, Inc. 15% 85% Dauphin Equities, Inc. 15% 85% Lorjo Corporation 15% 85% Mid-Atlantic States Casualty Company * 100% PMA Insurance, Cayman Ltd. * 100% PMA Services, Inc. 100% Presque Enterprises, Inc. 100% LeeWard, Inc. 100% Syl-Bar, Inc. 100% Gulph Industries, Inc. 100% Cris-Jen, Inc. 100% Walprop, Inc. 100% Marpan, Inc. 100% Pennsylvania Manufacturers' International Insurance, Ltd. 100% PMA Holdings, Cayman Ltd. 100% PMA Management Corp. 100% Pennsylvania Manufacturers Associates 100%
* - Material Subsidiary PMC SCHEDULE 7.2 TO THE CREDIT AGREEMENT DATED AS OF MARCH 14, 1997 INDEBTEDNESS As of December 31, 1996 Company or Amount of Subsidiary Debt Description of Debt - - - ---------- ---- ------------------- Cris-Jen, Inc. 127,214 Mortgage Note payable to National Bank of the Commonwealth Pennsylvania Manufacturers Guarantees of obligations of an Corporation 6,794,000 unconsolidated real estate subsidiary Pennsylvania Manufacturers Guarantees of obligation for 1992 Corporation 3,106,000 financial support program Pennsylvania Manufacturers Guaranty of indemnity agreement with Corporation 250,000 Colonial Insurance Company PMC SCHEDULE 7.3 TO THE CREDIT AGREEMENT DATED AS OF MARCH 14, 1997 LIST OF EXISTING LIENS Existing on February 20, 1997 The Company and its Subsidiaries are required by the laws of the various states in which they are licensed to conduct the business of insurance to deposit and maintain security for the performance of their obligations before they can issue policies. In satisfaction of this requirement, the Company and its subsidiaries have on deposit as of the Closing Date Securities with an aggregate par value of approximately $16,810,000 in the following states: 1. California 9. North Carolina 2. Delaware 10. Oklahoma 3. Georgia 11. Oregon 4. Idaho 12. Pennsylvania 5. Louisiana 13. South Carolina 6. Massachusetts 14. Tennessee 7. Michigan 15. Texas 8. New Mexico 16. Virginia Other Liens (Valued as of January 31, 1997) Name of Subsidiary Amount of Debt Secured Party - - - ------------------ -------------- ------------- PMA Reinsurance Corp. $5,000,000 Collateral for Standby LOC Facility PMAIC $5,150,000 Collateral for Standby LOC Facility PMAIC $161,300 IBM Corp PMIC / PMAIC / MAICO / MASCCO $7,742,281 CoreStates Bank N.A. PMAIC $3,821,904 PNC Leasing Corp. PMAIC $52,162 Canon Financial Services, Inc. PMAIC $27,375 Great America Leasing Corp. PMAIC $171,366 El Camino Resources Ltd PMAIC $2,400,000 IBM Credit Corp. PMC SCHEDULE 7.6 TO THE CREDIT AGREEMENT DATED AS OF MARCH 14, 1997 TRANSACTIONS WITH AFFILIATES None PMC SCHEDULE 1.1 TO THE CREDIT AGREEMENT DATED AS OF MARCH 14, 1997 LIST OF MEMBERS OF CURRENT MANAGEMENT GROUP Board of Directors - - - ------------------ Frederick W. Anton III Paul I. Detwiler, Jr. Joseph H. Foster Anne S. Genter James F. Malone III A. John May Louis N. McCarter III John W. Miller, Jr., M.D. Edward H. Owlett Louis I. Pollock L.J. Rowell, Jr. Roderic H. Ross John W. Smithson Management - - - ---------- Frederick W. Anton III John W. Smithson Francis W. McDonnell Vincent T. Donnelly Stephen G. Tirney Richard DeCoux James J. Fleming, Jr. Anthony J. Grosso Stephen F. Litz David C. Snow PMC SCHEDULE 4.14 TO THE CREDIT AGREEMENT DATED AS OF MARCH 14, 1997 ENVIRONMENTAL MATTERS There is presently a 10,000 gallon underground fuel oil storage tank located at Gulph Industries, Inc.'s property, 1025 W. Eighth Street, King of Prussia, PA. Two other tanks for gasoline and waste oil storage were formerly located at this facility, but have been removed. PMC SCHEDULE 4.18 TO THE CREDIT AGREEMENT DATED AS OF MARCH 14, 1997 LIST OF CERTAIN CONTRACTS Obligation to: Description: - - - -------------- ------------ Scudder, Stevens, & Clark Investment advisory services Nine Penn Center Associates, L.P. Building lease IBM Equipment PNC Leasing Corporation Furniture, fixtures, and equipment Cap Gemini Consulting Decision One Management and maintenance of data processing equipment AT&T Frame relay, private line, and local channel service CoreStates Sale of accounts receivable Frederick W. Anton III Employment agreement John W. Smithson Employment agreement PMC SCHEDULE 4.19 TO THE CREDIT AGREEMENT DATED AS OF MARCH 14, 1997 PMA REINSURANCE CORPORATION UNSECURED RECOVERABLES RATED LESS THAN A- BY AM BEST AS OF DECEMBER 31, 1996 - - - ------------------------------------------------------------------------------- (1) LOC AM BEST TICK NAME (000's) RATING MARKS - - - ------------------------------------------------------------------------------- AUTHORIZED US Aegon Reinsurance Company(Ennia) NR-3 American Fuji Fire & Marine B++ Baltica-Skandinavia Re Co C- Cigna Reinsurance Co B+ g Covenant Mutual Ins Co NR-2 (3) MONY Reinsurance Corp NR-3 Philadelphia Reins Corp NR-3 Republic Ins Co B++ g AUTHORIZED POOLS Associated A&H Re Underwriters NA UNAUTHORIZED US Constellation Re NA (2) Delta America Re Ins Co (Elkhorn) NA Mead Reinsurance Corp NR-3 Universal Reins Co NA AUTHORIZED - OTHER NON-U.S. INSURERS Sphere Drake Ins plc B++ Zurich Re (UK) Ltd NA UNAUTHORIZED - OTHER NON-U.S. INSURERS Baloise Insurance Co NR-5 Beneficial American NA Bishopsgate Ins Ltd 1 NA Bryanston Ins Co NA Compagnie Europeene de Reassurances, S.A. 26 NA Dai-Tokyo Ins Co (UK) Ltd NA Eagle Star Reinsurance Company Ltd NA Eisen Und Stahl Ruckversicherungs NA English & American Ins Co Ltd(New Zealand) F Excess Insurance Co Ltd 2 NR-5 Fremont Ins Co (UK) Ltd 1 NR-5 GAN Incendie Accidents NR-5 GIO (UK) Ltd NA Hansa International 1 NA Municipal General Ins Ltd 8 NA River Thames Ins Co Ltd 85 NR-5 Sampo Ins Co (UK) Ltd 1 NR-5 Sparkassen-Versicherung Allgemeine 6 NA Stockholm Reins Co Ltd NR-5 Taisei Fire & Marine Ins Co NA Traders General NA Transcontinentale NA 1997 REINSURERS Monde Re NA - - - ------------------------------------------------------------------------------- NA - Not available (1) AM Best rating was obtained from the 1997 edition and 1996 edition for foreign companies and domestic companies, respectively. (2) Company is in liquidation (3) Company demutualized and is now Covenant Insurance Company (NR-2) PMC SCHEDULE 4.19 TO THE CREDIT AGREEMENT DATED AS OF MARCH 14, 1997 PMAIC AND INSURANCE SUBSIDIARIES UNSECURED RECOVERABLES RATED LESS THAN A-BY AM BEST AS OF DECEMBER 31 1996 - - - ------------------------------------------------------------------------------- (1) LOC AM BEST NAME (000's) RATING TICK - - - ------------------------------------------------------------------------------- UNAUTHORIZED - OTHER US Classic Fire & Marine Insurance Co. NR-4 Constellation Reinsurance Co. NA (2) Farm Bureau Mutual Ins. Co. of Michigan B++g Hamburg International Reinsurance Co. NR-3 Mead Reinsurance Corp. NR-3 AUTHORIZED US American Fuji Fire & Marine Ins. Co. B++ CIGNA Reinsurance Co. B+g Cologne Reinsurance Co. of America NR-3 Folksamerica National Reinsurance NR-3 John Hancock Property and Casualty Co. B++p New England Reinsurance Corp. NR-3 Signet Star Reinsurance Corp. NR-3 SAFR Reinsurance Corp. of the US B++ US International Reins. Co. B-r Unione Italiana Reins. Co. of America NR-3 Netherlands Reins. Group US Branch NA Reliance Insurance Co. NA AUTHORIZED MANDATORY POOLS American Accident Re Group NA Excess & Casualty Reins. Association NA IRM NA NCCI NA UNAUTHORIZED-AFFILIATES-NON US Pennsylvania Manufacturers Intrnl. Ins. NA PMA Insurance Cayman. Ltd. NA UNAUTHORIZED-OTHER NON US Albingia Versieherungs NR-5 Allianz International Ins Co. Ltd. NA Ancon Insurance Co. (UK) Ltd, FPR-7 Anglo American Insurance Co. Ltd. NR-5 British National Insurance Co. Ltd. NA Cie Europeene De Reass Internationale NA Colonia Ins. Co. (UK) Ltd. B++ Compagnie Eurepeenne D'Assurances NR-5 Dai-Tokyo Insurance Co. (UK) Ltd. NA D.N.H. Reinsurance Company NA Eagle Star Reinsurance Co. Ltd. NA Excess Insurance Co. Ltd. NR-5 Fuji International Insurance Co. Ltd. NA G.T.E. Reinsurance Co. Ltd. 37 NR-5 Harleysville Ins. Co. (UK) Ltd. NA IAT Syndicate 65 NA INSCO Ltd. NA J & H Syndicate B, Inc. 62 NA Laurentian General Insurance Co. NA Mitsui Marine & Fire Ins. Co. (Europe) Ltd. NR-5 MML Syndicate 125 NA NW Reins. Corp. Ltd. NR-5 Scan Reinsurance Co. Ltd. NR-5 Security Insurance Co. (UK) Ltd. NA Sovereign Marine & General Ins Co. Ltd. NR-5 Spear, Leeds, & Kellogg Re Corp. NA Storebrand Ins. Co. (UK) Ltd. NA Toa Reinsurance Co. (UK) Ltd. NA Tokio Marine & Fire Ins. Co. (UK) Ltd. FPR-6 Turegum Insurance Co. (UK) Ltd. 136 NA Yasuda Fire & Marine Ins. of Europe NR-5 - - - ------------------------------------------------------------------------------- NA - Not available (1) AM Best rating was obtained from the 1997 edition and 1996 edition for foreign companies and domestic companies respectively. (2) Company is in liquidation. PMC SCHEDULE 4.4 TO THE CREDIT AGREEMENT DATED AS OF MARCH 14, 1997 LIST OF LICENSES, PERMITS, AND AUTHORIZATIONS STATE PMAIC PMIC MAICO MASCCO PMA LIFE PMA Re - - - ----- ----- ---- ----- ------ -------- ------ AL XR AK X XR AZ X XR AR A CA X XR CO X A CT X XR DE X X X XR DC X X X XR FL X XR GA X XR Hl X A ID X XR IL X XR IN X XR IA X XR KS XR KY X XR LA X XR ME X A MD X X X XR MA X XR Ml X XR MN XR MS X XR MO X XR MT X XR NE X XR NV X XR NH X A NJ X X X XR NM X XR NY X X X XR NC X X X XR ND X XR OH X X X XR OK X XR OR X X X XR PA X X X X X XR RI X XR SC X X X XR SD X XR TN X XR TX X XR UT X XR VT X A VA X X X A WA X XR WV X Wl X XR WY A A - Accredited Reinsurer X - Licensed Insurer XR - Licensed Reinsurer PMC SCHEDULE 4.6 TO THE CREDIT AGREEMENT DATED AS OF MARCH 14, 1997 TAXES Year Audits/Examinations - - - ---- ------------------- 1992 Claim for refund under examination by the Internal Revenue Service. 1993 Claim for refund under examination by the Internal Revenue Service. 1994 Tax year under audit by the Internal Revenue Service. 1995 Tax year under audit by the Internal Revenue Service. PMC SCHEDULE 4.7 TO THE CREDIT AGREEMENT DATED AS OF MARCH 14, 1997 LIST OF SUBSIDIARIES PERCENT OWNED PERCENT OWNED BY THE BY THE BORROWER BORROWER Name of Subsidiary DIRECTLY INDIRECTLY - - - ---------------------------------------- ------------- -------------- Pennsylvania Manufacturers' Association Insurance Company * 100% Manufacturers Alliance Insurance Company * 100% PMA Reinsurance Corporation * 100% Pennsylvania Manufacturers Indemnity Company * 100% Chestnut Insurance Company, Ltd. 100% PMA Holdings, Inc. 100% DP Corporation 100% REM Corporation 100% Pennsylvania Manufacturers Association Finance Company 100% 925 Chestnut, Inc. 100% Mid-Atlantic States Investment Company * 100% PMA Life Insurance Company 100% Ajon, Inc. 15% 85% Sarfred, Inc. 15% 85% Wisteve, Inc. 15% 85% Rosemarie, Inc. 15% 85% Aud-Evad, Inc. 15% 85% Dauphin Equities, Inc. 15% 85% Lorjo Corporation 15% 85% Mid-Atlantic States Casualty Company * 100% PMA Insurance, Cayman Ltd. * 100% PMA Services, Inc. 100% Presque Enterprises, Inc. 100% LeeWard, Inc. 100% Syl-Bar, Inc. 100% Gulph Industries, Inc. 100% Cris-Jen, Inc 100% Walprop, Inc. 100% Marpan, Inc. 100% Pennsylvania Manufacturers' International Insurance, Ltd. 100% PMA Holdings, Cayman Ltd. 100% PMA Management Corp. 100% Pennsylvania Manufacturers Associates 100% * - Material Subsidiary PMC SCHEDULE 7.2 TO THE CREDIT AGREEMENT DATED AS OF MARCH 14, 1997 INDEBTEDNESS As of December 31, 1996 Company or Amount of Subsidiary Debt Description of Debt - - - ---------- ---- ------------------- Cris-Jen, Inc. 127,214 Mortgage Note payable to National Bank of the Commonwealth Pennsylvania Manufacturers 6,794,000 Guarantees of obligations Corporation of an unconsolidated real estate subsidiary Pennsylvania Manufacturers 3,106,000 Guarantees of obligation Corporation for 1992 financial support program Pennsylvania Manufacturers 250,000 Guaranty of indemnity Corporation agreement with Colonial Insurance Company PMC SCHEDULE 7.3 TO THE CREDIT AGREEMENT DATED AS OF MARCH 14, 1997 LIST OF EXISTING LIENS Existing on February 20, 1997 The Company and its Subsidiaries are required by the laws of the various states in which they are licensed to conduct the business of insurance to deposit and maintain security for the performance of their obligations before they can issue policies. In satisfaction of this requirement, the Company and its subsidiaries have on deposit as of the Closing Date Securities with an aggregate par value of approximately $16,810,000 in the following states: - 1. California 9. North Carolina 2. Delaware 10. Oklahoma 3. Georgia 11. Oregon 4. Idaho 12. Pennsylvania 5. Louisiana 13. South Carolina 6. Massachusetts 14. Tennessee 7. Michigan 15. Texas 8. New Mexico 16. Virginia Other Liens: (Valued as of January 31. 1997) Name of Subsidiary Amount of Debt Secured Party - - - ------------------ -------------- ------------- PMA Reinsurance Corp. $5,000,000 Collateral for Standby LOC Facility PMAIC $5,150,000 Collateral for Standby LOC Facility PMAIC $161,300 IBM Corp PMIC / PMAIC / MAICO / MASCCO $7,742,281 CoreStates Bank N.A. PMAIC $3,821,904 PNC Leasing Corp. PMAIC $52,162 Canon Financial Services, Inc. PMAIC $27,375 Great America Leasing Corp. PMAIC $171,366 El Canino Resources Ltd PMAIC $2,400,000 IBM Credit Corp. PMC SCHEDULE 7.6 TO THE CREDIT AGREEMENT DATED AS OF MARCH 14, 1997 TRANSACTIONS WITH AFFILIATES None EX-10.14 17 MASTER AGREEMENT (Local Currency--Single Jurisdiction) ISDA(R) International Swap Dealers Association, Inc. MASTER AGREEMENT dated as of February 7, 1997 FIRST UNION NATIONAL BANK OF NORTH CAROLINA and PENNSYLVANIA MANUFACTURERS CORPORATION have entered and/or anticipate entering into one or more transactions (each a "Transaction") that are or will be governed by this Master Agreement, which includes the schedule (the "Schedule"), and the documents and other confirming evidence (each a "Confirmation") exchanged between the parties confirming those Transactions. Accordingly, the parties agree as follows:-- 1. Interpretation (a) Definitions. The terms defined in Section 12 and in the Schedule will have the meanings therein specified for the purpose of this Master Agreement. (b) Inconsistency. In the event of any inconsistency between the provisions of the Schedule and the other provisions of this Master Agreement, the Schedule will prevail. In the event of any inconsistency between the provisions of any Confirmation and this Master Agreement (including the Schedule), such Confirmation will prevail for the purpose of the relevant Transaction. (c) Single Agreement. All Transactions are entered into in reliance on the fact that this Master Agreement and all Confirmations form a single agreement between the parties (collectively referred to as this "Agreement"), and the parties would not otherwise enter into any Transactions. 2. Obligations (a) General Conditions. (i) Each party will make each payment or delivery specified in each Confirmation to be made by it, subject to the other provisions of this Agreement. (ii) Payments under this Agreement will be made on the due date for value on that date in the place of the account specified in the relevant Confirmation or otherwise pursuant to this Agreement, in freely transferable funds and in the manner customary for payments in the required currency. Where settlement is by delivery (that is, other than by payment), such delivery will be made for receipt on the due date in the manner customary for the relevant obligation unless otherwise specified in the relevant Confirmation or elsewhere in this Agreement. (iii) Each obligation of each party under Section 2(a)(i) is subject to (1) the condition precedent that no Event of Default or Potential Event of Default with respect to the other party has occurred and is continuing, (2) the condition precedent that no Early Termination Date in respect of the relevant Transaction has occurred or been effectively designated and (3) each other applicable condition precedent specified in this Agreement. Copyright (c) 1992 by International Swap Dealers Association, Inc. (b) Change of Account. Either party may change its account for receiving a payment or delivery by giving notice to the other party at least five Local Business Days prior to the scheduled date for the payment or delivery to which such change applies unless such other party gives timely notice of a reasonable objection to such change. (c) Netting. If on any date amounts would otherwise be payable:-- (i) in the same currency; and (ii) in respect of the same Transaction, by each party to the other, then, on such date, each party's obligation to make payment of any such amount will be automatically satisfied and discharged and, if the aggregate amount that would otherwise have been payable by one party exceeds the aggregate amount that would otherwise have been payable by the other party, replaced by an obligation upon the party by whom the larger aggregate amount would have been payable to pay to the other party the excess of the larger aggregate amount over the smaller aggregate amount. The parties may elect in respect of two or more Transactions that a net amount will be determined in respect of all amounts payable on the same date in the same currency in respect of such Transactions, regardless of whether such amounts are payable in respect of the same Transaction. The election may be made in the Schedule or a Confirmation by specifying that subparagraph (ii) above will not apply to the Transactions identified as being subject to the election, together with the starting date (in which case subparagraph (ii) above will not, or will cease to, apply to such Transactions from such date). This election may be made separately for different groups of Transactions and will apply separately to each pairing of branches or offices through which the parties make and receive payments or deliveries. (d) Default Interest; Other Amounts. Prior to the occurrence or effective designation of an Early Termination Date in respect of the relevant Transaction, a party that defaults in the performance of any payment obligation will, to the extent permitted by law and subject to Section 6(c), be required to pay interest (before as well as after judgment) on the overdue amount to the other party on demand in the same currency as such overdue amount, for the period from (and including) the original due date for payment to (but excluding) the date of actual payment, at the Default Rate. Such interest will be calculated on the basis of daily compounding and the actual number of days elapsed. If, prior to the occurrence or effective designation of an Early Termination Date in respect of the relevant Transaction, a party defaults in the performance of any obligation required to be settled by delivery, it will compensate the other party on demand if and to the extent provided for in the relevant Confirmation or elsewhere in this Agreement. 3. Representations Each party represents to the other party (which representations will be deemed to be repeated by each party on each date on which a Transaction is entered into) that:-- (a) Basic Representations. (i) Status. It is duly organised and validly existing under the laws of the jurisdiction of its organisation or incorporation and, if relevant under such laws, in good standing; (ii) Powers. It has the power to execute this Agreement and any other documentation relating to this Agreement to which it is a party, to deliver this Agreement and any other documentation relating to this Agreement that it is required by this Agreement to deliver and to perform its obligations under this Agreement and any obligations it has under any Credit Support Document to which it is a party and has taken all necessary action to authorise such execution, delivery and performance; (iii) No Violation or Conflict. Such execution, delivery and performance do not violate or conflict with any law applicable to it, any provision of its constitutional documents, any order or judgment of any court or other agency of government applicable to it or any of its assets or any contractual restriction binding on or affecting it or any of its assets; 2 (iv) Consents. All governmental and other consents that are required to have been obtained by it with respect to this Agreement or any Credit Support Document to which it is a party have been obtained and are in full force and effect and all conditions of any such consents have been complied with; and (v) Obligations Binding. Its obligations under this Agreement and any Credit Support Document to which it is a party constitute its legal, valid and binding obligations, enforceable in accordance with their respective terms (subject to applicable bankruptcy, reorganisation, insolvency, moratorium or similar laws affecting creditors' rights generally and subject, as to enforceability, to equitable principles of general application (regardless of whether enforcement is sought in a proceeding in equity or at law)). (b) Absence of Certain Events. No Event of Default or Potential Event of Default or, to its knowledge, Termination Event with respect to it has occurred and is continuing and no such event or circumstance would occur as a result of its entering into or performing its obligations under this Agreement or any Credit Support Document to which it is a party. (c) Absence of Litigation. There is not pending or, to its knowledge, threatened against it or any of its Affiliates any action, suit or proceeding at law or in equity or before any court, tribunal, governmental body, agency or official or any arbitrator that is likely to affect the legality, validity or enforceability against it of this Agreement or any Credit Support Document to which it is a party or its ability to perform its obligations under this Agreement or such Credit Support Document. (d) Accuracy of Specified Information. All applicable information that is furnished in writing by or on behalf of it to the other party and is identified for the purpose of this Section 3(d) in the Schedule is, as of the date of the information, true, accurate and complete in every material respect. 4. Agreements Each party agrees with the other that, so long as either party has or may have any obligation under this Agreement or under any Credit Support Document to which it is a party:-- (a) Furnish Specified Information. It will deliver to the other party any forms, documents or certificates specified in the Schedule or any Confirmation by the date specified in the Schedule or such Confirmation or, if none is specified, as soon as reasonably practicable. (b) Maintain Authorisations. It will use all reasonable efforts to maintain in full force and effect all consents of any governmental or other authority that are required to be obtained by it with respect to this Agreement or any Credit Support Document to which it is a party and will use all reasonable efforts to obtain any that may become necessary in the future. (c) Comply with Laws. It will comply in all material respects with all applicable laws and orders to which it may be subject if failure so to comply would materially impair its ability to perform its obligations under this Agreement or any Credit Support Document to which it is a party. 5. Events of Default and Termination Events (a) Events of Default. The occurrence at any time with respect to a party or, if applicable, any Credit Support Provider of such party or any Specified Entity of such party of any of the following events constitutes an event of default (an "Event of Default") with respect to such party:-- (i) Failure to Pay or Deliver. Failure by the party to make, when due, any payment under this Agreement or delivery under Section 2(a)(i) or 2(d) required to be made by it if such failure is not remedied on or before the third Local Business Day after notice of such failure is given to the party; (ii) Breach of Agreement. Failure by the party to comply with or perform any agreement or obligation (other than an obligation to make any payment under this Agreement or delivery under Section 2(a)(i) or 2(d) or to give notice of a Termination Event) to be complied with or performed 3 by the party in accordance with this Agreement if such failure is not remedied on or before the thirtieth day after notice of such failure is given to the party; (iii) Credit Support Default. (1) Failure by the party or any Credit Support Provider of such party to comply with or perform any agreement or obligation to be complied with or performed by it in accordance with any Credit Support Document if such failure is continuing after any applicable grace period has elapsed; (2) the expiration or termination of such Credit Support Document or the failing or ceasing of such Credit Support Document to be in full force and effect for the purpose of this Agreement (in either case other than in accordance with its terms) prior to the satisfaction of all obligations of such party under each Transaction to which such Credit Support Document relates without the written consent of the other party; or (3) the party or such Credit Support Provider disaffirms, disclaims, repudiates or rejects, in whole or in part, or challenges the validity of, such Credit Support Document; (iv) Misrepresentation. A representation made or repeated or deemed to have been made or repeated by the party or any Credit Support Provider of such party in this Agreement or any Credit Support Document proves to have been incorrect or misleading in any material respect when made or repeated or deemed to have been made or repeated; (v) Default under Specified Transaction. The party, any Credit Support Provider of such party or any applicable Specified Entity of such party (1) defaults under a Specified Transaction and, after giving effect to any applicable notice requirement or grace period, there occurs a liquidation of, an acceleration of obligations under. or an early termination of, that Specified Transaction, (2) defaults, after giving effect to any applicable notice requirement or grace period, in making any payment or delivery due on the last payment, delivery or exchange date of, or any payment on early termination of, a Specified Transaction (or such default continues for at least three Local Business Days if there is no applicable notice requirement or grace period) or (3) disaffirms, disclaims, repudiates or rejects, in whole or in part, a Specified Transaction (or such action is taken by any person or entity appointed or empowered to operate it or act on its behalf); (vi) Cross Default. If "Cross Default" is specified in the Schedule as applying to the party, the occurrence or existence of (1) a default, event of default or other similar condition or event (however described) in respect of such party, any Credit Support Provider of such party or any applicable Specified Entity of such party under one or more agreements or instruments relating to Specified Indebtedness of any of them (individually or collectively) in an aggregate amount of not less than the applicable Threshold Amount (as specified in the Schedule) which has resulted in such Specified Indebtedness becoming, or becoming capable at such time of being declared, due and payable under such agreements or instruments, before it would otherwise have been due and payable or (2) a default by such party, such Credit Support Provider or such Specified Entity (individually or collectively) in making one or more payments on the due date thereof in an aggregate amount of not less than the applicable Threshold Amount under such agreements or instruments (after giving effect to any applicable notice requirement or grace period); (vii) Bankruptcy. The party, any Credit Support Provider of such party or any applicable Specified Entity of such party:-- (1) is dissolved (other than pursuant to a consolidation, amalgamation or merger); (2) becomes insolvent or is unable to pay its debts or fails or admits in writing its inability generally to pay its debts as they become due; (3) makes a general assignment, arrangement or composition with or for the benefit of its creditors; (4) institutes or has instituted against it a proceeding seeking a judgment of insolvency or bankruptcy or any other relief under any bankruptcy or insolvency law or other similar law affecting creditors' rights, or a petition is presented for its 4 winding-up or liquidation, and, in the case of any such proceeding or petition instituted or presented against it, such proceeding or petition (A) results in a judgment of insolvency or bankruptcy or the entry of an order for relief or the making of an order for its winding-up or liquidation or (B) is not dismissed, discharged, stayed or restrained in each case within 30 days of the institution or presentation thereof; (5) has a resolution passed for its winding-up, official management or liquidation (other than pursuant to a consolidation, amalgamation or merger); (6) seeks or becomes subject to the appointment of an administrator, provisional liquidator, conservator, receiver, trustee, custodian or other similar official for it or for all or substantially all its assets; (7) has a secured party take possession of all or substantially all its assets or has a distress, execution, attachment, sequestration or other legal process levied, enforced or sued on or against all or substantially all its assets and such secured party maintains possession, or any such process is not dismissed, discharged, stayed or restrained, in each case within 30 days thereafter; (8) causes or is subject to any event with respect to it which, under the applicable laws of any jurisdiction, has an analogous effect to any of the events specified in clauses (1) to (7) (inclusive); or (9) takes any action in furtherance of, or indicating its consent to, approval of, or acquiescence in, any of the foregoing acts; or (viii) Merger Without Assumption. The party or any Credit Support Provider of such party consolidates or amalgamates with, or merges with or into, or transfers all or substantially all its assets to, another entity and, at the time of such consolidation, amalgamation, merger or transfer:-- (1) the resulting, surviving or transferee entity fails to assume all the obligations of such party or such Credit Support Provider under this Agreement or any Credit Support Document to which it or its predecessor was a party by operation of law or pursuant to an agreement reasonably satisfactory to the other party to this Agreement; or (2) the benefits of any Credit Support Document fail to extend (without the consent of the other party) to the performance by such resulting, surviving or transferee entity of its obligations under this Agreement. (b) Termination Events. The occurrence at any time with respect to a party or, if applicable, any Credit Support Provider of such party or any Specified Entity of such party of any event specified below constitutes an Illegality if the event is specified in (i) below, and, if specified to be applicable, a Credit Event Upon Merger if the event is specified pursuant to (ii) below or an Additional Termination Event if the event is specified pursuant to (iii) below:-- (i) Illegality. Due to the adoption of, or any change in, any applicable law after the date on which a Transaction is entered into, or due to the promulgation of, or any change in, the interpretation by any court, tribunal or regulatory authority with competent jurisdiction of any applicable law after such date, it becomes unlawful (other than as a result of a breach by the party of Section 4(b)) for such party (which will be the Affected Party):-- (1) to perform any absolute or contingent obligation to make a payment or delivery or to receive a payment or delivery in respect of such Transaction or to comply with any other material provision of this Agreement relating to such Transaction; or (2) to perform, or for any Credit Support Provider of such party to perform, any contingent or other obligation which the party (or such Credit Support Provider) has under any Credit Support Document relating to such Transaction; (ii) Credit Event Upon Merger. If "Credit Event Upon Merger" is specified in the Schedule as applying to the party, such party ("X"), any Credit Support Provider of X or any applicable Specified Entity of X consolidates or amalgamates with, or merges with or into, or transfers all or substantially all its assets to, another entity and such action does not constitute an event described in Section 5(a)(viii) but the creditworthiness of the resulting, surviving or transferee entity is materially weaker than that of X, such Credit Support Provider or such Specified Entity, as the case may be, immediately prior to such action (and, in such event, X or its successor or transferee, as appropriate, will be the Affected Party); or 5 (iii) Additional Termination Event. If any "Additional Termination Event" is specified in the Schedule or any Confirmation as applying, the occurrence of such event (and, in such event, the Affected Party or Affected Parties shall be as specified for such Additional Termination Event in the Schedule or such Confirmation). (c) Event of Default and Illegality. If an event or circumstance which would otherwise constitute or give rise to an Event of Default also constitutes an Illegality, it will be treated as an Illegality and will not constitute an Event of Default. 6. Early Termination (a) Right to Terminate Following Event of Default. If at any time an Event of Default with respect to a party (the "Defaulting Party") has occurred and is then continuing, the other party (the "Non-defaulting Party") may, by not more than 20 days notice to the Defaulting Party specifying the relevant Event of Default, designate a day not earlier than the day such notice is effective as an Early Termination Date in respect of all outstanding Transactions. If, however, "Automatic Early Termination" is specified in the Schedule as applying to a party, then an Early Termination Date in respect of all outstanding Transactions will occur immediately upon the occurrence with respect to such party of an Event of Default specified in Section 5(a)(vii)(1), (3), (5), (6) or, to the extent analogous thereto, (8), and as of the time immediately preceding the institution of the relevant proceeding or the presentation of the relevant petition upon the occurrence with respect to such party of an Event of Default specified in Section 5(a)(vii)(4) or, to the extent analogous thereto, (8). (b) Right to Terminate Following Termination Event. (i) Notice. If a Termination Event occurs, an Affected Party will, promptly upon becoming aware of it, notify the other party, specifying the nature of that Termination Event and each Affected Transaction and will also give such other information about that Termination Event as the other party may reasonably require. (ii) Two Affected Parties. If an Illegality under Section 5(b)(i)(1) occurs and there are two Affected Parties, each party will use all reasonable efforts to reach agreement within 30 days after notice thereof is given under Section 6(b)(i) on action to avoid that Termination Event. (iii) Right to Terminate. If:-- (1) an agreement under Section 6(b)(ii) has not been effected with respect to all Affected Transactions within 30 days after an Affected Party gives notice under Section 6( b)(i); or (2) an Illegality other than that referred to in Section 6(b)(ii), a Credit Event Upon Merger or an Additional Termination Event occurs, either party in the case of an Illegality, any Affected Party in the case of an Additional Termination Event if there is more than one Affected Party, or the party which is not the Affected Party in the case of a Credit Event Upon Merger or an Additional Termination Event if there is only one Affected Party may, by not more than 20 days notice to the other party and provided that the relevant Termination Event is then continuing, designate a day not earlier than the day such notice is effective as an Early Termination Date in respect of all Affected Transactions. (c) Effect of Designation. (i) If notice designating an Early Termination Date is given under Section 6(a) or (b), the Early Termination Date will occur on the date so designated, whether or not the relevant Event of Default or Termination Event is then continuing. 6 (ii) Upon the occurrence or effective designation of an Early Termination Date, no further payments or deliveries under Section 2(a)(i) or 2(d) in respect of the Terminated Transactions will be required to be made, but without prejudice to the other provisions of this Agreement. The amount. if any, payable in respect of an Early Termination Date shall be determined pursuant to Section 6(e). (d) Calculations. (i) Statement. On or as soon as reasonably practicable following the occurrence of an Early Termination Date, each party will make the calculations on its part, if any, contemplated by Section 6(e) and will provide to the other party a statement (1) showing, in reasonable detail, such calculations (including all relevant quotations and specifying any amount payable under Section 6(e)) and (2) giving details of the relevant account to which any amount payable to it is to be paid. In the absence of written confirmation from the source of a quotation obtained in determining a Market Quotation, the records of the party obtaining such quotation will be conclusive evidence of the existence and accuracy of such quotation. (ii) Payment Date. An amount calculated as being due in respect of any Early Termination Date under Section 6(e) will be payable on the day that notice of the amount payable is effective (in the case of an Early Termination Date which is designated or occurs as a result of an Event of Default) and on the day which is two Local Business Days after the day on which notice of the amount payable is effective (in the case of an Early Termination Date which is designated as a result of a Termination Event). Such amount will be paid together with (to the extent permitted under applicable law) interest thereon (before as well as after judgment), from (and including) the relevant Early Termination Date to (but excluding) the date such amount is paid, at the Applicable Rate. Such interest will be calculated on the basis of daily compounding and the actual number of days elapsed. (e) Payments on Early Termination. If an Early Termination Date occurs, the following provisions shall apply based on the parties' election in the Schedule of a payment measure, either "Market Quotation" or "Loss", and a payment method, either the "First Method" or the "Second Method". If the parties fail to designate a payment measure or payment method in the Schedule, it will be deemed that "Market Quotation" or the "Second Method", as the case may be, shall apply. The amount, if any, payable in respect of an Early Termination Date and determined pursuant to this Section will be subject to any Set-off. (i) Events of Default. If the Early Termination Date results from an Event of Default:-- (1) First Method and Market Quotation. If the First Method and Market Quotation apply, the Defaulting Party will pay to the Non-defaulting Party the excess, if a positive number, of (A) the sum of the Settlement Amount (determined by the Non-defaulting Party) in respect of the Terminated Transactions and the Unpaid Amounts owing to the Non-defaulting Party over (B) the Unpaid Amounts owing to the Defaulting Party. (2) First Method and Loss. If the First Method and Loss apply, the Defaulting Party will pay to the Non-defaulting Party, if a positive number, the Non-defaulting Party's Loss in respect of this Agreement. (3) Second Method and Market Quotation. If the Second Method and Market Quotation apply, an amount will be payable equal to (A) the sum of the Settlement Amount (determined by the Non-defaulting Party) in respect of the Terminated Transactions and the Unpaid Amounts owing to the Non-defaulting Party less (B) the Unpaid Amounts owing to the Defaulting Party. If that amount is a positive number, the Defaulting Party will pay it to the Non-defaulting Party; if it is a negative number, the Non-defaulting Party will pay the absolute value of that amount to the Defaulting Party. (4) Second Method and Loss. If the Second Method and Loss apply, an amount will be payable equal to the Non-defaulting Party's Loss in respect of this Agreement. If that amount is a positive number, the Defaulting Party will pay it to the Non-defaulting Party; if it is a negative 7 number, the Non-defaulting Party will pay the absolute value of that amount to the Defaulting Party. (ii) Termination Events. If the Early Termination Date results from a Termination Event:-- (1) One Affected Party. If there is one Affected Party, the amount payable will be determined in accordance with Section 6(e)(i)(3), if Market Quotation applies, or Section 6(e)(i)(4), if Loss applies, except that, in either case, references to the Defaulting Party and to the Non-defaulting Party will be deemed to be references to the Affected Party and the party which is not the Affected Party, respectively, and, if Loss applies and fewer than all the Transactions are being terminated, Loss shall be calculated in respect of all Terminated Transactions. (2) Two Affected Parties. If there are two Affected Parties: (A) if Market Quotation applies, each party will determine a Settlement Amount in respect of the Terminated Transactions, and an amount will be payable equal to (1) the sum of (a) one-half of the difference between the Settlement Amount of the party with the higher Settlement Amount ("X") and the Settlement Amount of the party with the lower Settlement Amount ("Y") and (b) the Unpaid Amounts owing to X less (II) the Unpaid Amounts owing to Y; and (B) if Loss applies, each party will determine its Loss in respect of this Agreement (or, if fewer than all the Transactions are being terminated, in respect of all Terminated Transactions) and an amount will be payable equal to one-half of the difference between the Loss of the party with the higher Loss ("X') and the Loss of the party with the lower Loss ("Y"). If the amount payable is a positive number, Y will pay it to X; if it is a negative number, X will pay the absolute value of that amount to Y. (iii) Adjustment for Bankruptcy. In circumstances where an Early Termination Date occurs because "Automatic Early Termination" applies in respect of a party, the amount determined under this Section 6(e) will be subject to such adjustments as are appropriate and permitted by law to reflect any payments or deliveries made by one party to the other under this Agreement (and retained by such other party) during the period from the relevant Early Termination Date to the date for payment determined under Section 6(d)(ii). (iv) Pre-Estimate. The parties agree that if Market Quotation applies an amount recoverable under this Section 6(e) is a reasonable pre-estimate of loss and not a penalty. Such amount is payable for the loss of bargain and the loss of protection against future risks and except as otherwise provided in this Agreement neither party will be entitled to recover any additional damages as a consequence of such losses. 7. Transfer Neither this Agreement nor any interest or obligation in or under this Agreement may be transferred (whether by way of security or otherwise) by either party without the prior written consent of the other party, except that:-- (a) a party may make such a transfer of this Agreement pursuant to a consolidation or amalgamation with, or merger with or into, or transfer of all or substantially all its assets to, another entity (but without prejudice to any other right or remedy under this Agreement); and (b) a party may make such a transfer of all or any part of its interest in any amount payable to it from a Defaulting Party under Section 6(e). Any purported transfer that is not in compliance with this Section will be void. 8 8. Miscellaneous (a) Entire Agreement. This Agreement constitutes the entire agreement and understanding of the parties with respect to its subject matter and supersedes all oral communication and prior writings with respect thereto. (b) Amendments. No amendment, modification or waiver in respect of this Agreement will be effective unless in writing (including a writing evidenced by a facsimile transmission) and executed by each of the parties or confirmed by an exchange of telexes or electronic messages on an electronic messaging system. (c) Survival of Obligations. Without prejudice to Sections 2(a)(iii) and 6(c)(ii), the obligations of the parties under this Agreement will survive the termination of any Transaction. (d) Remedies Cumulative. Except as provided in this Agreement, the rights, powers, remedies and privileges provided in this Agreement are cumulative and not exclusive of any rights, powers, remedies and privileges provided by law. (e) Counterparts and Confirmations. (i) This Agreement (and each amendment, modification and waiver in respect of it) may be executed and delivered in counterparts (including by facsimile transmission), each of which will be deemed an original. (ii) The parties intend that they are legally bound by the terms of each Transaction from the moment they agree to those terms (whether orally or otherwise). A Confirmation shall be entered into as soon as practicable and may be executed and delivered in counterparts (including by facsimile transmission) or be created by an exchange of telexes or by an exchange of electronic messages on an electronic messaging system, which in each case will be sufficient for all purposes to evidence a binding supplement to this Agreement. The parties will specify therein or through another effective means that any such counterpart, telex or electronic message constitutes a Confirmation. (f) No Waiver of Rights. A failure or delay in exercising any right, power or privilege in respect of this Agreement will not be presumed to operate as a waiver, and a single or partial exercise of any right, power or privilege will not be presumed to preclude any subsequent or further exercise, of that right, power or privilege or the exercise of any other right, power or privilege. (g) Headings. The headings used in this Agreement are for convenience of reference only and are not to affect the construction of or to be taken into consideration in interpreting this Agreement. 9. Expenses A Defaulting Party will, on demand, indemnify and hold harmless the other party for and against all reasonable out-of-pocket expenses, including legal fees, incurred by such other party by reason of the enforcement and protection of its rights under this Agreement or any Credit Support Document to which the Defaulting Party is a party or by reason of the early termination of any Transaction, including, but not limited to, costs of collection. 1O. Notices (a) Effectiveness. Any notice or other communication in respect of this Agreement may be given in any manner set forth below (except that a notice or other communication under Section 5 or 6 may not be given by facsimile transmission or electronic messaging system) to the address or number or in accordance with the electronic messaging system details provided (see the Schedule) and will be deemed effective as indicated:-- (i) if in writing and delivered in person or by courier, on the date it is delivered; (ii) if sent by telex, on the date the recipient's answerback is received; 9 (iii) if sent by facsimile transmission, on the date that transmission is received by a responsible employee of the recipient in legible form (it being agreed that the burden of proving receipt will be on the sender and will not be met by a transmission report generated by the sender's facsimile machine); (iv) if sent by certified or registered mail (airmail, if overseas) or the equivalent (return receipt requested), on the date that mail is delivered or its delivery is attempted; or (v) if sent by electronic messaging system, on the date that electronic message is received, unless the date of that delivery (or attempted delivery) or that receipt, as applicable, is not a Local Business Day or that communication is delivered (or attempted) or received, as applicable, after the close of business on a Local Business Day, in which case that communication shall be deemed given and effective on the first following day that is a Local Business Day. (b) Change of Addresses. Either party may by notice to the other change the address, telex or facsimile number or electronic messaging system details at which notices or other communications are to be given to it. 11. Governing Law and Jurisdiction (a) Governing Law. This Agreement will be governed by and construed in accordance with the law specified in the Schedule. (b) Jurisdiction. With respect to any suit, action or proceedings relating to this Agreement ("Proceedings"), each party irrevocably: (i) submits to the jurisdiction of the English courts, if this Agreement is expressed to be governed by English law, or to the non-exclusive jurisdiction of the courts of the State of New York and the United States District Court located in the Borough of Manhattan in New York City, if this Agreement is expressed to be governed by the laws of the State of New York; and (ii) waives any objection which it may have at any time to the laying of venue of any Proceedings brought in any such court, waives any claim that such Proceedings have been brought in an inconvenient forum and further waives the right to object, with respect to such Proceedings, that such court does not have any jurisdiction over such party. Nothing in this Agreement precludes either party from banging Proceedings in any other jurisdiction (outside, if this Agreement is expressed to be governed by English law, the Contracting States, as defined in Section 1(3) of the Civil Jurisdiction and Judgments Act 1982 or any modification, extension or re-enactment thereof for the time being in force) nor will the bringing of Proceedings in any one or more jurisdictions preclude the bringing of Proceedings in any other jurisdiction. (c) Waiver of Immunities. Each party irrevocably waives, to the fullest extent permitted by applicable law, with respect to itself and its revenues and assets (irrespective of their use or intended use), all immunity on the grounds of sovereignty or other similar grounds from (i) suit, (ii) jurisdiction of any court, (iii) relief by way of injunction, order for specific performance or for recovery of property, (iv) attachment of its assets (whether before or after judgment) and (v) execution or enforcement of any judgment to which it or its revenues or assets might otherwise be entitled in any Proceedings in the courts of any jurisdiction and irrevocably agrees, to the extent permitted by applicable law, that it will not claim any such immunity in any Proceedings. 12. Definitions As used in this Agreement:-- "Additional Termination Event" has the meaning specified in Section 5(b). "Affected Party" has the meaning specified in Section 5(b). 10 "Affected Transactions" means (a) with respect to any Termination Event consisting of an Illegality, all Transactions affected by the occurrence of such Termination Event and (b) with respect to any other Termination Event, all Transactions. "Affiliate" means, subject to the Schedule, in relation to any person, any entity controlled, directly or indirectly, by the person, any entity that controls, directly or indirectly, the person or any entity directly or indirectly under common control with the person. For this purpose, "control" of any entity or person means ownership of a majority of the voting power of the entity or person. "Applicable Rate" means:-- (a) in respect of obligations payable or deliverable (or which would have been but for Section 2(a)(iii)) by a Defaulting Party, the Default Rate; (b) in respect of an obligation to pay an amount under Section 6(e) of either party from and after the date (determined in accordance with Section 6(d)(ii)) on which that amount is payable, the Default Rate; (c) in respect of all other obligations payable or deliverable (or which would have been but for Section 2(a)(iii)) by a Non-defaulting Party, the Non-default Rate; and (d) in all other cases, the Termination Rate. "consent" includes a consent, approval, action, authorisation, exemption, notice, filing, registration or exchange control consent. "Credit Event Upon Merger" has the meaning specified in Section 5(b). "Credit Support Document" means any agreement or instrument that is specified as such in this Agreement. "Credit Support Provider" has the meaning specified in the Schedule. "Default Rate" means a rate per annum equal to the cost (without proof or evidence of any actual cost) to the relevant payee (as certified by it) if it were to fund or of funding the relevant amount plus 1% per annum. "Defaulting Party" has the meaning specified in Section 6(a). "Early Termination Date" means the date determined in accordance with Section 6(a) or 6(b)(iii). "Event of Default" has the meaning specified in Section 5(a) and, if applicable, in the Schedule. "Illegality" has the meaning specified in Section 5(b). "law" includes any treaty, law, rule or regulation and "lawful' and "unlawful" will be construed accordingly. "Local Business Day" means, subject to the Schedule, a day on which commercial banks are open for business (including dealings in foreign exchange and foreign currency deposits) (a) in relation to any obligation under Section 2(a)(i), in the place(s) specified in the relevant Confirmation or, if not so specified, as otherwise agreed by the parties in writing or determined pursuant to provisions contained, or incorporated by reference, in this Agreement, (b) in relation to any other payment, in the place where the relevant account is located, (c) in relation to any notice or other communication, including notice contemplated under Section 5(a)(i), in the city specified in the address for notice provided by the recipient and, in the case of a notice contemplated by Section 2(b), in the place where the relevant new account is to be located and (d) in relation to Section 5(a)(v)(2), in the relevant locations for performance with respect to such Specified Transaction. "Loss" means, with respect to this Agreement or one or more Terminated Transactions, as the case may be, and a party, an amount that party reasonably determines in good faith to be its total losses and costs (or gain, in which case expressed as a negative number) in connection with this Agreement or that Terminated Transaction or group of Terminated Transactions, as the case may be, including any loss of bargain, cost of funding or, at the election of such party but without duplication, loss or cost incurred as a result of its terminating, liquidating, obtaining or reestablishing any hedge or related trading position (or any gain 11 resulting from any of them). Loss includes losses and costs (or gains) in respect of any payment or delivery required to have been made (assuming satisfaction of each applicable condition precedent) on or before the relevant Early Termination Date and not made, except, so as to avoid duplication, if Section 6(e)(i)(1) or (3) or 6(e)(ii)(2)(A) applies. Loss does not include a party's legal fees and out-of-pocket expenses referred to under Section 9. A party will determine its Loss as of the relevant Early Termination Date, or, if that is not reasonably practicable, as of the earliest date thereafter as is reasonably practicable. A party may (but need not) determine its Loss by reference to quotations of relevant rates or prices from one or more leading dealers in the relevant markets. "Market Quotation" means, with respect to one or more Terminated Transactions and a party making the determination, an amount determined on the basis of quotations from Reference Market-makers. Each quotation will be for an amount, if any, that would be paid to such party (expressed as a negative number) or by such party (expressed as a positive number) in consideration of an agreement between such party (taking into account any existing Credit Support Document with respect to the obligations of such party) and the quoting Reference Market-maker to enter into a transaction (the "Replacement Transaction") that would have the effect of preserving for such party the economic equivalent of any payment or delivery (whether the underlying obligation was absolute or contingent and assuming the satisfaction of each applicable condition precedent) by the parties under Section 2(a)(i) in respect of such Terminated Transaction or group of Terminated Transactions that would, but for the occurrence of the relevant Early Termination Date, have been required after that date. For this purpose, Unpaid Amounts in respect of the Terminated Transaction or group of Terminated Transactions are to be excluded but, without limitation, any payment or delivery that would, but for the relevant Early Termination Date, have been required (assuming satisfaction of each applicable condition precedent) after that Early Termination Date is to be included. The Replacement Transaction would be subject to such documentation as such party and the Reference Market-maker may, in good faith, agree. The party making the determination (or its agent) will request each Reference Market-maker to provide its quotation to the extent reasonably practicable as of the same day and time (without regard to different time zones) on or as soon as reasonably practicable after the relevant Early Termination Date. The day and time as of which those quotations are to be obtained will be selected in good faith by the party obliged to make a determination under Section 6(e), and, if each party is so obliged, after consultation with the other. If more than three quotations are provided, the Market Quotation will be the arithmetic mean of the quotations, without regard to the quotations having the highest and lowest values. If exactly three such quotations are provided, the Market Quotation will be the quotation remaining after disregarding the highest and lowest quotations. For this purpose, if more than one quotation has the same highest value or lowest value, then one of such quotations shall be disregarded. If fewer than three quotations are provided, it will be deemed that the Market Quotation in respect of such Terminated Transaction or group of Terminated Transactions cannot be determined. "Non-default Rate" means a rate per annum equal to the cost (without proof or evidence of any actual cost) to the Non-defaulting Party (as certified by it) if it were to fund the relevant amount. "Non-defaulting Party" has the meaning specified in Section 6(a). "Potential Event of Default" means any event which, with the giving of notice or the lapse of time or both, would constitute an Event of Default. "Reference Market-makers" means four leading dealers in the relevant market selected by the party determining a Market Quotation in good faith (a) from among dealers of the highest credit standing which satisfy all the criteria that such party applies generally at the time in deciding whether to offer or to make an extension of credit and (b) to the extent practicable, from among such dealers having an office in the same city. "Scheduled Payment Date" means a date on which a payment or delivery is to be made under Section 2(a)(i) with respect to a Transaction. "Set-off" means set-off, offset, combination of accounts, right of retention or withholding or similar right or requirement to which the payer of an amount under Section 6 is entitled or subject (whether arising under 12 this Agreement, another contract, applicable law or otherwise) that is exercised by, or imposed on, such payer. "Settlement Amount" means, with respect to a party and any Early Termination Date, the sum of:-- (a) the Market Quotations (whether positive or negative) for each Terminated Transaction or group of Terminated Transactions for which a Market Quotation is determined; and (b) such party's Loss (whether positive or negative and without reference to any Unpaid Amounts) for each Terminated Transaction or group of Terminated Transactions for which a Market Quotation cannot be determined or would not (in the reasonable belief of the party making the determination) produce a commercially reasonable result. "Specified Entity" has the meaning specified in the Schedule. "Specified Indebtedness" means, subject to the Schedule, any obligation (whether present or future, contingent or otherwise, as principal or surety or otherwise) in respect of borrowed money. "Specified Transaction" means, subject to the Schedule, (a) any transaction (including an agreement with respect thereto) now existing or hereafter entered into between one party to this Agreement (or any Credit Support Provider of such party or any applicable Specified Entity of such party) and the other party to this Agreement (or any Credit Support Provider of such other party or any applicable Specified Entity of such other party) which is a rate swap transaction, basis swap, forward rate transaction, commodity swap, commodity option, equity or equity index swap, equity or equity index option, bond option, interest rate option, foreign exchange transaction, cap transaction, floor transaction, collar transaction, currency swap transaction, cross-currency rate swap transaction, currency option or any other similar transaction (including any option with respect to any of these transactions), (b) any combination of these transactions and (c) any other transaction identified as a Specified Transaction in this Agreement or the relevant confirmation. "Terminated Transactions" means with respect to any Early Termination Date (a) if resulting from a Termination Event, all Affected Transactions and (b) if resulting from an Event of Default, all Transactions (in either case) in effect immediately before the effectiveness of the notice designating that Early Termination Date (or, if "Automatic Early Termination" applies, immediately before that Early Termination Date). "Termination Event" means an Illegality or, if specified to be applicable, a Credit Event Upon Merger or an Additional Termination Event. "Termination Rate" means a rate per annum equal to the arithmetic mean of the cost (without proof or evidence of any actual cost) to each party (as certified by such party) if it were to fund or of funding such amounts. "Unpaid Amounts" owing to any party means, with respect to an Early Termination Date, the aggregate of (a) in respect of all Terminated Transactions, the amounts that became payable (or that would have become payable but for Section 2(a)(iii)) to such party under Section 2(a)(i) on or prior to such Early Termination Date and which remain unpaid as at such Early Termination Date and (b) in respect of each Terminated Transaction, for each obligation under Section 2(a)(i) which was (or would have been but for Section 2(a)(iii)) required to be settled by delivery to such party on or prior to such Early Termination Date and which has not been so settled as at such Early Termination Date, an amount equal to the fair market value of that which was (or would have been) required to be delivered as of the originally scheduled date for delivery, in each case together with (to the extent permitted under applicable law) interest, in the currency of such amounts, from (and including) the date such amounts or obligations were or would have been required to have been paid or performed to (but excluding) such Early Termination Date, at the Applicable Rate. Such amounts of interest will be calculated on the basis of daily compounding and the actual number of days elapsed. The fair market value of any obligation referred to in clause (b) above shall be reasonably determined 13 by the party obliged to make the determination under Section 6(e) or, if each party is so obliged. it shall be the average of the fair market values reasonably determined by both parties. IN WITNESS WHEREOF the parties have executed this document on the respective dates specified below with effect from the date specified on the first page of this document. FIRST UNION NATIONAL BANK PENNSYLVANIA MANUFACTURERS OF NORTH CAROLINA CORPORATION - - - -------------------------- --------------------------- (Name of Party) (Name of Party) By: /s/Bruce M. Young By: /s/ Edward S. Hochberg ---------------------- ------------------------ Name: Bruce M. Young Name: Edward S. Hochberg Title: Vice President Title: VP - Finance Date: 3/12/97 Date: 3/10/97 14 SCHEDULE to the MASTER AGREEMENT dated as of February 7, 1997 between FIRST UNION NATIONAL BANK OF North Carolina ("Party A") and [NAME OF PARTY] ("Party B") I. Termination Provisions (a) "Specified Entity" for purposes of Section 5(a)(v) means each party's Affiliates. If a party or any Credit Support Provider of a party is a partnership, then for purposes of Sections 5(a)(v), 5(a)(vi), 5(a)(vii) and 5(b)(ii), "Specified Entity" also means each general partner of that partnership. (b) "Specified Transaction" has its meaning as defined in Section 12, provided that "Default under Specified Transaction" excludes Force Majeure as defined below. (c) "Cross Default" applies to both parties, but excludes Force Majeure. "Force Majeure" means nonpayment resulting solely from a wire transfer or operational problem or error (so long as sufficient funds are available), or from the general unavailability of the relevant currency due to exchange controls or other similar governmental action, but only if payment is made within three Business Days after the problem has been corrected, the error has been discovered or the currency becomes available. With respect to Party B, "Cross Default" is amended by inserting at the end of Section 5(a)(vi): "or (3) any default, event of default or other similar condition or event (however described) under any Financial Agreement." "Specified Indebtedness" means any obligation (whether present, future, contingent or otherwise, as principal or surety or otherwise) in respect of borrowed money or relating to the payment or delivery of funds, securities or other property (including, without limitation, collateral). "Threshold Amount" means, with respect to Party A, an amount (including its equivalent in another currency) equal to the higher of $10,000,000 or 2% of its stockholders' equity as reflected on its most recent financial statements or call reports, and with respect to Party B, any amount of Specified Indebtedness. (d) "Credit Event Upon Merger" applies to both parties. (e) "Automatic Early Termination" does not apply to either party. (f) Payments on Early Termination. "Market Quotation" and the "Second Method" apply, subject to the following: (i) "Market Quotation" for any Terminated Transaction that is, or is subject to, any unexercised option shall be determined by taking into account the economic equivalent of the option. (ii) The Non-defaulting Party may, upon the occurrence of an Early Termination Date, offset payments due by it under this Agreement (or under any Specified Transaction) against, and apply such payments 1 to the satisfaction of, any obligations owing by the Defaulting Party (including any Office of the Defaulting Party) to the Non-defaulting Party or any of the Non-defaulting Party's Affiliates (including any Office of the Non-defaulting Party or its Affiliates) whether matured or unmatured, and it is a condition precedent to the Non-defaulting Party's obligation to make any such payments that such obligations of the Defaulting Party have been paid in full or satisfied by offset as contemplated hereunder. For this purpose, the Non-defaulting Party may convert any such payments or obligations into the currency of the other at a rate of exchange (including premiums and costs of exchange) at which it could purchase the relevant currency acting in good faith. (g) "Additional Termination Event" applies to a party (which will be the Affected Party) if that party, any Credit Support Provider of that party, or Specified Entity of that party is a natural person and means the death of, or the appointment of a guardian for, that natural person. II. Documents (a) Delivery of Documents. When it delivers this Agreement, Party B shall also deliver to Party A the Closing Documents in form and substance reasonably satisfactory to Party A. For each Transaction, Party B shall deliver, promptly upon request, a duly executed incumbency certificate for the person(s) executing the Confirmation for Party B for that Transaction. (b) "Closing Documents" means an opinion of counsel covering Party B's Basic Representations under Section 3(a)(i), or in lieu thereof, Party B's Authorizing Documents for this Agreement and the Transactions and a duly executed incumbency certificate for the person(s) executing this Agreement for Party B. (c) "Authorizing Documents" of a party or its Credit Support Provider means a certified copy of the board of directors' resolutions of that party or Credit Support Provider (or for a partnership, a copy of its partnership agreement and a certified copy of the resolutions of the partnership or of each general partner). III. Miscellaneous (a) Addresses for Notices. To Party A: To Party B: FIRST UNION NATIONAL BANK OF PENNSYLVANIA MANUFACTURERS NORTH CAROLINA CORPORATION 1735 Market Street Philadelphia, Pa 19103 c/o First Union National Bank of North Carolina 301 South College Charlotte, NC 28288-0601 Atention: Joseph Nenichka Attention: Edward S. Hochberg Vice President, Capital Markets Support Fax: (704) 383-9139 Fax: (215) 665-5061 Phone: (704) 383-0590 Phone: (215)665-5069 2 (b) "Calculation Agent" means Party A. (c) "Credit Support Document" means each document which by its terms secures, guarantees or otherwise supports Party B's obligations hereunder from time to time, whether or not this Agreement, any Transaction, or any type of Transaction entered into hereunder is specifically referenced or described in any such document. "Credit Support Default" is amended by adding at the end of Section 5(a)(iii)(1): ", any default, event of default or other similar condition or event (however described) exists under any Credit Support Document, any action is taken to realize upon any collateral provided to secure such party's obligations hereunder or under any Transaction, or the other party fails at any time to have a valid and perfected first priority security interest in any such collateral;" (d) "Credit Support Provider" means each party to a Credit Support Document that provides or is obligated to provide security, a guaranty or other credit support for Party B's obligations hereunder. (e) "Affiliate" has its meaning as defined in Section 12, except for Party A under Section 5(a)(v), "Affiliate" means First Union Corporation. (f) Governing Law. This Agreement will be governed by and construed in accordance with the law (and not the law of conflicts) of the State of New York. (g) Waiver of Jury Trial. To the extent permitted by applicable law, each party irrevocably waives any and all right to trial by jury in any legal proceeding in connection with this Agreement, any Credit Support Document to which it is a party, or any Transaction. (h) Netting of Payments. If payments are due by each party on the same day under two or more Transactions, then Section 2(c)(ii) will not apply to those payments if a party gives notice to the relevant Office(s) of the other party on or before the second New York Business Day before that payment date stating that those payments will be netted or, if given by the Calculation Agent, stating the net amount due. (i) Recorded Conversations. Each party may electronically record all telephone conversations between them in connection with this Agreement or any Transaction, and any such recordings may be submitted in evidence in any proceeding to establish any matters pertinent to this Agreement or any Transaction. (j) Additional Representations. Section 3 is amended by adding the following Sections 3(e) and 3(f): "(e) for any Relevant Agreement: (i) it acts as principal and not as agent, (ii) it acknowledges that the other party acts only at arm's length and is not its agent, broker, advisor or fiduciary in any respect, and any agency, brokerage, advisory or fiduciary services that the other party (or any of its affiliates) may otherwise provide to the party (or to any of its affiliates) excludes the Relevant Agreement, (iii) it is relying solely upon its own evaluation of the Relevant Agreement (including the present and future results, consequences, risks, and benefits thereof, whether financial, accounting, tax, legal, or otherwise) and upon advice from its own professional advisors, (iv) it understands the Relevant Agreement and those risks, has determined they are appropriate for it, and willingly assumes those 3 risks, and (v) it has not relied and will not be relying upon any evaluation or advice (including any recommendation, opinion, or representation) from the other party, its affiliates or the representatives or advisors of the other party or its affiliates (except representations expressly made in the Relevant Agreement or an opinion of counsel required thereunder). "Relevant Agreement" means this Agreement, each Transaction, each Confirmation, any Credit Support Document, and any agreement (including any amendment, modification, transfer or early termination) between the parties relating thereto or to any Transaction. (f) it is an "eligible swap participant" within the meaning of 17 C.F.R. ss.35.1." (k) Joint Party. If more than one entity or natural person is executing this Agreement as Party B, then (i) the obligations of Party B hereunder and under each Transaction shall be the joint and several obligations of each such entity or natural person, (ii) any Event of Default or Potential Event of Default occurring with respect to any such entity or natural person shall be an Event of Default or Potential Event of Default, respectively, with respect to Party B, (iii) the death, release or discharge, in whole or in part, of any such entity or natural person, or the occurrence of any bankruptcy, liquidation, dissolution or any other event described in Section 5(a)(vii) with respect to any such entity or natural person, shall not discharge or affect the liabilities of any other such entity or natural person; and (iii) unless the context otherwise requires, each reference herein or in any Confirmation to "party" shall, as applied to Party B, be construed as a joint and several reference to each such entity or natural person. IV. ISDA Definitions (a) Incorporation. This Agreement and each Transaction are subject to the 1991 ISDA Definitions (as published by the International Swaps and Derivatives Association, Inc.) and will be governed by the provisions of the ISDA Definitions, without regard to any amendments to the ISDA Definitions subsequent to the date hereof. The provisions of the ISDA Definitions are incorporated by reference in, and shall be deemed to be part of, this document and each Confirmation. (b) Inconsistency. In the event of any inconsistency between the provisions of this document and the ISDA Definitions, this document will prevail. V. Additional Terms (a) Covenants of Financial Agreements. (i) Party B shall provide Party A at all times hereunder with the same covenant protection as Party A requires of Party B under Financial Agreements. Therefore, in addition to the Cross Default provisions of this Agreement, and notwithstanding the satisfaction of any obligation or promise to pay money to Party A under any Financial Agreement, or the termination or cancellation of any Financial Agreement, Party B hereby agrees to perform, comply with and observe for the benefit of Party A hereunder all affirmative and negative covenants contained in each Financial Agreement applicable to Party B (excluding any obligation or promise to pay money under any Financial Agreement) at any time Party B has any obligation (whether absolute or contingent) under this Agreement. (ii) For purposes hereof: (A) the affirmative and negative covenants of each Financial Agreement applicable to Party B (together with related definitions and ancillary provisions, but in any event 4 excluding any obligation or promise to pay money under any Financial Agreement) are incorporated (and upon execution of any future Financial Agreement, shall automatically be incorporated) by reference herein (mutatis mutandis); (B) if other lenders or creditors are parties to any Financial Agreement, then references therein to the lenders or creditors shall be deemed references to Party A; and (C) for any such covenant applying only when any loan, other extension of credit, obligation or commitment under the Financial Agreement is outstanding, that covenant shall be deemed to apply hereunder at any time Party B has any obligation (whether absolute or contingent) under this Agreement. (b) "Financial Agreement" means each existing or future agreement or instrument relating to any loan or extension of credit from Party A to Party B (whether or not anyone else is a party thereto), as the same exists when executed and without regard to any termination or cancellation thereof, or unless consented to in writing by Party A, any amendment, modification, addition, waiver or consent thereto or thereof. IN WITNESS WHEREOF, the parties have executed this Schedule by their duly authorized signatories as of the date hereof. FIRST UNION NATIONAL BANK OF By: /s/ Bruce M. Young ---------------------------------- Title: Vice President PENNSYLVANIA MANUFACTURERS CORPORATION By: /s/ Edward S. Hochberg ---------------------------------- Title: Vice President - Finance 5 EX-10.15 18 LETTER OF CREDIT AGREEMENT FIRST AMENDED AND RESTATED LETTER OF CREDIT AGREEMENT by and among PENNSYLVANIA MANUFACTURERS CORPORATION, THE BANKS PARTY HERETO, CORESTATES BANK, N.A., AS CO-AGENT AND THE BANK OF NEW YORK, AS AGENT AND AS ISSUING BANK ---------------- $50,000,000 ---------------- Dated as of March 14, 1997 -2- TABLE OF CONTENTS 1. DEFINITIONS AND PRINCIPLES OF CONSTRUCTION .......................... 3 1.1. Definitions .................................................. 3 1.2. Principles of Construction .................................. 21 2. AMOUNT AND TERMS OF LETTERS OF CREDIT .............................. 23 2.1. Issuance of Letters of Credit ............................... 23 2.2. Letter of Credit Participation and Funding Commitments ................................................. 24 2.3. Interest Rate ............................................... 26 2.4. Termination or Reduction of Commitment ...................... 26 2.5. Amendments to Letters of Credit ............................. 26 2.6. Extension of Commitment and Termination Date ................ 28 2.7. Extension of the Stated Expiration Date of Each Letter of Credit ............................................ 28 2.8. Reimbursement Obligations Absolute .......................... 29 2.9. No Liability of the Issuing Bank ............................ 30 2.10. Increased Costs; Capital Adequacy .......................... 31 2.11. Withholding Tax Exemption .................................. 32 2.12. Agent's Records ............................................ 32 2.13. Use of Proceeds ............................................ 32 2.14. Collateral ................................................. 33 2.15. Replacement of Banks ....................................... 34 2.16. Commitment Fee ............................................. 35 2.17. Letter of Credit Commissions ............................... 35 3. CONDITIONS PRECEDENT ............................................... 35 3.1. Conditions to Effectiveness ................................. 35 3.2. Conditions for Issuance of All Letters of Credit and Extension and Increases thereof and Conditions to Effectiveness of Letters of Credit ........................................... 38 4. REPRESENTATIONS AND WARRANTIES ..................................... 39 4.1. Corporate Organization and Power ............................ 39 4.2. Authorization; Enforceability ............................... 40 4.3. No Violation ................................................ 40 4.4. Governmental Authorization; Permits ......................... 40 -i- 4.5. Litigation .................................................. 41 4.6. Taxes ....................................................... 41 4.7. Subsidiaries ................................................ 42 4.8. Full Disclosure ............................................. 42 4.9. Margin Regulations .......................................... 42 4.10. No Material Adverse Change ................................. 42 4.11. Financial Matters. ......................................... 43 4.12. Ownership of Properties .................................... 44 4.13. ERISA ...................................................... 44 4.14. Environmental Matters ...................................... 44 4.15. Compliance With Laws ....................................... 45 4.16. Regulated Industries ....................................... 46 4.17. Insurance .................................................. 46 4.18. Certain Contracts. ......................................... 46 4.19. Reinsurance Agreements ..................................... 47 4.20. Ranking of Obligations ..................................... 47 5. AFFIRMATIVE COVENANTS .............................................. 47 5.1. GAAP Financial Statements ................................... 47 5.2. Statutory Financial Statements .............................. 48 5.3. Other Business and Financial Information .................... 49 5.4. Corporate Existence; Franchises; Maintenance of Properties .................................................. 53 5.5. Compliance with Laws ........................................ 53 5.6. Payment of Obligations ...................................... 53 5.7. Insurance ................................................... 53 5.8. Maintenance of Books and Records; Inspection ................ 54 5.9. Dividends ................................................... 54 5.10. Ownership of Insurance Subsidiaries ........................ 54 5.11. Extinguishment of Senior Note Indebtedness ................. 54 5.12. Further Assurances ......................................... 55 6. FINANCIAL COVENANTS ................................................ 55 6.1. Capitalization Ratio ........................................ 55 6.2. Cash Coverage Ratio ......................................... 55 6.3. Statutory Surplus ........................................... 55 6.4. Risk-Based Capital .......................................... 56 7. NEGATIVE COVENANTS ................................................. 56 7.1. Merger; Consolidation; Disposition of Assets ................ 56 7.2. Indebtedness ................................................ 57 -ii- 7.3. Liens ....................................................... 58 7.4. Investments; Acquisitions ................................... 59 7.5. Restricted Payments ......................................... 59 7.6. Transactions with Affiliates ................................ 60 7.7. Certain Amendments .......................................... 60 7.8. Lines of Business ........................................... 61 7.9. Limitation on Certain Restrictions .......................... 61 7.10. Fiscal Year ................................................ 61 7.11. Accounting Changes ......................................... 62 7.12. Reinsurance Agreements ..................................... 62 8. DEFAULT ............................................................ 62 8.1. Events of Default ........................................... 63 9. THE AGENT .......................................................... 67 9.1. Appointment ................................................. 67 9.2. Delegation of Duties ........................................ 68 9.3. Exculpatory Provisions ...................................... 68 9.4. Reliance by Agent ........................................... 68 9.5. Notice of Default ........................................... 69 9.6. Non-Reliance on Agent and Other Banks ....................... 69 9.7. Indemnification ............................................. 70 9.8. Agent in Its Individual Capacity ............................ 70 9.9. Successor Agent ............................................. 71 9.10. Co-Agent ................................................... 71 10. OTHER PROVISIONS .................................................. 72 10.1. Amendments and Waivers ..................................... 72 10.2. Notices .................................................... 73 10.3. No Waiver; Cumulative Remedies ............................. 74 10.4. Survival of Representations and Warranties ................. 74 10.5. Payment of Expenses and Taxes .............................. 75 10.6. Assignments and Participations ............................. 76 10.7. Counterparts ............................................... 77 10.8. Adjustments; Set-off ....................................... 78 10.9. Construction ............................................... 79 10.10. Indemnity ................................................. 79 10.11. Governing Law ............................................. 80 10.12. Headings Descriptive ...................................... 80 10.13. Severability .............................................. 80 10.14. Integration ............................................... 80 -iii- 10.15. Consent to Jurisdiction ................................... 80 10.16. Service of Process ........................................ 80 10.17. No Limitation on Service or Suit .......................... 81 10.18. WAIVER OF TRIAL BY JURY ................................... 81 10.19. Confidentiality ........................................... 81 EXHIBITS Exhibit A List of Commitment Percentages Exhibit B Form of Assignment and Acceptance Agreement Exhibit C Form of Letter of Credit Request Exhibit D Form of Letter of Credit Exhibit E-1 Form of Compliance Certificate (GAAP Financial Statements) Exhibit E-2 Form of Compliance Certificate (Statutory Financial Statements) Exhibit F Form of Financial Condition Certificate Exhibit G Form of Opinion of Counsel to the Applicant Exhibit H Form of Opinion of Special Counsel Exhibit I Form of Extension Request SCHEDULES Schedule 1.1 Management Group Schedule 4.4 Licenses Schedule 4.6 Taxes Schedule 4.7 Subsidiaries Schedule 4.14 Environmental Matters Schedule 4.18 Material Contracts Schedule 4.19 Reinsurers and Collateral Securing Certain Reinsurers' Obligations Schedule 7.2 Indebtedness Schedule 7.3 Liens Schedule 7.6 Transactions with Affiliates Schedule 10.2 List of Banks and their Addresses -iv- FIRST AMENDED AND RESTATED LETTER OF CREDIT AGREEMENT, dated as of March 14, 1997, by and among PENNSYLVANIA MANUFACTURERS CORPORATION, a Pennsylvania corporation (the "Applicant"), each subsidiary of the Applicant which is or may become a party hereto (each a "Co-Applicant"), each of the banks or other lending institutions party hereto (together with their respective assigns, the "Banks", each a "Bank"), CORESTATES BANK, N.A., as Co-Agent (in such capacity, the "Co-Agent") and THE BANK OF NEW YORK, as agent for itself and the other Banks (in such capacity, the "Agent"), and as issuing bank (in such capacity, the "Issuing Bank") for the Letters of Credit (as defined in Section 1). RECITALS A. The Applicant, the Banks, the Co-Agent, the Issuing Bank and the Agent entered into a Letter of Credit Agreement, dated as of November 10, 1995. B. Prior to the effectiveness of this First Amended and Restated Letter of Credit Agreement, the aggregate Commitments were $75,000,000. In connection with the execution and delivery by the Applicant of the Credit Agreement, dated as of the date hereof, among the Applicant, the lenders party thereto, The Bank of New York, as administrative agent and First Union National Bank of North Carolina, as documentation agent (as the same may be amended, supplemented or otherwise modified pursuant to Section 7.7, the "Revolving Credit Agreement"), the aggregate Commitments are being reduced to $50,000,000. C. For convenience, this Agreement is dated as of March 14, 1997 (the "Restatement Effective Date"), and references to certain matters related to the period prior thereto have been deleted. 1. DEFINITIONS AND PRINCIPLES OF CONSTRUCTION 1.1. Definitions As used in this Agreement, terms defined in the preamble have the meanings therein indicated, and the following terms have the following meanings: "Affiliate" shall mean, as to any Person, each other Person that directly, or indirectly through one or more intermediaries, owns or controls, is controlled by or under common control with, such Person or is a director or officer of such Person. For purposes of -3- this definition, with respect to any Person "control" shall mean (i) the possession, direct or indirect, 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, or (ii) the beneficial ownership of securities or other ownership interests of such Person having ten percent (10%) or more of the combined voting power of the then outstanding securities or other ownership interests of such Person ordinarily (and apart from rights accruing under special circumstances) having the right to vote in the election of directors or other governing body of such Person. "Agent" means BNY in its capacity as agent for the Banks hereunder, and its successors in such capacity. "Agreement" means this First Amended and Restated Letter of Credit Agreement, as the same may be amended, supplemented or otherwise modified from time to time. "Alternate Base Rate" means on any date, a rate of interest per annum equal to the higher of (i) the Federal Funds Rate in effect on such date plus 1/2 of 1% or (ii) the Prime Rate in effect on such date. "Annual Statement" shall mean, with respect to any Insurance Subsidiary for any fiscal year, the annual financial statements of such Insurance Subsidiary as required to be filed with the Insurance Regulatory Authority of its jurisdiction of domicile and in accordance with the laws of such jurisdiction, together with all exhibits, schedules, certificates and actuarial opinions required to be filed or delivered therewith. "Applicable Fee Percentage" means with respect to the Letter of Credit Commissions, (i) 0.55% in the case of each Unsecured Letter of Credit and (ii) 0.30% in the case of each Secured Letter of Credit. "Assignment and Acceptance Agreement" means an assignment and acceptance agreement executed by a Bank and an Eligible Assignee substantially in the form of Exhibit B. "Assignment Fee" has the meaning set forth in Section 10.6(b). "Authorized Signatory" means as to (i) any Person which is a corporation, the chairman of the board, the president, any vice president, the chief financial officer or any other duly authorized officer of such Person and (ii) any Person which is not a corporation, the general partner or other managing Person thereof. -4- "Available Amount" means at any time the amount of the Commitment less the Letter of Credit Exposure. "Available Dividend Amount" shall mean, with respect to any Insurance Subsidiary for any period of four consecutive fiscal quarters, the aggregate maximum amount of dividends that is, or would be if such period were a fiscal year, permitted by the Insurance Regulatory Authority of its jurisdiction of domicile, under applicable Requirements of Law (without the necessity of any consent, approval or other action of such Insurance Regulatory Authority involving the granting of permission or the exercise of discretion by such Insurance Regulatory Authority), to be paid by such Insurance Subsidiary to the Applicant or another Subsidiary of the Applicant in respect of such four-quarter period as if such period were a fiscal year (whether or not any such dividends are actually paid). "Bank" means each bank listed on the signature pages hereof and each assignee which becomes a Bank pursuant to Section 10.6, and their respective assigns, each of which shall meet the criteria of "Eligible Assignee" hereunder. "Bankruptcy Code" shall mean 11 U.S.C. ss.ss. 101 et seq., as amended from time to time, and any successor statute. "Beneficiary Notification Date" shall mean, with respect to an Evergreen Letter of Credit, the last day on which the beneficiary thereof may be notified in order that such Stated Expiration Date is not to be automatically extended. "Benefit Arrangement" shall mean, at any time, an employee benefit plan within the meaning of Section 3(3) of ERISA which is not a Plan or a Multiemployer Plan and which is maintained or otherwise contributed to by any member of the ERISA Group. "Benefited Bank" has the meaning set forth in Section 10.8. "BNY" means The Bank of New York. "Business Day" means any day other than a Saturday, a Sunday or a day on which commercial banks located in New York City are authorized or required by law or other governmental action to close. "CMOs" shall mean any security or certificate representing any interest or participation in a pool of Mortgage Backed Securities (it being understood that Mortgage Backed Securities themselves are not CMOs). -5- "Capitalization Ratio" shall mean, as of the last day of any fiscal quarter, the ratio of (i) Consolidated Indebtedness as of such date to (ii) the sum of Consolidated Indebtedness and Consolidated Net Worth, each as of such date. "Cash Coverage Ratio" shall mean, as of the last day of any period of four consecutive fiscal quarters (the "Measurement Period"), the ratio of: (i) the aggregate of (y) the Available Dividend Amount for the Measurement Period for the Insurance Subsidiaries, other than each Insurance Subsidiary that is a Subsidiary of another Insurance Subsidiary plus (z) the Net Tax Sharing Payments (whether a positive or negative number) for the Measurement Period, to (ii) the aggregate of (x) Interest Expense incurred during the Measurement Period, (y) the aggregate of all operating costs and expenses of the Applicant, including rent, utilities and payroll expenses paid by the Applicant during the Measurement Period, and (z) all dividends paid by the Applicant during the Measurement Period. "Cash Equivalents" shall mean (i) securities issued or unconditionally guaranteed by the United States of America or any agency or instrumentality thereof, backed by the full faith and credit of the United States of America and maturing within 180 days from the date of acquisition, (ii) commercial paper issued by any Person organized under the laws of the United States of America, maturing within 180 days from the date of acquisition and, at the time of acquisition, having a rating of at least A-1 or the equivalent thereof by Standard & Poor's and at least P-1 or the equivalent thereof by Moody's, (iii) time deposits, certificates of deposit and banker's acceptances maturing within 180 days from the date of issuance and issued by a bank or trust company organized under the laws of the United States of America or any state thereof that has combined capital and surplus of at least $500,000,000 and that has (or is a subsidiary of a bank holding company that has) a long-term unsecured debt rating of at least A or the equivalent thereof by Standard & Poor's or at least A2 or the equivalent thereof by Moody's, and (iv) repurchase obligations of a bank or trust company described in clause (iii) above and having a term not exceeding seven (7) days with respect to underlying securities of the types described in clause (i) above entered into with any bank or trust company meeting the qualifications specified in clause (iii) above. "Chestnut" shall mean Chestnut Insurance Company, Ltd., a Bermuda corporation. "Collateral" has the meaning set forth in Section 2.14. "Collateral Account" has the meaning set forth in Section 2.14 hereof. -6- "Co-Applicant" means each Subsidiary of the Applicant which is or becomes a party hereto. "Combined Annual Statement" shall mean, with respect to PMAIC and the Consolidated Affiliates, the combined annual statement of such entities on the Fire and Casualty form (or any successor form thereto) as required to be filed by any such entity with the Insurance Regulatory Authority of its jurisdiction of domicile in accordance with the laws of such jurisdiction, together with all exhibits, schedules, certificates and actuarial opinions required to be filed or delivered therewith. "Commitment" means the commitment of BNY, as Issuing Bank, to issue Letters of Credit having an aggregate outstanding face amount up to $50,000,000 (as reduced from time to time pursuant to Section 2.4), and with respect to each of the Banks shall mean their commitment to participate in the Letter of Credit Exposure in an amount equal to their respective Commitment Percentages as set forth in Section 2.2. "Commitment Fee" has the meaning set forth in Section 2.16. "Commitment Percentage" means as to any Bank, the percentage set forth opposite the name of such Bank in Exhibit A under the heading "Commitment Percentage". "Commitment Period" means the period from the Original Effective Date through the day preceding the Termination Date. "Compliance Certificate" shall mean a fully completed and duly executed certificate in the form of Exhibit E-1 or Exhibit E-2, as applicable. "Consolidated Affiliates" shall mean, collectively, PMA Re, the PMA Group and any other fire and casualty insurance company that is or hereafter becomes an Affiliate of PMAIC and the accounts of which are prescribed or permitted by Statutory Accounting Practices to be consolidated with those of PMAIC for purposes of any Combined Annual Statements. "Consolidated Indebtedness" shall mean, as of the last day of any fiscal quarter, the aggregate (without duplication) of all Indebtedness of the Applicant and its Subsidiaries as of such date, determined on a consolidated basis in accordance with Generally Accepted Accounting Principles but excluding (i) reimbursement obligations with respect to letters of credit issued to secure the reinsurance obligations of one or more Insurance Subsidiaries under reinsurance agreements entered into as a reinsurer in the ordinary course of such Insurance Subsidiaries' business but only in each case to the extent of the cash and Treasury Securities provided to the issuer of such letter of credit by the -7- Applicant or any Subsidiary as collateral for such reimbursement obligations, and (ii) the reimbursement obligations with respect to the letter of credit issued upon the Applicant's application for the benefit of PMAIC with PMA Cayman as an account party thereto, but only if the stated amount of such letter of credit is less than $28,000,000. "Consolidated Net Worth" shall mean, at any time, the net worth of the Applicant and its Subsidiaries at such time, determined on a consolidated basis in accordance with Generally Accepted Accounting Principles but (i) excluding any preferred stock or other class of equity securities that, by its stated terms (or by the terms of any class of equity securities issuable upon conversion thereof or in exchange therefor), or upon the occurrence of any event, matures or is mandatorily redeemable, or is redeemable at the option of the holders thereof, in whole or in part, and (ii) without regard to the requirements of Statement of Financial Accounting Standards No. 115 issued by the Financial Accounting Standards Board. "Consolidated Statutory Surplus" shall mean, as to all Insurance Subsidiaries, as of any date, the sum (without duplication) of the total amounts shown (i) with respect to each Insurance Subsidiary not legally domiciled in the United States, the shareholders' equity of such Insurance Subsidiary as determined in accordance with Generally Accepted Accounting Principles (without regard to the requirements of Statement of Financial Accounting Standards No. 115 issued by the Financial Accounting Standards Board), (ii) with respect to each other Insurance Subsidiary that is a life and accident and health insurance company, on line 38, column 1, page 3 of the Annual Statement of such Insurance Subsidiary, and (iii) with respect to each other Insurance Subsidiary, on line 25, column 1, page 3 of the Annual Statement of such Insurance Subsidiary, excluding in each case under clauses (i), (ii) and (iii) any Insurance Subsidiary that is a Subsidiary of an Insurance Subsidiary, or the sum of amounts determined in a consistent manner for any date other than one as of which an Annual Statement is prepared. "Contingent Obligation" shall mean, with respect to any Person, (without duplication) any direct or indirect liability of such Person with respect to any Indebtedness, liability or other obligation (the "primary obligation") of another Person (the "primary obligor"), whether or not contingent, (a) to purchase, repurchase or otherwise acquire such primary obligation or any property constituting direct or indirect security therefor, (b) to advance or provide funds (i) for the payment or discharge of any such primary obligation or (ii) to maintain working capital or equity capital of the primary obligor or otherwise to maintain the net worth or solvency or any balance sheet item, level of income or financial condition of the primary obligor, (c) 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 in respect thereof to make payment of such primary obligation or (d) otherwise to assure or hold harmless the owner of any such primary obligation against -8- loss or failure or inability to perform in respect thereof; provided, however, that, with respect to the Applicant and its Subsidiaries, the term Contingent Obligation shall not include (y) endorsements for collection or deposit in the ordinary course of business or (z) obligations entered into by an Insurance Subsidiary in the ordinary course of its business under insurance policies or contracts issued by it or to which it is a party, including reinsurance agreements (and security posted by any such Insurance Subsidiary in the ordinary course of its business to secure obligations thereunder). "Covenant Compliance Worksheet" shall mean a fully completed worksheet in the form of Attachment A to Exhibit E-1 or Exhibit E-2, as applicable. "Credit Documents" means collectively, this Agreement, each Letter of Credit Request and all other agreements, instruments, documents and certificates now or hereafter executed and delivered to the Agent or any Bank by or on behalf of the Applicant or any of its Subsidiaries with respect to this Agreement and the transactions contemplated hereby, in each case as amended, modified, supplemented or restated from time to time. "Credit Party" means the Applicant, each Co-Applicant and each other party (other than the Agent, the Issuing Bank and the Banks) that is a signatory to a Credit Document. "Date of Issuance" means any Business Day specified in a Letter of Credit Request as a date on which the Applicant and, if applicable, a Co-Applicant, requests the issuance by the Issuing Bank of a Letter of Credit. "Default" means any condition or event which constitutes an Event of Default or which with the giving of notice or lapse of time or both would, unless cured or waived, become an Event of Default. "Discounted Collateral Value" means, in respect of Eligible Collateral consisting of (i) cash, 100% of the amount thereof and (ii) Treasury Securities, 90% of the fair market value thereof. The fair market value of Treasury Securities shall be as determined in good faith by the Agent and the Agent's good faith determination thereof shall be conclusive absent manifest error. "Dollar Roll Agreements" shall mean, as to any Person, an agreement pursuant to which such Person sells securities to another Person and agrees to repurchase "substantially the same" securities (as determined by the Public Securities Association and Generally Accepted Accounting Principles) at a described or specified date and price. "Dollars" and "$" means lawful currency of the United States of America. -9- "Duff & Phelps" shall mean Duff & Phelps Credit Rating Co., Inc., its successors and assigns. "Eligible Assignee" shall mean and include a commercial bank or other financial institution (other than a property or casualty insurance company) acceptable to the Issuing Bank and the Agent. "Eligible Collateral" means cash and Treasury Securities. "Environmental Claims" shall mean any and all administrative, regulatory or judicial actions, suits, demands, demand letters, claims, liens, notices of noncompliance or violation, investigations (other than internal reports prepared by any Person in the ordinary course of its business and not in response to any third party action or request of any kind) or proceedings relating in any way to any Environmental Law or any permit issued, or any approval given, under any such Environmental Law (collectively, "Claims"), including, without limitation, (i) any and all Claims by Governmental Authorities for enforcement, cleanup, removal, response, remedial or other actions or damages pursuant to any applicable Environmental Law and (ii) any and all Claims by any third party seeking damages, contribution, indemnification, cost recovery, compensation or injunctive relief resulting from Hazardous Substances or arising from alleged injury or threat of injury to human health or the environment. "Environmental Laws" shall mean any and all federal, state and local laws, statutes, ordinances, rules, regulations, permits, licenses, approvals, interpretations, rules of common law and orders of courts or Governmental Authorities, relating to the protection of human health or occupational safety or the environment, now or hereafter in effect and in each case as amended from time to time, including, without limitation, requirements pertaining to the manufacture, processing, distribution, use, treatment, storage, disposal, transportation, handling, reporting, licensing, permitting, investigation or remediation of Hazardous Substances. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time, and any successor statute, and all rules and regulations from time to time promulgated thereunder. "ERISA Group" shall mean the Applicant and all members of a controlled group of corporations and all trades or businesses (whether or not incorporated) under common control which, together with the Applicant, are treated as a single employer under Section 414 of the Internal Revenue Code. -10- "Event of Default" has the meaning set forth in Section 8.1. "Evergreen Letter of Credit" shall mean a Letter of Credit, the Stated Expiration Date of which, by terms of such Letter of Credit, is automatically extended for the period therein specified unless the beneficiary thereof is notified a specified number of days prior to the then scheduled Stated Expiration Date that such scheduled Stated Expiration Date will not be extended. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended from time to time, and any successor statute, and all rules and regulations from time to time promulgated thereunder. "Extension Consent Period" means the period which is less than 35 days, but equal to or greater than 30 days, prior to the then current Termination Date (provided, however, that if such 30th prior day falls on a day that is not a Business Day, such date shall be extended to the next following Business Day). "Extension Request" has the meaning set forth in Section 2.6. "Federal Funds Rate" means, for any day, the rate per annum (rounded upward, if necessary, to the nearest 1/100th of 1%) 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 (i) 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 (ii) 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 quoted to The Bank of New York on such day on such transactions as determined by the Agent. "Generally Accepted Accounting Principles" shall mean generally accepted accounting principles, as followed in the United States and as set forth in the statements, opinions and pronouncements of the Accounting Principles Board, the American Institute of Certified Public Accountants and the Financial Accounting Standards Board (or, to the extent not so set forth in such statements, opinions and pronouncements, as generally followed by entities similar in size to the Applicant and engaged in generally similar lines of business), consistently applied and maintained and in conformity with those used in the preparation of the most recent financial statements of the Applicant referred to in Section 4.11(a). -11- "Governmental Authority" shall mean any nation or government, any state or other political subdivision thereof and any central bank thereof, any municipal, local, city or county government, 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. "Hazardous Substances" shall mean any substances or materials (i) that are or become defined as hazardous wastes, hazardous substances, pollutants, contaminants or toxic substances under any Environmental Law, (ii) that are defined by any Environmental Law as toxic, explosive, corrosive, ignitable, infectious, radioactive, mutagenic or otherwise hazardous, (iii) the presence of which require investigation or response under any Environmental Law, (iv) that constitute a nuisance, trespass or health or safety hazard to Persons or neighboring properties, (v) that consist of underground or aboveground storage tanks, whether empty, filled or partially filled with any substance or (vi) that contain, without limitation, asbestos, polychlorinated biphenyls, urea formaldehyde foam insulation, petroleum hydrocarbons, petroleum derived substances or wastes, crude oil, nuclear fuel, natural gas or synthetic gas. "Hedge Agreement" shall mean any interest or foreign currency rate swap, cap, collar, option, hedge, forward rate or other similar agreement or arrangement designed to protect against fluctuations in interest rates or currency exchange rates. "Historical Statutory Statements" shall have the meaning given to such term in Section 4.11(b). "Indebtedness" shall mean, with respect to any Person (without duplication), (i) all indebtedness of such Person for borrowed money or in respect of loans or advances, (ii) all obligations of such Person evidenced by notes, bonds, debentures or similar instruments, (iii) all reimbursement obligations of such Person with respect to surety bonds, letters of credit and bankers' acceptances (in each case, whether or not drawn or matured and in the stated amount thereof), (iv) all obligations of such Person to pay the deferred purchase price of property or services, (v) all indebtedness created or arising under any conditional sale or other title retention agreement with respect to property acquired by such Person, (vi) all obligations of such Person as lessee under leases that are or should be, in accordance with Generally Accepted Accounting Principles, recorded as capital leases, to the extent such obligations are required to be so recorded, (vii) all obligations of such Person to purchase, redeem, retire, defease or otherwise make any payment in respect of any capital stock or other equity securities that, by their stated terms (or by the terms of any equity securities issuable upon conversion thereof or in exchange therefor), or upon the occurrence of any event, mature or are mandatorily redeemable, or are redeemable at the option of the -12- holder thereof, in whole or in part, (viii) the net termination obligations of such Person under any Hedge Agreements, other than any Hedge Agreement that qualifies as a hedge of an exposure to an indentifiable interest rate risk as determined in accordance with Statement of Financial Accounting Standards No. 80 issued by the Financial Accounting Standards Board, calculated as of any date as if such agreement or arrangement were terminated as of such date, (ix) all indebtedness of such Person in respect of Reverse Repurchase Agreements and Dollar Roll Agreements, (x) all Contingent Obligations of such Person and (xi) all indebtedness referred to in clauses (i) through (x) above secured by any Lien on any property or asset owned or held by such Person regardless of whether the indebtedness secured thereby shall have been assumed by such Person or is nonrecourse to the credit of such Person. "Indemnified Person" has the meaning set forth in Section 10.10. "Insurance Regulatory Authority" shall mean, with respect to any Insurance Subsidiary, the insurance department or similar Governmental Authority charged with regulating insurance companies or insurance holding companies, in its jurisdiction of domicile and, to the extent that it has regulatory authority over such Insurance Subsidiary, in each other jurisdiction in which such Insurance Subsidiary conducts business or is licensed to conduct business. "Insurance Subsidiary" shall mean any Subsidiary of the Applicant the ability of which to pay dividends is regulated by an Insurance Regulatory Authority or that is otherwise required to be regulated thereby in accordance with the applicable Requirements of Law of its jurisdiction of domicile, and shall mean and include, without limitation, each of PMAIC and PMA Re. "Interest Expense" shall mean, for any period, total interest expense of the Applicant for such period in respect of Indebtedness of the Applicant and its Subsidiaries (including all such interest expense accrued or capitalized during such period, whether or not actually paid during such period, and such portion of finance leases properly characterized as interest), adjusted to give effect to all interest rate swap, cap or other interest rate hedging arrangements and fees and expenses paid in connection therewith, all as determined on a consolidated basis in accordance with Generally Accepted Accounting Principles. "Internal Revenue Code" shall mean the Internal Revenue Code of 1986, as amended from time to time, and any successor statute, and all rules and regulations from time to time promulgated thereunder. -13- "Invested Assets" shall mean, with respect to any Person, the amount, on a consolidated basis, of its investments, cash and cash equivalents as reflected on such Person's most recent balance sheet. "Investment Grade Securities" shall mean (i) non-equity securities (other than those issued by an Affiliate of the Applicant and other than CMOs and REMICs) that, if rated by the NAIC, are rated "NAIC 2" (or the equivalent thereof) or better by the NAIC, or, if not rated by the NAIC, are rated "BBB-" (or the equivalent thereof) or higher by Standard & Poor's, "Baa3" (or the equivalent thereof) or higher by Moody's, or "BBB-" (or the equivalent thereof) or higher by Duff & Phelps, (ii) municipal bonds that, if rated by the NAIC, are rated "NAIC 2" (or the equivalent thereof) or better by the NAIC, or if not rated by the NAIC, are rated "SP-2" (or the equivalent thereof) or higher by Standard & Poor's, "Baa3" or "MIG4" (or the equivalent thereof) or higher by Moody's, or "BBB-" (or the equivalent thereof) or higher by Duff & Phelps, and (iii) Permitted CMOs and Mortgage Backed Securities that, if rated by the NAIC, are rated "NAIC 2" (or the equivalent thereof) or higher by Standard & Poor's, "Baa3" (or the equivalent thereof) or higher by Moody's, or "BBB-" (or the equivalent thereof) or higher by Duff & Phelps (or, in the case of clauses (i), (ii) and (iii) above, in the event all such rating agencies cease to publish investment ratings, carrying an equivalent rating of a nationally recognized rating agency). "Issuing Bank" means BNY in its capacity as issuing bank hereunder, and its successors in such capacity. "Letters of Credit" shall mean letters of credit issued by the Issuing Bank for the account of the Applicant and any Co-Applicant as defined in Section 2.1. "Letter of Credit Commissions" has the meaning set forth in Section 2.17. "Letter of Credit Exposure" means at any date, (i) in respect of all the Banks, the sum, without duplication, of (x) the aggregate undrawn face amount of the Outstanding Letters of Credit at such date, (y) the aggregate amount of unpaid drafts drawn on all Letters of Credit at such date, and (z) the aggregate unpaid reimbursement obligations in respect of the Letters of Credit at such date, and (ii) in respect of any Bank, an amount equal to such Bank's Commitment Percentage multiplied by the amount determined under clause (i) of this definition. "Letter of Credit Request" means a request from the Applicant, or from the Applicant and a Co-Applicant, for the issuance of a Letter of Credit, substantially in the form of Exhibit C. "Licenses" shall have the meaning given to such term in Section 4.4(c). -14- "Lien" shall mean any mortgage, pledge, hypothecation, assignment, security interest, lien (statutory or otherwise), preference, priority, charge or other encumbrance of any nature, whether voluntary or involuntary, including, without limitation, the interest of any vendor or lessor under any conditional sale agreement, title retention agreement, capital lease or any other lease or arrangement having substantially the same effect as any of the foregoing. "MASCCO" shall mean Mid-Atlantic States Casualty Company, a Pennsylvania insurance corporation. "Management Group" shall mean, collectively, the individuals listed on Schedule 1.1, provided, however, each individual shall be included in the Management Group only so long as such individual is a member of the Applicant's Board of Directors or is employed by the Applicant or any Material Insurance Subsidiary in a senior management position. "Margin Stock" shall have the meaning given to such term in Regulation U. "Material Adverse Change" shall mean a material adverse change in the condition (financial or otherwise), operations, business, properties or financial prospects of the Applicant or the Applicant and its Subsidiaries, taken as a whole. "Material Adverse Effect" shall mean a material adverse effect upon (i) the condition (financial or otherwise), operations, business, properties or financial prospects of the Applicant or the Applicant and its Subsidiaries, taken as a whole, (ii) the ability of the Applicant to perform its obligations under this Agreement or any of the other Credit Documents or (iii) the legality, validity or enforceability of this Agreement or any of the other Credit Documents. "Material Insurance Subsidiary" shall mean any Insurance Subsidiary that is a Material Subsidiary. "Material Plan" shall mean, at any time, a Plan or Plans having aggregate Unfunded Liabilities in excess of $1,000,000. "Material Subsidiary" shall mean each of (i) MASCCO, (ii) PMA Cayman, (iii) the members of the PMA Group, (iv) PMA Re, (v) at the relevant time of determination, any Subsidiary of the Applicant having (after the elimination of intercompany accounts) (y) assets constituting at least ten percent (10%) of the total assets of the Applicant and its Subsidiaries on a consolidated basis, or (z) revenues constituting at least ten percent (10%) -15- of the total revenues of the Applicant and its Subsidiaries on a consolidated basis, in each case as determined as of the date of the financial statements of the Applicant and its Subsidiaries most recently delivered under Section 5.1 prior to such time (or, with regard to determinations at any time prior to the initial delivery of financial statements under Section 5.1, as of the date of the most recent financial statements referred to in Section 4.11(a)), and (vi) any Subsidiary that has one of the foregoing as a Subsidiary. "Moody's" shall mean Moody's Investors Service, Inc., its successors and assigns. "Mortgage Backed Securities" shall mean investment securities representing any undivided interest or participation in, or which are secured by, a pool of loans secured by mortgages or deeds of trust. "Multiemployer Plan" shall mean, at any time, an employee pension benefit plan within the meaning of Section 4001(a)(3) of ERISA to which any member of the ERISA Group is then making or accruing an obligation to make contributions or has within the preceding five plan years made contributions, including for these purposes any Person which ceased to be a member of the ERISA Group during such five year period. "NAIC" shall mean the National Association of Insurance Commissioners and any successor thereto. "Net Tax Sharing Payments" shall mean, for any period, (i) the aggregate (without duplication) of all payments made or to be made to the Applicant by its Subsidiaries pursuant to tax sharing or tax allocation agreements or arrangements or otherwise in respect of taxable income realized during such period, minus (ii) the aggregate (without duplication) of all foreign, federal, state or local income, franchise and other tax payments made or to be made by the Applicant in respect of taxable income realized during such period and any payments made or to be made by the Applicant during such period pursuant to such tax sharing or tax allocation agreement or arrangement. "Obligations" means all of the obligations and liabilities of the Applicant and the Co-Applicants under the Credit Documents, including, without limitation, reimbursement obligations (whether absolute or contingent) under any Letter of Credit or Credit Document and all obligations in respect of fees, expenses and other amounts payable under any Credit Document, in each case whether fixed, contingent, now existing or hereafter arising, created, assumed, incurred or acquired. "Original Effective Date" means November 10, 1995. -16- "Outstanding Letters of Credit" means at any time the Letters of Credit outstanding at such time. "PAC I" shall mean a planned amortization class bond which is a tranche or class of CMO or REMIC that is retired according to a predetermined amortization schedule independent of the prepayment rate on the underlying collateral and which has the highest level of protection within the pool against prepayment or extension. "Parent" means, with respect to any Bank, any Person controlling such Bank. "PBGC" shall mean the Pension Benefit Guaranty Corporation and any successor thereto. "PMA Cayman" shall mean PMA Insurance Cayman, Ltd., a Cayman Islands corporation. "PMA Group" shall mean PMAIC, Manufacturers Alliance Insurance Company, a Pennsylvania insurance corporation, and Pennsylvania Manufacturers Indemnity Company, a Pennsylvania insurance corporation. "PMA Re" shall mean PMA Reinsurance Corporation, a Pennsylvania insurance corporation. "PMAIC" shall mean Pennsylvania Manufacturers' Association Insurance Company, a Pennsylvania insurance corporation. "Permitted CMOs and Mortgage Backed Securities" shall mean (i) mortgage participation certificates issued by the Federal Home Loan Mortgage Corporation, (ii) mortgage backed securities issued by the Federal National Mortgage Association, (iii) securities guaranteed by the Government National Mortgage Association, and (iv) other securities and certificates representing participations in any CMO or REMIC which are PAC I's or which have comparable priority in respect of the repayment thereof. "Permitted Liens" shall have the meaning given to such term in Section 7.3. "Person" shall mean any corporation, association, joint venture, partnership, limited liability company, organization, business, individual, trust, government or agency or political subdivision thereof or any other legal entity. "Plan" shall mean, at any time, an employee pension benefit plan (other than a Multiemployer Plan) which is covered by Title IV of ERISA or subject to the minimum -17- funding standards under Section 412 of the Internal Revenue Code and either (i) is maintained, or contributed to, by any member of the ERISA Group for employees of any member of the ERISA Group or (ii) has at any time within the preceding five years been maintained, or contributed to, by any Person which was at such time a member of the ERISA Group for employees of any Person which was at such time a member of the ERISA Group. "Prime Rate" means the rate of interest publicly announced by The Bank of New York in New York City from time to time as its Prime Rate. "Property" means all types of real, personal, tangible, intangible or mixed property. "Quarterly Statement" shall mean, with respect to any Insurance Subsidiary for any fiscal quarter, the quarterly financial statements of such Insurance Subsidiary as required to be filed with the Insurance Regulatory Authority of its jurisdiction of domicile, together with all exhibits, schedules, certificates and actuarial opinions required to be filed or delivered therewith. "REMIC" shall mean a real estate mortgage investment conduit. "Regulations D, G, T, U and X" shall mean Regulations D, G, T, U and X, respectively, of the Federal Reserve Board, and any successor regulations. "Reinsurance Agreement" shall mean any agreement, contract, treaty, certificate or other arrangement whereby any Insurance Subsidiary agrees to transfer, cede or retrocede to another insurer or reinsurer all or part of the liability assumed or assets held by such Insurance Subsidiary under a policy or policies of insurance issued by such Insurance Subsidiary or under a reinsurance agreement assumed by such Insurance Subsidiary. "Replaced Bank" has the meaning set forth in Section 2.15. "Required Banks" means at any time Banks representing at least 51% of the Commitment or, if the Commitment shall have been terminated, at least 51% of the Letter of Credit Exposure at such time. "Requirement of Law" shall mean, with respect to any Person, the charter, articles or certificate of organization or incorporation and bylaws or other organizational or governing documents of such Person, and any statute, law, treaty, rule, regulation, order, decree, writ, injunction or determination of any arbitrator or court or other Governmental Authority, in each case applicable to or binding upon such Person or any of its property or to -18- which such Person or any of its property is subject or otherwise pertaining to any or all of the transactions contemplated by this Agreement and the other Credit Documents. "Reserve Adjustment" shall mean the non-recurring expense charged, in accordance with Generally Accepted Accounting Principles, during the fourth quarter of 1996 to the statements of earnings for Chestnut, MASCCO and the relevant members of the PMA Group in the aggregate amount of $190,000,000 and the corresponding adjustment in accordance with Statutory Accounting Practices. "Restatement Effective Date" has the meaning set forth in the Recitals. "Reverse Repurchase Agreement" shall mean, as to any Person, an agreement pursuant to which such Person sells securities to another Person (the "Counterparty") and agrees to repurchase such securities at a described or specified date and price, provided, however, that "Reverse Repurchase Agreements" shall not include any agreement pursuant to which such Person lends securities pursuant to a securities lending arrangement to a Counterparty who collateralizes such borrowing with cash, Cash Equivalents, letters of credit or other collateral acceptable to the Required Banks, and agrees to return such securities to such Person at a described or specified date. "Secured Letter of Credit means a Letter of Credit designated as a Secured Letter of Credit in the Letter of Credit Request delivered in connection with the issuance thereof and with respect to which the Applicant or a Co-Applicant deposits Eligible Collateral with the Agent on the Date of Issuance thereof. "Special Counsel" means Emmet, Marvin & Martin, LLP, special counsel to the Agent. "Special 1996 Charges" shall mean the non-recurring expense charged with respect to receivables, equipment write-offs and other restructuring charges, in accordance with Generally Accepted Accounting Principles, during the fourth quarter of 1996 to the statements of earnings for the Applicant in the aggregate amount of $31,000,000. "Standard & Poor's" shall mean Standard & Poor's Ratings Services, a division of McGraw-Hill Companies, Inc., its successors and assigns. "Stated Expiration Date" means, with respect to each Letter of Credit, the date occurring up to one year after the Date of Issuance, as such date may be extended in accordance with the terms of this Agreement. -19- "Statutory Accounting Practices" shall mean, with respect to any Insurance Subsidiary, the statutory accounting practices prescribed or permitted by the relevant Insurance Regulatory Authority of its state of domicile, consistently applied and maintained and in conformity with those used in the preparation of the most recent Historical Financial Statements. "Subsidiary" shall mean, with respect to any Person, any corporation or other Person of which more than fifty percent (50%) of the outstanding capital stock having ordinary voting power to elect a majority of the board of directors, in the case of a corporation, or of the ownership or beneficial interests, in the case of a Person not a corporation, is at the time, directly or indirectly, owned or controlled by such Person and one or more of its other Subsidiaries or a combination thereof (irrespective of whether, at the time, securities of any other class or classes of any such corporation or other Person shall or might have voting power by reason of the happening of any contingency). When used without reference to a parent entity, the term "Subsidiary" shall be deemed to refer to a Subsidiary of the Applicant. "Surplus Relief Reinsurance Agreement" shall mean any agreement or other arrangement whereby any Insurance Subsidiary cedes business under a reinsurance agreement that would not be considered a transaction that indemnifies an insurer against loss or liability relating to insurance risk, as determined in accordance with Statement of Financial Accounting Standards No. 113 ("FAS 113") issued by the Financial Accounting Standards Board (without regard to the effective date of FAS 113). "Surviving Senior Note Indebtedness" shall mean the Indebtedness of the Applicant outstanding from time to time in respect of the Surviving Senior Notes. "Surviving Senior Notes" shall mean the $7,143,000 principal amount of the Applicant's 9.53% Senior Notes, dated June 17, 1987, due June 30, 1997, together with any amendment, modification, replacement, substitutes, supplements thereto, and renewals or extensions thereof, in whole or in part. "Terminating Indebtedness" shall mean the Terminating Revolving Credit Indebtedness and the Terminating Senior Note Indebtedness. "Terminating Revolving Credit Indebtedness" shall mean all indebtedness and other monetary obligations of the Applicant under the Credit Agreement, dated as of August 11, 1995, as amended, between the Applicant, the lenders and financial institutions named therein and The Bank of New York, as agent for the lenders. -20- "Terminating Senior Note Indebtedness" shall mean the aggregate Indebtedness of the Applicant outstanding from time to time in respect to the (i) $46,428,000 principal amount of the Applicant's 9.60% Senior Notes, dated September 26, 1991, due October 1, 2001, (ii) the $71,000,000 principal amount of the Applicant's 7.62% Senior Notes, dated July 19, 1995, due July 15, 2001, and (iii) the $36,000,000 principal amount of the Applicant's 7.62% Senior Notes, dated July 19, 1995, due July 15, 2000, together with any amendments, modification, replacement, substitute, supplements thereto, and renewals or extensions thereof, in whole or in part. "Termination Date" means October 27, 1997, or such earlier date on which the Commitment is terminated, or if the Commitment is extended with the consent of the Banks pursuant to Section 2.6, such later date. "Treasury Security" shall mean any "Treasury security" under, and as such term is defined in, 31 C.F.R. part 306, subpart O, as amended. "Unsecured Letter of Credit" means a Letter of Credit other than a Secured Letter of Credit. "Unfunded Liabilities" shall mean, with respect to any Plan at any time, the amount (if any) by which (i) the present value of all benefits under such Plan exceeds (ii) the fair market value of all Plan assets allocable to such benefits (excluding any accrued but unpaid contributions), all determined as of the then most recent valuation date for such Plan, but only to the extent that such excess represents a potential liability of a member of the ERISA Group to the PBGC or any other Person under Title IV of ERISA. "United States" means the United States of America, including the States and the District of Columbia, but excluding its territories and possessions. "Unfunded Liabilities" shall mean, with respect to any Plan at any time, the amount (if any) by which (i) the present value of all benefits under such Plan exceeds (ii) the fair market value of all Plan assets allocable to such benefits (excluding any accrued but unpaid contributions), all determined as of the then most recent valuation date for such Plan, but only to the extent that such excess represents a potential liability of a member of the ERISA Group to the PBGC or any other Person under Title IV of ERISA. "Wholly Owned" shall mean, with respect to any Subsidiary of any Person, that 100% of the outstanding capital stock or other ownership interests of such Subsidiary is owned, directly or indirectly, by such Person. 1.2. Principles of Construction -21- (a) All terms defined in a Credit Document shall have the meanings given such terms therein when used in the other Credit Documents or any certificate, opinion or other document made or delivered pursuant thereto, unless otherwise defined therein. (b) Except as specifically provided otherwise in this Agreement, all accounting terms used herein that are not specifically defined shall have the meanings customarily given them, and all financial computations hereunder shall be made, in accordance with Generally Accepted Accounting Principles (or, to the extent that such terms apply solely to any Insurance Subsidiary or if otherwise expressly required, Statutory Accounting Practices). Notwithstanding the foregoing, in the event that any changes in Generally Accepted Accounting Principles or Statutory Accounting Practices after the date hereof are required to be applied to the transactions described herein and would affect the computation of the financial covenants contained in Sections 6.1 through 6.4, as applicable, such changes shall be followed in the computation of such financial covenants only from and after the date this Agreement shall have been amended to take into account any such changes, provided the parties agree to negotiate in good faith to so amend this Agreement as soon as practicable after such a change. References to amounts on particular exhibits, schedules, lines, pages and columns of any Annual Statement or Quarterly Statement are based on the format promulgated by the NAIC for the 1995 Annual Statements and Quarterly Statements. In the event such format is changed in future years so that different information is contained in such items or they no longer exist, or if the Annual Statement or Quarterly Statement is replaced by the NAIC or by any Insurance Regulatory Authority after the date hereof such that different forms of financial statements are required to be furnished by the Insurance Subsidiaries in lieu thereof, such references shall be to information consistent with that reported in the referenced item in the 1995 Annual Statements or Quarterly Statements, as the case may be. (c) The words "hereof", "herein", "hereto" and "hereunder" and similar words when used in a Credit Document shall refer to such Credit Document as a whole and not to any particular provision thereof, and Section, schedule and exhibit references contained therein shall refer to Sections thereof or schedules or exhibits thereto unless otherwise expressly provided therein. (d) The phrase "may not" is prohibitive and not permissive. (e) Unless the context otherwise requires, words in the singular number include the plural, and words in the plural include the singular. (f) Unless specifically provided in a Credit Document to the contrary, references to a time shall refer to New York City time. -22- (g) Unless specifically provided in a Credit Document to the contrary, in the computation of periods of time from a specified date to a later specified date, the word "from" means "from and including" and the words "to" and "until" each means "to but excluding". (h) References in any Credit Document to a fiscal period shall refer to that fiscal period of the Applicant. 2. AMOUNT AND TERMS OF LETTERS OF CREDIT 2.1. Issuance of Letters of Credit (a) Subject to the terms and conditions of this Agreement, the Issuing Bank agrees, in reliance on the agreement of the other Banks set forth in Section 2.2, to issue standby letters of credit (the "Letters of Credit"; each, individually, a "Letter of Credit") during the Commitment Period for the account of the Applicant, or jointly and severally for the account of the Applicant and each Co-Applicant delivering a Letter of Credit Request. The aggregate Letter of Credit Exposure shall not at any time exceed the amount of the Commitment at such time. In addition, the Letter of Credit Exposure in respect of Letters of Credit issued during the Commitment Period for the account of Subsidiaries of the Applicant which are not Material Insurance Subsidiaries shall not at any time exceed $10,000,000 in the aggregate. Each Letter of Credit issued pursuant to this Section shall have a Stated Expiration Date. No Letter of Credit shall be issued if the Agent determines that the conditions set forth in Section 3.2 have not been satisfied. (b) Each Letter of Credit shall be issued for the account of the Applicant, individually, or for the account of the Applicant and one or more Co-Applicants, jointly and severally, in support of an obligation of the Applicant or of the Applicant and one or more Co-Applicants in favor of a beneficiary which has requested the issuance of such Letter of Credit as a condition to a transaction entered into in connection with the Applicant's or the Co-Applicant's or Co-Applicants' reinsurance business or otherwise for the general corporate purposes of the Applicant or Co-Applicant(s), provided, however, that the Letter of Credit Exposure with respect to Letters of Credit issued for the general corporate purposes of the Applicant or Co-Applicant(s) shall not at any time exceed $15,000,000. The Applicant, and any Co-Applicant, as the case may be, shall give the Agent a Letter of Credit Request for the issuance of each Letter of Credit by 11:00 A.M., one Business Day prior to the requested Date of Issuance. Each Letter of Credit Request executed by a Co-Applicant shall provide that such Co-Applicant shall be, from and after the Date of Issuance of the Letter of Credit which is requested, a party hereto and shall have all the rights and obligations of a Co- -23- Applicant under this Agreement and under the other Credit Documents to which it is a party. Such Letter of Credit Request shall specify (i) the beneficiary of such Letter of Credit and the obligations of the Applicant and/or Co-Applicant in respect of which such Letter of Credit is to be issued, (ii) the Applicant's proposal as to the conditions under which a drawing may be made under such Letter of Credit and the documentation to be required in respect thereof, (iii) the maximum amount to be available under such Letter of Credit, (iv) the requested Date of Issuance, (v) the requested Stated Expiration Date for such Letter of Credit which shall not be more than one year from the requested Date of Issuance, (vi) whether such Letter of Credit is to be an Evergreen Letter of Credit and, if so, the Beneficiary Notification Date (which shall be at least 30 days prior to the Stated Expiration Date thereof), (vii) the account party with respect to such Letter of Credit and (viii) whether such Letter of Credit is to be a Secured Letter of Credit or an Unsecured Letter of Credit. Upon receipt of such Letter of Credit Request, the Agent shall promptly notify the Issuing Bank and each other Bank thereof. The Issuing Bank shall, on the proposed Date of Issuance and subject to the other terms and conditions of this Agreement, issue the requested Letter of Credit. Each Letter of Credit shall be in form and substance reasonably satisfactory to the Issuing Bank, with such provisions with respect to the conditions under which a drawing may be made thereunder and the documentation required in respect of such drawing as the Issuing Bank shall reasonably require. The parties agree that a Letter of Credit substantially in the form of Exhibit D shall be deemed to be in form and substance reasonably satisfactory to the Issuing Bank; provided, however, that Letters of Credit issued pursuant hereto need not be in the form of said Exhibit D. Each Letter of Credit shall be used solely for the purposes described therein. (c) Each payment by the Issuing Bank of a draft drawn under a Letter of Credit shall give rise to an immediate obligation on the part of the Applicant, or to an immediate joint and several obligation on the part of the Applicant and the Co-Applicant, as the case may be, to reimburse the Issuing Bank for the amount thereof on the Business Day on which the Issuing Bank shall have notified the Applicant that payment of such draft has been made to the beneficiary (which notice shall be given promptly and shall be deemed to constitute a demand for reimbursement). 2.2. Letter of Credit Participation and Funding Commitments (a) Each Bank hereby unconditionally and irrevocably, severally for itself only and without any notice to or the taking of any action by such Bank, takes an undivided participating interest in the obligations of the Issuing Bank under and in connection with each Letter of Credit in an amount equal to such Bank's Commitment Percentage of the amount of such Letter of Credit. Each Bank shall be liable to the Issuing Bank for its Commitment Percentage of the unreimbursed amount of any draft drawn and honored under each Letter of Credit. Each Bank shall also be liable for an amount equal to the product of -24- its Commitment Percentage and any amounts paid by the Applicant or any Co-Applicant that are subsequently rescinded or avoided, or must otherwise be restored or returned. Subject to the penultimate sentence of subsection (b) below, such liabilities shall be unconditional and without regard to the occurrence of any Default or Event of Default or the compliance by the Applicant or any Co-Applicant with any of their obligations under the Credit Documents. (b) The Agent will promptly (and in no event later than two Business Days) notify each Bank (which notice shall be promptly confirmed in writing) of the date and the amount of any draft presented under any Letter of Credit with respect to which full reimbursement of payment is not made by the Applicant or any Co-Applicant immediately, and forthwith upon receipt of such notice, such Bank (other than the Issuing Bank) shall make available to the Agent for the account of the Issuing Bank its Commitment Percentage of the amount of such unreimbursed draft at the office of the Agent specified in Section 10.2, in lawful money of the United States and in immediately available funds, before 4:00 P.M., on the day such notice was given by the Agent, if the relevant notice was given by the Agent at or prior to 1:00 P.M., on such day, and before 12:00 Noon, on the next Business Day, if the relevant notice was given by the Agent after 1:00 P.M., on such day. The Agent shall distribute the payments made by each Bank (other than the Issuing Bank) pursuant to the immediately preceding sentence to the Issuing Bank promptly upon receipt thereof in like funds as received. Each Bank shall indemnify and hold harmless the Agent and the Issuing Bank from and against any and all losses, liabilities (including liabilities for penalties), actions, suits, judgments, demands, costs and expenses (including, without limitation, reasonable attorneys' fees and expenses) resulting from any failure on the part of such Bank to provide, or from any delay in providing, the Agent with such Bank's Commitment Percentage of the amount of any payment made by the Issuing Bank under a Letter of Credit in accordance with this subsection (b) above (except in respect of losses, liabilities or other obligations suffered by the Issuing Bank resulting from the gross negligence or willful misconduct of the Issuing Bank). If a Bank does not make available to the Agent when due such Bank's Commitment Percentage of any unreimbursed payment made by the Issuing Bank under a Letter of Credit (other than payments made by the Issuing Bank by reason of its gross negligence or willful misconduct), such Bank shall be required to pay interest to the Agent for the account of the Issuing Bank on such Bank's Commitment Percentage of such payment from the date such Bank's payment is due until the date such payment is received by the Agent at a rate of interest per annum equal to (i) for the first three days after the due date of such payment, the Federal Funds Rate and (ii) thereafter, the Federal Funds Rate plus 2%. The Agent shall distribute such interest payments to the Issuing Bank upon receipt thereof in like funds as received. (c) Whenever the Agent is reimbursed by the Applicant or any Co-Applicant, for the account of the Issuing Bank, for any payment under a Letter of Credit and -25- such payment relates to an amount previously paid by a Bank in respect of its Commitment Percentage of the amount of such payment under such Letter of Credit, the Agent will pay over such payment to such Bank (i) before 4:00 P.M. on the day such payment from the Applicant or the Co-Applicant is received, if such payment is received at or prior to 1:00 P.M. on such day, or (ii) before 12:00 Noon on the next succeeding Business Day, if such payment from the Applicant or the Co-Applicant is received after 1:00 P.M. on such day. 2.3. Interest Rate If all or any portion of any reimbursement obligation in respect of a Letter of Credit shall not be paid on the Business Day on which the Issuing Bank shall have notified the Applicant that payment of such draft has been made, such overdue amount shall bear interest at a rate per annum equal to the Alternate Base Rate plus 2% from the date of such nonpayment until paid in full (whether before or after the entry of a judgment thereon). All such interest shall be payable on demand. Interest computed with reference to the Federal Funds Rate shall be calculated on the basis of a 360 day year for the actual number of days elapsed, and interest computed with reference to the Prime Rate shall be computed on the basis of a 365 or 366 day year, as applicable, for the actual number of days elapsed. The Applicant acknowledges that to the extent interest is based on the Prime Rate, such rate is only one of the bases for computing interest on extensions of credit made by the Banks, and by basing interest on the Prime Rate, the Banks have not committed to charge, and neither the Applicant nor any Co-Applicant has in any way bargained for, interest based on a lower or the lowest rate at which the Banks may now or in the future make extensions of credit to other Persons. 2.4. Termination or Reduction of Commitment The Applicant shall have the right, upon at least three Business Days' prior written notice to the Agent, at any time to terminate or reduce the amount of the Commitment in an amount of $10,000,000 or such amount plus multiples of $5,000,000 in excess thereof, provided that after giving effect thereto, the Commitment shall not be less than the Letter of Credit Exposure at such time. Any reduction of the Commitment shall be applied pro rata according to the Commitment Percentage of each Bank. Simultaneously with any reduction of the Commitment the Applicant shall pay the Commitment Fee accrued on the amount by which the Commitment has been reduced. 2.5. Amendments to Letters of Credit (a) At any time during the Commitment Period: -26- (i) Evergreen Letters of Credit shall be automatically extended unless at least two Business Days prior to the Beneficiary Notification Date, the Agent shall have received written notice from the Applicant, a Co-Applicant or a Bank that a Default or an Event of Default has occurred and is continuing in which event the Agent shall instruct the Issuing Bank to, and the Issuing Bank shall, notify the beneficiary of such Evergreen Letter of Credit on or before the Beneficiary Notification Date that the Stated Expiration date of such Evergreen Letter of Credit will not be extended. (ii) The Applicant, together with the Co-Applicant, if any, with respect to an Outstanding Letter of Credit, shall have the right to request in writing that such Outstanding Letter of Credit be amended, including an amendment to increase or reduce the undrawn face amount thereof and/or, in the case of a Letter of Credit other than an Evergreen Letter of Credit, to extend for up to one year from the date of such amendment the then Stated Expiration Date. Provided that (A) no Default or Event of Default shall exist and be continuing and (B) after giving effect thereto (1) the Letter of Credit Exposure does not exceed the Commitment and (2) the Letter of Credit Exposure with respect to Letters of Credit issued for the account of Subsidiaries of the Applicant which are not Material Insurance Subsidiaries does not exceed $10,000,000 in the aggregate, the Agent shall promptly request that the Issuing Bank amend such Letter of Credit to give effect to such increase, reduction, extension and/or other requested amendment, and the Issuing Bank shall either amend such Letter of Credit or issue a substitute Letter of Credit containing such amended terms. Notwithstanding the foregoing, in the event that a requested amendment of a Letter of Credit would reduce the amount available to be drawn thereunder, reduce the period during which drawings can be made thereunder or would otherwise be adverse to the beneficiary thereof, such amendment or such substitute Letter of Credit shall not, by its terms, be effective unless and until such beneficiary shall have consented in writing thereto. (b) Following the Termination Date, provided that no Default or Event of Default shall then exist and be continuing, the Applicant, together with the Co-Applicant, if any, with respect to an Outstanding Letter of Credit, may request that an Outstanding Letter of Credit be amended, including an amendment to increase or reduce the undrawn face amount thereof but excluding any amendment which extends the Stated Expiration Date which extensions are governed by Section 2.7, provided that any such increase in the face amount of Outstanding Letters of Credit which expire on the same date, after giving effect to any reductions which become effective on the same date as such increase with respect to such Outstanding Letters of Credit which expire on the same date, shall not cause an increase, at such date, in the aggregate undrawn face amount of Outstanding Letters of Credit which expire on the same date. Upon receipt of such request, the Agent shall promptly request that the Issuing Bank amend such Letter of Credit to give effect to such amendment, and the Issuing Bank, shall either amend such Letter of Credit or issue a substitute Letter of Credit containing such amended terms. Notwithstanding the foregoing (i) in -27- the event that such requested amendment would increase the amount available to be drawn thereunder, the Agent shall not request the Issuing Bank to either amend such Letter of Credit or issue a substitute Letter of Credit, and the Issuing Bank shall not so amend or issue unless all of the Banks shall have consented thereto and (ii) in the event that a requested amendment of a Letter of Credit would reduce the amount available to be drawn thereunder, reduce the period during which drawings can be made thereunder or would otherwise be adverse to the beneficiary thereof, such amendment or such substitute Letter of Credit shall not, by its terms, be effective unless and until such beneficiary shall have consented in writing thereto. 2.6. Extension of Commitment and Termination Date Provided that no Default or Event of Default shall exist and be continuing, the Applicant may request that the Commitment be extended for an additional period of 364 days by giving written notice of such request substantially in the form of Exhibit I (an "Extension Request") to the Agent during the period not more than 180 days but not less than 60 days prior to the then Termination Date, and upon the receipt of such notice, the Agent shall promptly notify each Bank of such request. If each Bank consents to such Extension Request during the Extension Consent Period by giving written notice thereof to the Agent, then effective on the first day of the Extension Consent Period, the then applicable Termination Date shall be extended by 364 days. If all of the Banks have not consented to such Extension Request during the Extension Consent Period and such non-consenting Bank or Banks have not been replaced pursuant to Section 2.15 during the Extension Consent Period, the Termination Date shall not be extended. 2.7. Extension of the Stated Expiration Date of Each Letter of Credit The Stated Expiration Date of each Letter of Credit shall be up to one year from its Date of Issuance thereof, or, if extended during the Commitment Period as provided in Section 2.5, such later date. In addition, with respect to a Letter of Credit the Stated Expiration Date of which is after the Termination Date, such Stated Expiration Date thereof may be extended as follows: (a) Evergreen Letters of Credit. In the case of an Evergreen Letter of Credit, the Stated Expiration Date thereof may be extended for up to one year as provided in such Letter of Credit from the then Stated Expiration Date in accordance with the provisions of this subsection (a). The Agent will notify each Bank not less than 50 days prior to the Beneficiary Notification Date with respect to each such Outstanding Letter of Credit which is an Evergreen Letter of Credit that such Evergreen Letter of Credit will be automatically extended if each Bank notifies the Agent not less than 41 days prior to the Beneficiary Notification Date with respect thereto that such Bank consents to such -28- extension. If the Agent does not receive notice from each Bank to the effect that such Bank so consents, the Agent shall notify the Applicant not less than 35 days prior to such Beneficiary Notification Date that less than all Banks have consented to such extension. Upon receipt of such notification, the Applicant may obtain a replacement Bank for each such non-consenting Bank pursuant to Section 2.15. If each such non-consenting Bank has not been replaced pursuant to Section 2.15 on or prior to 10 days prior to the Beneficiary Notification Date, the Agent shall notify the Applicant and the beneficiary of such Evergreen Letter of Credit not later than the Beneficiary Notification Date that the Stated Expiration Date thereof will not be extended. If the Agent receives notice from each Bank as set forth above that such Bank consents to such extension, and provided that each non-consenting Bank shall have been replaced pursuant to Section 2.15, the Stated Expiration Date of such Evergreen Letter of Credit will be automatically extended for one year, without further action. Notwithstanding the foregoing, (i) in the event that the Termination Date is extended pursuant to Section 2.6 after the procedures set forth in this subsection have commenced, the provisions of Section 2.5(a)(i) shall apply and shall supercede the provisions in this subsection and (ii) in the event that at least two Business Days prior to the Beneficiary Notification Date, the Agent shall have received written notice from the Applicant, a Co-Applicant or a Bank that a Default or an Event of Default has occurred and is continuing, the Agent shall instruct the Issuing Bank to, and the Issuing Bank shall, notify the beneficiary of such Evergreen Letter of Credit on or before the Beneficiary Notification Date that the Stated Expiration date of such Evergreen Letter of Credit will not be extended. (b) Other Letters of Credit. In the case of a Letter of Credit other than an Evergreen Letter of Credit, the Applicant and the Co-Applicants, if any, may request in writing delivered to the Agent that the Stated Expiration Date thereof be extended for a term of up to one year from the then Stated Expiration Date. Upon receipt of such request, the Agent will promptly notify each Bank thereof. If all of the Banks consent to such extension, the Agent shall notify the Issuing Bank and the Issuing Bank shall amend such Letter of Credit to reflect such extended Stated Expiration Date. Each Bank will use its best efforts to promptly respond to any such request, provided that no Bank's failure to so respond shall create any claim against it or have the effect of extending the Stated Expiration Date of such Letter of Credit. (c) In General. Each Letter of Credit may be extended in the manner set forth herein an unlimited number of times. 2.8. Reimbursement Obligations Absolute (a) The reimbursement obligations of the Applicant and each Co-Applicant, if any, in respect of a Letter of Credit shall be absolute, unconditional and ir- -29- revocable, and shall be performed strictly in accordance with the terms of this Agreement, irrespective of any circumstances, including, without limitation, the following: (i) any lack of validity or enforceability of any Letter of Credit; (ii) any amendment or waiver of, or consent to departure from, all or any of the other Credit Documents; (iii) the existence of any claim, set-off, defense or other right which the Applicant, any Co-Applicant, or any other Person may have at any time against any beneficiary or any transferee of a Letter of Credit (or any Person or entity for whom any such beneficiary or any such transferee may be acting), the Issuing Bank, the Agent, any Bank, any participant or assignee, or any other Person or entity, whether in connection with this Agreement, any other Credit Document or any unrelated transaction; (iv) any statement or any other document presented under a Letter of Credit proving to be forged, fraudulent or invalid in any respect or any statement therein being untrue or inaccurate in any respect whatsoever; (v) payment by the Issuing Bank under a Letter of Credit against presentation of a draft or certificate which does not comply with the terms of the Letter of Credit; or (vi) any other circumstance or happening whatsoever, whether or not similar to any of the foregoing. 2.9. No Liability of the Issuing Bank It is understood that in making any payment under a Letter of Credit (i) the Issuing Bank's exclusive reliance on the documents presented to it under such Letter of Credit as to any and all matters set forth therein, including reliance on the amount of any draft presented under such Letter of Credit, whether or not the amount due to the beneficiary equals the amount of such draft and whether or not any document presented pursuant to such Letter of Credit proves to be insufficient in any respect, if such document on its face appears to be in order, and whether or not any other statement or any other document presented pursuant to such Letter of Credit proves to be forged or invalid or any statement therein proves to be inaccurate or untrue in any respect whatsoever; and (ii) any noncompliance of the documents presented in an immaterial respect under a Letter of Credit with the terms thereof shall in each case not be deemed wilful misconduct or gross negligence of the Issuing Bank. -30- 2.10. Increased Costs; Capital Adequacy (a) If on or after the Original Effective Date the adoption of any applicable law, rule or regulation, or any change in any applicable law, rule or regulation, or any change in the interpretation or administration thereof by any Governmental Authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by the Issuing Bank or any Bank with any request or directive after such date (whether or not having the force of law) of any such authority, central bank or comparable agency shall impose, modify or deem applicable any reserve (including, without limitation, any such requirement imposed by the Board of Governors of the Federal Reserve System), special deposit, insurance assessment or similar requirement against assets of, deposits with or for the account of, or credit extended by, the Issuing Bank or any Bank or shall impose on any Bank any other condition affecting its Commitment or the term thereof or its obligation to issue or participate in Letters of Credit and the result of any of the foregoing is to increase the cost to the Issuing Bank or such Bank of issuing or maintaining the Letters of Credit or its obligations pursuant to Section 2.2, or to reduce the amount of any sum received or receivable by the Issuing Bank or such Bank under this Agreement with respect thereto, by an amount deemed by the Issuing Bank or such Bank to be material, then, within 15 days after demand by such Bank or the Issuing Bank (with a copy to the Agent), the Applicant shall pay to the Issuing Bank or such Bank such additional amount or amounts as will compensate such Bank or the Issuing Bank for such increased cost or reduction. (b) If any Bank or the Issuing Bank shall have determined that, after the Original Effective Date, the adoption of any applicable law, rule or regulation regarding capital adequacy, or any change therein, or any change in the interpretation or administration thereof by any Governmental Authority, central bank or comparable agency charged with the interpretation or administration thereof, or any request or directive regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on capital of such Bank or the Issuing Bank (or its Parent) as a consequence of such Bank's or the Issuing Bank's obligations hereunder to a level below that which such Bank or the Issuing Bank (or its Parent) could have achieved but for such adoption, change, request or directive (taking into consideration its policies with respect to capital adequacy) by an amount deemed by such Bank or the Issuing Bank to be material, then from time to time, within 15 days after demand by such Bank or the Issuing Bank (with a copy to the Agent), the Applicant shall pay to such Bank or the Issuing Bank such additional amount or amounts as will compensate such Bank or the Issuing Bank (or its Parent) for such reduction. (c) Each Bank or the Issuing Bank, as the case may be, will promptly notify the Applicant and the Agent of any event of which it has knowledge, occurring after -31- the date hereof, which will entitle such Bank to compensation pursuant to this Section. A certificate of any Bank or the Issuing Bank claiming compensation under this Section and setting forth the additional amount or amounts to be paid to it hereunder shall be conclusive in the absence of manifest error. In determining such amount, such Bank or the Issuing Bank may use any reasonable averaging and attribution methods. 2.11. Withholding Tax Exemption At least five Business Days prior to the first date on which interest or fees are payable hereunder for the account of any Bank, each Bank that is not incorporated under the laws of the United States of America or a state thereof agrees that it will deliver to each of the Applicant and the Agent two duly completed copies of United States Internal Revenue Service Form 1001 or 4224, certifying in either case that such Bank is entitled to receive payments under this Agreement without deduction or withholding of any United States federal income taxes. Each Bank which so delivers a Form 1001 or 4224 further undertakes to deliver to each of the Applicant and the Agent two additional copies of such form (or a successor form) on or before the date that such form expires or becomes obsolete or after the occurrence of any event requiring a change in the most recent form so delivered by it, and such amendments thereto or extensions or renewals thereof as may be reasonably requested by the Applicant or the Agent, in each case certifying that such Bank is entitled to receive payments under this Agreement without deduction or withholding of any United States federal income taxes, unless an event (including without limitation any change in treaty, law or regulation) has occurred prior to the date on which any such delivery would otherwise be required which renders all such forms inapplicable or which would prevent such Bank from duly completing and delivering any such form with respect to it and such Bank advises the Applicant and the Agent that it is not capable of receiving payments without any deduction or withholding of United States federal income tax. 2.12. Agent's Records The Agent's records regarding the amount of each Letter of Credit, each payment by the Applicant or any Co-Applicant of reimbursement obligations in respect of Letters of Credit and other information relating to the Letters of Credit shall be presumptively correct absent manifest error. 2.13. Use of Proceeds The Applicant and Co-Applicants will use the Letters of Credit only to collateralize reinsurance liabilities assumed by direct and indirect Wholly-Owned Consolidated Subsidiaries of the Applicant and otherwise for the Applicant's or Co-Applicant's general corporate purposes. Notwithstanding anything to the contrary contained in any -32- Credit Document, the Applicant and each Co-Applicant agrees that no part of the proceeds of any Letters of Credit will be used, directly or indirectly, for the purpose, whether immediate, incidental or ultimate, of buying or carrying any Margin Stock. 2.14. Collateral (a) In General. (i) At the option of the Applicant, a Letter of Credit may be issued as a Secured Letter of Credit or an Unsecured Letter of Credit. With respect to each Secured Letter of Credit, on or prior to the Date of Issuance thereof, the Applicant and any Co-Applicant, if applicable, shall deliver to the Agent for deposit in the Collateral Account (as defined below) Eligible Collateral, the Discounted Collateral Value of which together with the Discounted Collateral Value of all other Eligible Collateral then held in the Collateral Account shall not be less than the Letter of Credit Exposure determined with respect to all Secured Letters of Credit. In addition, upon the occurrence of an Event of Default, the Applicant and any Co-Applicant, if applicable shall immediately deliver to the Agent for deposit in the Collateral Account Eligible Collateral, the Discounted Collateral Value of which together with the Discounted Collateral Value of all other Eligible Collateral then held in the Collateral Account shall not be less than the Letter of Credit Exposure determined with respect to all Letters of Credit. (ii) The Applicant hereby unconditionally agrees that at all times the Obligations attributable to Secured Letters of Credit shall be secured by Eligible Collateral, the Discounted Collateral Value of which equals or exceeds the Letter of Credit Exposure attributable to Secured Letters of Credit. In the event that the Discounted Collateral Value of the Eligible Collateral is less than such amount, the Applicant or, if applicable, the Co-Applicant(s), shall promptly (and in no event later than two Business Days) deliver to the Agent additional Eligible Collateral as shall be necessary so that the Discounted Collateral Value of all Eligible Collateral shall equal or exceed the Letter of Credit Exposure attributable to Secured Letters of Credit. In the event that the Applicant or, if applicable, the Co-Applicant(s), shall not have delivered such additional Collateral, for purposes of computing the Letter of Credit Commissions, the amount of the Unsecured Letters of Credit shall be deemed increased by the amount of such collateral insufficiency. (b) Collateral Account. To secure the prompt and complete payment, observance and performance of the Obligations, the Applicant and, if applicable, each Co-Applicant hereby grants to the Agent a security interest in and to all of the Applicant's or, if applicable, such Co-Applicant's right, title and interest in and to the Collateral Account and all Property, including all money and securities, at any time and from time to time on deposit therein, and all of the Proceeds (which shall include all distributions and income on and in -33- respect of all of the foregoing and all other rights and benefits in respect thereof) of all of the foregoing, whether now owned or existing or hereafter arising or acquired (collectively, the "Collateral"). The Agent shall establish and maintain, at its offices at One Wall Street, New York, New York, or at such other offices in The City of New York as it shall designate from time to time, in the name of the Agent, and under the sole dominion and control of the Agent, one or more collateral accounts (collectively, the "Collateral Account"). To the extent that any cash is held in the Collateral Account, neither the Applicant nor any Co-Applicant shall be entitled to interest thereon. Subject to the provisions of the Credit Documents, the Agent shall hold any Treasury Securities delivered to it as Collateral and shall, upon the direction of the Applicant from time to time, invest cash on deposit in the Collateral Account in Treasury Securities, provided, however, that, any loss or expense incurred in connection with any such holding or investment shall be for the sole account of the Applicant or Co-Applicant, as the case may be. (ii) All Property in the Collateral Account shall be held by the Agent as collateral for the payment and performance of all Obligations. Collateral may (A) automatically be applied by the Agent to reimburse the Issuing Bank for Letter of Credit payments and disbursements, and (B) be held for the satisfaction of the reimbursement obligations of the Applicant and Co-Applicants for the then outstanding Letter of Credit Exposure. If the Applicant is required to provide an amount of Collateral hereunder as a result of an Event of Default, such amount (to the extent not applied as aforesaid) shall be returned to the Applicant within five Business Days after all Events of Default have been cured or waived. After the occurrence and during the continuation of an Event of Default, the Agent may, in accordance with the provisions of this Agreement, apply all or any portion of the Collateral held in the Collateral Account to the Obligations and shall have the power to sell any securities held therein in connection therewith. 2.15. Replacement of Banks (a) If any Bank does not consent to an Extension Request pursuant to Section 2.6 or does not consent to the extension of any Stated Expiration Date with respect to any Outstanding Letter of Credit pursuant to Section 2.7, the Applicant shall have the right, if no Default or Event of Default then exists, to replace such Bank (any such Bank being referred to herein as a "Replaced Bank") with one or more Eligible Assignee or Eligible Assignees, each of which shall be acceptable to the Agent and the Issuing Bank, and such Replaced Bank shall assign to such Eligible Assignee or Eligible Assignees who are willing to so purchase the same for such Replaced Bank, all (but not less than all) of such Replaced Bank's rights and obligations under this Agreement, provided that such Eligible Assignee or Eligible Assignees shall pay to such Replaced Bank, an amount equal to all interest, fees and other amounts owing or accrued to such Replaced Bank to the date of such assignment, but without any premium. -34- (b) For each assignment, the parties shall execute and deliver to the Agent an Assignment and Acceptance Agreement. Upon such execution and delivery, from and after the effective date specified in such Assignment and Acceptance Agreement, the assignee thereunder shall be a party hereto and the assignor Bank released from its obligations hereunder to the extent provided therein. 2.16. Commitment Fee The Applicant agrees to pay to the Agent, for the account of the Banks in accordance with each Bank's Commitment Percentage, a fee (the "Commitment Fee"), during the Commitment Period, equal to 0.1875% per annum on the average daily Available Amount. The Commitment Fee shall be payable quarterly in arrears on the last day of each March, June, September and December of each year and on the Termination Date or other date on which the Commitment shall expire or otherwise terminate, and upon each reduction of the Available Amount. The Commitment Fee shall be calculated on the basis of a 360-day year for the actual number of days elapsed. 2.17. Letter of Credit Commissions The Applicant agrees to pay to the Agent, for the account of the Banks in accordance with each Bank's Commitment Percentage, commissions (the "Letter of Credit Commissions") with respect to each Letter of Credit for the period from and including the Date of Issuance thereof to and including the expiration date thereof (giving effect to any extensions, cancellations or other amendments thereto), at a rate per annum equal to the Applicable Fee Percentage per annum on the average daily amount available to be drawn under such Letter of Credit. The Letter of Credit Commissions shall be (i) calculated on the basis of a 360-day year for the actual number of days elapsed, (ii) payable quarterly in arrears on the last day of each March, June, September and December of each year and on the date that the Commitment shall expire and (iii) nonrefundable. In addition to the Letter of Credit Commissions, the Applicant agrees to pay to the Issuing Bank, for its own account, its standard fees and charges customarily charged to customers similar to the Applicant with respect to any Letter of Credit. 3. CONDITIONS PRECEDENT 3.1. Conditions to Effectiveness The effectiveness of this Agreement and the obligation of the Issuing Bank to issue any Letter of Credit on the Restatement Effective Date or any day thereafter, and the -35- Banks to participate therein shall be subject to the fulfillment of the following conditions precedent: (a) The Agent shall have received the following, each dated as of the Restatement Effective Date (unless otherwise specified) and in sufficient copies for each Bank: (i) a certificate, signed by the chief executive officer, chief financial officer or an executive vice president of the Applicant, in form and substance satisfactory to the Agent, certifying that (A) all representations and warranties of the Applicant contained in this Agreement and the other Credit Documents are true and correct as of the Restatement Effective Date, (B) no Default or Event of Default has occurred and is continuing, (C) there are no insurance regulatory proceedings pending or, to such individual's knowledge, threatened against any of the Insurance Subsidiaries in any jurisdiction that, if adversely determined, would be reasonably likely to have a Material Adverse Effect, and (D) both immediately before and after giving effect to the consummation of the transactions contemplated by this Agreement, no Material Adverse Change has occurred since December 31, 1995, and there exists no event, condition or state of facts that could reasonably be expected to result in a Material Adverse Change, other than the Reserve Adjustment and the Special 1996 Charges; (ii) a certificate of the secretary or an assistant secretary of each of the Applicant and its Material Subsidiaries, in form and substance satisfactory to the Agent, certifying (A) that attached thereto is a true and complete copy of the articles or certificate of incorporation and all amendments thereto of the Applicant or such Subsidiary, as the case may be, certified as of a recent date by the Secretary of State (or comparable Governmental Authority) of its jurisdiction of organization, and that the same has not been amended since the date of such certification, (B) that attached thereto is a true and complete copy of the bylaws of the Applicant or such Subsidiary, as the case may be, as then in effect and as in effect at all times from the date on which the resolutions referred to in clause (C) below were adopted to and including the date of such certificate, and (C) as to the Applicant only, that attached thereto is a true and complete copy of resolutions adopted by the board of directors of the Applicant authorizing the execution, delivery and performance of this Agreement and the other Credit Documents to which it is a party, and as to the incumbency and genuineness of the signature of each officer of the Applicant executing this Agreement or any of the other Credit Documents, and attaching all such copies of the documents described above; -36- (iii) a certificate of the Applicant's chief financial officer as to the financial condition of the Applicant in the form of Exhibit F; (iv) a favorable opinion of Duane, Morris & Heckscher, counsel to the Applicant, addressed to Agent and the Banks, in substantially the form of Exhibit G and addressing such other matters as the Agent or any Bank may reasonably request; and (v) a favorable opinion of Special Counsel, in substantially the form of Exhibit H. (b) The Agent shall have received (i) a certificate as of a recent date of the good standing of each of the Applicant and its Material Subsidiaries under the laws of its jurisdiction of organization, from the Secretary of State (or comparable Governmental Authority) of such jurisdiction, and (ii) as to each Material Insurance Subsidiary, a certificate of compliance as of a recent date, issued by the Insurance Regulatory Authority of its jurisdiction of legal domicile and any other jurisdiction in which such Insurance Subsidiary is reasonably likely to be commercially domiciled as defined under the laws and regulations of such jurisdiction. (c) All approvals, permits and consents of any Governmental Authorities (including, without limitation, all relevant Insurance Regulatory Authorities) or other Persons required in connection with the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby shall have been obtained (without the imposition of conditions that are not reasonably acceptable to the Agent), and all related filings, if any, shall have been made, and all such approvals, permits, consents and filings shall be in full force and effect and the Agent shall have received such copies thereof as it shall have requested; all applicable waiting periods shall have expired without any adverse action being taken by any Governmental Authority having jurisdiction; and no action, proceeding, investigation, regulation or legislation shall have been instituted, threatened or proposed before, and no order, injunction or decree shall have been entered by, any court or other Governmental Authority, in each case to enjoin, restrain or prohibit, to obtain substantial damages in respect of, or that is otherwise related to or arises out of, this Agreement or the consummation of the transactions contemplated hereby, or that, in the opinion of the Agent, would otherwise be reasonably likely to have a Material Adverse Effect. (d) Since December 31, 1995, both immediately before and after giving effect to the consummation of the transactions contemplated by this Agreement, other than the Reserve Adjustment and the Special 1996 Charges, there shall not have occurred any -37- Material Adverse Change or any event, condition or state of facts that could reasonably be expected to result in a Material Adverse Change. (e) The Agent shall have received evidence satisfactory to it that all principal, interest and other amounts outstanding with respect to the Terminating Indebtedness shall be repaid and satisfied in full and that all agreements relating thereto have been terminated and that the Revolving Credit Agreement has been declared (or contemporaneously herewith is being declared) effective. (f) The Agent shall have received evidence satisfactory to it that the Reserve Adjustment has been made to the relevant financial statements of MASCCO, Chestnut and the members of the PMA Group. (g) The Agent shall be satisfied with the actuarial review and valuation statement of, and opinion as to the adequacy of, each Insurance Subsidiary's loss and loss adjustment expense reserve positions as of December 31, 1996, with respect to the insurance business then in force, prepared and given by an independent actuarial firm satisfactory to the Agent. (h) The Applicant shall have paid all fees and expenses of the Agent required hereunder or under any other Credit Document to be paid on or prior to the Restatement Effective Date (including fees and expenses of counsel) in connection with this Agreement and the transactions contemplated hereby. (i) The Agent shall have received Compliance Certificates together with Covenant Compliance Worksheets (prepared on a pro-forma basis after giving effect to the consummation of the transactions contemplated by the Credit Documents) satisfactory to the Agent and certified by the chief financial officer of the Applicant. (j) The Agent and each Bank shall have received such other documents, certificates, opinions and instruments as it shall have reasonably requested. 3.2. Conditions for Issuance of All Letters of Credit and Extension and Increases thereof and Conditions to Effectiveness of Letters of Credit The obligation of the Issuing Bank to issue any Letter of Credit on a Date of Issuance and each Bank to participate therein and any increase of the face amount of any Letter of Credit or any extension of the Stated Expiration Date of any Letter of Credit is subject to the satisfaction of the following conditions precedent as of such Date of Issuance or the date of such increase or extension: -38- (a) On each Date of Issuance, and on each date on which the face amount of any Letter of Credit is to be increased or the Stated Expiration Date of any Letter of Credit is to be extended, and both before and after giving effect to the Letters of Credit to be issued thereon or such increase or extension, as the case may be, (i) each of the representations and warranties contained in Section 4 and in the other Credit Documents shall be true and correct on and as of such date with the same effect as if made on and as of such date (except to the extent any such representation or warranty is expressly stated to have been made as of a specific date, in which case such representation or warranty shall be true and correct as of such date), (ii) no Default or Event of Default shall have occurred and be continuing on such date, (c) the aggregate Letters of Credit Exposure will not exceed the Commitment, (d) the aggregate Letter of Credit Exposure with respect to Letters of Credit issued for the account of Subsidiaries of the Applicant which are not Material Insurance Subsidiaries will not exceed $10,000,000 and (e) the aggregate Letter of Credit Exposure with respect to Letters of Credit issued for the general corporate purposes of the Applicant or a Co-Applicant shall not exceed $15,000,000. Each request by the Applicant for the issuance of a Letter of Credit shall constitute a certification by the Applicant as of such date that each of the foregoing matters is true and correct in all respects. (b) All documents required by the provisions of the Credit Documents to be executed or delivered to the Agent on or before the applicable Date of Issuance shall have been executed and shall have been delivered at the office of the Agent set forth in Section 10.2 on or before such Date of Issuance. (c) With respect to the issuance of each Letter of Credit, the Agent shall have received a Letter of Credit Request duly executed by an Authorized Signatory of the Applicant and, if applicable, the Co-Applicant. (d) With respect to each Secured Letter of Credit, the Applicant or the Co-Applicants, as the case may be, shall have delivered Eligible Collateral to the Agent as required by Section 2.14. 4. REPRESENTATIONS AND WARRANTIES In order to induce the Agent and the Banks to enter into this Agreement and the Issuing Bank to issue the Letters of Credit and the Banks to participate therein, the Applicant makes the following representations and warranties to the Agent, each Bank and the Issuing Agent: 4.1. Corporate Organization and Power -39- Each of the Applicant and its Material Subsidiaries (i) is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation, (ii) has the full corporate power and authority to execute, deliver and perform the Credit Documents to which it is or will be a party, to own and hold its property and to engage in its business as presently conducted, and (iii) is duly qualified to do business as a foreign corporation and is in good standing in each jurisdiction where the nature of its business or the ownership of its properties requires it to be so qualified except where the failure to be so qualified would not have a Material Adverse Effect. 4.2. Authorization; Enforceability The Applicant has taken all necessary corporate action to execute, deliver and perform each of the Credit Documents to which it is or will be a party, and has, or on the Restatement Effective Date (or any later date of execution and delivery) will have, validly executed and delivered each of the Credit Documents to which it is or will be a party. This Agreement constitutes, and each of the other Credit Documents upon execution and delivery by the Applicant will constitute, the legal, valid and binding obligation of the Applicant, enforceable against it in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting creditors' rights generally or by general equitable principles. 4.3. No Violation The execution, delivery and performance by the Applicant of this Agreement and each of the other Credit Documents, and compliance by it with the terms hereof and thereof, do not and will not (i) contravene any Requirement of Law applicable to the Applicant, (ii) conflict with, result in a breach of or constitute (with notice, lapse of time or both) a default under any material indenture, agreement or other instrument to which it is a party, by which it or any of its properties is bound or to which it is subject, or (iii) result in or require the creation or imposition of any Lien upon any of its properties or assets. No Subsidiary is subject to any restriction or encumbrance on its ability to make dividend payments or other distributions in respect of its capital stock, to make loans or advances to the Applicant or any other Subsidiary, or to transfer any of its assets or properties to the Applicant or any other Subsidiary, in each case other than such restrictions or encumbrances existing under or by reason of the Credit Documents or applicable Requirements of Law. 4.4. Governmental Authorization; Permits (a) No consent, approval, authorization or other action by, notice to, or registration or filing with, any Governmental Authority or other Person is or will be required as a condition to or otherwise in connection with the due execution, delivery and -40- performance by the Applicant of this Agreement or any of the other Credit Documents or the legality, validity or enforceability hereof or thereof. (b) Each of the Applicant and its Subsidiaries has, and is in good standing with respect to, all governmental approvals, licenses, permits and authorizations necessary to conduct its business as presently conducted and to own or lease and operate its properties except where the failure to do so would not have a Material Adverse Effect. (c) Schedule 4.4 lists with respect to each Material Insurance Subsidiary, as of the Restatement Effective Date, all of the jurisdictions in which such Material Insurance Subsidiary holds licenses (including, without limitation, licenses or certificates of authority from relevant Insurance Regulatory Authorities), permits or authorizations to transact insurance and reinsurance business (collectively, the "Licenses"), and indicates the line or lines of insurance in which each such Material Insurance Subsidiary is permitted to be engaged with respect to each License therein listed. To the knowledge of the Applicant, (i) no such License is the subject of a proceeding for suspension, revocation or limitation or any similar proceedings, (ii) there is no sustainable basis for such a suspension, revocation or limitation, and (iii) no such suspension, revocation or limitation is threatened by any relevant Insurance Regulatory Authority. No Material Insurance Subsidiary transacts any insurance business, directly or indirectly, in any jurisdiction other than those listed on Schedule 4.4, where such business requires any license, permit or other authorization of an Insurance Regulatory Authority of such jurisdiction. 4.5. Litigation There are no actions, investigations, suits or proceedings pending or, to the knowledge of the Applicant, threatened, at law, in equity or in arbitration, before any court, other Governmental Authority or other Person, (i) against or affecting the Applicant, any of its Subsidiaries or any of their respective properties that would, if adversely determined, be reasonably likely to have a Material Adverse Effect or (ii) with respect to this Agreement or any of the other Credit Documents. 4.6. Taxes Each of the Applicant and its Subsidiaries has timely filed all federal and all material state and local tax returns and reports required to be filed by it and has paid all taxes, assessments, fees and other charges levied upon it or upon its properties that are shown thereon as due and payable, other than those that are being contested in good faith and by proper proceedings and for which adequate reserves have been established in accordance with Generally Accepted Accounting Principles. Such returns accurately reflect in all material respects all liability for taxes of the Applicant and its Subsidiaries for the periods -41- covered thereby. Except as set forth on Schedule 4.6, there is no ongoing audit or examination or, to the knowledge of the Applicant, other investigation by any Governmental Authority of the tax liability of the Applicant or any of its Subsidiaries; and there is no unresolved claim by any Governmental Authority concerning the tax liability of the Applicant or any of its Subsidiaries for any period for which tax returns have been or were required to have been filed, other than claims for which adequate reserves have been established in accordance with Generally Accepted Accounting Principles. 4.7. Subsidiaries Schedule 4.7 sets forth a list, as of the Restatement Effective Date, of all of the Subsidiaries of the Applicant and, as to each such Subsidiary, the percentage ownership (direct and indirect) of the Applicant in each class of its capital stock and each direct owner thereof, and indicates in each case whether such Subsidiary is a Material Subsidiary. 4.8. Full Disclosure All factual information heretofore or contemporaneously furnished to the Agent or any Bank in writing by or on behalf of the Applicant or any of its Subsidiaries for purposes of or in connection with this Agreement and the transactions contemplated hereby is, and all other such factual information hereafter furnished to the Agent or any Bank in writing by or on behalf of the Applicant or any of its Subsidiaries will be, true and accurate in all material respects on the date as of which such information is dated or certified (or, if such information has been amended or supplemented, on the date as of which any such amendment or supplement is dated or certified) and not made incomplete by omitting to state a material fact necessary to make the statements contained therein, in light of the circumstances under which such information was provided, not misleading. 4.9. Margin Regulations Neither the Applicant nor any of its Subsidiaries is engaged principally, or as one of its important activities, in the business of extending credit for the purpose of purchasing or carrying Margin Stock. No Letter of Credit will be used, directly or indirectly, to purchase or carry any Margin Stock, to extend credit for such purpose or for any other purpose that would violate or be inconsistent with Regulations G, T, U or X or any provision of the Exchange Act. 4.10. No Material Adverse Change Other than the Reserve Adjustment and the Special 1996 Charges, there has been no Material Adverse Change since December 31, 1995, and there exists no event, -42- condition or state of facts that could reasonably be expected to result in a Material Adverse Change. 4.11. Financial Matters. (a) The Applicant has heretofore furnished to the Agent copies of (i) the audited consolidated balance sheets of the Applicant and its Subsidiaries as of December 31, 1995, 1994, and 1993, and the related statements of income, stockholders' equity and cash flows for the fiscal years then ended, together with the opinion of Coopers & Lybrand, L.L.P. thereon, and (ii) the unaudited consolidated balance sheet of the Applicant and its Subsidiaries as of December 31, 1996, and the related statements of income, stockholders' equity and cash flows for the fiscal year then ended. Such financial statements have been prepared in accordance with Generally Accepted Accounting Principles (subject, with respect to the unaudited financial statements, to the absence of notes required by Generally Accepted Accounting Principles and to normal year-end audit adjustments) and present fairly the financial condition of the Applicant and its Subsidiaries on a consolidated basis as of the respective dates thereof and the consolidated results of operations of the Applicant and its Subsidiaries for the respective periods then ended. Except as fully reflected in the most recent financial statements referred to above and the notes thereto, there are no material liabilities or obligations with respect to the Applicant or any of its Subsidiaries of any nature whatsoever (whether absolute, contingent or otherwise and whether or not due). (b) The Applicant has heretofore furnished to the Agent copies of (i) the Annual Statements of each of the Insurance Subsidiaries as of December 31, 1996, 1995 and 1994, and for the fiscal years then ended, each as filed with the relevant Insurance Regulatory Authority (collectively, the "Historical Statutory Statements"). The Historical Statutory Statements (including, without limitation, the provisions made therein for investments and the valuation thereof, reserves, policy and contract claims and statutory liabilities) have been prepared in accordance with Statutory Accounting Practices (except as may be reflected in the notes thereto and subject, with respect to the Quarterly Statements, to the absence of notes required by Statutory Accounting Practices and to normal year-end adjustments), were in compliance with applicable Requirements of Law when filed and present fairly the financial condition of the respective Insurance Subsidiaries covered thereby as of the respective dates thereof and the results of operations, changes in capital and surplus and cash flow of the respective Insurance Subsidiaries covered thereby for the respective periods then ended. Except for liabilities and obligations disclosed or provided for in the Historical Statutory Statements (including, without limitation, reserves, policy and contract claims and statutory liabilities), no Insurance Subsidiary had, as of the date of its respective Historical Statutory Statements, any material liabilities or obligations of any nature whatsoever (whether absolute, contingent or otherwise and whether or not due) that, in accordance with Statutory Accounting Practices, would have been required to have been -43- disclosed or provided for in such Historical Statutory Statements. All books of account of each Insurance Subsidiary fully and fairly disclose all of its material transactions, properties, assets, investments, liabilities and obligations, are in its possession and are true, correct and complete in all material respects. (c) Each of the Applicant and its Material Subsidiaries, after giving effect to the consummation of the transactions contemplated hereby, (i) will have capital sufficient to carry on its businesses as conducted and as proposed to be conducted, (ii) will have assets with a fair saleable value, determined on a going concern basis, (y) not less than the amount required to pay the probable liability on its existing debts as they become absolute and matured and (z) greater than the total amount of its liabilities (including identified contingent liabilities, valued at the amount that can reasonably be expected to become absolute and matured), and (iii) will not intend to, and will not believe that it will, incur debts or liabilities beyond its ability to pay such debts and liabilities as they mature. 4.12. Ownership of Properties Each of the Applicant and its Material Subsidiaries (i) has good and marketable title to all real property owned by it, (ii) holds interests as lessee under valid leases in full force and effect with respect to all material leased real and personal property used in connection with its business, and (iii) has good title to all of its other properties and assets reflected in the most recent financial statements referred to in Section 4.11(a) (except as sold or otherwise disposed of since the date thereof in the ordinary course of business), in each case under (i), (ii) and (iii) above free and clear of all Liens other than Permitted Liens. 4.13. ERISA Each member of the ERISA Group has fulfilled its obligations under the minimum funding standards of ERISA and the Internal Revenue Code with respect to each Plan and is in compliance in all material respects with the presently applicable provisions of ERISA and the Internal Revenue Code with respect to each Plan. No member of the ERISA Group has (i) sought a waiver of the minimum funding standard under Section 412 of the Internal Revenue Code in respect of any Plan, (ii) failed to make any contribution or payment to any Plan or Multiemployer Plan or in respect of any Benefit Arrangement, or made any amendment to any Plan or Benefit Arrangement, which has resulted or could result in the imposition of a Lien or the posting of a bond or other security under ERISA or the Internal Revenue Code or (iii) incurred any liability under Title IV of ERISA other than a liability to the PBGC for premiums under Section 4007 of ERISA. 4.14. Environmental Matters -44- (a) No Hazardous Substances are or have been generated, used, located, released, treated, disposed of or stored by the Applicant or any of its Subsidiaries or, to the knowledge of the Applicant, by any other Person or otherwise, in, on or under any portion of any real property, leased or owned, of the Applicant or any of its Subsidiaries, except in material compliance with all applicable Environmental Laws, and no portion of any such real property or, to the knowledge of the Applicant, any other real property at any time leased, owned or operated by the Applicant or any of its Subsidiaries, has been contaminated by any Hazardous Substance; and no portion of any real property, leased or owned, of the Applicant or any of its Subsidiaries has been or, to the knowledge of the Applicant, is presently the subject of an environmental audit, assessment or remedial action. (b) Except as set forth of Schedule 4.14, to the knowledge of the Applicant, (i) no portion of any real property, leased or owned, of the Applicant or any of its Subsidiaries has been used as or for a mine, a landfill, a dump or other disposal facility, a gasoline service station, or (other than for petroleum substances stored in the ordinary course of business) a petroleum products storage facility, (ii) no portion of such real property or any other real property at any time leased, owned or operated by the Applicant or any of its Subsidiaries has, pursuant to any Environmental Law, been placed on the "National Priorities List" or "CERCLIS List" (or any similar federal, state or local list) of sites subject to possible environmental problems, and (iii) there are not and have never been any underground storage tanks situated on any real property, leased or owned, of the Applicant or any of its Subsidiaries. (c) All activities and operations of the Applicant and its Subsidiaries are in compliance with the requirements of all applicable Environmental Laws, except to the extent the failure so to comply, individually or in the aggregate, would not be reasonably likely to have a Material Adverse Effect. Other than normal claims in the ordinary course of business pursuant to insurance policies written by an Insurance Subsidiary, neither the Applicant nor any of its Subsidiaries is involved in any suit, action or proceeding, or has received any notice, complaint or other request for information from any Governmental Authority or other Person, with respect to any actual or alleged Environmental Claims that, if adversely determined, would be reasonably likely, individually or in the aggregate, to have a Material Adverse Effect; and, to the knowledge of the Applicant, there are no threatened actions, suits, proceedings or investigations with respect to any such Environmental Claims, nor any basis therefor. 4.15. Compliance With Laws Each of the Applicant and its Subsidiaries has timely filed all material reports, documents and other materials required to be filed by it under all applicable Requirements of Law with any Governmental Authority, has retained all material records and -45- documents required to be retained by it under all applicable Requirements of Law, and is otherwise in compliance with all applicable Requirements of Law in respect of the conduct of its business and the ownership and operation of its properties, except for such Requirements of Law the failure to comply with which, individually or in the aggregate, would not be reasonably likely to have a Material Adverse Effect. 4.16. Regulated Industries Neither the Applicant nor any of its Subsidiaries is (i) an "investment company," a company "controlled" by an "investment company," or an "investment advisor," within the meaning of the Investment Company Act of 1940, as amended, or (ii) a "holding company," a "subsidiary company" of a "holding company," or an "affiliate" of a "holding company" or of a "subsidiary company" of a "holding company," within the meaning of the Public Utility Holding Company Act of 1935, as amended. 4.17. Insurance The assets, properties and business of the Applicant and its Subsidiaries are insured against such hazards and liabilities (other than normal life insurance risk), under such coverages and in such amounts, as are customarily maintained by prudent companies similarly situated and under policies issued by insurers of recognized responsibility. No notice of any pending or threatened cancellation or material premium increase has been received by the Applicant or any of its Subsidiaries with respect to any such insurance policies, and the Applicant and each of its Subsidiaries are in substantial compliance with all conditions contained therein. 4.18. Certain Contracts. Schedule 4.18 lists, as of the Restatement Effective Date, each material contract, agreement or commitment, written or oral, other than Reinsurance Agreements, to which the Applicant or any of its Subsidiaries is a party, by which any of them or their respective properties is bound or to which any of them is subject (other than insurance policies written in the ordinary course of business) and that (i) relates to employment or labor matters, (ii) involves aggregate consideration payable to or by any party thereto of $1,000,000 or more or (iii) is otherwise material to the business, condition (financial or otherwise), operations, performance or properties of the Applicant or any of its Subsidiaries, and also indicates the parties, subject matter and term thereof. As of the Restatement Effective Date, each such contract is in full force and effect, and neither the Applicant nor any of its Subsidiaries or, to the knowledge of the Applicant, any other party thereto, is in breach of or default under any such contract. As of the Restatement Effective Date, none of such other parties has any presently exercisable right to terminate any such contract nor will -46- any such other party have any right to terminate any such contract on account of the execution, delivery and performance of the Credit Documents. 4.19. Reinsurance Agreements (a) Except as set forth on Schedule F to the Annual Statements for the Insurance Subsidiaries for the fiscal year ending December 31, 1996, there are no material liabilities outstanding as of the Restatement Effective Date under any Reinsurance Agreement. Each Reinsurance Agreement is in full force and effect; none of the Insurance Subsidiaries or, to the knowledge of the Applicant, any other party thereto, is in breach of or default under any such contract; and the Applicant has no reason to believe that the financial condition of any other party to any such contract is impaired such that a default thereunder by such party could reasonably be anticipated. Each Reinsurance Agreement is qualified under all applicable Requirements of Law to receive the statutory credit assigned to such Reinsurance Agreement in the relevant Annual Statement or Quarterly Statement at the time prepared. Except as set forth on Schedule 4.19, each Person to whom any of the Insurance Subsidiaries has ceded any material liability pursuant to any Reinsurance Agreement on the Restatement Effective Date either (i) has a rating of "A-" or better by A.M. Best & Company or (ii) has provided collateral in favor of the applicable Insurance Subsidiary of the type and in an amount described in Schedule 4.19. (b) As of the Restatement Effective Date, no Insurance Subsidiary is a party to any Surplus Relief Reinsurance Agreement. 4.20. Ranking of Obligations So long as any of the Surviving Senior Notes remain unpaid and outstanding, the Obligations rank pari passu with the obligations of the Applicant in respect of the Surviving Senior Notes. 5. AFFIRMATIVE COVENANTS The Applicant agrees that, so long as this Agreement is in effect, any reimbursement obligations (contingent or otherwise) in respect of any Letter of Credit remain outstanding and unpaid, or any other amount is owing under any Credit Document to the Issuing Bank, any Bank or the Agent: 5.1. GAAP Financial Statements The Applicant will deliver to each Bank: -47- (a) As soon as available and in any event within sixty (60) days after the end of each of the first three fiscal quarters of each fiscal year, beginning with the first fiscal quarter ending after the date hereof, unaudited consolidated and consolidating balance sheets of the Applicant and its Subsidiaries as of the end of such fiscal quarter and unaudited consolidated and consolidating statements of income, stockholders' equity and cash flows for the Applicant and its Subsidiaries for the fiscal quarter then ended and for that portion of the fiscal year then ended, in each case setting forth comparative consolidated figures as of the end of and for the corresponding period in the preceding fiscal year, all prepared in accordance with Generally Accepted Accounting Principles (subject to the absence of notes required by Generally Accepted Accounting Principles and subject to normal year-end audit adjustments) applied on a basis consistent with that of the preceding quarter or containing disclosure of the effect on the financial condition or results of operations of any change in the application of accounting principles and practices during such quarter; and (b) As soon as available and in any event within one-hundred twenty (120) days after the end of each fiscal year, beginning with the fiscal year ended December 31, 1996, (i) an audited consolidated balance sheet of the Applicant and its Subsidiaries as of the end of such fiscal year and audited consolidated statements of income, stockholders' equity and cash flows for the Applicant and its Subsidiaries for the fiscal year then ended, including the applicable notes, in each case setting forth comparative figures as of the end of and for the preceding fiscal year, certified by the independent certified public accounting firm regularly retained by the Applicant or another independent certified public accounting firm of recognized national standing reasonably acceptable to the Required Banks, together with a report thereon by such accountants that is not qualified as to going concern or scope of audit and to the effect that such financial statements present fairly the consolidated financial condition and results of operations of the Applicant and its Subsidiaries as of the dates and for the periods indicated in accordance with generally accepted accounting principles, (ii) an unaudited consolidating balance sheet of the Applicant and its Subsidiaries as of the end of such fiscal year and unaudited consolidating statements of income, stockholders' equity and cash flows for the Applicant and its Subsidiaries for the fiscal year then ended, all in reasonable detail, and (iii) an unaudited balance sheet of PMA Cayman as of the end of such fiscal year and unaudited statements of income, stockholders' equity and cash flows for PMA Cayman for the fiscal year then ended, all prepared in accordance with Generally Accepted Accounting Principles applied on a consistent basis with that of the preceding fiscal year or containing disclosure to the effect on the financial condition or results of operations of any change in the application of accounting principles and practices during such fiscal year. 5.2. Statutory Financial Statements -48- The Applicant will deliver to each Bank: (a) As soon as available and in any event within forty-five (45) days after the end of each of the first three fiscal quarters of each fiscal year, beginning with the first fiscal quarter ending after the date hereof, a Quarterly Statement of each Insurance Subsidiary as of the end of such fiscal quarter and for that portion of the fiscal year then ended, in the form filed with the relevant Insurance Regulatory Authority, prepared in accordance with Statutory Accounting Practices; (b) As soon as available and in any event within sixty (60) days after the end of each fiscal year, beginning with the fiscal year ended December 31, 1996, an Annual Statement of each Insurance Subsidiary as of the end of such fiscal year and for the fiscal year then ended, in the form filed with the relevant Insurance Regulatory Authority, prepared in accordance with Statutory Accounting Practices; and (c) As soon as available and in any event within one hundred twenty-one (121) days after the end of each fiscal year, beginning with the fiscal year ended December 31, 1996, a Combined Annual Statement of PMAIC and its Consolidated Affiliates as of the end of such fiscal year and for the fiscal year then ended, in the form filed with the relevant Insurance Regulatory Authority, prepared in accordance with Statutory Accounting Practices. 5.3. Other Business and Financial Information The Applicant will deliver to each Bank: (a) Concurrently with each delivery of the financial statements described in Sections 5.1 and 5.2, a Compliance Certificate in the form of Exhibit E-1 (in the case of the financial statements described in Section 5.1) or Exhibit E-2 (in the case of the financial statements described in Section 5.2) with respect to the period covered by the financial statements then being delivered, executed by the chief financial officer of the Applicant (or a vice president of the Applicant having significant responsibility for financial matters), together, in the case of the financial statements described in Section 5.1, with a Covenant Compliance Worksheet reflecting the computation of the financial covenants set forth in Sections 6.1 and 6.2 as of the last day of the period covered by such financial statements, and in the case of the financial statements described in Section 5.2, with a Covenant Compliance Worksheet reflecting the computation of the financial covenants set forth in Sections 6.3 and 6.4 as of the last day of the period covered by such financial statements; -49- (b) Promptly upon filing with the relevant Insurance Regulatory Authority and in any event within ninety (90) days after the end of each fiscal year, beginning with the fiscal year ended December 31, 1996, a copy of each Insurance Subsidiary's "Statement of Actuarial Opinion" (or equivalent information should the relevant Insurance Regulatory Authority not require such a statement) as to the adequacy of such Insurance Subsidiary's loss reserves for such fiscal year, together with a copy of its management discussion and analysis in connection therewith, each in the format prescribed by the applicable insurance laws of such Insurance Subsidiary's jurisdiction of domicile; (c) Promptly upon the sending or filing thereof, copies of any "internal control" letter filed by on behalf of the Applicant or any of its Subsidiaries with any Insurance Regulatory Authority; (d) Promptly upon the sending, filing or receipt thereof, copies of (i) all financial statements, reports, notices and proxy statements that the Applicant or any of its Subsidiaries shall send or make available generally to its shareholders, (ii) all regular, periodic and special reports, registration statements and prospectuses that the Applicant or any of its Subsidiaries shall render to or file with the Securities and Exchange Commission, the National Association of Securities Dealers, Inc. or any national securities exchange, (iii) all significant reports on examination or similar significant reports, financial examination reports or market conduct examination reports by the NAIC or any Insurance Regulatory Authority or other Governmental Authority with respect to any Insurance Subsidiary's insurance business, and (iv) all significant filings made under applicable state insurance holding company acts by the Applicant or any of its Subsidiaries, including, without limitation, filings seeking approval of transactions with Affiliates; (e) Promptly upon (and in any event within three (3) Business Days after) an officer of the Applicant obtaining knowledge thereof, written notice of any of the following: (i) the occurrence of any Default or Event of Default, together with a written statement of the chief executive officer or chief financial officer of the Applicant specifying the nature of such Default or Event of Default, the period of existence thereof and the action that the Applicant has taken and proposes to take with respect thereto; (ii) the institution or threatened institution of any action, suit, investigation or proceeding against or affecting the Applicant or any of its Subsidiaries, including any such investigation or proceeding by any Insurance Regulatory Authority or other Governmental Authority (other than routine periodic inquiries, investigations or reviews), that would, if adversely determined, be reasonably likely, individually or in the -50- aggregate, to have a Material Adverse Effect, and any material development in any litigation or other proceeding previously reported pursuant to Section 4.5 or this Section 5.3(e)(ii); (iii) the receipt by the Applicant or any of its Subsidiaries from any Insurance Regulatory Authority or other Governmental Authority of (i) any notice asserting any failure by the Applicant or any of its Subsidiaries to be in compliance with applicable Requirements of Law or that threatens the taking of any action against the Applicant or such Subsidiary or sets forth circumstances that, if taken or adversely determined, would be reasonably likely to have a Material Adverse Effect, or (ii) any notice of any actual or threatened suspension, limitation or revocation of, failure to renew, or imposition of any restraining order, escrow or impoundment of funds in connection with, any license, permit, accreditation or authorization of the Applicant or any of its Subsidiaries, where such action would be reasonably likely to have a Material Adverse Effect; (iv) the occurrence of any of the following, together with a reasonably detailed description thereof and copies of any filings, communications, reports or other information relating thereto made available to the Applicant or any of its Subsidiaries: (A) the assertion of any Environmental Claim against or affecting the Applicant, any of its Subsidiaries or any of their respective real property, leased or owned; (B) the receipt by the Applicant or any of its Subsidiaries of notice of any alleged violation of or noncompliance with any Environmental Laws by the Applicant or any of its Subsidiaries; or (C) the taking of any remedial action by the Applicant, any of its Subsidiaries or any other Person in response to the actual or alleged generation, storage, release, disposal or discharge of any Hazardous Substances on, to, upon or from any real property leased or owned by the Applicant or any of its Subsidiaries; but in each case under clauses (A), (B) and (C) above, only to the extent the same would be reasonably likely to have a Material Adverse Effect; (v) the occurrence of any actual changes in any insurance statute or regulation governing the investment or dividend practices of any Insurance Subsidiary that would be reasonably likely to have a Material Adverse Effect; (vi) if and when any member of the ERISA Group gives or is required to give notice to the PBGC of any "reportable event" (as defined in section 4043 of ERISA) with respect to any Plan which might constitute grounds for a termination of such Plan under Title IV of ERISA, or knows that the plan administrator of any Plan has given or is required to give notice of any such reportable event, a copy of the notice of such reportable event given or required to be given to the PBGC; (ii) receives notice of complete or partial withdrawal liability under Title IV of ERISA or notice that any Multiemployer Plan is in reorganization, is insolvent or has been terminated, a copy of such notice; (iii) receives notice from the PBGC under Title IV of ERISA of an intent to terminate, impose liability (other than for premiums under Section 4007 of ERISA) in respect of, or appoint a -51- trustee to administer any Plan, a copy of such notice; (iv) applies for a waiver of the minimum funding standard under Section 412 of the Internal Revenue Code, a copy of such application; (v) gives notice of intent to terminate any Plan under Section 4041(c) of ERISA, a copy of such notice and other information filed with the PBGC; (vi) gives notice of withdrawal from any Plan pursuant to Section 4063 of ERISA, a copy of such notice; or (vii) fails to make any payment or contribution to any Plan or Multiemployer Plan or in respect of any Benefit Arrangement or makes any amendment to any Plan or Benefit Arrangement which has resulted or could result in the imposition of a Lien or the posting of a bond or other security, a certificate of the chief financial officer or the chief accounting officer of the Applicant setting forth details as to such occurrence and action, if any, which the Applicant or applicable member of the ERISA Group is required or proposes to take; and (vii) any other matter or event that has, or would be reasonably likely to have, a Material Adverse Effect, together with a written statement of the chief executive officer or chief financial officer of the Applicant setting forth the nature and period of existence thereof and the action that the Applicant has taken and proposes to take with respect thereto; (f) Promptly, notice of (i) the occurrence of any material amendment or modification to any Reinsurance Agreement (whether entered into before or after the Restatement Effective Date), including any such agreements that are in a runoff mode on the Restatement Effective Date, which amendment or modification would be reasonably likely to have a Material Adverse Effect, or (ii) the receipt by the Applicant or any of its Subsidiaries of any written notice of any denial of coverage, litigation, claim or arbitration arising out of any Reinsurance Agreement to which it is a party which would be reasonably likely to have a Material Adverse Effect; (g) As promptly as reasonably possible, such other information about the business, condition (financial or otherwise), operations or properties of the Applicant or any of its Subsidiaries (including, without limitation, financial, actuarial and other information with respect to Reinsurance Agreements) as the Agent or any Bank may from time to time reasonably request; and (h) Upon the request of the Agent at the direction of the Required Banks (which absent a showing of good cause shall not be more often than one time during any twelve-month period), at the Applicant's expense, deliver to each Bank within sixty (60) days of such request an actuarial review of the liabilities and other items of each Insurance Subsidiary prepared by an actuary or a firm of actuaries reasonably acceptable to the Agent, such actuarial review to be in form and substance reasonably acceptable to the Required Banks. -52- 5.4. Corporate Existence; Franchises; Maintenance of Properties The Applicant will, and will cause each of its Subsidiaries to, maintain and preserve in full force and effect its corporate existence, except as expressly permitted otherwise by Section 7.1. The Applicant will, and will cause each of its Subsidiaries to, (i) obtain, maintain and preserve in full force and effect all other rights, franchises, licenses, permits, certifications, approvals and authorizations required by Governmental Authorities and necessary to the ownership, occupation or use of its properties or the conduct of its business, except to the extent the failure to do so would not be reasonably likely to have a Material Adverse Effect, and (ii) keep all material properties in good working order and condition (normal wear and tear excepted) and from time to time make all necessary repairs to and renewals and replacements of such properties, except to the extent that any of such properties are obsolete or are being replaced. 5.5. Compliance with Laws The Applicant will, and will cause each of its Subsidiaries to, comply in all respects with all Requirements of Law applicable in respect of the conduct of its business and the ownership and operation of its properties, except to the extent the failure so to comply would not be reasonably likely to have a Material Adverse Effect. 5.6. Payment of Obligations The Applicant will, and will cause each of its Subsidiaries to, (i) pay all liabilities and obligations as and when due (subject to any applicable subordination provisions), except to the extent failure to do so would not be reasonably likely to have a Material Adverse Effect, and (ii) pay and discharge all taxes, assessments and governmental charges or levies imposed upon it, upon its income or profits or upon any of its properties, prior to the date on which penalties would attach thereto, and all lawful claims that, if unpaid, might become a Lien upon any of the properties of the Applicant or any of its Subsidiaries; provided, however, that neither the Applicant nor any of its Subsidiaries shall be required to pay any such tax, assessment, charge, levy or claim that is being contested in good faith and by proper proceedings and as to which the Applicant or such Subsidiary is maintaining adequate reserves with respect thereto in accordance with Generally Accepted Accounting Principles. 5.7. Insurance The Applicant will, and will cause each of its Subsidiaries to, maintain with financially sound and reputable insurance companies insurance with respect to its assets, properties and business, against such hazards and liabilities (other than normal life insurance -53- risk), of such types and in such amounts, as is customarily maintained by companies in the same or similar businesses similarly situated. 5.8. Maintenance of Books and Records; Inspection The Applicant will, and will cause each of its Subsidiaries to, (i) maintain adequate books, accounts and records, in which full, true and correct entries shall be made of all financial transactions in relation to its business and properties, and prepare all financial statements required under this Agreement, in each case in accordance with Generally Accepted Accounting Principles or Statutory Accounting Practices, as applicable, and in compliance with the requirements of any Governmental Authority having jurisdiction over it, and (ii) permit employees or agents of the Agent or any Bank, at the Agent's or Bank's expense (except as provided in Section 10.1), to inspect its properties and examine or audit its books, records, working papers and accounts and make copies and memoranda of them, and to discuss its affairs, finances and accounts with its officers and employees and, with the prior consent of the Applicant (such consent not to be unreasonably withheld), the independent public accountants of the Applicant and its Subsidiaries (and by this provision the Applicant authorizes such accountants to discuss the finances of the Applicant and its Subsidiaries), all at such times and from time to time, upon reasonable notice and during business hours, as may be reasonably requested. 5.9. Dividends The Applicant will take all action necessary to cause its Subsidiaries to make such dividends, distributions or other payments to the Applicant as shall be necessary for the Applicant to make payments of the Obligations. In the event the approval of any Governmental Authority or other Person is required in order for any such Subsidiary to make any such dividends, distributions or other payments to the Applicant, or for the Applicant to make any such principal or interest payments, the Applicant will forthwith exercise its best efforts and take all actions permitted by law and necessary to obtain such approval. 5.10. Ownership of Insurance Subsidiaries The Applicant will cause each of its Insurance Subsidiaries to remain at all times a Wholly Owned Subsidiary of the Applicant, except as expressly permitted otherwise by Section 7.1. 5.11. Extinguishment of Senior Note Indebtedness -54- The Applicant, on or before June 30, 1997, will cause the Surviving Senior Note Indebtedness, including all fees and interest accrued thereon, to be extinguished and paid in full and the Surviving Senior Notes to be cancelled. 5.12. Further Assurances The Applicant will, and will cause each of its Subsidiaries to, make, execute, endorse, acknowledge and deliver any amendments, modifications or supplements hereto and restatements hereof and any other agreements, instruments or documents, and take any and all such other actions, as may from time to time be reasonably requested by the Agent or the Required Banks to effect, confirm or further assure or protect and preserve the interests, rights and remedies of the Agent and the Banks under this Agreement and the other Credit Documents. 6. FINANCIAL COVENANTS The Applicant agrees that, so long as this Agreement is in effect, any reimbursement obligations (contingent or otherwise) in respect of any Letter of Credit remain outstanding and unpaid, or any other amount is owing under any Credit Document to the Issuing Bank, any Bank or the Agent: 6.1. Capitalization Ratio The Applicant will not permit the Capitalization Ratio to be greater than 0.35 to 1.0 as of the last day of any fiscal quarter, beginning with the fiscal quarter ending December 31, 1996. 6.2. Cash Coverage Ratio The Applicant will not permit the Cash Coverage Ratio to be less than (i) with respect to any four fiscal quarter period ending on or after December 31, 1996 or ending on or before December 31, 1999, 2.50 to 1.0, and (ii) with respect to any four fiscal quarter period ending thereafter, 2.75 to 1.0. 6.3. Statutory Surplus The Applicant will cause the Consolidated Statutory Surplus of the Insurance Subsidiaries to be not less than $450,000,000 at all times from and after the Restatement Effective Date. -55- 6.4. Risk-Based Capital The Applicant will not permit "total adjusted capital" (within the meaning of the Risk-Based Capital for Insurers Model Act as promulgated by the NAIC as of the date hereof (the "Model Act")) of the following Insurance Subsidiaries to be less than the percentages set forth below, as of the dates set forth below, of the applicable "Company Action Level RBC" (within the meaning of the Model Act): (i) with respect to PMA Re, as of the last day of any fiscal year, beginning with the fiscal year ending December 31, 1996, not less than 150%; (ii) with respect to any other Insurance Subsidiary (other than an Insurance Subsidiary not required by the relevant Insurance Regulatory Authority to meet any RBC requirements), not less than (w) as of December 31, 1996, 100% (x) as of December 31, 1997, 110%, and (y) as of December 31, 1998, 115%, and (z) as of December 31, 1999 and the last day of any fiscal year thereafter, 120%. 7. NEGATIVE COVENANTS The Applicant agrees that, so long as this Agreement is in effect, any reimbursement obligations (contingent or otherwise) in respect of any Letter of Credit remain outstanding and unpaid, or any other amount is owing under any Credit Document to the Issuing Bank, any Bank or the Agent: 7.1. Merger; Consolidation; Disposition of Assets The Applicant will not, and will not permit or cause any of its Subsidiaries to, liquidate, wind up or dissolve, enter into any consolidation, merger or other combination, or sell, assign, lease, convey, transfer, assumption reinsure or otherwise dispose of (whether in one or a series of transactions) all or any portion of its assets, business or properties outside of the ordinary course of its business, or agree to do any of the foregoing; provided, however, that: (i) any Subsidiary may merge or consolidate with, or sell or otherwise dispose of assets to, another Subsidiary or the Applicant so long as (y) the surviving or transferee corporation is the Applicant or a Wholly Owned Subsidiary and (z) immediately after giving effect thereto, no Default or Event of Default would exist; -56- (ii) the Applicant and its Subsidiaries may sell or exchange used or obsolete equipment to the extent (y) the proceeds of such sale are applied towards, or such equipment is exchanged for, similar replacement equipment or (z) such equipment is no longer necessary for the operations of the Applicant or its applicable Subsidiary in the ordinary course of business; and (iii) the Applicant and its Subsidiaries may sell (y) the capital stock or all or any portion of the assets, business or properties of a Subsidiary that is not a Material Subsidiary, and (z) any asset or group of assets constituting less than (A) in any single transaction or series or related transactions, ten percent (10%) of Consolidated Statutory Surplus as of the last day of the fiscal quarter ending on or immediately prior to the date of such sale, and (B) during the term of this Agreement, in the aggregate with all such other sales pursuant to this clause (iii), thirty percent (30%) of Consolidated Statutory Surplus as of the end of the immediately preceding fiscal year. 7.2. Indebtedness The Applicant will not, and will not permit or cause any of its Subsidiaries to, directly or indirectly, create, incur, assume or suffer to exist, any Indebtedness other than: (i) Indebtedness under the Revolving Credit Agreement and any other Credit Document (as therein defined), provided the aggregate principal amount thereof does not exceed $250,000,000; (ii) accrued expenses, current trade or other accounts payable and other current liabilities arising in the ordinary course of business and not incurred through the borrowing of money, provided that the same shall be paid when due except to the extent being contested in good faith and by appropriate proceedings; (iii) Indebtedness of any Wholly Owned Subsidiary of the Applicant to the Applicant or to another Wholly Owned Subsidiary; (iv) Indebtedness due under the Credit Documents; (v) subject to Section 5.11, the Surviving Senior Note Indebtedness; (vi) the Terminating Indebtedness but only until the initial borrowing under the Revolving Credit Agreement shall have occurred; -57- (vii) Indebtedness existing on the Restatement Effective Date as set forth on Schedule 7.2; (viii) Indebtedness in respect of any Hedge Agreement covering a notional principal amount not in excess of the amount of the aggregate Commitments; and (ix) Indebtedness (other than Indebtedness specified in clauses (i) through (viii) above) in the aggregate principal amount outstanding not exceeding $10,000,000 at any time and constituting (y) unsecured Indebtedness of the Applicant or (z) reimbursement obligations under letters of credit (whether or not drawn or matured and in the stated amount thereof) issued on behalf of an Insurance Subsidiary in the ordinary course of such Insurance Subsidiary's business. 7.3. Liens The Applicant will not, and will not permit or cause any of its Subsidiaries to, directly or indirectly, make, create, incur, assume or suffer to exist, or enter into or suffer to exist any agreement or restriction that prohibits or conditions the creation, incurrence or assumption of, any Lien upon or with respect to any part of its property or assets, whether now owned or hereafter acquired, or agree to do any of the foregoing, other than the following (collectively, "Permitted Liens"): (i) Liens (y) in existence on the Restatement Effective Date and set forth on Schedule 7.3 and (z) arising out of the refinancing, extension, renewal or refunding of any Indebtedness secured by any such Lien provided that such Indebtedness is not increased and is not secured by any additional assets; (ii) Liens imposed by law, such as Liens of carriers, warehousemen, mechanics, materialmen and landlords, and other similar Liens incurred in the ordinary course of business for sums not constituting borrowed money that are not overdue for a period of more than thirty (30) days or that are being contested in good faith by appropriate proceedings and for which adequate reserves have been established in accordance with Generally Accepted Accounting Principles; (iii) Liens (other than any Lien imposed by ERISA, the creation or incurrence of which would result in an Event of Default under Section 8.1(k)) incurred in the ordinary course of business in connection with worker's compensation, unemployment insurance or other forms of governmental insurance or benefits, or to secure the performance of letters of credit, bids, tenders, statutory obligations, surety and appeal bonds, leases, government contracts and other similar obligations (other than obligations for borrowed money) entered into in the ordinary course of business; -58- (iv) Liens for taxes, assessments or other governmental charges or statutory obligations that are not delinquent or remain payable without any penalty or that are being contested in good faith by appropriate proceedings and for which adequate reserves have been established in accordance with Generally Accepted Accounting Principles; (v) Liens in connection with pledges and deposits made pursuant to statutory and regulatory requirements of Insurance Regulatory Authorities by an Insurance Subsidiary in the ordinary course of its business, for the purpose of securing regulatory capital or satisfying other financial responsibility requirements; (vi) with respect to any real property occupied by the Applicant or any of its Subsidiaries, all easements, rights of way, licenses and similar encumbrances on title that do not materially impair the use of such property for its intended purposes; (vii) Liens in favor of the Agent and the Banks hereunder; and (viii) Liens (other than Liens specified in clauses (i) through (vii) above) securing obligations in the aggregate principal amount not exceeding, at any time, the greater of (y) five percent (5%) of Consolidated Net Worth as of the end of the immediately preceding fiscal year or (z) $20,000,000. 7.4. Investments; Acquisitions The Applicant will not, and will not permit or cause any of its Subsidiaries to, directly or indirectly, purchase, own, invest in or otherwise acquire any capital stock, evidence of indebtedness or other obligation or security or any interest whatsoever in any other Person, or make or permit to exist any loans, advances or extensions of credit to, or any investment in cash or by delivery of property in, any other Person, or purchase or otherwise acquire (whether in one or a series of related transactions) any portion of the assets, business or properties of another Person, or create or acquire any Subsidiary, or become a partner or joint venturer in any partnership or joint venture (collectively, "Investments"), or make a commitment or otherwise agree to do any of the foregoing, if, immediately after any such Investment, the amount of the cash, Cash Equivalents and Investment Grade Securities owned by the Applicant and its Subsidiaries, on a consolidated basis, would be less than eighty-five percent (85%) of the total Invested Assets of the Applicant and its Subsidiaries determined as of the end of the most recent fiscal quarter. 7.5. Restricted Payments -59- (a) The Applicant will not, and will not permit or cause any of its Subsidiaries to, directly or indirectly, declare or make any dividend payment, or make any other distribution of cash, property or assets, in respect of any of its capital stock or any warrants, rights or options to acquire its capital stock, or purchase, redeem, retire or otherwise acquire for value any shares of its capital stock or any warrants, rights or options to acquire its capital stock, or set aside funds for any of the foregoing, except that: (i) each Wholly Owned Subsidiary may declare and make dividend payments or other distributions to the Applicant or another Wholly Owned Subsidiary to the extent permitted under applicable Requirements of Law and, as to the Insurance Subsidiaries, by each relevant Insurance Regulatory Authority; and (ii) the Applicant may declare and make dividend payments or other distributions, and may purchase, redeem, retire or otherwise acquire shares of its capital stock, in cash or in-kind, in each case provided that, immediately after giving effect thereto, no Default or Event of Default would exist. (b) The Applicant will not, and will not permit or cause any of its Subsidiaries to, other than with respect to the Surviving Senior Note Indebtedness and the Terminating Indebtedness, make (or give any notice in respect of) any voluntary or optional payment or prepayment on any Indebtedness or, directly or indirectly, make any redemption (including pursuant to any change of control provision), retirement, defeasance or other acquisition for value of any Indebtedness, or make any deposit or otherwise set aside funds for any of the foregoing purposes. 7.6. Transactions with Affiliates The Applicant will not, and will not permit or cause any of its Subsidiaries to, enter into any transaction with any officer, director, stockholder or other Affiliate of the Applicant or any Subsidiary, except in the ordinary course of its business and upon fair and reasonable terms that are no less favorable to it than would obtain in a comparable arm's length transaction with a Person other than an Affiliate of the Applicant or such Subsidiary; provided, however, that nothing contained in this Section shall prohibit: (i) transactions described on Schedule 7.6 or otherwise expressly permitted hereunder; and (ii) the payment by the Applicant of reasonable and customary fees to members of its board of directors. 7.7. Certain Amendments -60- The Applicant will not, and will not permit or cause any of its Subsidiaries to, (i) amend, modify or waive, or permit the amendment, modification or waiver of, any provision of any agreement or instrument evidencing or governing any Indebtedness, including, without limitation, the Revolving Credit Agreement and the Surviving Senior Notes, or (ii) amend or modify its articles or certificate of incorporation or bylaws, in each case under clauses (i) and (ii) other than any amendments or modifications that could not reasonably be expected to affect the Banks adversely. 7.8. Lines of Business The Applicant will not, and will not permit or cause any of its Subsidiaries to, engage to any substantial degree in any business other than the lines of property and casualty insurance business and other businesses engaged in by the Applicant and its Subsidiaries on the date hereof or a business reasonably related thereto. 7.9. Limitation on Certain Restrictions The Applicant will not, and will not permit or cause any of its Subsidiaries to, directly or indirectly, create or otherwise cause or suffer to exist or become effective any restriction or encumbrance on (i) the ability of the Applicant and its Subsidiaries to perform and comply with their respective obligations under the Credit Documents or the Revolving Credit Agreement and the Credit Documents (as therein defined), (ii) the ability of the Applicant or any Subsidiary to grant, assume or permit to exist any Lien upon any of its assets or properties as security, directly or indirectly, for the Obligations, other than the restrictions set forth in the Credit Documents or the Revolving Credit Agreement and the Credit Documents (as therein defined), or (iii) the ability of any Subsidiary of the Applicant to make any dividend payments or other distributions in respect of its capital stock, to make loans or advances to the Applicant or any other Subsidiary, or to transfer any of its assets or properties to the Applicant or any other Subsidiary, in each case other than such restrictions or encumbrances existing under or by reason of the Credit Documents or applicable Requirements of Law. 7.10. Fiscal Year The Applicant will not, and will not permit or cause any of its Subsidiaries to, change the ending date of its fiscal year to a date other than December 31 unless (i) the Applicant shall have given the Banks written notice of its intention to change such ending date at least sixty (60) days prior to the effective date thereof and (ii) prior to such effective date this Agreement shall have been amended to make any changes in the financial -61- covenants and other terms and conditions to the extent necessary, in the reasonable determination of the Required Banks, to reflect the new fiscal year ending date. 7.11. Accounting Changes The Applicant will not, and will not permit or cause any of its Subsidiaries to, make or permit any material change in its accounting policies or reporting practices, except as may be required by Generally Accepted Accounting Principles or Statutory Accounting Practices, as applicable, and any change to an accounting principle that can be demonstrated by the Applicant to be "preferable" in accordance with Statements on Auditing Standards No. 58 as promulgated by the Auditing Standards Board. 7.12. Reinsurance Agreements The Applicant will not, and will not permit or cause any of its Insurance Subsidiaries to, (i) except for the Reinsurance Agreements existing on the Restatement Effective Date with the reinsurers set forth on Schedule 4.19, be or become a party to any Reinsurance Agreement (whether in effect as of the Restatement Effective Date or at any time thereafter) with any reinsurer not rated "A-" or better by A.M. Best & Company unless such reinsurer has either (x) provided a letter of credit issued by a United States bank having a long term senior debt rating of A or better by Standard & Poor's Ratings Group and Moody's Investors Services, Inc., in favor of the Applicant or the applicable Insurance Subsidiary in an amount equal to or greater than the obligations transferred pursuant to such Reinsurance Agreement, (y) placed the assets transferred by the Insurance Subsidiary pursuant to such Reinsurance Agreement in a trust with a fiduciary and under terms, including investment restrictions consistent with this Agreement, satisfactory to the Agent, or (z) otherwise provided collateral in favor of the Applicant or the applicable Insurance Subsidiary in form and amount satisfactory to the Required Banks, (ii) enter into any Reinsurance Agreements, or make any amendment or modification to or waiver of any Reinsurance Agreements, that would, individually or in the aggregate, be reasonably likely to have a Material Adverse Effect, or (iii) be or become a party to any Surplus Relief Reinsurance Agreement if the increase in Consolidated Statutory Surplus as a result of or arising from such Surplus Relief Reinsurance Agreement, when added to the increase in Consolidated Statutory Surplus as a result of or arising from all other Surplus Relief Reinsurance Agreements theretofore entered into by any Insurance Subsidiary, net of any surplus relief recaptured in respect of such Surplus Relief Reinsurance Agreements, exceeds the lesser of (y) ten percent (10%) of Consolidated Statutory Surplus as of the most recent fiscal year end, or (z) $45,000,000. 8. DEFAULT -62- 8.1. Events of Default The following shall each constitute an "Event of Default" hereunder: (a) The failure of the Applicant or any Co-Applicant to pay any reimbursement obligations in respect of any Letter of Credit within two Business Days after demand; or (b) The failure of the Applicant or any Co-Applicant to pay any interest or any other fees or expenses payable under any Credit Document or otherwise to the Agent with respect to the credit facilities established hereunder within three Business Days of the date when due and payable; or (c) The issuance of any Letter of Credit for a purpose inconsistent with or in violation of Section 2.1(b) or the use of the proceeds of any Letter of Credit in a manner inconsistent with or in violation of Section 2.13; or (d) the Applicant shall fail to observe, perform or comply with any condition, covenant or agreement contained in any of Sections 5.3, 5.4(i), or 5.11, Section 6 or Section 7; or (e) The Applicant, any Co-Applicant or any of the Applicant's Subsidiaries shall fail to observe, perform or comply with any condition, covenant or agreement contained in this Agreement or any of the other Credit Documents other than those enumerated in clauses (a), (b), (c), or (d) above), and such failure shall continue unremedied for any grace period specifically applicable thereto or, if no such grace period is applicable, for a period after the Applicant acquires knowledge thereof of (i) five (5) days with respect to covenants set forth in Sections 5.1 or 5.2 or (ii) thirty (30) days with respect to any other condition, covenant or agreement; or (f) Any representation, warranty, certification or statement made by the Applicant or any Co-Applicant in this Agreement or in any Credit Document or any certificate, financial statement or other document delivered pursuant to this Agreement shall prove to have been incorrect in any material respect when made (or deemed made); or (g) The Applicant or any of its Subsidiaries shall (i) fail to pay when due (whether by scheduled maturity, acceleration or otherwise and after giving effect to any applicable grace period) any principal of or interest on any Indebtedness (other than the Indebtedness incurred pursuant to this Agreement) having an aggregate principal amount of at least $1,000,000; or (ii) fail to observe, perform or comply with any condition, -63- covenant or agreement contained in any agreement or instrument evidencing or relating to any such Indebtedness, or any other event shall occur or condition exist in respect thereof, and the effect of such failure, event or condition is to cause, or permit the holder or holders of such Indebtedness (or a trustee or agent on its or their behalf) to cause (with the giving of notice, lapse of time, or both), such Indebtedness to become due, or to be prepaid, redeemed, purchased or defeased, prior to its stated maturity; or (h) The Applicant or any of its Subsidiaries shall (i) file a voluntary petition or commence a voluntary case seeking liquidation, winding-up, reorganization, dissolution, arrangement, readjustment of debts or any other relief under the Bankruptcy Code or under any other applicable bankruptcy, insolvency or similar law now or hereafter in effect, (ii) consent to the institution of, or fail to controvert in a timely and appropriate manner, any petition or case of the type described in subsection (g) below, (iii) apply for or consent to the appointment of or taking possession by a custodian, trustee, receiver or similar official for or of itself or all or a substantial part of its properties or assets, (iv) fail generally, or admit in writing its inability, to pay its debts generally as they become due, (v) make a general assignment for the benefit of creditors or (vi) take any corporate action to authorize or approve any of the foregoing; or (i) Any involuntary petition or case shall be filed or commenced against the Applicant or any of its Subsidiaries seeking liquidation, winding-up, reorganization, dissolution, arrangement, readjustment of debts, the appointment of a custodian, trustee, receiver or similar official for it or all or a substantial part of its properties or any other relief under the Bankruptcy Code or under any other applicable bankruptcy, insolvency or similar law now or hereafter in effect, and such petition or case shall continue undismissed and unstayed for a period of sixty (60) days; or an order, judgment or decree approving or ordering any of the foregoing shall be entered in any such proceeding; or (j) Any one or more money judgments, writs or warrants of attachment, executions or similar processes involving an aggregate amount (exclusive of amounts fully bonded or covered by insurance as to which the surety or insurer, as the case may be, has acknowledged its liability in writing) in excess of $1,000,000 (other than a liability of an Insurance Subsidiary under an insurance contract written in the ordinary course of business) shall be entered or filed against the Applicant or any of its Subsidiaries or any of their respective properties and the same shall not be dismissed, stayed or discharged for a period of thirty (30) days; or (k) Any member of the ERISA Group shall fail to pay when due an amount or amounts aggregating in excess of $1,000,000 which it shall have become liable to pay under Title IV of ERISA; or notice of intent to terminate a Material Plan shall be filed under Title IV of ERISA by any member of the ERISA Group, any plan administrator or any -64- combination of the foregoing; or the PBGC shall institute proceedings under Title IV of ERISA to terminate, to impose liability (other than for premiums under Section 4007 of ERISA) in respect of, or to cause a trustee to be appointed to administer any Material Plan; or a condition shall exist by reason of which the PBGC would be entitled to obtain a decree adjudicating that any Material Plan must be terminated; or there shall occur a complete or partial withdrawal from, or a default, within the meaning of Section 4219(c)(5) of ERISA, with respect to, one or more Multiemployer Plans which could cause one or more members of the ERISA Group to incur a current payment obligation in excess of $1,000,000; or (l) Any Insurance Regulatory Authority or other Governmental Authority having jurisdiction shall issue any order of conservation, supervision, rehabilitation or liquidation or any other order of similar effect in respect of any Insurance Subsidiary, and such action, individually or in the aggregate, would be reasonably likely to have a Material Adverse Effect; or (m) Any one or more licenses, permits, accreditations or authorizations of the Applicant or any of its Subsidiaries shall be suspended, limited or terminated or shall not be renewed, or any other action shall be taken, by any Governmental Authority in response to any alleged failure by the Applicant or any of its Subsidiaries to be in compliance with applicable Requirements of Law, and such action, individually or in the aggregate, would be reasonably likely to have a Material Adverse Effect; or (n) Any of the following shall occur: (i) any Person, including, without limitation, any individual member of the Management Group, or group of Persons acting in concert as a partnership or other group shall, as a result of a tender or exchange offer, open market purchases, privately negotiated purchases or otherwise, have become, after the date hereof, the "beneficial owner" (within the meaning of such term under Rule 13d-3 under the Exchange Act) of securities of the Applicant representing thirty percent (30%) or more of the combined voting power of the then outstanding securities of the Applicant ordinarily (and apart from rights accruing under special circumstances) having the right to vote in the election of directors, provided, however, The PMA Foundation, a Pennsylvania non-profit corporation, may become the beneficial owner of securities of the Applicant representing fifty percent (50%) or less of the combined voting power of the then outstanding securities of the Applicant so long as it remains a non-profit corporation that has no members with voting rights and the Management Group collectively may become the beneficial owner of securities of the Applicant representing fifty percent (50%) or less of the combined voting power of the then outstanding securities of the Applicant, or (ii) the Board of Directors of the Applicant shall cease to consist of a majority of the individuals who constituted the Board of Directors of the Applicant as of the date hereof or who shall have become a member thereof subsequent to the date hereof after having been nominated, or otherwise approved in writing, by at least a majority of individuals who constituted the -65- Board of Directors of the Applicant as of the date hereof (or their replacements approved as herein required). Upon the occurrence of an Event of Default or at any time thereafter during the continuance thereof, (a) if such event is an Event of Default specified in clause (h) or (i) above, the Commitment shall immediately and automatically terminate and any reimbursement obligations owing or contingently owing in respect of all Outstanding Letters of Credit and all other amounts owing under the Credit Documents shall immediately become due and payable, and if not previously deposited, the Applicant shall forthwith deposit pursuant to Section 2.14 Eligible Collateral with a Discounted Collateral Value which, together with the Discounted Collateral Value of all other Eligible Collateral then held in the Collateral Account, shall not be less than the Letter of Credit Exposure with and under the exclusive control of the Agent, and the Agent may, and, upon the direction of the Required Banks shall, exercise any and all remedies and other rights provided in the Credit Documents, and (b) if such event is any other Event of Default, any or all of the following actions may be taken: (i) with the consent of the Required Banks, the Agent may, and upon the direction of the Required Banks shall, by notice to the Applicant, declare the Commitment to be terminated forthwith, whereupon the Commitment shall immediately terminate, and (ii) with the consent of the Required Banks, the Agent may, and upon the direction of the Required Banks shall, by notice of default to the Applicant, declare any reimbursement obligations owing or contingently owing in respect of all Outstanding Letters of Credit and all other amounts owing under the Credit Documents to be due and payable forthwith, whereupon the same shall immediately become due and payable, and if not previously deposited, the Applicant shall forthwith deposit pursuant to Section 2.14 Eligible Collateral with a Discounted Collateral Value which, together with the Discounted Collateral Value of all other Eligible Collateral then held in the Collateral Account, shall not be less than to the Letter of Credit Exposure with and under the exclusive control of the Agent, and the Agent may, and upon the direction of the Required Banks shall, exercise any and all remedies and other rights provided pursuant to the Credit Documents. Except as otherwise provided in this Section, presentment, demand, protest and all other notices of any kind are hereby expressly waived. Each Credit Party hereby further expressly waives and covenants not to assert any appraisement, valuation, stay, extension, redemption or similar laws, now or at any time hereafter in force which might delay, prevent or otherwise impede the performance or enforcement of any Credit Document. Upon the occurrence of an Event of Default or at any time thereafter during the continuance thereof, the Agent may and, at the direction of Required Banks, shall (i) exercise any and all rights and remedies granted to a secured party by the Uniform Commercial Code in effect in the State of New York or otherwise allowed at law, and otherwise provided by this Agreement, and (i) dispose of the Collateral consisting of Treasury Securities as it may choose, so long as every aspect of the disposition including the method, -66- manner, time, place and terms are commercially reasonable, and the Applicant and each Co-Applicant agrees that, without limitation, the following are each commercially reasonable: (A) the Agent shall not in any event be required to give more than 5 days' prior notice to the Applicant or any Co-Applicant of any such disposition, (B) any place within the City of New York may be designated by the Agent for disposition, and (C) the Agent may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. In the event that the Commitment shall have been terminated pursuant to the provisions of this Section, any funds received by the Agent and the Banks from or on behalf of the Applicant and/or any Co-Applicant shall, in the event that any Letters of Credit remain outstanding, either be held by the Agent or applied by the Agent in liquidation of the obligations of the Applicant and the Co-Applicants under the Credit Documents in the Agent's discretion. Any such funds to be applied by the Agent and the Banks in liquidation of the obligations of the Applicant and the Co-Applicants under the Credit Documents shall be applied (i) first, to reimburse the Agent and the Banks for any expenses due from the Applicant and/or any Co-Applicant, pursuant to the provisions of Section 10.5; (ii) second, to the payment of the accrued and unpaid Commitment Fees, Letter of Credit Commissions and all other fees, expenses and amounts due under the Credit Documents (other than the reimbursement obligations); (iii) third, to the payment of interest due on the reimbursement obligations, on a pro rata basis; (iv) fourth, to the payment of the reimbursement obligations, on a pro rata basis; and (v) fifth, to the payment of any other amounts owing to the Agent and the Banks under any Credit Document. 9. THE AGENT 9.1. Appointment Each Bank and the Issuing Bank hereby irrevocably designates and appoints BNY as Agent hereunder and under the other Credit Documents and each such Bank and the Issuing Bank hereby irrevocably authorizes the Agent to take such action on its behalf under the provisions of the Credit Documents and to exercise such powers and perform such duties as are expressly delegated to the Agent by the terms of the Credit Documents, together with such other powers as are reasonably incidental thereto. Notwithstanding any provision to the contrary elsewhere in any Credit Document, the Agent shall not have any duties or responsibilities other than those expressly set forth therein, or any fiduciary relationship with any Bank or the Issuing Bank, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into the Credit Documents or otherwise exist against the Agent. -67- 9.2. Delegation of Duties The Agent may execute any of its duties under the Credit Documents by or through agents or attorneys-in-fact and shall be entitled to rely upon the advice of counsel concerning all matters pertaining to such duties. 9.3. Exculpatory Provisions Neither the Agent nor any of its officers, directors, employees, agents, attorneys-in-fact or affiliates shall be (i) liable for any action lawfully taken or omitted to be taken by it or such Person under or in connection with the Credit Documents (except for its or their own gross negligence or willful misconduct, including gross negligence or willful misconduct in selecting a Person to whom duties are delegated pursuant to Section 9.2), or (ii) responsible in any manner to any of the Banks for any recitals, statements, representations or warranties made by any Credit Party or any officer thereof contained in the Credit Documents or in any certificate, report, statement or other document referred to or provided for in, or received by the Agent under or in connection with, the Credit Documents or for the value, validity, effectiveness, genuineness, perfection, enforceability or sufficiency of any of the Credit Documents or for any failure of any Credit Party or any other Person to perform its obligations thereunder. The Agent shall not be under any obligation to any Bank or the Issuing Bank to ascertain or to inquire as to the observance or performance of any of the agreements contained in, or conditions of, the Credit Documents, or to inspect the properties, books or records of any Credit Party. The Agent shall not be under any liability or responsibility whatsoever, as Agent, to any Credit Party or any other Person as a consequence of any failure or delay in performance, or any breach, by any Bank or the Issuing Bank of any of its obligations under any of the Credit Documents. 9.4. Reliance by Agent The Agent shall be entitled to rely, and shall be fully protected in relying, upon any writing, resolution, notice, consent, certificate, affidavit, opinion, letter, cablegram, telegram, facsimile, telex or teletype message, statement, order 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, without limitation, counsel to any Credit Party), independent accountants and other experts selected by the Agent. The Agent may treat each Bank and the Issuing Bank, or the Person designated in the last notice filed with it under this Section, as the holder of all of the interests of such Bank or Issuing Bank hereunder until written notice of transfer, signed by such Bank or Issuing Bank (or the Person designated in the last notice filed with the Agent) and by the Person designated in such written notice of transfer, in form and substance sat- -68- isfactory to the Agent, shall have been filed with the Agent. The Agent shall not be under any duty to examine or pass upon the validity, effectiveness, enforceability, perfection or genuineness of the Credit Documents or any instrument, document or communication furnished pursuant thereto or in connection therewith, and the Agent shall be entitled to assume that the same are valid, effective and genuine, have been signed or sent by the proper parties and are what they purport to be. The Agent shall be fully justified in failing or refusing to take any action under the Credit Documents unless it shall first receive such advice or concurrence of the Required Banks as it deems appropriate. The Agent shall in all cases be fully protected in acting, or in refraining from acting, under the Credit Documents in accordance with a request or direction of the Required Banks, and such request or direction and any action taken or failure to act pursuant thereto shall be binding upon all the Banks, including all future Banks and the Issuing Bank. 9.5. Notice of Default The Agent shall not be deemed to have knowledge or notice of the occurrence of any Default or Event of Default unless the Agent has received written notice thereof from the Issuing Bank, a Bank or the Applicant or any Co-Applicant. In the event that the Agent receives such a notice, the Agent shall promptly give notice thereof to the Issuing Bank, the Banks and the Applicant. The Agent shall take such action with respect to such Default or Event of Default as shall be directed by the Required Banks, provided, however, that unless and until the Agent shall have received such directions, the Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default or Event of Default as it shall deem to be in the best interests of the Banks. 9.6. Non-Reliance on Agent and Other Banks Each Bank and the Issuing Bank expressly acknowledges that neither the Agent nor any of its respective officers, directors, employees, agents, attorneys-in-fact or affiliates has made any representations or warranties to it and that no act by the Agent hereinafter, including any review of the affairs of any Credit Party, shall be deemed to constitute any representation or warranty by the Agent to any Bank or the Issuing Bank. Each Bank and the Issuing Bank represents to the Agent that it has, independently and without reliance upon the Agent or any other Bank or the Issuing Bank, and based on such documents and information as it has deemed appropriate, made its own evaluation of and investigation into the business, operations, Property, financial and other condition and creditworthiness of the Credit Parties and made its own decision to enter into this Agreement. Each Bank and the Issuing Bank also represents that it will, independently and without reliance upon the Agent or any other Bank, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit analysis, evaluations and decisions in taking or not taking action under any Credit Document, and to make such in- -69- vestigation as it deems necessary to inform itself as to the business, operations, Property, financial and other condition and creditworthiness of the Credit Parties. Except for notices, reports and other documents expressly required to be furnished to the Banks by the Agent hereunder, the Agent shall not have any duty or responsibility to provide any Bank or the Issuing Bank with any credit or other information concerning the business, operations, Property, financial and other condition or creditworthiness of the Credit Parties which may come into the possession of the Agent or any of its officers, directors, employees, agents, attorneys-in-fact or affiliates. 9.7. Indemnification Each Bank agrees to indemnify and reimburse the Agent in its capacity as such (to the extent not promptly reimbursed by the Applicant or any Co-Applicant and without limiting the obligation of any Credit Party to do so), in the amount of its pro rata share (based on its Commitment Percentage hereunder), from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind whatsoever including, without limitation, any amounts paid to the Banks (through the Agent) by the Applicant or any Co-Applicant pursuant to the terms of the Credit Documents, that are subsequently rescinded or avoided, or must otherwise be restored or returned) which may at any time be imposed on, incurred by or asserted against the Agent in any way relating to or arising out of the Credit Documents or any other documents contemplated by or referred to therein or the transactions contemplated thereby or any action taken or omitted to be taken by the Agent under or in connection with any of the foregoing; provided, however, that no Bank shall be liable for the payment of any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements to the extent resulting primarily from the finally adjudicated gross negligence or willful misconduct of the Agent (or any final settlement in which the Agent admits being guilty of gross negligence or willful misconduct). Without limitation of the foregoing, each Bank agrees to reimburse the Agent promptly upon demand for its pro rata share of any unpaid fees owing to the Agent, and any costs and expenses (including, without limitation, reasonable fees and expenses of counsel) payable by the Applicant under Section 10.5, to the extent that the Agent has not been paid such fees or has not be reimbursed for such costs and expenses, by the Applicant or any other Credit Party. The failure of any Bank to reimburse the Agent promptly upon demand for its pro rata share of any amount required to be by the Banks to the Agent as provided in this Section shall not relieve any other Bank of its obligation hereunder to reimburse the Agent for its pro rata share of such amount, but no Bank shall be responsible for the failure of another Bank to reimburse the Agent for such other Bank's pro rata share of such amount. The agreements in this Section shall survive the payment of all amounts payable under the Credit Documents. 9.8. Agent in Its Individual Capacity -70- The Agent and its respective affiliates may make loans to, accept deposits from, issue letters of credit for the account of, and generally engage in any kind of business with, any Credit Party as though the Agent were not Agent hereunder. With respect to its commitment and participation as Bank with respect to Letters of Credit, the Agent, in its individual capacity and not as Agent, shall have the same rights and powers under the Credit Documents as any Bank and may exercise the same as though it were not the Agent, and the terms "Bank" and "Banks" shall in each case include the Agent in its individual capacity and not as Agent. 9.9. Successor Agent If at any time the Agent deems it advisable, in its sole discretion, it may submit to each of the Banks and the Issuing Bank a written notice of its resignation as Agent under the Credit Documents, such resignation to be effective upon the earlier of (i) the written acceptance of the duties of the Agent under the Credit Documents by a successor Agent and (ii) on the 30th day after the date of such notice. Upon any such resignation, the Required Banks shall have the right to appoint from among the Banks a successor Agent. If no successor Agent shall have been so appointed by the Required Banks and accepted such appointment in writing within 30 days after the retiring Agent's giving of notice of resignation, then the retiring Agent may, on behalf of the Banks, appoint a successor Agent, which successor Agent shall be a commercial bank organized under the laws of the United States of America or any State thereof and having a combined capital, surplus, and undivided profits of at least $100,000,000. Upon the acceptance of any appointment as Agent hereunder by a successor Agent, such successor Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Agent, and the retiring Agent's rights, powers, privileges and duties as Agent under the Credit Documents shall be terminated. The Applicant, Co-Applicant, Issuing Bank and the Banks shall execute such documents as shall be necessary to effect such appointment. After any retiring Agent's resignation as Agent, the provisions of the Credit Documents shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent under the Credit Documents. If at any time there shall not be a duly appointed and acting Agent, the Applicant agrees to make each payment due under the Credit Documents directly to the Issuing Bank and the Banks entitled thereto during such time. 9.10. Co-Agent The Co-Agent shall have no duties or obligations under the Credit Documents in its capacity as Co-Agent. The Co-Agent in such capacity shall be entitled to the same protections, indemnities and rights, and subject to the same standards with respect to their actions, inactions and duties, as the Agent. -71- 10. OTHER PROVISIONS 10.1. Amendments and Waivers With the written consent of the Required Banks, the Agent and the appropriate Credit Parties may, from time to time, enter into written amendments, supplements or modifications of the Credit Documents and, with the consent of the Required Banks, the Agent on behalf of the Banks may execute and deliver to any such parties a written instrument waiving or a consent to a departure from, on such terms and conditions as the Agent may specify in such instrument, any of the requirements of the Credit Documents or any Default or Event of Default and its consequences; provided, however, that: (a) no such amendment, supplement, modification, waiver or consent shall, without the consent of all of the Banks, (i) increase the Commitment Percentage of any Bank or the Commitment, (ii) extend the Termination Date (except as provided in Section 2.6) or, subject to Section 2.5, the Stated Expiration Date of any Letter of Credit, (iii) reduce interest, any fees or other amounts payable hereunder, (iv) postpone any date fixed for payment of reimbursement obligations, interest or any fees or other amounts payable hereunder, (v) change the provisions of Sections 2.11, 2.12, 10.1 or 10.6(a), (vi) increase the sublimit applicable to Letters of Credit issued at the request of Subsidiaries of the Applicant which are not Material Insurance Subsidiaries, (vii) change the definition of Required Banks or (viii) release any Collateral after the occurrence and during the continuance of an Event of Default; (b) without the written consent of the Issuing Bank, no such amendment, supplement, modification or waiver shall change the Commitment, change the amount or the time of payment of the Letter of Credit Commissions or change any other term or provision which relates to the Commitment or the Letters of Credit; and (c) without the written consent of the Agent, no such amendment, supplement, modification or waiver shall amend, modify or waive any provision of Section 10 or otherwise change any of the rights or obligations of the Agent hereunder or under the Credit Documents. Any such amendment, supplement, modification or waiver shall apply equally to each of the Banks and shall be binding upon the parties to the applicable Credit Document, the Banks, the Agent, the Issuing Bank and all future Banks. In the case of any waiver, the parties to the applicable Credit Document, the Banks and the Agent shall be restored to their former position and rights hereunder and under the other Credit Documents -72- to the extent provided for in such waiver, and any Default or Event of Default waived shall not extend to any subsequent or other Default or Event of Default, or impair any right consequent thereon. The Credit Documents may not be amended orally or by any course of conduct. 10.2. Notices All notices, requests and demands to or upon the respective parties to the Credit Documents to be effective shall be in writing and, unless otherwise expressly provided therein, shall be deemed to have been duly given or made when delivered by hand, or when deposited in the mail, first-class postage or, in the case of notice by facsimile, when sent, addressed as follows in the case of the Applicant, the Issuing Bank, the Agent and to the address of a Bank designated as such on Schedule 10.2 hereto and to the address of a Credit Party set forth in a Credit Document, or to such other addresses as to which the Agent may be hereafter notified by the respective parties thereto: The Applicant: Pennsylvania Manufacturers Corporation Mellon Bank Center 1735 Market Street Philadelphia, Pennsylvania 19103-7590 Attention: Francis W. McDonnell, Senior Vice President and Chief Financial Officer Telephone: (215) 665-5070 Facsimile: (215) 665-5099 The Agent: The Bank of New York One Wall Street Agency Function Administration 18th Floor New York, New York 10286 Attention: Ramona Washington Telephone: (212) 635-4699 Facsimile: (212) 635-6365 or 6366 or 6367 The Issuing Bank: -73- The Bank of New York 101 Barclay Street New York, New York 10286 Attention: Manager, Standby Letter of Credit Department Telephone: (212) 815-4346 Facsimile: (212) 349-3955, with a copy to in the case of notices to the Agent or the Issuing Bank: The Bank of New York One Wall Street 17th Floor New York, New York 10286 Attention: Lizanne T. Eberle Vice President Telephone: (212) 635-6475 Facsimile: (212) 809-9520, except that any notice, request or demand by the Applicant to or upon the Agent, the Issuing Bank or the Banks pursuant to Sections 2.1, 2.5 or 2.6 shall not be effective until received, and any notice of payment or demand for payment under Section 2.1(c) shall not be effective until received at the facsimile number designated above for the Applicant. Any party to a Credit Document may rely on signatures of the parties thereto which are transmitted by facsimile or other electronic means as fully as if originally signed. 10.3. No Waiver; Cumulative Remedies No failure to exercise and no delay in exercising, on the part of the Agent, the Issuing Bank or any Bank, any right, remedy, power or privilege under any Credit Document shall operate as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power or privilege under any Credit Document preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege. The rights, remedies, powers and privileges under the Credit Documents 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 under the Credit Documents and in any document, certificate or statement delivered pursuant thereto or in connection therewith shall survive the execution and delivery of the Credit Documents. -74- 10.5. Payment of Expenses and Taxes The Applicant agrees, promptly upon presentation of a statement or invoice therefor, and whether any Letter of Credit is issued (i) to pay or reimburse the Agent for all its out-of-pocket costs and expenses reasonably incurred in connection with (A) the development, preparation and execution of, the Credit Documents and any amendment, supplement or modification thereto (whether or not executed), any documents prepared in connection therewith and the consummation of the transactions contemplated thereby, including syndication, and (B) any costs incurred in connection with any confirmation of any Letters of Credit and, including, in each case without limitation, the reasonable fees and disbursements of Special Counsel, (ii) to pay or reimburse the Agent or the Issuing Bank for the cost of any confirmation of any Letter of Credit, (iii) to pay or reimburse the Agent, the Issuing Bank and the Banks for all of their respective costs and expenses, including, without limitation, reasonable fees and disbursements of counsel, incurred in connection with (A) any Default or Event of Default and any enforcement or collection proceedings resulting therefrom or in connection with the negotiation of any restructuring or "work-out" (whether consummated or not) of the obligations of the Credit Parties under any of the Credit Documents, (B) the enforcement of this Section, (iv) to pay, indemnify, and hold each Bank, the Issuing Bank and the Agent harmless from and against, any and all recording and filing fees and any and all liabilities with respect to, or resulting from any delay in paying, stamp, excise and other similar taxes, if any, which may be payable or determined to be payable in connection with the execution and delivery of, or consummation of any of the transactions contemplated by, or any amendment, supplement or modification of, or any waiver or consent under or in respect of, the Credit Documents and any such other documents, and (v) to pay, indemnify and hold each Bank, the Issuing Bank and the Agent and each of their respective officers, directors and employees harmless from and against any and all other liabilities, obligations, claims, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever (including, without limitation, reasonable counsel fees and disbursements) with respect to the enforcement and performance of the Credit Documents, the use of the proceeds of the Letter of Credit (all the foregoing, collectively, the "indemnified liabilities") and, if and to the extent that the foregoing indemnity may be unenforceable for any reason, the Applicant agrees to make the maximum payment permitted or not prohibited under applicable law; provided, however, that the Applicant shall have no obligation hereunder to pay indemnified liabilities to the Agent, the Issuing Bank or any Bank arising from the finally adjudicated gross negligence or willful misconduct of the Agent, the Issuing Bank or such Bank or claims between one indemnified party and another indemnified party (or any final settlement in which the Agent, the Issuing Bank, or such Bank admits being guilty of gross negligence or willful misconduct). The agreements in this Section shall survive the termination of the Commitment and the payment of all amounts payable under the Credit Documents. -75- 10.6. Assignments and Participations (a) The Credit Documents shall be binding upon and inure to the benefit of the Applicant, the Co-Applicants, the Banks, the Issuing Bank, the Agent, all future Banks and their respective successors and assigns, except that no Credit Party may assign, delegate or transfer any of its rights or obligations under the Credit Documents without the prior written consent of the Agent and each Bank. (b) Each Bank shall have the right at any time, upon written notice to the Agent of its intent to do so, to sell, assign, transfer or negotiate all or any part of such Bank's rights under the Credit Documents to one or more of its affiliates which would otherwise be Eligible Assignees, to one or more of the other Banks (or to affiliates of such other Banks which would be an Eligible Assignee) or, with the prior written consent of the Applicant, the Issuing Bank and the Agent (which consent shall not be unreasonably withheld and shall not be required upon the occurrence and during the continuance of an Event of Default), to sell, assign, transfer or negotiate all or any part of such Bank's rights and obligations under the Credit Documents to any other bank, insurance company, pension fund, mutual fund or other financial institution which meets the criteria of Eligible Assignee, provided that (i) each such sale, assignment, transfer or negotiation (other than sales, assignments, transfers or negotiations to affiliates of such Bank) shall be in a minimum amount of $5,000,000, provided that the assigning Bank retains a Commitment amount of at least $5,000,000 following such assignment, and (ii) there shall be paid to the Agent by the assigning Bank a fee (the "Assignment Fee") of $3,000. A Bank may sell, assign, transfer or negotiate such Bank's rights and obligations under the Credit Documents without regard to the required minimum retention referred to in clause (i) of the preceding sentence with the consent of the Applicant and the Agent. For each assignment, the parties to such assignment shall execute and deliver to the Agent for its acceptance and recording an Assignment and Acceptance Agreement. Upon such execution, delivery, acceptance and recording by the Agent, from and after the effective date specified in such Assignment and Acceptance Agreement, the assignee thereunder shall be a party hereto and, to the extent provided in such Assignment and Acceptance Agreement, the assignor Bank thereunder shall be released from its obligations under the Credit Documents. Upon any such sale, assignment or other transfer, the Commitment Percentages set forth in Exhibit A shall be adjusted accordingly by the Agent and a new Exhibit A shall be distributed by the Agent to the Applicant and each Bank. (c) Each Bank may grant participations in all or any part of its Commitment Percentage to one or more banks, insurance companies (other than property and casualty insurance companies), financial institutions, pension funds or mutual funds, provided that (i) such Bank's obligations under the Credit Documents shall remain unchanged, (ii) such Bank shall remain solely responsible to the other parties to the Credit -76- Documents for the performance of such obligations, (iii) the Applicant, the Issuing Bank, the Agent and the other Banks shall continue to deal solely and directly with such Bank in connection with such Bank's rights and obligations under the Credit Documents, (v) no sub-participations shall be permitted and (vi) the voting rights of any holder of any participation shall be limited to decisions that only do any of the following: (A) subject the participant to any additional obligation, (B) reduce interest, any fees or other amounts payable hereunder, or (C) postpone any date fixed for the payment of reimbursement obligations, interest or any fees or other amounts payable hereunder. The Applicant acknowledges and agrees that any such participant shall for purposes of Sections 2.11 and 2.12 be deemed to be a "Bank"; provided, however, the Applicant shall not, at any time, be obligated to pay any participant in any interest of any Bank hereunder any sum in excess of the sum which the Applicant would have been obligated to pay to such Bank in respect of such interest had such Bank not sold such participation. (d) No Bank shall, as between and among the Applicant, any Co-Applicant, the Issuing Bank, the Agent and such Bank, be relieved of any of its obligations under the Credit Documents as a result of any sale, assignment, transfer or negotiation of, or granting of participations in, all or any part of its Commitment Percentage, except that a Bank shall be relieved of its obligations to the extent of any such sale, assignment, transfer, or negotiation of any part of its Commitment Percentage. (e) Notwithstanding anything to the contrary contained in this Section, any Bank may at any time or from time to time assign all or any portion of its rights under the Credit Documents to a Federal Reserve Bank, provided that any such assignment shall not release such assignor from its obligations thereunder. (f) Any Bank may, in connection with any assignment or participation or proposed assignment or participation pursuant to this Section, disclose to the Assignee or Participant or proposed Assignee or Participant any information relating to the Applicant and its Subsidiaries furnished to it by or on behalf of any other party hereto, provided that such Assignee or Participant or proposed Assignee or Participant agrees in writing to keep such information confidential to the same extent required of the Banks under Section 10.20. 10.7. Counterparts Each Credit Document may be executed by one or more of the parties thereto on any number of separate counterparts and all of said counterparts taken together shall be deemed to constitute one and the same document. It shall not be necessary in making proof of any Credit Document to produce or account for more than one counterpart signed by the party to be charged. A counterpart of any Credit Document or to any document evidencing, and of any an amendment, modification, consent or waiver to or of any Credit Document -77- transmitted by facsimile shall be deemed to be an originally executed counterpart. A set of the copies of the Credit Documents signed by all the parties thereto shall be deposited with each of the Applicant and the Agent. Any party to a Credit Document may rely upon the signatures of any other party thereto which are transmitted by facsimile or other electronic means to the same extent as if originally signed. 10.8. Adjustments; Set-off (a) If any Bank (a "Benefited Bank") shall at any time receive any payment or collateral in respect of the Obligations in excess of its pro rata share (based on its Commitment Percentage) (whether voluntarily or involuntarily, by set-off, pursuant to events or proceedings of the nature referred to in Section 8.1(h) or (i), or otherwise), such Benefited Bank shall purchase from each of the other Banks such portion of each such other Bank's participation in the Obligations, and shall provide each of such other Banks with the benefits of any such collateral, or the proceeds thereof, as shall be necessary to cause such Benefited Bank to share the excess payment or benefits of such collateral or proceeds ratably with each of the Banks, provided, however, that if all or any portion of such excess payment or benefits is thereafter recovered from such Benefited Bank, such purchase shall be rescinded, and the purchase price and benefits returned, to the extent of such recovery, but without interest. The Applicant and Co-Applicants agree that each Bank so purchasing a portion of another Bank's percentage of Obligations may exercise all rights of payment (including, without limitation, rights of set-off, to the extent not prohibited by law) with respect to such portion as fully as if such Bank were the direct holder of such portion. (b) In addition to any rights and remedies of the Banks provided by law, upon the occurrence of and during the continuance of an Event of Default, under Section 8.1(a) or (b), each Bank shall have the right, without prior notice to the Applicant, any such notice being expressly waived by each Credit Party to the extent not prohibited by applicable law, to set-off and apply against any indebtedness, whether contingent, matured or unmatured, of such Credit Party to such Bank, any amount owing from such Bank to such Credit Party, at, or at any time after, the happening of any of the above-mentioned events. To the extent not prohibited by applicable law, the aforesaid right of set-off may be exercised by such Bank against such Credit Party or against any trustee in bankruptcy, custodian, debtor in possession, assignee for the benefit of creditors, receiver, or execution, judgment or attachment creditor of such Credit Party, or against anyone else claiming through or against such Credit Party or such trustee in bankruptcy, custodian, debtor in possession, assignee for the benefit of creditors, receiver, or execution, judgment or attachment creditor, notwithstanding the fact that such right of set-off shall not have been exercised by such Bank prior to the making, filing or issuance, or service upon such Bank of, or of notice of, any such petition, assignment for the benefit of creditors, appointment or application for the appointment of a receiver, or issuance of execution, subpoena, order or warrant. Each -78- Bank agrees promptly to notify the applicable Credit Party, the Issuing Bank and the Agent after any such set-off and application made by such Bank, provided that the failure to give such notice shall not affect the validity of such set-off and application. 10.9. Construction Each Credit Party represents that it has been represented by counsel in connection with the Credit Documents and the transactions contemplated thereby and that the principle that agreements are to be construed against the draftsman shall be inapplicable. 10.10. Indemnity The Applicant agrees to indemnify and hold harmless the Agent, the Issuing Bank and each Bank and their respective affiliates, directors, officers, employees, attorneys and agents (each an "Indemnified Person") from and against any loss, cost, liability, claim, damage or expense (including the reasonable fees and disbursements of counsel of such Indemnified Person, including all local counsel hired by any such counsel) incurred by such Indemnified Person in investigating, preparing for, defending against, or providing evidence, producing documents or taking any other action in respect of, any commenced or threatened litigation, administrative proceeding or investigation under any federal securities law or any other statute of any jurisdiction, or any regulation, or at common law or otherwise, which is alleged to arise out of or is based upon (i) any untrue statement or alleged untrue statement of any material fact by any Credit Party in any document or schedule executed or filed with any governmental body, agency or authority, by or on behalf of any Credit Party; (ii) any omission or alleged omission to state any material fact required to be stated in such document or schedule, or necessary to make the statements made therein, in light of the circumstances under which made, not misleading; or (iii) any acts, practices or omissions or alleged acts, practices or omissions of any Credit Party or its agents relating to the use of the proceeds of any or all Letters of Credit made by the Applicant which are alleged to be in violation of Section 2.13, or in violation of any federal securities law or of any other statute, regulation or other law of any jurisdiction applicable thereto. The indemnity set forth herein shall be in addition to any other obligations or liabilities of the Applicant and/or Co-Applicant to each Indemnified Person under the Credit Documents or at common law or otherwise, and shall survive any termination of the Credit Documents, the expiration of the Commitment and the payment of all obligations of the Applicant and Co-Applicants under the Credit Documents, provided that the Applicant shall have no obligation under this Section to an Indemnified Person with respect to any of the foregoing to the extent found in a final judgment of a court having jurisdiction to have resulted primarily out of the gross negligence or wilful misconduct of such Indemnified Person or arising solely from claims between one such Indemnified Person and another such Indemnified Person. -79- 10.11. Governing Law The Credit Documents and the rights and obligations of the parties thereunder shall be governed by, and construed and interpreted in accordance with, the internal laws of the State of New York, without regard to principles of conflict of laws. 10.12. Headings Descriptive Section headings have been inserted in the Credit Documents for convenience only and shall not be construed to be a part thereof. 10.13. Severability Every provision of the Credit Documents is intended to be severable, and if any term or provision thereof shall be invalid, illegal or unenforceable for any reason, the validity, legality and enforceability of the remaining provisions thereof shall not be affected or impaired thereby, and any invalidity, illegality or unenforceability in any jurisdiction shall not affect the validity, legality or enforceability of any such term or provision in any other jurisdiction. 10.14. Integration All exhibits to a Credit Document shall be deemed to be a part thereof. The Credit Documents embody the entire agreement and understanding among the Credit Parties, the Agent, the Issuing Bank and the Banks with respect to the subject matter thereof and supersede all prior agreements and understandings among the Credit Parties, the Agent, the Issuing Bank and the Banks with respect to the subject matter thereof. 10.15. Consent to Jurisdiction Each Credit Party hereby irrevocably submits to the jurisdiction of any New York State or Federal court sitting in the City of New York over any suit, action or proceeding arising out of or relating to the Credit Documents. Each Credit Party hereby irrevocably waives, to the fullest extent permitted or not prohibited by law, any objection which it may now or hereafter have to the laying of the venue of any such suit, action or proceeding brought in such a court and any claim that any such suit, action or proceeding brought in such a court has been brought in an inconvenient forum. Each Credit Party hereby agrees that a final judgment in any such suit, action or proceeding brought in such a court, after all appropriate appeals, shall be conclusive and binding upon it. 10.16. Service of Process -80- Each Credit Party hereby irrevocably consents to the service of process in any suit, action or proceeding by sending the same by first class mail, return receipt requested or by overnight courier service, to the address of such Credit Party set forth in or referred to in Section 10.2 or in the applicable Credit Document executed by such Credit Party. Each Credit Party hereby agrees that any such service (i) shall be deemed in every respect effective service of process upon it in any such suit, action, or proceeding, and (ii) shall to the fullest extent enforceable by law, be taken and held to be valid personal service upon and personal delivery to it. 10.17. No Limitation on Service or Suit Nothing in the Credit Documents or any modification, waiver, consent or amendment thereto shall affect the right of the Agent or any Bank to serve process in any manner permitted by law or limit the right of the Agent, the Issuing Bank or any Bank to bring proceedings against any Credit Party in the courts of any jurisdiction or jurisdictions in which such Credit Party may be served. 10.18. WAIVER OF TRIAL BY JURY THE AGENT, THE ISSUING BANK, THE BANKS AND EACH CREDIT PARTY HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION ARISING OUT OF, UNDER OR IN CONNECTION WITH THE CREDIT DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED THEREIN. FURTHER, EACH CREDIT PARTY HEREBY CERTIFIES THAT NO REPRESENTATIVE OR AGENT OF THE AGENT, THE ISSUING BANK, OR THE BANKS, OR COUNSEL TO THE AGENT OR THE BANKS, HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT THE AGENT, THE ISSUING BANK OR THE BANKS WOULD NOT, IN THE EVENT OF SUCH LITIGATION, SEEK TO ENFORCE THIS WAIVER OF RIGHT TO JURY TRIAL PROVISION. EACH CREDIT PARTY ACKNOWLEDGES THAT THE AGENT, THE ISSUING BANK AND THE BANKS HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, INTER ALIA, THE PROVISIONS OF THIS SECTION. 10.19. Confidentiality Each Bank agrees to keep confidential, pursuant to its customary procedures for handling confidential information of a similar nature and in accordance with safe and sound banking practices, all nonpublic information provided to it by or on behalf of the Applicant or any of its Subsidiaries in connection with this Agreement or any other Credit Document; provided, however, that any Bank may disclose such information (i) to its -81- directors, employees and agents and to its auditors, counsel and other professional advisors, (ii) at the demand or request of any bank regulatory authority, court or other Governmental Authority having or asserting jurisdiction over such Bank, as may be required pursuant to subpoena or other legal process, or otherwise in order to comply with any applicable Requirement of Law, (iii) in connection with any proceeding to enforce its rights hereunder or under any other Credit Document or any other litigation or proceeding related hereto or to which it is a party, (iv) to the Agent or any other Bank, (v) to the extent the same has become publicly available other than as a result of a breach of this Agreement and (vi) pursuant to and in accordance with the provisions of Section 10.6(f). -82- 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. PENNSYLVANIA MANUFACTURERS CORPORATION By: /s/Francis W. McDonnell --------------------------- Name: Francis W. McDonnell ------------------------- Title: Chief Financial Officer ------------------------ THE BANK OF NEW YORK, Individually and as Agent and Issuing Bank By: /s/ Lizanne T. Eberle --------------------------- Name: Lizanne T. Eberle ------------------------- Title: Vice President ------------------------ CORESTATES BANK, N.A. Individually and as Co-Agent By: /s/ H.D. Tamine --------------------------- Name: H.D. Tamine ------------------------- Title: Vice President ------------------------ MELLON BANK, N.A. By: /s/ Susan M. Whitewood --------------------------- Name: Susan M. Whitewood ------------------------- -83- Title: Assistant Vice President ------------------------ FLEET BANK, NATIONAL ASSOCIATION By: /s/ Carla Bolesano --------------------------- Name: Carla Bolesano ------------------------- Title: Vice President ------------------------ PNC BANK, NATIONAL ASSOCIATION By: /s/ Kirk Seagers --------------------------- Name: Kirk Seagers ------------------------- Title: Vice President ------------------------ FIRST UNION NATIONAL BANK OF NORTH CAROLINA By: /s/ Gail M. Golightly --------------------------- Name: Gail M. Golightly ------------------------- Title: Senior Vice President ------------------------ -84- PMC EXHIBIT B FORM OF ASSIGNMENT AND ACCEPTANCE AGREEMENT This Assignment and Acceptance Agreement is made and entered into as of _____ __, 19__, by and between (the "Assignor") and ________ (the "Assignee"). R E C I T A L S --------------- A. The Assignor, certain other banks (together with any prior assignees, the "Banks"), CoreStates Bank, N.A., as Co-Agent and The Bank of New York, as agent (the "Agent") and as issuing bank (the "Issuing Bank"), are parties to that certain First Amended and Restated Letter of Credit Agreement dated as of March 14, 1997 (as from time to time amended, the "Agreement") with Pennsylvania Manufacturers Corporation, a Pennsylvania corporation (the "Applicant") and certain subsidiaries of the Applicant party thereto. Pursuant to the Agreement, the Banks agreed to participate in Letters of Credit issued by the Issuing Bank under the Agreement in accordance with their Commitment Percentage. The Assignor's Commitment (without giving effect to the assignment effected hereby or to other assignments thereof which have not yet become effective) is specified in Item 1 of Schedule 1 hereto. The Assignor's percentage of the Letter of Credit Exposure (without giving effect to the assignment effected hereby or to other assignments thereof which have not yet become effective) is specified in Item 2 of Schedule 1 hereto. All capitalized terms not otherwise defined herein are used herein as defined in the Agreement. B. The Assignor wishes to sell and assign to the Assignee, and the Assignee wishes to purchase and assume from the Assignor, the portion of the Assignor's Commitment specified in Item 3 of Schedule 1 hereto together with its related rights and obligations under the Credit Documents and in respect of the Collateral (the "Assigned Commitment"). The parties agree as follows: 1. Assignment. Subject to the terms and conditions set forth herein and in the Agreement, the Assignor hereby sells and assigns to the Assignee, and the Assignee hereby purchases and assumes from the Assignor, without recourse, on the date set forth above (the "Assignment Date") all obligations of the Assignor under the Agreement with respect to the Assigned Commitment together with its related rights and obligations under the Credit Documents and in respect of the Collateral. As consideration for the assignment and sale contemplated hereby, the Assignee shall pay to the Assignor on the date hereof the amount heretofore agreed between them. 2. Representation and Warranties. Each of the Assignor and the Assignee represents and warrants to the other that (a) it has full power and legal right to execute and deliver this Assignment and Acceptance Agreement and to perform the provisions of this Assignment and Acceptance Agreement; (b) the execution, delivery and performance of this Assignment and Acceptance Agreement have been authorized by all action, corporate or otherwise, and do not violate any provisions of its charter or by-laws or any contractual obligations or requirement of law binding on it; and (c) this Assignment and Acceptance Agreement constitutes its legal, valid and binding obligation, enforceable against it in accordance with its terms. The Assignor further represents that it is the legal and beneficial owner of the interest being assigned by it hereunder and that such interest is free and clear of any adverse claim created by the Assignor. The Assignee further represents that it is an "Eligible Assignee" as said term is defined in the Agreement. 3. Condition Precedent. The obligations of the Assignor and the Assignee hereunder shall be subject to the fulfillment of the condition that the Assignor shall have complied with the other applicable provisions of Section 10.6 of the Agreement. 4. Notice of Assignment. The Assignor agrees to give notice of the assignment and assumption of the Assigned Commitment to the Agent, the Issuing Bank and the Applicant and hereby instructs the Agent, the Issuing Bank and the Applicant to make all payments with respect to the Assigned Commitment directly to the Assignee at the applicable office specified on Schedule 2 hereto; provided, however, that the Applicant, the Agent and the Issuing Bank all shall be entitled to continue to deal solely and directly with the Assignor in connection with the interests so assigned until the Agent, the Issuing Bank and the Applicant, to the extent required by Section 10.6 of the Agreement, shall have received notice of the assignment, the Applicant, the Agent and the Issuing Bank shall have consented in writing thereto to the extent required by Section 10.6 of the Agreement, and the Agent shall have recorded and accepted this Assignment and Acceptance Agreement and received the Assignment Fee required to be paid pursuant to Section 10.6 of the Agreement. From and after the date (the "Effective Date") on which the Agent shall notify the Applicant and the Assignor that the requirements set forth in the foregoing sentence shall have occurred and all consents (if any) required shall have been given, (i) the Assignee shall be deemed to be a party to the Agreement and, to the extent that rights and obligations thereunder shall have been assigned to Assignee as provided in such notice of assignment to the Agent, shall have the rights and obligations of a Bank under the Agreement, and (ii) the Assignee shall be deemed to have appointed the Agent to take such action as agent on its behalf and to exercise such powers under the Credit Documents as are delegated to the Agent by the terms thereof, together with such powers as are reasonably incidental thereto. After the Effective Date, the Agent shall make all payments in respect of the interest assigned hereby (including payments of interest, fees and other amounts) to the Assignee. The Assignor and Assignee shall make all appropriate adjustment in payments under the Assigned Commitment for periods prior to the Effective Date hereof directly between themselves. If the Assignee is not a United States Person as defined in Section 7701(a)(30) of the Code, the Assignee shall deliver herewith the forms required by Section 2.11 of the Agreement to evidence the Assignee's complete exemption from United States withholding taxes with respect to payments under the Credit Documents. 5. Independent Investigation. The Assignee acknowledges that it is purchasing the Assigned Commitment from the Assignor totally without recourse and, except as provided in Section 2 hereof, without representation or warranty. The Assignee further acknowledges that it has made its own independent investigation and credit evaluation of the Applicant and any Co-Applicant in connection with its purchase of the Assigned Commitment. Except for the representations or warranties set forth in Section 2, the Assignee acknowledges that it is not relying on any representation or warranty of the Assignor, expressed or implied, including without limitation, any representation or warranty relating to the legality, validity, genuineness, enforceability, collectibility, interest rate, repayment schedule or status of the Assigned Commitment, the legality, validity, genuineness or enforceability of the Agreement, or any other Credit Document referred to in or delivered -2- pursuant to the Agreement, or financial condition or creditworthiness of the Applicant, any Co-Applicant or any other Person. The Assignor has not and will not be acting as either the representative, agent or trustee of the Assignee with respect to matters arising out of or relating to the Agreement or this Assignment and Acceptance Agreement. From and after the Effective Date, except as set forth in Section 4 above, the Assignor shall have no rights or obligations with respect to the Assigned Commitment. 6. Consent of the Applicant. Pursuant to the provisions of Section 10.6 of the Agreement, and to the extent required thereby, the Applicant, by signing below, consents to this Assignment and Acceptance Agreement and to the assignment contemplated herein. 7. Method of Payment. Any payments to be made by either party hereunder shall be in funds available at the place of payment on the same day and shall be made by wire transfer to the account designated by the party to receive payment. 8. Integration. This Assignment and Acceptance Agreement shall supersede any prior agreement or understanding between the parties (other than the Credit Documents) as to the subject matter hereof. 9. Counterparts. This Assignment and Acceptance Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original and shall be binding upon both parties, their successors and assigns. 10. Headings. Section headings have been inserted herein for convenience only and shall not be construed to be a part hereof. 11. Amendments; Waivers. This Assignment and Acceptance Agreement may not be amended, changed, waived or modified except by a writing executed by the parties hereto, and may not be amended, changed, waived or modified in any manner inconsistent with Section 10.6 of the Agreement without the prior written consent of the Agent. 12. Governing Law. This Assignment and Acceptance Agreement shall be governed by, and construed in accordance with the laws of, the State of New York. -3- IN WITNESS WHEREOF, the parties hereto have caused this Assignment and Acceptance Agreement to be duly executed and delivered by their proper and duly authorized officers as of the day and year first above written. ________________, as Assignor By: -------------------------- Name: ------------------------ Title: ----------------------- ________________, as Assignee By: -------------------------- Name: ------------------------ Title: ----------------------- Consented to: PENNSYLVANIA MANUFACTURERS CORPORATION By: ---------------------------- Name: -------------------------- Title: ------------------------- Consented to and Accepted: THE BANK OF NEW YORK, as Agent By: ---------------------------- Name: -------------------------- Title: ------------------------- THE BANK OF NEW YORK, as Issuing Bank By: ---------------------------- Name: -------------------------- Title: ------------------------- -4- SCHEDULE 1 TO ASSIGNMENT AND ACCEPTANCE AGREEMENT between _______________, as Assignor and _______________, as Assignee relating to First Amended and Restated Letter of Credit Agreement among Pennsylvania Manufacturers Corporation, the Banks party thereto, CoreStates Bank, N.A., as Co-Agent and The Bank of New York, as Agent and as Issuing Bank, dated as of March 14, 1997 Item 1. (a) Assignor's Commitment Percentage: ________% (b) Assignor's Commitment: $________ Item 2. Assignor's Letter of Credit Exposure: $________ (the Assignor's Commitment Percentage times the Letter of Credit Exposure) Item 3. Assigned Commitment: $________ SCHEDULE 2 TO ASSIGNMENT AND ACCEPTANCE AGREEMENT between _______________, as Assignor and _______________, as Assignee relating to First Amended and Restated Letter of Credit Agreement among Pennsylvania Manufacturers Corporation, the Banks party thereto, CoreStates Bank, N.A., as Co-Agent and The Bank of New York, as Agent and as Issuing Bank, dated as of March 14, 1997 Address for Notices __________________________________ __________________________________ Attention: _______________________ _______________________ Telephone: ( )___-______________ Fax: ( )___-______________ PMC EXHIBIT C FORM OF LETTER OF CREDIT REQUEST _____________, 19__ The Bank of New York, as Agent One Wall Street New York, New York 10286 Attention: Agency Function Administration The Bank of New York, as Issuing Bank 101 Barclay Street New York, New York 10286 Attention: Manager, Standby Letter of Credit Department Gentlemen: Reference is made to the First Amended and Restated Letter of Credit Agreement, dated as of March 14, 1997, by and among PENNSYLVANIA MANUFACTURERS CORPORATION (the "Applicant"), each Subsidiary of the Applicant which is or may become a party thereto (each, a "Co-Applicant"), the Banks party thereto, CORESTATES BANK, N.A., as Co-Agent and THE BANK OF NEW YORK, as Agent and Issuing Bank (as from time to time amended, the "Agreement"). Capitalized terms used herein that are defined in the Agreement shall have the meanings therein defined. 1. Pursuant to Section 2.1 and 3.2(c) of the Agreement, the undersigned Applicant [and, if applicable, ____________ (the "Co-Applicant(s)")] hereby requests that the Issuing Bank issue the Letter(s) of Credit in accordance with the information annexed hereto as contains the verbatim text of the proposed letter(s) of credit including the proposed terms and conditions and a precise description of the documentation required to be complied with and submitted by the beneficiary, which, if complied with by the beneficiary on or prior to the Stated Expiration Date, would require the Issuing Bank to make payment under the Letter of Credit. 2. The Applicant hereby certifies that on the date hereof and on the Date of Issuance set forth in Annex A, and after giving effect to the Letter(s) of Credit requested hereby: (a) The Applicant is and shall be in compliance with all of the terms, covenants and conditions of the Credit Documents. (b) There exists and there shall exist no Default or Event of Default under the Agreement. (c) Each of the representations and warranties contained in the Agreement which is required to be made on such Date of Issuance is and shall be true and correct. (d) After giving effect to the Letters of Credit requested to be issued hereby, the aggregate Letters of Credit Exposure will not exceed the Commitment and the aggregate Letter of Credit Exposure with respect to Letters of Credit issued for the account of Subsidiaries of the Applicant which are not Material Insurance Subsidiaries will not exceed $10,000,000. [3. Each Co-Applicant which signs this Letter of Credit Request acknowledges that it has received a copy of the Agreement and acknowledges and agrees that from and after the Date of Issuance of the Letter(s) of Credit requested hereby, the undersigned shall be jointly and severally liable with the Applicant for all obligations with respect to the Letter(s) of Credit requested hereby and that the undersigned shall be a party to the Agreement and the other Credit Documents as a Co-Applicant with all the rights and obligations of a Co-Applicant under the Agreement and Credit Documents with respect to the Letter(s) of Credit requested hereby, and each and every reference in the Agreement and in any other Credit Document to "Co-Applicant" shall mean and be a reference to include the undersigned. The undersigned will at the request of the Agent execute a copy of the Agreement and such other Credit Documents as may be required.] 1 [4. Each Co-Applicant which signs this Letter of Credit Request represents and warrants that the Agreement and each Credit Document executed by the undersigned Co-Applicant constitutes a legal, valid and binding obligation of the undersigned Co-Applicant in each case enforceable in accordance with its terms.] [5. Each Co-Applicant which signs this Letter of Credit Request specifically acknowledges that certain provisions of the Agreement, including, without limitation, Section 10.1 (Amendments and Waivers), 10.3 (No Waiver; Cumulative Remedies), 10.6 (Assignments and Participation), 10.7 (Counterparts), 10.11 (Governing Law), 10.13 (Severability), 10.14 (Integration), 10.15 (Consent to Jurisdiction), 10.16 (Service of Process), 10.17 (No Limitation on Service or Suit) and 10.18 (Waiver of Trial by Jury) thereof, are made applicable to the Co-Applicant.] - - - ------------------ 1 Delete Items 3 through 5 if inapplicable. IN WITNESS WHEREOF, the Applicant [and Co-Applicant, if applicable] has caused this certificate to be executed by its duly authorized officer(s) as of the date and year first written above. PENNSYLVANIA MANUFACTURERS CORPORATION By: ----------------------------------- Name: --------------------------------- Title: -------------------------------- [CO-APPLICANT] By: ----------------------------------- Name: --------------------------------- Title: -------------------------------- [CO-APPLICANT] By: ----------------------------------- Name: --------------------------------- Title: -------------------------------- Annex A LETTER OF CREDIT INFORMATION 1. Name of Beneficiary: _________________________________________________. 2. Address of Beneficiary to which Letter of Credit will be sent: _______________________________________________________________________ _______________________________________________________________________. 3. Name of Account Party: ________________________________________________. 4. Address of Account Party: _____________________________________________. 5. Type of Letter of Credit requested (check one box only): [ ] Secured Letter of Credit, or [ ] Unsecured Letter of Credit. 6. Conditions under which a drawing may be made (specify the required documentation): _______________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ ______________________________________________________________________. 7. Maximum amount to be available under such Letter of Credit: $_________. 8. Requested Date of Issuance: _________ __, 199_. 9. Stated Expiration Date: ___________ __, 199_.1 10. Text of Letter of Credit: _____________________________________________ _______________________________________________________________________ _______________________________________________________________________ ______________________________________________________________________. 11. Name and address of Co-Applicant, if any: _____________________________ _______________________________________________________________________ _______________________________________________________________________ - - - --------------------- 1 Not to be more than one year from the date of issuance. _______________________________________________________________________ ______________________________________________________________________. 12. Obligations in respect of which the Letter of Credit is to be issued: _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ ______________________________________________________________________. 13. Letter of Credit is to be (check one box only): [ ] Evergreen Letter of Credit. [ ] Not an Evergreen Letter of Credit. 14. If the Evergreen Letter of Credit box in Item 13 was checked, specify the Beneficiary Notification Date. PMC EXHIBIT D FORM OF LETTER OF CREDIT THE BANK OF NEW YORK Letter of Credit Department Church St. Station P.O. Box 11235 New York, NY 10286-1238 OUR REF NO. DATE Beneficiary [Address] GENTLEMEN/LADIES: OUR REFERENCE NO. ACCOUNT OF: [Name of Account Party] [Address] AVAILABLE WITH: OURSELVES BY PAYMENT DRAFTS AT SIGHT DRAWN ON THE BANK OF NEW YORK, NEW YORK, NEW YORK, AS INDICATED BELOW. TO THE EXTENT OF: ***USD *** EXPIRY DATE: PLACE OF EXPIRY: OUR COUNTERS ADDITIONAL DETAILS: WE HEREBY ESTABLISH THIS IRREVOCABLE LETTER OF CREDIT IN YOUR FAVOR FOR DRAWINGS UP TO US$ _______________, EFFECTIVE [Date] AND EXPIRING AT OUR OFFICE AT 101 BARCLAY STREET, NEW YORK, NEW YORK 10286, WITH OUR CLOSE OF BUSINESS ON [Date]. WE HEREBY UNDERTAKE TO PROMPTLY HONOR YOUR SIGHT DRAFT(S), MARKED "DRAWN UNDER LETTER OF CREDIT NO. ___________", FOR ALL OR ANY PART OF THIS LETTER OF CREDIT IF PRESENTED AT OUR 101 BARCLAY STREET OFFICE, NEW YORK, NEW YORK 10286 ON OR BEFORE THE EXPIRY DATE OR ANY AUTOMATICALLY EXTENDED DATE. EXCEPT AS STATED HEREIN, THIS UNDERTAKING IS NOT SUBJECT TO ANY CONDITION OR QUALIFICATION. THE OBLIGATION OF THE BANK OF NEW YORK UNDER THIS LETTER OF CREDIT IS THE INDIVIDUAL OBLIGATION OF THE BANK OF NEW YORK, AND IS IN NO WAY CONTINGENT UPON REIMBURSEMENT WITH RESPECT THERETO. [IT IS A CONDITION OF THIS LETTER OF CREDIT THAT IT IS DEEMED TO BE AUTOMATICALLY EXTENDED, WITHOUT AMENDMENT, FOR ONE YEAR FROM THE EXPIRY DATE OR ANY FUTURE EXPIRATION DATE, UNLESS AT LEAST __ DAYS PRIOR TO ANY EXPIRATION DATE WE NOTIFY YOU BY REGISTERED MAIL THAT WE ELECT NOT TO CONSIDER THIS LETTER OF CREDIT RENEWED FOR ANY SUCH ADDITIONAL PERIOD.]* THIS LETTER OF CREDIT IS SUBJECT TO THE UNIFORM CUSTOMS AND PRACTICE FOR DOCUMENTARY CREDITS (1993 REVISION), INTERNATIONAL CHAMBER OF COMMERCE, PUBLICATION NO. 500. YOURS VERY TRULY, AUTHORIZED SIGNATURE - - - ----------------------- * To be included in Evergreen Letters of Credit only. - 2 - PMC EXHIBIT E-1 FORM OF COMPLIANCE CERTIFICATE (GAAP Financial Statements) THIS CERTIFICATE is given pursuant to Section 5.3(a) of the First Amended and Restated Letter of Credit Agreement, dated as of March 14, 1997 (as amended, modified or supplemented from time to time, the "Agreement," the terms defined therein being used herein as therein defined), by and among Pennsylvania Manufacturers Corporation (the "Applicant"), the Banks party thereto, CoreStates Bank, N.A., as Co-Agent and The Bank of New York, as Agent and Issuing Bank. The undersigned hereby certifies that: 1 1. He is [the duly appointed chief financial officer of the Applicant] [a duly appointed vice president of the Applicant having significant responsibility for financial matters]. 2. Enclosed with this Certificate are copies of the financial statements of the Applicant and its Subsidiaries as of _________, and for the [_______ - - - -month period] [year] then ended, required to be delivered under Section [5.1(a)] [5.1(b)] of the Agreement. Such financial statements have been prepared in accordance with generally accepted accounting principles [(subject to the absence of notes required by generally accepted accounting principles and subject to normal year-end audit adjustments)]2 and present fairly the financial condition of the Applicant and its Subsidiaries on a consolidated basis as of the date indicated and the results of operations of the Applicant and its Subsidiaries on a consolidated basis for the period covered thereby. 3. The undersigned has reviewed the terms of the Agreement and has made, or caused to be made under the supervision of the undersigned, a review in reasonable detail of the activities of the Applicant and its Subsidiaries during the accounting period covered by such financial statements with a view to determining whether the Applicant has performed and maintained all of its obligations under the Agreement. 4. Based upon the review described in paragraph 3 above, the undersigned has no knowledge of the existence of any Default or Event of Default during or at the end of the accounting period covered by such financial statements or as of the date of this Certificate [, except as set forth herein].3 5. Attached to this Certificate as Attachment A is a Covenant Compliance Worksheet reflecting the computation of the financial covenants set forth in Sections 6.1 and 6.2 of the Agreement, as of the last day of the period covered by the financial statements enclosed herewith. - - - ----------------- 1 Insert applicable bracketed language throughout the Certificate. 2 Insert in the case of quarterly financial statements. 3 Insert if applicable and describe in the Certificate or in a separate attachment any exceptions to paragraph 4 above by listing, in reasonable detail, the nature of the Default or Event of Default, the period during which it existed and the action that the Applicant has taken or proposes to take with respect thereto. IN WITNESS WHEREOF,, the undersigned has executed and delivered this Certificate as of the ____ day of ___________, ____. [signature] ---------------------------------- Name: ----------------------------- Title: ---------------------------- ATTACHMENT A TO GAAP COMPLIANCE CERTIFICATE COVENANT COMPLIANCE WORKSHEET Capitalization Ratio (Section 6.1 of the Agreement): Not greater than 0.35 to 1.0 (1) Consolidated Indebtedness: (a) Indebtedness of Applicant and Subsidiaries as of _______, ____ (the "Measurement Date") $_______ (b) Reimbursement obligations with respect to letters of credit to secure the reinsurance obligations of Insurance Subsidiaries under reinsurance agreements entered into as a reinsurer in the ordinary course of business to the extent that such reimbursement obligations are secured by cash and Treasury Securities delivered to the issuers of such letters of credit as of the Measurement Date _______ (c) Reimbursement obligations with respect to PMA Insurance Cayman, Ltd. letter of credit as of the Measurement Date1 (d) Consolidated Indebtedness: Subtract lines 1(b) and 1(c) from 1(a) $_______ (2) Capitalization: (a) Consolidated Indebtedness as of the Measurement Date (from Line 1(d)) $_______ (b) Consolidated Net Worth as of the Measurement Date _______ (c) Capitalization: Add Lines 2(a) and 2(b) $_______ (3) Ratio of Consolidated Indebtedness to Total Capitalization: Divide Line 1(d) by Line 2(c) __to 1.0 - - - -------------- 1 Reimbursement obligations with respect to the letter of credit issued upon the Applicant's application for the benefit of PMAIC with PMA Insurance Cayman, Ltd. as account party thereto, but only if the stated amount of such letter of credit is less than $28,000,000. Cash Coverage Ratio (Section 6.2 of the Agreement): Not less than ___ to 1.0 1 (1) Cash Available: (a) Aggregate Available Dividend Amount for the Insurance Subsidiaries 2 for the Measurement Period 3 $_______ (b) Net Tax Sharing Payments for the Measurement Period (i) Tax sharing payments received by Applicant $_______ (ii) Tax sharing payments estimated to be received by Applicant in respect of Measurement Period _______ (iii) Taxes paid by Applicant (_______) (iv) Taxes estimated to be paid by Applicant in respect of Measurement Period (_______) (v) Other payments, if any, paid or to be paid by Applicant under tax sharing agreements or arrangements during Measurement Period (_______) (vi) Net Amount (lines (i) + (ii) minus lines (iii) + (iv) + (v)) _______ (c) Cash Available: Add lines 1(a) and 1(b)(v) $ (2) Cash Uses: (a) Interest Expense incurred during the Measurement Period $_______ (b) Operating expenses paid by the Applicant during the Measurement Period _______ (c) Dividends paid by the Applicant during the Measurement Period ________ (d) Cash Uses: Add lines 2(a), 2(b) and 2(c) $ (3) Cash Coverage Ratio: Divide line l(c) by line 2(d) __to 1.0 - - - --------------- 1 Insert (i) with respect to a Measurement Date occurring on or before December 31, 1999, 2.5, and (ii) a Measurement Date occurring thereafter, 2.75. 2 Other than each Insurance Subsidiary that is a Subsidiary of another Insurance Subsidiary and determined as if the four fiscal quarters measured constitute a fiscal year for regulatory purposes. 3 The four fiscal quarters immediately preceding the Measurement Date. PMC EXHIBIT E-2 FORM OF COMPLIANCE CERTIFICATE (Statutory Financial Statements) THIS CERTIFICATE is given pursuant to Section 5.3(a) of the First Amended and Restated Letter of Credit Agreement, dated as of March 14, 1997 (as amended, modified or supplemented from time to time, the "Agreement," the terms defined therein being used herein as therein defined), by and among Pennsylvania Manufacturers Corporation (the "Applicant"), the Banks party thereto, CoreStates Bank, N.A., as Co-Agent and The Bank of New York, as Agent and Issuing Bank. The undersigned hereby certifies that: 1 i) He is [the duly appointed chief financial officer of the Applicant] [a duly appointed vice president of the Applicant having significant responsibility for financial matters]. ii) Enclosed with this Certificate are copies of the financial statements of the Applicant and its Subsidiaries as of __________, and for the [______-month period] [year] then ended, required to be delivered under Section [5.2(a)] [5.2(b)] of the Agreement. Such financial statements have been prepared in accordance with Statutory Accounting Principles and present fairly the financial condition of the Applicant and its Subsidiaries on a consolidated basis as of the date indicated and the results of operations of the Applicant and its Subsidiaries on a consolidated basis for the period covered thereby. iii) Attached to this Certificate as Attachment A is a Covenant Compliance Worksheet reflecting the computation of the financial covenants set forth in Sections 6.3 and 6.4 of the Agreement as of the last day of the period covered by the financial statements enclosed herewith. - - - ------------ 1 Insert applicable bracketed language throughout the Certificate. IN WITNESS WHEREOF, the undersigned has executed and delivered this Certificate as of the ____ day of ________, ____. [signature] ------------------------------ Name: ------------------------- Title: ------------------------ ATTACHMENT A TO STATUTORY COMPLIANCE CERTIFICATE COVENANT COMPLIANCE WORKSHEET Statutory Surplus (Section 6.3 of the Agreement): Not less than $450,000,000 (1) Statutory Surplus of each Insurance Subsidiary1 as of ________, ____ (the "Measurement Date"): (a) PMA Re $_______ (b) PMAIC $_______ (c) Pennsylvania Manufacturers Indemnity Company $_______ (d) Manufacturers Alliance Insurance Company $_______ (e) MASCCO $_______ (f) PMA Life Insurance Company $_______ (g) [Other Insurance Subsidiaries legally domiciled in the United States]2 $_______ (h) PMA Cayman3 $_______ (i) Chestnut3 $_______ (j) Pennsylvania Manufacturers International Insurance, Ltd.3 $_______ (k) [Other Insurance Subsidiaries not legally domiciled in the United States3]2 $_______ (2) Consolidated Statutory Surplus -- Sum of lines in item (1) $_______ - - - ------------ 1 Do not include any Insurance Subsidiary whose Statutory Surplus is included in the Statutory Surplus of another Insurance Subsidiary. 2 List each such Insurance Subsidiary individually. 3 Include the shareholders' equity of such Insurance Subsidiary as determined in accordance with Generally Accepted Accounting Principles (without regard to the requirements of Statement of Financial Accounting Standards No. 115 issues by the Financial Accounting Standards Board). ATTACHMENT A TO STATUTORY COMPLIANCE CERTIFICATE COVENANT COMPLIANCE WORKSHEET Risk-Based Capital For each Insurance Subsidiary, as (Section 6.4 of the Agreement): 1 appropriate, line (a) to be not less than line (d) (1) PMA Re (a) Total adjusted capital as of the Measurement Date $_______ (b) Company Action Level RBC2 as of the Measurement Date $_______ (c) Required Multiple 150% (d) Required total adjusted capital as of the Measurement Date: Multiply Line l(b) by l(c) $_______ (2) Other Insurance Subsidiaries3 (a) Total adjusted capital as of the Measurement Date $_______ (b) Company Action Level RBC2 as of the Measurement Date $_______ (c) Required Percentage3: December 31, 1996, 100%; December 31, 1997, 110%; December 31, 1998, 115 %; December 31, 1999 and thereafter, 120% % (d) Required total adjusted capital as of the Measurement Date: Multiply Line 3(b) by 3(c) $_______ - - - ------------------- 1 To be calculated and submitted annually. 2 As defined by the Risk-Based Capital for Insurers Model Act of the NAIC. 3 Complete different schedule for each Insurance Subsidiary required by the relevant Insurance Regulatory Authority to meet any RBC requirements. PMC EXHIBIT F FORM OF FINANCIAL CONDITION CERTIFICATE THIS FINANCIAL CONDITION CERTIFICATE is delivered pursuant to Section 3.1(a)(iii) of the First Amended and Restated Letter of Credit Agreement, dated as of March 14, 1997 (the "Agreement"), by and among Pennsylvania Manufacturers Corporation, a Pennsylvania corporation (the "Applicant"), the Banks party thereto, CoreStates Bank, N.A., as Co-Agent and The Bank of New York, as Agent and as Issuing Bank. Capitalized terms used herein without definition shall have the meanings given to such terms in the Agreement. The undersigned hereby certifies for and on behalf of the Applicant as follows: 1. Capacity. The undersigned is, and at all pertinent times mentioned herein has been, the Applicant's duly qualified and acting chief financial officer (and in such capacity has responsibility for the management of the Applicant's financial affairs) and senior accounting officer (and in such capacity has responsibility for the preparation of the Applicant's financial statements). The undersigned has, together with other officers of the Applicant, acted on behalf of the Applicant in connection with the negotiation and consummation of the Agreement and the transactions contemplated thereby. 2. Procedures. For purposes of this certificate, the undersigned, or officers or other personnel of the Applicant under the direction and supervision of the undersigned, have, as of or prior to the date hereof, undertaken the following activities in connection herewith: a) The undersigned has carefully reviewed the following: i) the contents of this certificate; ii) the Agreement (including the exhibits and schedules thereto); iii) the audited consolidated balance sheets of the Applicant for the fiscal years ended December 31, 1993, 1994 and 1995, and the related consolidated statements of income, stockholders equity and cash flows of the Applicant for the three-year period ended December 31, 1995, each certified by Coopers & Lybrand, L.L.P.; and iv) the unaudited consolidated balance sheet of the Applicant as of December 31, 1996, and the related consolidated statements of income, stockholders equity and cash flows of the Applicant for the fiscal year then ended. b) The undersigned has made inquiries of certain other officers and personnel of the Applicant with responsibility for financial and accounting matters regarding whether the unaudited financial statements described in paragraph 2.1(a)(iv) above are in conformity with Generally Accepted Accounting Principles applied on a basis substantially consistent with that of the audited financial statements described in paragraph 2.1(a)(iii) above, and whether notes omitted from the unaudited consolidated financial statements would have disclosed any new information that would be necessary to make such materials not misleading. c) With respect to any Contingent Obligations of the Applicant, the undersigned: i) has inquired of certain officers and other personnel of the Applicant who have responsibility for the legal, financial and accounting affairs of the Applicant, as to the existence and estimated amounts of all Contingent Obligations known to them; ii) has confirmed with senior officers of the Applicant that, to the best of such officers' knowledge, (i) all appropriate items have been included in the Contingent Obligations made known to the undersigned in the course of the inquiry of the undersigned in connection herewith, and (ii) the amounts relating thereto were the maximum estimated amounts of liability reasonably likely to result therefrom as of the date hereof, and iii) confirms that, to the best of his knowledge, all material Contingent Obligations that may arise from any pending litigation, asserted claims and assessments, guarantees, uninsured risks, and other Contingent Obligations of the Applicant have been considered in making the certification set forth herein, and with respect to each such Contingent Obligation the estimable maximum estimated of liability with respect thereto was used in making such certification. d) In connection with the preparation for consummation of the transactions contemplated by the Agreement, the undersigned has caused the preparation of and has reviewed projected financial statements consisting of balance sheets and statements of income of the Applicant giving effect to the transactions contemplated by the Agreement. The assumptions upon which such projections are based were, in the opinion of the undersigned, reasonable when made and continue to be reasonable as of the date hereof, subject to the uncertainties and approximations inherent in any projections. e) The undersigned has inquired of certain officers of the Applicant having responsibility for financial reporting and accounting matters regarding whether such persons were aware of any events or conditions that, as of the date hereof, would cause the statements made in Section 3 below to be untrue. f) The undersigned has conferred with counsel to the Applicant for the purpose of discussing the meaning of the contents of this Certificate (including, without limitation, Sections 3(a), 3(c) and 3(d) below). 3. Certifications. Based on the foregoing, the undersigned hereby certifies as follows: a) The Applicant is not now, nor will consummation of the transactions contemplated by the Agreement and the incurrence of the Obligations under the Agreement render the Applicant, "insolvent" (as hereinafter defined). The undersigned understands that, in this context, "insolvent" means that the present fair saleable value of assets is less than the amount that will be required to be paid on or in respect of the existing debts and other liabilities as such debts and liabilities of the Applicant mature. The undersigned understands that the term "debts" includes any legal liability, whether matured or unmatured, liquidated or unliquidated, absolute, fixed or contingent, including any guaranty obligations. A valuation of the Applicant, on the basis thereof, with reasonable allowance for error, would reflect the net worth of the Applicant in the aggregate (excess of fair value of assets over liabilities) as not less than $_______. b) After giving effect to the transaction contemplated by the Agreement, all accounts and other liabilities of the Applicant are current and not past due. c) The undersigned believes that, by incurring the Obligations pursuant to the Agreement, the Applicant will not incur debts beyond its ability to pay as such obligations mature (taking into account the timing and amounts of cash to be payable on or in respect of the Applicant's Indebtedness). The foregoing conclusion is based in part on the projections, which demonstrate that the cash flow of the Applicant, after taking into account all anticipated uses of the cash of the Applicant, will at all times be sufficient to pay all amounts on or in respect of Indebtedness of the Applicant when such amounts are required to be paid (including without limitation, scheduled payments pursuant to the Agreement). d) As of the date hereof, the consummation of the transactions contemplated by the Agreement will not leave the Applicant with "unreasonably small capital" within the meaning of Section 548(a) of the Bankruptcy Code or with remaining assets that are unreasonably small. In reaching this conclusion, the undersigned understands that "unreasonably small capital" depends upon the nature of the particular business or businesses conducted or to be conducted, and has reached this conclusion based on the needs and anticipated needs for capital of the businesses conducted or anticipated to be conducted by the Applicant in light of the Applicant's available credit capacity. e) The Applicant has not executed the Agreement, or any documents mentioned herein, or made any transfer or incurred any obligations thereunder, with intent to hinder, delay or defraud either present or future creditors of the Applicant. f) The undersigned understands that the Banks have performed their own review and analysis of the financial condition of the Applicant, but that the Banks are relying on the foregoing statements in connection with the extension of credit to the Applicant pursuant to the Agreement. Executed this 14th day of March, 1997. -------------------------------------- Chief Financial Officer Pennsylvania Manufacturers Corporation PMC EXHIBIT G FORM OF OPINION OF COUNSEL TO THE APPLICANT March 14, 1997 The Bank of New York, as Agent and as Issuing Bank, CoreStates Bank, N.A., as Co-Agent, and the Banks Party to the First Amended and Restated Letter of Credit Agreement Referenced Below Ladies and Gentlemen: We have acted as counsel to Pennsylvania Manufacturers Corporation, a Pennsylvania corporation (the "Applicant") in connection with the execution and delivery of and the consummation of the transactions contemplated by the First Amended and Restated Letter of Credit Agreement, dated as of March 14, 1997 (the "Agreement"), by and among the Applicant, the Banks party thereto, CoreStates Bank, N.A., as Co-Agent and The Bank of New York, as Agent and Issuing Bank. Unless otherwise defined herein, capitalized terms used herein have the meanings assigned to them in the Agreement. In this connection, we have examined a copy of the executed Agreement and such certificates of public officials, certificates of officers of the Applicant and copies certified to our satisfaction of corporate documents and records of the Applicant and of other papers, and have made such other investigations as we have deemed relevant and necessary as a basis for our opinion hereinafter set forth. We have relied upon such certificates of public officials and of officers of the Applicant with respect to the accuracy of material factual matters contained therein which were not independently established. In addition, we have assumed and relied upon the accuracy, completeness, authenticity and genuineness of all documents and certificates examined and all signatures thereon, other than the signatures of representatives of the Applicant. In rendering this opinion, we have assumed that the Banks, the Issuing Bank, the Co-Agent and the Agent have all requisite authority and have taken all necessary corporate or other action to enter into and perform their obligations under the Credit Documents and that the Credit Documents are valid and binding upon the Banks, the Issuing Bank, the Co-Agent and the Agent and enforceable against them in accordance with their respective terms. We have also assumed that the Banks', the Issuing Bank's, the CoAgent's and the Agent's actions in connection with the enforcement of the Credit Documents will be commercially reasonable and taken in good faith. Any opinion expressed "to the best of our knowledge" is made on the basis of our actual knowledge only of the attorneys of this firm who have participated in the legal representation of the Applicant in connection with the Credit Documents, without having conducted an independent investigation as to the matters stated therein. Based upon the subject to the foregoing and the further limitations, qualifications and exceptions herein set forth, we are of the opinion that: 1. Each of the Applicant and its Material Subsidiaries is a corporation duly organized and validly existing under the laws of the jurisdiction of its incorporation and is duly qualified to do business as a foreign corporation and is in good standing in each jurisdiction where the nature of its business or the ownership of its properties requires it to be so qualified, except where the failure to be so qualified would not have a Material Adverse Effect. 2. Each of the Applicant and its Material Subsidiaries has the full corporate power and authority to execute, deliver and perform the Credit Documents to which it is a party, to own and hold its property and to engage in its business as presently conducted. 3. The Applicant has taken all necessary corporate action to execute, deliver and perform each Credit Document, and each Credit Document has been validly executed and delivered by, and constitutes the legal, valid and binding obligation of the Applicant, enforceable against it in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance or other similar laws affecting creditors' rights generally or by general equitable principles which may limit rights of acceleration, self-help and the availability of equitable remedies, including (without limitation) concepts of materiality, reasonableness, good faith and fair dealing (regardless of whether considered in a proceeding in equity or at law). 4. No consent, approval, authorization, exemption or other action by, notice to, or declaration or filing with, any governmental or regulatory authority of the United States or the Commonwealth of Pennsylvania is required in connection with the due execution, delivery and performance by the Applicant of the Credit Documents, the legality, validity or enforceability thereof or the consummation of the transactions contemplated thereby. 5. The execution, delivery and performance by the Applicant of the Credit Documents, and compliance by it therewith, do not and will not (i) violate any provision of its certificate of incorporation or bylaws, (ii) contravene any provisions of any applicable law, rule or regulation or, to the best of our knowledge, any judgment, order, writ, injunction or decree to which it is subject, (iii) to the best of our knowledge, conflict with, result in a breach of or constitute (with notice, lapse of time or both) a default under any material indenture, agreement or other instrument to which it is a party, by which it or any of its properties is bound or to which it may be subject, or (iv) result in the creation or imposition of any Lien (except for Permitted Liens) arising under any of the documents or instruments referred to in clause (iii), upon any property or assets of the Applicant. 6. To the best of our knowledge, there are no actions, investigations, suits or proceedings pending or threatened, at law, in equity or in arbitration, before any court, other Governmental Authority or other Person, against or affecting the Applicant and its Subsidiaries or any of their respective properties that, if adversely determined, would be reasonably likely to have a Material Adverse Effect. 7. The Surviving Senior Note Indebtedness does not have any priority or preference senior in any respect to the Obligations. 8. In any proceeding taken for the enforcement of the Credit Documents, the provisions therein specifying that the internal laws of the State of New York will govern such documents would more likely than not be given effect by a state court or federal court sitting in the Commonwealth of Pennsylvania and applying the laws of the Commonwealth of Pennsylvania concerning conflicts of law, subject to the exceptions and limitations referred to below. Pennsylvania courts have followed Section 187 of the Restatement 2nd Conflict of Laws (See: In re Allegheny International. Inc., 954 F.2d 167 (3rd Cir. 1992) and Smith v. Commonwealth National Bank, 557 A.2d 775 (Pa. Super. 1989)). However, even in the case where financing documents have included an express choice of law provision identifying that a foreign state's laws shall govern the documents, this general rule has not been followed by a Pennsylvania court in instances where the court was asked to apply the procedural law of another state (See: Unisys Finance Corporation v. U S Vision, Inc., 630 A.2d 55 (Pa. Super. 1993)) such as on a question of the applicable statute of limitations on a claim, or where the action involved the enforcement of debts or recovery of collateral given as security for a loan (See: Howard Savings Bank v. Cohen, 607 A.2d 1077 (Pa. Super. 1992)). Furthermore, we call your attention to the existence of Fuller Co. v. Campagnie Des Bauxites De Guinee, 421 F. Supp. 938 (W.D.Pa. 1976), in which the court rejected a contractual choice of law provision primarily because the only nexus between the transaction and the designated state was the retention by one party of counsel in such state. 9. Neither the Applicant nor any of its Subsidiaries is an "investment company," a company controlled by an "investment company," or an "investment advisor," within the meaning of the Investment Company Act of 1940, as amended. 10. Neither the Applicant nor any of its Subsidiaries is engaged in the business of extending credit for the purpose of purchasing or carrying Margin Stock, and the consummation of the transactions contemplated by the Agreement will not violate Regulations G, T, U or X of the Board of Governors of the Federal Reserve System. 11. The fees, interest and other charges payable under the Credit Documents do not violate any usury or similar laws of the Commonwealth of Pennsylvania. 12. No transfer, filing, stamp, privilege, franchise, indebtedness or other taxes of the Commonwealth of Pennsylvania are required to be paid in connection with the execution and delivery of the Credit Documents. 13. Neither Agent nor any Bank is required to comply with the requirements of any foreign lender statute in the Commonwealth of Pennsylvania in order to carry out the transactions contemplated by the Credit Documents or to avail itself of the remedies provided thereby. The foregoing opinions are limited to the laws of the Commonwealth of Pennsylvania, and, to the extent applicable, the laws of the United States and we express no opinion with respect to the law of any other state or jurisdiction. We note that the Credit Documents are expressly governed by the laws of the State of New York, and we have assumed, with your permission and without investigation, that the substantive laws of the State of New York are identical to those of the Commonwealth of Pennsylvania. The opinions given herein are as of the date hereof, and we assume no obligation to update or supplement this opinion to reflect any facts or circumstances which may hereafter come to our attention or any changes in laws which may hereafter occur. This opinion is furnished solely in connection with the transactions contemplated by the Agreement, may be relied upon only by each of you and any of your successors and Assignees under the Agreement, and may not be used or relied upon by you or any other person in any other manner or for any other purpose without our prior written consent. Very truly yours, DUANE, MORRIS & HECKSCHER PMC EXHIBIT H FORM OF OPINION OF SPECIAL COUNSEL March 14, 1997 To The Parties Listed on Schedule A Attached Hereto Re: First Amended and Restated Letter of Credit Agreement, dated as of March 14, 1997, by and among Pennsylvania Manufacturers Corporation (the "Applicant"), the Banks party thereto, CoreStates Bank, N.A., as Co-Agent and The Bank of New York. as Agent and Issuing Bank (the "Agreement") We have acted as Special Counsel to the Agent in connection with the Agreement. Capitalized terms used herein which are defined in the Agreement shall have the meanings therein defined, unless the context hereof otherwise requires. We have examined originals or copies certified to our satisfaction of the documents required to be delivered pursuant to the provisions of Section 3.1 of the Agreement. In conducting such examination, we have assumed the genuineness of all signatures, the authenticity of all documents submitted to us as originals, and the conformity to originals of all documents submitted to us as copies. Based upon the foregoing examination, and (i) assuming, without any independent inquiry or investigation, the accuracy of (a) the opinion of Duane, Morris & Heckscher, counsel to the Applicant (the "Duane' Morris Opinion"), dated of even date herewith, (b) the representations and warranties of the Applicant contained in the Credit Documents as to matters of fact, and (c) certain representations and warranties of the Agent as to matters of fact, and (ii) subject to all of the limitations, assumptions and qualifications set forth below and contained, directly or indirectly, in the Duane, Morris Opinion, we are of the opinion that: 1. All legal preconditions to the effectiveness of the Agreement on the Restatement Effective Date have been satisfactorily met or waived. 2. The Agreement constitutes the valid and legally binding obligation of the Applicant, enforceable against the Applicant in accordance with its terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, fraudulent conveyance, moratorium or similar laws relating to or affecting the enforcement of creditors' rights generally and by general principles of equity, including, without limitation, concepts of materiality, reasonableness, good faith and fair dealing and the possible unavailability of specific performance or injunctive relief, regardless of whether considered in a proceeding in equity or at law. For purposes of the opinion set forth in paragraph 2 above, we have assumed that: (a) Each of the Banks, the Issuing Bank, the Co-Agent and the Agent (collectively, the "Other Transaction Parties", and each an "Other Transaction Party"), has the requisite power and authority to enter into and perform the Agreement. (b) The Agreement has been duly executed, delivered and accepted by each of the Other Transaction Parties. (c) The Agreement constitutes a valid and legally binding obligation of each Other Transaction Party, enforceable against each Other Transaction Party in accordance with its terms. (d) Each Other Transaction Party has satisfied all legal requirements applicable to it to the extent necessary to make the Agreement enforceable against it and has complied with all legal requirements pertaining to its status as such status relates to its rights to enforce the Agreement. (e) Neither the execution, delivery, or acceptance of, nor the observance and performance of the provisions contained in, the Agreement by each of the Other Transaction Parties, will conflict with or result in a breach of any requirement of law applicable to such Other Transaction Party. (f) Each of the Other Transaction Parties will observe and perform all of its obligations and duties arising under the Agreement. The opinion expressed in paragraph 2 is subject to the further limitation that we express no opinion herein with respect to (i) provisions of the Agreement purporting to establish evidentiary standards, (ii) the waiver of inconvenient forum set forth in Section 10.15 of the Agreement with respect to proceedings in a Federal court, (iii) whether a Federal or state court outside of the State of New York would give effect to the choice of New York law provided for in the Agreement, (iv) the effect of the law of any jurisdiction other than the State of New York wherein any Bank may be located or wherein enforcement of the Agreement may be sought which limits the rates of interest legally chargeable or collectible, (v) provisions of the Agreement regarding delay or omission of enforcement of rights and remedies, (vi) provisions of the Agreement to the effect that rights or remedies are not exclusive, that every right or remedy is cumulative and may be exercised in addition to or with any other right or remedy, or that the election of a particular remedy or remedies does not preclude recourse to one or more other remedies, or (vii) penalties or forfeitures, or late payment charges or an increase in interest rate upon delinquency in - 2 - payment or upon the occurrence of default, to the extent that the same may constitute a penalty or forfeiture; provided, however, that the non-enforceability of any of the provisions, rights and remedies referred to in this paragraph will not, in our opinion, materially diminish the practical realization of the economic benefits of the Agreement intended thereby, except for the economic consequences of any judicial, administrative, procedural or other delay which may be imposed by, relate to or arise from applicable laws, constitutional requirements, statutes, court decisions, codes, ordinances, rules and regulations, equitable principles and all interpretations thereof. This opinion is rendered solely for your benefit in connection with the transactions referred to herein and may not be relied upon by any other Person. In rendering the foregoing opinion, we express no opinion as to laws other than the laws of the State of New York and the federal laws of the United States of America. Very truly yours, Emmet, Marvin & Martin, LLP - 3 - SCHEDULE A The Bank of New York, as Agent and as Issuing Bank CoreStates Bank, N.A., as Co-Agent Each of the Banks party from time to time to the First Amended and Restated Credit Agreement, dated as of March 14, 1997, by and among Pennsylvania Manufacturers Corporation, the Banks party thereto, CoreStates Bank, N.A., as Co-Agent and The Bank of New York, as Agent and Issuing Bank PMC EXHIBIT I FORM OF EXTENSION REQUEST EXTENSION REQUEST (this "Extension Request"), dated as of _, 19 _, made by PENNSYLVANIA MANUFACTURERS CORPORATION, a Pennsylvania corporation (the "Applicant") pursuant to the First Amended and Restated Letter of Credit Agreement, dated as of March 14, 1997, by and among the Applicant, the Banks party thereto, CORESTATES BANK, N.A., as Co-Agent and THE BANK OF NEW YORK, in its capacity as Agent and as Issuing Bank (as time amended, supplemented or otherwise modified from time to time, the "Agreement"). RECITALS A. Capitalized terms used herein which are not defined herein and which are defined in the Agreement shall have the same meanings as therein defined. B. Section 2.6 of the Agreement provides that so long as no Default or Event of Default shall exist and be continuing, the Applicant may request that the Termination Date be extended for a period of 364 days by delivering an Extension Request to the Agent. C. Section 2.6 of the Agreement further provides that if each Bank consents to an Extension Request during the Extension Consent Period by giving written notice thereof to the Agent, then effective on the first day of the Extension Consent Period, the then applicable Termination Date shall be extended by 364 days. D. As of the date hereof, the Termination Date (without giving effect to the extension requested hereby) is ________ __, 19__. E. The Applicant desires that the Termination Date be extended for an additional period of 364 days and the Banks signing below desire to consent thereto. In consideration of the premises, and the terms and conditions herein contained and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: 1. Pursuant to Section 2.6 of the Agreement, the Applicant hereby requests that the Termination Date be extended for an additional period of 364 days. 2. The Applicant hereby represents and warrants to the Agent, the Co-Agent, the Issuing Bank and each Bank that no Default or Event of Default exists and is continuing. 3. Each Bank signing below hereby consents to this Extension Request. 4. Subject to receipt by the Agent during the Extension Consent Period of a counterpart of this Extension Request signed by each Bank (or a replacement bank pursuant to Section 2.15), then effective on the first day of such Extension Consent Period, the then applicable Termination Date shall be extended by 364 days. 5. This instrument may be executed in any number of counterparts, each of which shall be an original and all of which shall constitute one instrument. It shall not be necessary in making proof of this instrument to produce or account for more than one counterpart signed by the party to be charged. 6. This instrument is being delivered in and is intended to be performed in the State of New York and shall be construed and enforceable in accordance with, and be governed by, the internal laws of the State of New York without regard to principles of conflict of laws. IN WITNESS WHEREOF, each of the parties has caused this Extension Request to be executed by its duly authorized officer as of the date and year first written above. PENNSYLVANIA MANUFACTURERS CORPORATION By: ----------------------------------- Name: --------------------------------- Title: -------------------------------- THE BANK OF NEW YORK, Individually and as Agent and Issuing Bank By: ----------------------------------- Name: --------------------------------- Title: -------------------------------- CORESTATES BANK, N.A. Individually and as Co-Agent By: ----------------------------------- Name: --------------------------------- Title: -------------------------------- - 2 - PMC SCHEDULE 1.1 TO THE FIRST AMENDED AND RESTATED LETTER OF CREDIT AGREEMENT DATED AS OF MARCH 14, 1997 LIST OF MEMBERS OF CURRENT MANAGEMENT GROUP Board of Directors - - - ------------------ Frederick W. Anton III Paul I. Detwiler, Jr. Joseph H. Foster Anne S. Genter James F. Malone III A. John May Louis N. McCarter III John W. Miller, Jr., M.D. Edward H. Owlett Louis I. Pollock L.J. Rowell, Jr. Roderic H. Ross John W. Smithson Management - - - ---------- Frederick W. Anton III John W. Smithson Francis W. McDonnell Vincent T. Donnelly Stephen G. Tirney Richard DeCoux James J. Fleming, Jr. Anthony J. Grosso Stephen F. Litz David C. Snow PMC SCHEDULE 4.14 TO THE FIRST AMENDED AND RESTATED LETTER OF CREDIT AGREEMENT DATED AS OF MARCH 14, 1997 ENVIRONMENTAL MATTERS There is presently a 10,000 gallon underground fuel oil storage tank located at Gulph Industries, Inc.'s property, 1025 W. Eighth Street, King of Prussia, PA. Two other tanks for gasoline and waste oil storage were formerly located at this facility, but have been removed. PMC SCHEDULE 4.18 TO THE FIRST AMENDED AND RESTATED LETTER OF CREDIT AGREEMENT DATED AS OF MARCH 14, 1997 LIST OF CERTAIN CONTRACTS Obligation to: Description: Scudder, Stevens, & Clark Investment advisory services Nine Penn Center Associates, L.P. Building lease IBM Equipment PNC Leasing Corporation Furniture, fixtures, and equipment Cap Gemini Consulting Decision One Management and maintenance of data processing equipment AT&T Frame relay, private line, and local channel service CoreStates Sale of accounts receivable Frederick W. Anton III Employment agreement John W. Smithson Employment agreement PMC SCHEDULE 4.19 TO THE FIRST AMENDED AND RESTATED LETTER OF CREDIT AGREEMENT DATED AS OF MARCH 14, 1997 PMA REINSURANCE CORPORATION UNSECURED RECOVERABLES RATED LESS THAN A- BY AM BEST AS OF DECEMBER 31, 1996 - - - ------------------------------------------------------------------------------ (1) LOC AM BEST TICK NAME (000'S) RATING MARKS - - - ------------------------------------------------------------------------------ AUTHORIZED US Aegon Reinsurance Company(Ennia) NR-3 American Fuji Fire & Marine B++ Baltica-Skandinavia Re Co C- Cigna Reinsurance Co B+ g Covenant Mutual Ins Co NR-2 (3) MONY Reinsurance Corp NR-3 Philadelphia Reins Corp NR-3 Republic Ins Co B++ g AUTHORIZED POOLS Associated A&H Re Underwriters NA UNAUTHORIZED US Constellation Re NA (2) Delta America Re Ins Co (Elkhorn) NA Mead Reinsurance Corp NR-3 Universal Reins Co NA AUTHORIZED - OTHER NON-U.S. INSURERS Sphere Drake Ins plc B++ Zurich Re (UK) Ltd NA UNAUTHORIZED - OTHER NON-U.S. INSURERS Baloise insurance Co NR-5 Beneficial American NA Bishopsgate Ins Ltd 1 NA Bryanston Ins Co NA Compagnie Europeene de Reassurances, S.A. 26 NA Dai-Tokyo Ins Co (UK) Ltd NA Eagle Star Reinsurance Company Ltd. NA Eisen Und Stahl Ruckversicherungs NA English & American Ins Co Ltd (New Zealand) F Excess Insurance Co Ltd 2 NR-5 Fremont Ins Co (UK) Ltd 1 NR-5 GAN Incendie Accidents NR-5 GIO (UK) Ltd NA Hansa International 1 NA Municipal General Ins Ltd 8 NA River Thames Ins Co Ltd 85 NR-5 Sampo Ins Co (UK) Ltd 1 NR-5 Sparkassen-Versicherung Allgemeine 6 NA Stockholm Reins Co Ltd NR-5 Taisei Fire & Marine Ins Co NA Traders General NA Transcontinentale NA 1997 REINSURERS Monde Re NA - - - ------------------------------------------------------------------------------ NA - Not available (1) AM Best rating was obtained from the 1997 edition and 1996 edition for foreign companies and domestic companies, respectively. (2) Company is in liquidation (3) Company demutualized and is now Covenant Insurance Company (NR-2) PMC SCHEDULE 4.19 TO THE FIRST AMENDED AND RESTATED LETTER OF CREDIT AGREEMENT DATED AS OF MARCH 14, 1997 PMAIC AND OTHER INSURANCE SUBSIDIARIES UNSECURED RECOVERABLES RATED LESS THAN A- BY AM BEST AS OF DECEMBER 31,1996 - - - ------------------------------------------------------------------------------ (1) LOC AM BEST NAME (000'S) RATING TICK - - - ------------------------------------------------------------------------------ UNAUTHORIZED - OTHER US Classic Fire & Marine Insurance Co. NR-4 Constellation Reinsurance Co. NA (2) Farm Bureau Mutual Ins. Co. of Michigan B++ g Hamburg International Reinsurance Co. NR-3 Mead Reinsurance Corp. NR-3 AUTHORIZED US American Fuji Fire & Marine Ins. Co. B++ CIGNA Reinsurance Co. B+ g Cologne Reinsurance Co. of America NR-3 Folksamerica National Reinsurance NR-3 John Hancock Property and Casualty Co. B++ p New England Reinsurance Corp. NR-3 Signet Star Reinsurance Corp. NR-3 SAFR Reinsurance Corp. of the US B++ US International Reins. Co. B- r Unione Italiana Reins. Co. of America NR-3 Netherlands Reins. Group US Branch NA Reliance Insurance Co NA AUTHORIZED MANDATORY POOLS American Accident Re Group NA Excess & Casualty Reins. Association NA IRM NA NCCI NA UNAUTHORIZED-AFFILIATES-NON US Pennsylvania Manufacturers Intrnl. Ins. NA PMA Insurance Cayman, Ltd. NA UNAUTHORIZED-OTHER NON US Albingia Versicherungs NR-5 Allianz International Ins. Co. Ltd. NA Ancon Insurance Co (UK) Ltd. FPR-7 Anglo American Insurance Co. Ltd. NR-5 British National Insurance Co. Ltd. NA Cie Europeene De Reass Internationale NA Colonia Ins. Co. (UK) Ltd. B++ Compagnie Europeenne D'Assurances NR-5 Dai-Tokyo Insurance Co. (UK) Ltd. NA D.N.H. Reinsurance Company NA Eagle Star Reinsurance Co., Ltd. NA Excess Insurance Co. Ltd. NR-5 Fuji International Insurance Co. Ltd. NA G.T.E. Reinsurance Co. Ltd. 37 NR-5 Harleysville Ins. Co. (UK) Ltd. NA IAT Syndicate 65 NA INSCO, Ltd NA J & H Syndicate B, Inc. 62 NA Laurentian General Insurance Co. NA Mitsui Marine & Fire Ins. Co. (Europe) Ltd. NR-5 MML Syndicate 125 NA NW Reins. COSD. Ltd. NR-5 Scan Reinsurance Co. Ltd. NR-5 Security Insurance Co. (UK) Ltd. NA Sovereign Marine & General Ins. Co. Ltd. NR-5 Spear, Leeds, & Kellogg Re Corp. NA Storebrand Ins. Co. (UK) Ltd. NA Toa Reinsurance Co. (UK) Ltd. NA Tokio Marine & Fire Ins. Co. (UK) Ltd FPR-6 Turegum Insurance Co. (UK) Ltd. 136 NA Yasuda Fire & Marine Ins. of Europe NR-5 - - - ------------------------------------------------------------------------------ NA - Not available (1) AM Best rating was obtained from the 1997 edition and 1996 edition for foreign companies and domestic companies, respectively (2) Company is in liquidation PMC SCHEDULE 4.4 TO THE FIRST AMENDED AND RESTATED LETTER OF CREDIT AGREEMENT DATED AS OF MARCH 14, 1997 LIST OF LICENSES, PERMITS AND AUTHORIZATIONS STATE PMAIC PMIC MAICO MASCCO PMA LIFE PMA Re - - - ----- ----- ---- ----- ------ -------- ------ AL XR AK X XR AZ X XR AR A CA X XR CO X A CT X XR DE X X X XR DC X X X XR FL X XR GA X XR Hl X A ID X XR IL X XR IN X XR IA X XR KS XR KY X XR LA X XR ME X A MD X X X XR MA X XR Ml X XR MN XR MS X XR MO X XR MT X XR NE X XR NV X XR NH X A NJ X X X XR NM X XR NY X X X XR NC X X X XR ND X XR OH X X X XR OK X XR OR X X X XR PA X X X X X XR Rl X XR SC X X X XR SD X XR TN X XR TX X XR UT X XR VT X A VA X X X A WA X XR WV X Wl X XR WY A A - Accredited Reinsurer X - Licensed Insurer XR - Licensed Reinsurer PMC SCHEDULE 4.6 TO THE FIRST AMENDED AND RESTATED LETTER OF CREDIT AGREEMENT DATED AS OF MARCH 14, 1997 TAXES Year Audits/Examinations - - - ---- ------------------- 1992 Claim for refund under examination by the Internal Revenue Service. 1993 Claim for refund under examination by the Internal Revenue Service. 1994 Tax year under audit by the Internal Revenue Service. 1995 Tax year under audit by the Internal Revenue Service. PMC SCHEDULE 4.7 TO THE FIRST AMENDED AND RESTATED LETTER OF CREDIT AGREEMENT DATED AS OF MARCH 14, 1997 LIST OF SUBSIDIARIES PERCENT OWNED PERCENT OWNED BY THE BY THE BORROWER BORROWER Name of Subsidiary DIRECTLY INDIRECTLY - - - ---------------------------------------- ------------- -------------- Pennsylvania Manufacturers' * Association Insurance Company 100% Manufacturers Alliance * Insurance Company 100% PMA Reinsurance Corporation * 100% Pennsylvania Manufacturers * Indemnity Company 100% Chestnut Insurance Company, Ltd. 100% PMA Holdings, Inc. 100% DP Corporation 100% REM Corporation 100% Pennsylvania Manufacturers Association Finance Company 100% 925 Chestnut, Inc 100% Mid-Atlantic States Investment Company * 100% PMA Life Insurance Company 100% Ajon, Inc. 15% 85% Sarfred, Inc. 15% 85% Wisteve, Inc. 15% 85% Rosemarie, Inc. 15% 85% Aud-Evad, Inc. 15% 85% Dauphin Equities, Inc. 15% 85% Lorjo Corporation 15% 85% Mid-Atlantic States Casualty Company * 100% PMA Insurance, Cayman Ltd. * 100% PMA Services, Inc. 100% Presque Enterprises, Inc. 100% LeeWard, Inc. 100% Syl-Bar, Inc. 100% Gulph Industries, Inc. 100% Cris-Jen, Inc. 100% Walprop, Inc. 100% Marpan, Inc. 100% Pennsylvania Manufacturers' 100% International Insurance, Ltd. PMA Holdings, Cayman Ltd. 100% PMA Management Corp. 100% Pennsylvania Manufacturers Associates 100% * - Material Subsidiary ATTACHMENT A TO GAAP COMPLIANCE CERTIFICATE COVENANT COMPLIANCE WORKSHEET Capitalization Ratio (Section 6.1 of the Agreement): The Capitalization Ratio is not to be greater than .35 to 1.0 as of the last day of any fiscal quarter. (dollar amounts in thousands) (1) Consolidated Indebtedness: (a) Indebtedness of Applicant and Subsidiaries as of December 31, 1996 (the "Measurement Date") $238,986 ** (b) Reimbursement obligations with respect to letters of credit to secure the reinsurance obligations of Insurance Subsidiaries under reinsurance agreements entered into as a reinsurer in the ordinary course of business to the extent that such reimbursement obligations are secured by cash and Treasury Securities delivered to the issuers of such letters of credit as of the Measurement Date 19,461 (c) Reimbursement Obligations with respect to PMA Insurance Cayman, Ltd. letter of credit as of the Measurement Date -- --------- (d) Consolidated Indebtedness: Subtract lines l(b) and l(c) from l(a) $219,525 (2) Capitalization: (a) Consolidated Indebtedness as the Measurement Date $219,525 (b) Consolidated Net Worth as of the Measurement Date 446,026 ** --------- (c) Capitalization: Add lines 2(a) and 2(b) $665,551 (3) Ratio of Consolidated Indebtedness to Total Capitalization: 0.33 to 1.0 Divide line l(d) by line 2(c) Applicable Margin for LIBOR Committed Loans (pursuant to the matrix set forth in the definition of Applicable Margin in the Credit Agreement) 0.425 Applicable Margin for Facility Fee (pursuant to the matrix set forth in the definition of Applicable Margin in the Credit Agreement) 0.275 ** Amounts are pro-forma assuming $4,676 extraordinary loss on extinguishment of debt. ATTACHMENT A TO GAAP COMPLIANCE CERTIFICATE COVENANT COMPLIANCE WORKSHEET Cash Coverage Ratio (Section 6.2 of the Agreement) The Cash Coverage Ratio is not to be less than 2.50 to 1.0 with respect to any four fiscal quarter period ending on or before 12/31/99; not less than 2.75 to 1.0 with respect to any four fiscal quarter period ending thereafter. (dollar amounts in thousands) (1) Cash Available: (a) Aggregate Available Dividend Amount for the Insurance Subsidiaries for the Measurement Period $53,978 (b) Net Tax Sharing Payments for the Measurement Period (i) Tax sharing payments received by Applicant 17,575 (ii) Tax sharing payments estimated to be received by Applicant in respect of Measurement Period -- (iii) Taxes paid by Applicant -- (iv) Taxes estimated to be paid by Applicant in respect of Measurement Period -- (v) Other payments, if any, paid or to be paid by Applicant under tax sharing agreements or arrangements during Measurement Period -- (vi) Net Tax Sharing Payments (lines (i)+(ii) minus lines (iii) + (iv) + (v)) 17,575 ------- (c) Cash Available: Add lines l(a) and l(b)(v) $71,553 (2) Cash Uses: (a) Interest Expense incurred during the Measurement Period $17,052 (b) Operating expenses paid by the Applicant during the Measurement Period 196 (c) Dividends paid by the Applicant during the Measurement Period 7,928 ------- (d) Cash Uses: Add lines 2(a), 2(b), and 2(c) $25,176 (3) Cash Coverage Ratio: Divide line l(c) by line 2(d) 2.84 to 1.0 ATTACHMENT A TO STATUTORY COMPLIANCE CERTIFICATE COVENANT COMPLIANCE WORKSHEET Statutory Surplus (Section 6.3 of the Agreement) (dollar amounts in thousands) The Consolidated Statutory Surplus of the Insurance Subsidiaries is not to be less than $450,000 as of December 31, 1996 (the "Measurement Date"). Statutory Surplus as of December 31, 1996 ------------------------ PMAIC $165,478 MAICO 41,051 PMIC 43,920 PMA Re 26O,853 MASCCO 16,740 CICL (10) PMA Life 4,914 PMA Insurance Cayman, Ltd. 1,037 PMII 1,764 -------- $535,747 ATTACHMENT A TO STATUTORY COMPLIANCE CERTIFICATE COVENANT COMPLIANCE WORKSHEET Risk-Based Capital (Section 6.4 of the Agreement) "Total adjusted capital" is not permitted to be less than the applicable "Company Action Level RBC" as follows: PMA Re: 150% as of the last day of any fiscal year, beginning with year ended 12/31/96 Other Insurance Subs: As of 12/31/96 100% As of I2/31/97 110% As of 12/31/98 115% As of 12/31/99 and thereafter 120% (dollar amounts in thousands) PMA Re - - - -------------------------------------------------------------------------------- (a) Total adjusted capital as of 12/31/96 238,355 ======= (b) Company Action Level RBC as of 12/31/96 124,770 (c) Required multiple 150% (d) Required total adjusted capital as of 12/31/96 ((b) * (c)) 187,155 ======= PMAIC - - - -------------------------------------------------------------------------------- (a) Total adjusted capital as of 12/31/96 128,198 ======= (b) Company Action Level RBC as of 12/31/96 111,572 (c) Required multiple 100% (d) Required total adjusted capital as of 12/31/96 ((b) * (c)) 111,572 ======= MAICO - - - -------------------------------------------------------------------------------- (a) Total adjusted capital as of 12/31/96 28,623 ======= (b) Company Action Level RBC as of 12/31/96 27,272 (c) Required multiple 100% (d) Required total adjusted capital as of 12/31/96 ((b) * (c)) 27,272 ======= PMIC - - - -------------------------------------------------------------------------------- (a) Total adjusted capital as of 12/31/96 31,492 ======= (b) Company Action Level RBC as of 12/31/96 27,404 (c) Required multiple 100% (d) Required total adjusted capital as of 12/31/96 ((b) * (c)) 27,404 ======= MASCCO - - - -------------------------------------------------------------------------------- (a) Total adjusted capital as of 12/31/96 16,740 ======= (b) Company Action Level RBC as of 12/31/96 14,710 (c) Required multiple 100% (d) Required total adjusted capital as of 12/31/96 ((b) * (c)) 14,710 ======= PMA Life - - - -------------------------------------------------------------------------------- (a) Total adjusted capital as of 12/31/96 4,946 ======= (b) Company Action Level RBC as of 12/31/96 310 (c) Required multiple 100% (d) Required total adjusted capital as of 12/31/96 ((b) * (c)) 310 ======= PMC SCHEDULE 7.2 TO THE FIRST AMENDED AND RESTATED LETTER OF CREDIT AGREEMENT DATED AS OF MARCH 14, 1997 INDEBTEDNESS As of December 31, 1996 Company or Amount of Subsidiary Debt Description of Debt ---------- ---- ------------------- Cris-Jen, Inc. 127,214 Mortgage Note payable to National Bank of the Commonwealth Pennsylvania Manufacturers 6,794,000 Guarantees of obligations of an Corporation unconsolidated real estate subsidiary Pennsylvania Manufacturers 3,106,000 Guarantees of obligation for Corporation 1992 financial support program Pennsylvania Manufacturers 250,000 Guaranty of indemnity agreement Corporation with Colonial Insurance Company PMC SCHEDULE 7.3 TO THE FIRST AMENDED AND RESTATED LETTER OF CREDIT AGREEMENT DATED AS OF MARCH 14, 1997 LIST OF EXISTING LIENS Existing on February 20, 1997 The Company and its Subsidiaries are required by the laws of the various states in which they are licensed to conduct the business of insurance to deposit and maintain security for the performance of their obligations before they can issue policies. In satisfaction of this requirement, the Company and its subsidiaries have on deposit as of the Closing Date Securities with an aggregate par value of approximately $16,810,000 in the following states: 1. California 9. North Carolina 2. Delaware 10. Oklahoma 3. Georgia 11. Oregon 4. Idaho 12. Pennsylvania 5. Louisiana 13. South Carolina 6. Massachusetts 14. Tennessee 7. Michigan 15. Texas 8. New Mexico 16. Virginia Other Liens: (Valued as of January 31 , 1997) Name of Subsidiary Amount of Debt Secured Party - - - ------------------ -------------- ------------- PMA Reinsurance Corp. $5,000,000 Collateral for Standby LOC Facility PMAIC $5,150,000 Collateral for Standby LOC Facility PMAIC $161,300 IBM Corp PMIC / PMAIC / MAICO / MASCCO $7,742,281 CoreStates Bank N.A. PMAIC $3,821,904 PNC Leasing Corp. PMAIC $52,162 Canon Financial Services, Inc. PMAIC $27,375 Great America Leasing Corp. PMAIC $171,366 El Camino Resources Ltd PMAIC $2,400,000 IBM Credit Corp. ATTACHMENT A TO STATUTORY COMPLIANCE CERTIFICATE COVENANT COMPLIANCE WORKSHEET Statutory Surplus (Section 6.3 of the Agreement) (dollar amounts in thousands)) The Consolidated Statutory Surplus of the Insurance Subsidiaries is not to be less than $45O,OOO as of December 31, 1996 (the "Measurement Date"). Statutory Surplus as of December 31, 1996 ----------------------- PMAIC $165,478 MAICO 41,051 PMIC 43,920 PMA Re 260,853 MASCCO 16,740 CICL (10) PMA Life 4,914 PMA Insurance Cayman, Ltd. 1,037 PMII 1,764 -------- $535,747 PMC SCHEDULE 7.6 TO THE FIRST AMENDED AND RESTATED LETTER OF CREDIT AGREEMENT DATED AS OF MARCH 14, 1997 TRANSACTIONS WITH AFFILIATES None PMC SCHEDULE 10.2 TO FIRST AMENDED AND RESTATED LETTER OF CREDIT AGREEMENT DATED AS OF MARCH 14, 1997 LIST OF BANKS 1. The Bank of New York One Wall Street Agency Function Administration 18th Floor New York, New York 10286 Attention: Ramona Washington Telephone: (212) 635-4699 Telecopy: (212) 635-6365, 6366 or 6367 2. CoreStates Bank, N.A. 1339 Chestnut Street Philadelphia, PA 19107 Attention: H. David Tamimie Telephone: (215) 973-7021 Telecopy: (215) 786-4114 3. Mellon Bank, N.A. One Mellon Bank Center Room 370 Pittsburgh, Pennsylvania 15258 Attention: Susan Whitewood Telephone: (412) 234-7112 Telecopy: (412) 234-8087 4. Fleet Bank, National Association 777 Main Street MSN 367 Hartford, Connecticut 06115 Attention: Mike Sinisgalli Telephone: (860) 986-2645 Telecopy: (860) 986-1264 5. PNC Bank, National Association 1600 Market Street 21st Floor Philadelphia, Pennsylvania 19110 Attention: Kirk Seagers, Assistant Vice President Telephone: (215) 585-6036 Telecopy: (215) 585-7615 6. First Union National Bank of North Carolina One First Union Center - 5th Floor Charlotte, North Carolina 28288-0735 Attention: Jay Bullock, Vice President Telephone: (704) 383-3789 Telecopy: (704) 383-7611 -2- EX-11.1 19 COMPUTATION OF PER SHARE EARNINGS Pennsylvania Manufacturers Corporation Exhibit 11.1 Computation of Per Share Earnings (Unaudited)
(In thousands, except per share data) Years ended December 31, 1996 1995 1994 ------------ ------------ ------------ Primary: Weighted average shares outstanding 23,800,791 23,815,871 23,808,847 Net effect of dilutive stock options - based on the treasury stock method using average market price -- 893,160 841,894 ------------ ------------ ------------ Total primary common shares 23,800,791 24,709,031 24,650,751 ============ ============ ============ Net (loss) income $ (135,334) $ 24,130 $ 57,250 ============ ============ ============ Net (loss) income per common and equivalent share $ (5.68) $ 0.98 $ 2.32 ============ ============ ============ Fully diluted: Weighted average shares outstanding 23,800,791 23,815,871 23,808,847 Net effect of dilutive stock options - based on the treasury stock method using average market price or end of period market price -- 1,118,708 841,894 ------------ ------------ ------------ Total fully diluted common shares 23,800,791 24,934,579 24,650,741 ============ ============ ============ Net (loss) income $ (135,334) $ 24,130 $ 57,250 ============ ============ ============ Net (loss) income per common and equivalent share $ (5.68) $ 0.97 $ 2.32 ============ ============ ============
EX-21.1 20 SUBSIDIARIES OF THE REGISTRANT Pennsylvania Manufacturers Corporation Subsidiaries of Registrant Exhibit 21.1
PMC Direct PMC Indirect Ownership Ownership -------------------------------------- Chestnut Insurance Company, Ltd. 100% DP Corp. 100% Manufacturers Alliance Insurance Company 100% Mid Atlantic States Investment Company 100% PMA Insurance Cayman, Ltd. 100% Mid-Atlantic States Casualty Company 100% PMA Holdings Cayman, Ltd. 100% Pennsylvania Manufacturers Association Insurance Company 100% Ajon, Inc. 15% 85% Aud-Evad, Inc. 15% 85% Dauphin Equities, Inc. 15% 85% Lorjo Corp. 15% 85% Rosemarie, Inc. 15% 85% Sarfred, Inc. 15% 85% Wisteve, Inc. 15% 85% Cris-Jen, Inc. 100% Gulph Industries, Inc. 100% Lee Ward, Inc. 100% Marpan, Inc. 100% PMA Management Corp. 100% PMA Services, Incorporated 100% Presque Enterprises, Inc. 100% Syl-Bar, Inc. 100% Walprop, Inc. 100% Pennsylvania Manufacturers' Association Finance Company 100% Pennsylvania Manufacturers Indemnity Company 100% PMA Holdings Limited 100% Pennsylvania Manufacturers International Insurance, Ltd. 100% PMA Life Insurance Company 100% PMA Reinsurance Corp. 100% REM Corp. 100% 925 Chestnut, Inc. 100% Pennsylvania Manufacturers Associates, L.P. 100%
EX-27.1 21 FDS
7 12-MOS 3-MOS DEC-31-1996 DEC-31-1997 DEC-31-1996 MAR-31-1997 2,126,120 2,101,914 0 0 0 0 262 262 0 0 0 0 2,261,353 2,143,426 7,176 13,986 257,983 331,184 44,006 53,980 3,117,516 3,167,351 2,091,072 2,138,939 205,982 258,434 0 0 12,524 12,100 204,699 203,232 0 0 0 0 121,716 121,716 304,112 263,189 3,117,516 3,167,351 420,575 107,950 133,936 35,847 2,984 (1,251) 9,189 2,548 536,623 94,904 90,292 18,339 114,908 21,276 (191,394) 7,318 (56,060) 2,561 0 0 0 0 0 (4,734) 0 0 (135,334) 23 (5.68) 0.00 (5.68) 0.00 0 0 0 0 0 0 0 0 0 0 0 0 0 0
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