-----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, FY8Eg1ClU2DgGN7AMqRs6gO7gzmpYbItKWo7nu7mDwKxjga+JHG2hWzk84ZcaGnm tyb3ejDDUhlRvQ8+Xpo4DQ== 0000001985-96-000001.txt : 19960402 0000001985-96-000001.hdr.sgml : 19960402 ACCESSION NUMBER: 0000001985-96-000001 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960329 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ACCEL INTERNATIONAL CORP CENTRAL INDEX KEY: 0000001985 STANDARD INDUSTRIAL CLASSIFICATION: LIFE INSURANCE [6311] IRS NUMBER: 310788334 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-08768 FILM NUMBER: 96542054 BUSINESS ADDRESS: STREET 1: 475 METRO PLACE N CITY: DUBLIN STATE: OH ZIP: 43017 BUSINESS PHONE: 6147647000 MAIL ADDRESS: STREET 1: 475 METRO PLACE NORTH CITY: DUBLIN STATE: OH ZIP: 43017 FORMER COMPANY: FORMER CONFORMED NAME: ACCELERATION CORP DATE OF NAME CHANGE: 19870814 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) FOR THE TRANSITION PERIOD FROM TO --------------- ---------------- COMMISSION FILE NUMBER 0-8162 ACCEL INTERNATIONAL CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 31-0788334 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 475 METRO PLACE NORTH, DUBLIN, OHIO 43017 (Address of principal executive offices) (Zip Code) 614-764-7000 (Registrant's Telephone Number) SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Title of each class COMMON STOCK, $.10 PAR VALUE Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulations S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. --- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- The aggregate market value of Common Stock held by non-affiliates on January 31, 1996 was approximately $7,280,000. As of January 31, 1996, there were 4,456,432 shares of Common Stock, $.10 par value per share outstanding. DOCUMENTS INCORPORATED BY REFERENCE: Portions of the definitive proxy statement furnished to stockholders of the registrant in connection with the annual meeting of stockholders to be held on June 11, 1996 are incorporated by reference into Part III. Total sequentially numbered pages 57 Exhibit Index on page 45 PART I ITEM 1. BUSINESS (a) GENERAL DEVELOPMENT OF BUSINESS ACCEL International Corporation ("ACCEL") is an insurance holding company incorporated in Delaware in June 1978 as the successor to an Ohio corporation, formerly Acceleration Corporation, organized in 1969. Unless the context requires otherwise, the "Company" includes ACCEL and its subsidiaries. The Company has been engaged in the sale and underwriting of credit life and credit accident and health insurance, extended service contracts, vendor's single interest and other specialty casualty products. The credit insurance and extended service contract products continue to be offered to consumers, principally through automobile dealers, financial institutions and other business entities. From 1986 through 1991, the Company offered a realtors' errors and omissions insurance product that was sold through an unaffiliated marketing organization which provided various products and services to realtor member entities; that product has been in run-off since 1991. The vendor's single interest product was marketed by a managing general agent ("MGA") and was discontinued in mid 1994. In 1990, the Company began offering farmowners' multi-peril and ancillary inland marine coverages through a network of selected agents. These coverages were discontinued in early 1995. See NARRATIVE DESCRIPTION OF BUSINESS for further information. (b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS Through 1995 the Company operated predominately in two industry segments: life and health and property and casualty insurance. See "Note J" in the Notes to Consolidated Financial Statements. (c) NARRATIVE DESCRIPTION OF BUSINESS GENERAL The Company's life and health insurance segment primarily consists of individual and group credit life and group credit accident and health insurance, which is sold through automobile dealers and financial institutions. The Company's property and casualty segment consists of extended service contracts, sold primarily through automobile dealers, the discontinued farmowners' multi-peril and ancillary inland marine coverages ("farmowners'"), which were marketed through independent agents. In 1996 the Company began working with agents which control books of business ("program business") that market long haul trucking, commercial buses and package policies for auto dealers. Credit insurance and extended service contracts, which represent a significant portion of the Company's business, are affected by automobile sales. These premiums accounted for approximately 90% of the Company's gross premiums written in 1995. The Company's principal subsidiary engaged in the life and health insurance business is Acceleration Life Insurance Company ("ALIC"), which holds licenses to do business in 40 states and the District of Columbia. Credit life and credit accident and health insurance are the primary insurance products written by ALIC. The Company's property and casualty business is conducted through Acceleration National Insurance Company ("ANIC"). ANIC holds licenses to do business in 47 states and the District of Columbia. Acceleration National Service Corporation ("ANSC") administers the Company's extended service contracts. The majority of the Company's direct premium revenue in 1995 was derived from sales in Ohio (47%), Virginia (13%), Michigan (7%), Indiana (7%) and North Carolina (5%). As of March, 1996, ALIC and ANIC are no longer licensed to write business in Michigan, and accordingly have discontinued their writings in said state. CREDIT INSURANCE The Company sells credit insurance primarily in connection with consumer credit transactions, of which the most significant to the Company are automobile purchases. Credit life insurance provides funds, in the event of the insured's death, for payment of a specified loan or loans which are obligations of the insured. Similarly, credit accident and health insurance provides for payments on such loans during the term of the insured's disability. In most cases, the entire premium is paid at the time the insurance is issued and such insurance is designed to cover the risk of loss for the scheduled term of the indebtedness. Most credit insurance is written on a decreasing term basis. The policy benefit is initially the amount of the unpaid indebtedness and decreases in amounts corresponding to the repayment schedule. The primary beneficiary under credit insurance is the lender. Substantially all of the Company's credit insurance is group insurance. Group credit insurance policies are issued to master policyholders (typically automobile dealers or financial institutions). The master policy of insurance authorizes the master policyholder to issue certificates representing insurance sold to its customers. Premiums collected from customers are remitted to the Company net of commissions. The Company uses good health statements as part of its underwriting measures, which inquire about the proposed insured's health at the time the insurance is to be issued. Although medical examinations are not required, the good health statement is intended to reduce the acceptance of certain risks. The Company also uses additional health related questions on its applications related to specific medical conditions. Because such conditions, if experienced within the twelve months prior to the loan date, could be expected to result in claims during the term of the loan, the applications are denied. In addition to other sales and marketing services, the Company conducts related training programs for finance and insurance managers, master policyholders and their salespeople, independent agents and sales representatives employed by the Company. The Company reinsures substantial percentages of its credit accident and health premiums on a written basis. This reinsurance provides statutory surplus relief, thereby increasing the Company's capacity to write credit insurance. An effect of this reinsurance is, however, to reduce the profit that the Company might otherwise realize on its credit insurance business. The applicable agreement contains an experience adjustment computation which results in the ultimate cost of this reinsurance being a stated percentage related to the business ceded. Under such arrangements, a security fund is usually maintained by the Company approximating the amount of ceded unearned premiums less commissions retained, plus ceded insurance claims. The Company has also entered into agreements to cede credit life and credit accident and health insurance to reinsurance companies owned by certain automobile dealers, financial institutions or agents. Under these arrangements said entities and persons participate in the profits or losses of the insurance sold through them, and the Company retains nominal percentages of the related risk. These agreements generally provide that the Company receive a ceding fee and be reimbursed for commissions and claims. Approximately 76%, 73% and 44% of the Company's gross premiums written during 1995, 1994 and 1993, respectively, were derived from its credit insurance business. The credit insurance business decreased 3.6% in 1995 compared to 1994, increased 4% in 1994 compared to 1993, and increased 22% in 1993 compared to 1992. Automobile purchases continue to be the most significant consumer credit transaction for which credit insurance is sold by the Company. Automobile purchases have been and will continue to be affected, directly and indirectly, by auto prices, interest rates, the availability of consumer credit and general economic conditions. The primary states in which the Company's credit insurance is sold are Ohio, Virginia, Indiana and West Virginia. The Company markets its credit insurance through both independent agents and its own direct sales representatives. A significant portion of the Company's gross credit insurance premiums were attributable to the Company's independent agents. In 1987 the Company entered into a joint marketing arrangement with Consumers Financial Corporation ("CFC") and transferred all of its Pennsylvania credit insurance accounts to CFC's subsidiary, Consumers Life Insurance Company. This business had previously been marketed by the Company's employees. The joint venture also provides for the marketing of automobile extended service contracts in Pennsylvania. The Company and CFC have combined their capabilities for marketing these products to automobile dealer accounts which both parties have serviced in the past and efforts continue to sign-up additional accounts. NEW PROPERTY AND CASUALTY PRODUCTS The Company has recently commenced new marketing initiatives in the Property and Casualty markets which have resulted in new business being written in the first quarter of 1996. These marketing efforts are directed toward agents who control books of program business. The lines include long haul trucking, commercial buses and package policies for auto dealers. The Company has employed individuals with extensive experience in these lines of business. In addition, two senior executives have considerable experience with these lines and with the producing agents. The Company anticipates a positive contribution from this business in 1996. EXTENDED SERVICE CONTRACTS Extended service contracts are sold under the name "Co$tGuard" and cover the cost of labor and certain parts for the repair of automobiles, motorcycles and watercraft. The Company's product covers towing, rental car reimbursement and other benefits during the entire contract term and enables a purchaser to obtain from the selling dealer a service contract covering the cost (in excess of a deductible amount where applicable) of repairs to covered parts subsequent to the expiration of the applicable manufacturer's warranty and the cost of other services. Extended service contracts are primarily marketed through the same group of automobile dealers who market the Company's credit insurance. The extended service contract program is marketed on a net cost basis to the automobile dealer who is free to establish the retail price for the contract. The net cost paid by the dealer includes the premiums for a contractual liability policy provided the dealer by ANIC, and administrative and marketing fees. In 1995, this program accounted for approximately 97% of ANIC's net retained premiums written. In 1992 the Company began to reinsure a limited number of its extended service contracts to reinsurance companies owned by automobile dealers. The Company expects reinsurance to become a major marketing factor in the future. REALTORS' ERRORS AND OMISSIONS INSURANCE Since mid-1986 ANIC provided errors and omissions insurance to members of a realtors' association in connection with their activities principally in noncommercial real estate transactions. ANIC reinsured the risk to an unaffiliated reinsurance company. An independent insurance broker was acting as broker/agent for ANIC in connection with the issuance, administration and policy services for this business. ANIC retained 25% of the premiums written for its participation in this program. On October 29, 1990, ANIC gave notice of termination to the broker/agent through which the realtors' errors and omissions ("E&O") coverage was marketed. The termination of this arrangement became effective January 31, 1991. In addition, the Company commuted the reinsurance agreement for this program. See "Note F" in the Notes to Consolidated Financial Statements. After termination, ANIC assumed responsibility for handling and processing all claims related to this business and discovered certain matters which resulted in litigation being commenced against the marketing organization and broker. See "Certain Events" under MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. OTHER INSURANCE PRODUCTS In early 1990, the Company introduced its farmowners' multi-peril and ancillary inland marine coverage products. Premiums written for these products were $97,000, $8,460,000 and $11,882,000 in 1995, 1994 and 1993, respectively. The Company elected to discontinue offering these lines and entered into an agreement whereby the Company ceded 100% of the in-force business at December 31, 1994. Accordingly, any new business written after January 1, 1995 was reinsured with an unaffiliated carrier. As of June 30, 1995, the Company ceased writing this business. INVESTMENT IN RANDJILL GROUP LTD. ("RGL") AND GALAXY INSURANCE COMPANY ("GALAXY") In 1986 the Company acquired a 20% interest in RGL, a company related through common ownership by a shareholder and director of the Company, and in 1991 acquired the remaining 80% interest. The total amount invested in RGL was approximately $10.3 million. Due to significant losses incurred, and the insolvency of RGL's operating subsidiary, Galaxy, a New York domiciled property and casualty insurance company, the Company wrote off its investment in RGL during the second quarter of 1994. For further information regarding RGL see "Note K" in the Notes to Consolidated Financial Statements. EMPLOYEES As of December 31, 1995, the Company employed 78 full-time equivalent employees compared to 98 at December 31, 1994. REINSURANCE WITH UNAFFILIATED INSURANCE COMPANIES Reinsurance enables insurance companies to provide greater diversification of risks and at the same time minimize risk exposure. The reinsurer reimburses the Company for any claims on the reinsured portion of the risk. Although reinsurance does not discharge the Company from primary liability to the insured for the full amount of the insurance coverage, the industry and regulatory practice is to exclude the reinsured portion of the risk from the consolidated statements of operations. The Company has an arrangement in place which covers a substantial portion of its credit insurance business with an unaffiliated insurance company. The effect of this agreement is that the Company ultimately retains a substantial part of the insurance risk, the underwriting income or loss and the investment income on net funds, all of which are retained by the Company, with the reinsurers receiving a stated percentage of the ceded business. See "Note F" in the Notes to Consolidated Financial Statements. In 1993, the Company entered into reinsurance agreements with unaffiliated reinsurers related to its discontinued health products. The effect of such reinsurance arrangements was to transfer 100% of the related risk to the reinsurers. Premiums ceded associated with these agreements and included in the accompanying consolidated statements of operations amounted to $633,000, $980,000 and $4,588,000 in 1995, 1994 and 1993, respectively. REINSURANCE WITH PRODUCER-OWNED REINSURANCE COMPANIES Certain automobile dealers, financial institutions and insurance agencies, which generate credit insurance premiums and are master policyholders of the Company, have formed Producer-owned Reinsurance Companies owned either wholly or in part, directly or indirectly, by such master policyholders to reinsure credit life and disability business generated by them. These arrangements are structured to provide Producer-owned Reinsurance Companies with underwriting income and a portion of investment income on the premiums ceded in connection with such reinsurance. In these transactions the Company's revenue is limited to a ceding fee and a portion of the investment income. As of December 31, 1995, $10,813,000 of credit life and disability unearned premium reserves were ceded by the Company to Producer-owned Reinsurance Companies. However, most Producer-owned Reinsurance Companies are required to deposit cash and marketable securities in a custodial account with an independent financial institution. The minimum balance in each account is generally required to be equal to the policy and claim reserves ceded to the Producer-owned Reinsurance Companies. In the event a Producer-owned Reinsurance Company fails to fulfill its obligation, the Company may withdraw funds from the Producer-owned Reinsurance Company's account as reimbursement for premium refunds and claim disbursements. On all insurance written by the Company and reinsured with Producer-owned Reinsurance Companies, the Company remains liable in the event of the insolvency of the reinsurers. As of December 31, 1995, the Company had ceded approximately $281,195,000 of credit life insurance in-force to Producer-owned Reinsurance Companies. See "Note F" in the Notes to Consolidated Financial Statements. COMPETITION The Company's business is extremely competitive as to both price and service. In the credit insurance business the Company's competitors include other insurance companies, many of which are larger than the Company and have greater resources. A significant competitive factor is the commission which may be paid to licensed agents affiliated with master policyholders. The Company, however, continues to compete by offering what it believes to be realistic commissions and providing a high level of service including training, consulting and related services to its master policyholders. In the property and casualty segment, the Company competes with much larger and established national and regional insurance companies and with automobile manufacturers which provide service contracts to their dealers. The automobile manufacturers have significantly greater resources than the Company and have relationships with automobile dealers which extend beyond providing service contracts. The principal competitive factors include price, profit potential, type and quality of the products offered and the quality of service. Many of the same master policyholders which sell the Company's credit insurance also market its extended service contracts, and the termination of the relationship in one segment could affect the Company's relationship in the other segment. REGULATION The Company is subject to regulation in the states in which it does business. The extent of such regulation varies from state to state; but in general, all states have statutory restrictions and a supervisory agency which has broad discretionary administrative powers. Such regulation is designed primarily to protect policyholders and relates to the licensing of insurers and their agents, the approval of policy forms, the methods of computing reserves, the form and content of financial reports and the type and concentration of permitted investments. Ohio and other jurisdictions in which the Company does business have enacted legislation providing for specific regulation of the relationship between licensed insurers and affiliated members of a holding company group. Such legislation generally (1) establishes requirements and procedures relative to the approval or disapproval of mergers and other acquisitions of control, (2) prescribes the filing of registration statements by insurers which are members of the holding company group, (3) subjects the holding company to reporting requirements, (4) establishes standards for transactions between insurers and their holding companies and between members of a holding company group and (5) controls the payment of extraordinary dividends. The dividends which the Company may receive from both its life and property and casualty insurance subsidiaries are subject to regulatory requirements as to minimum capital and surplus. In addition to regulatory considerations, management takes into account the overall financial strength of each operating entity before dividends are paid to the Company. Additionally, the amount of dividends the Company's primary life insurance subsidiary can pay is subject to certain tax considerations. In 1993, the National Association of Insurance Commissioners ("NAIC") adopted the life and health and property and casualty Risk-Based Capital ("RBC") formulas. These model acts require every insurer to calculate its total adjusted capital and RBC requirement, and provides for an insurance commissioner to intervene if the insurer experiences financial difficulty. These model acts will become law in Ohio, the Company's insurance subsidiaries' state of domicile, in March, 1996. The formula includes components for asset risk, liability risk, interest rate exposure, and other factors. Each of the Company's insurance subsidiaries exceed all required RBC levels as of December 31, 1995. The tax considerations related to the life insurance subsidiary restrict the amount of dividends that can be paid without incurring a tax. At December 31, 1995, the Company's life insurance subsidiary could pay an aggregate of $2,549,000 from shareholders' surplus without incurring a tax. At December 31, 1995, any amounts to be paid from the life and property and casualty insurance subsidiaries would require regulatory approval. For information regarding certain federal income tax limitations on dividends, see "Note G" in the Notes to Consolidated Financial Statements. (d) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES In 1982 the Company incorporated Dublin International Limited ("Dublin"), an exempted Island of Nevis domiciled company. Dublin is a wholly-owned subsidiary of ACCEL. In 1986 Acceleration Insurance Company, Ltd. ("AICL"), a wholly-owned subsidiary organized by ACCEL and domiciled in the United Kingdom, received approval from regulatory authorities to commence operations. From mid-1986 through 1992, AICL offered specialty casualty products in the United Kingdom. The assets and results of operations of these subsidiaries for the year ended December 31, 1995 are not significant to the Company's consolidated financial statements. See "Note M" in the Notes to Consolidated Financial Statements. During 1995, the Company redeemed most of its shares of AICL, which resulted in proceeds approximating the Company's original investment in AICL. The transaction was approved by the Department of Trade and Insurance (United Kingdom). On February 7, 1996, the Company received the final proceeds for redemption of its remaining shares, and AICL ceased to exist. ITEM 2. PROPERTIES Since July 1981 the Company's executive offices have been located at 475 Metro Place North, Dublin, Ohio. The four-story office building has been owned by ALIC and consists of approximately 80,000 square feet of office space. The industry segments as identified in "Note J" in the Notes to Consolidated Financial Statements most recently utilized approximately 30,000 square feet of the building. Approximately 45,000 square feet had been leased to unaffiliated parties through year-end 1995. The remaining 5,000 square feet remained available for lease. See "Note R" in the Notes to Consolidated Financial Statements. On March 21, 1996, the building was sold by ALIC for a price of $3.5 million. The Company will remain in the building and occupy approximately 16,000 square feet of home office space under a five-year lease at an annual rental of approximately $256,000. In late 1995 the Company began renting approximately 6,000 square feet of office space in Stafford, Texas, to house its executive offices. The annual rental on the five-year lease approximates $70,000. ITEM 3. LEGAL PROCEEDINGS Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. PART II ITEM 5. MARKET FOR ACCEL'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS (a) ACCEL's common stock is traded over-the-counter National Market Issues, under the NASDAQ symbol ACLE. The following table sets forth the quarterly range of over-the-counter prices for ACCEL's stock during the last two years. These prices have been adjusted for common stock dividends and do not include retail mark-up, mark-down, or commissions and do not always necessarily represent actual transactions. 1995 High Low 1994 High Low ---- ---- --- ---- ---- --- 4th Quarter $3.875 $2.375 4th Quarter $3.125 $1.750 3rd Quarter 4.875 2.750 3rd Quarter 3.750 2.250 2nd Quarter 3.125 2.000 2nd Quarter 5.000 3.000 1st Quarter 2.875 1.750 1st Quarter 6.000 3.750 (b) The approximate number of holders of record of ACCEL's common stock ($.10 par value) as of January 31, 1996, was 638 holders. (c) Dividends paid on common stock: 1994 - -0- per share 1995 - -0- per share Restrictions on present or future ability to pay dividends: The Senior Notes issued December 29, 1995 (See Note D in the Notes to Consolidated Financial Statements) contain certain covenants which restrict the payment of dividends to not more than 50% of the cumulative consolidated net income for the period from and after January 1, 1996 to and including the date of making the dividend payment. Since June 1992, ACCEL's Board of Directors suspended payment of cash dividends on the common stock until the Company returns to a level of profitability which will sustain such payments. ITEM 6. SELECTED FINANCIAL DATA ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES 1995** 1994** 1993** 1992 1991 ------------------------------------------------ (Thousands of dollars, except per share data & ratios) Gross premiums written $ 55,443 $ 60,504 $ 95,766 $122,101 $130,239 Premiums ceded (12,147) (12,495) (30,261) (45,116) (48,828) Net premiums written 43,296 48,009 65,505 76,985 81,411 Premiums earned 40,853 47,600 61,649 80,426 85,644 Net investment income: Interest and dividends 6,488 6,678 8,397 11,831 13,129 Realized gains (losses) 455 808 1,336 701 462 Total revenue 50,475 57,519 74,810 96,043 102,131 Policy benefits 20,118 24,997 38,431 71,472 57,923 Income (loss) before taxes and other items (1,101) (4,905) (5,626) (25,075) 150 Cumulative effect of change in accounting for income taxes - - - (3,067) - Net income (loss) (1,460) (5,238) (5,281) (22,124) 1,034 Per common share*: Cumulative effect of change in accounting for income taxes - - - (.69) - Net income (loss) (.33) (1.18) (1.19) (4.98) .23 Cash dividends - - - .07 .24 At end of year: Invested assets 63,297 98,189 126,590 139,244 161,861 Total assets 183,507 179,948 236,181 204,209 230,752 Policy reserves and liabilities 104,852 106,936 146,257 90,616 96,268 Total debt 22,531 18,462 18,847 22,000 23,348 Redeemable preferred stock - - - 73 145 Common stockholders' equity 20,560 15,366 28,583 32,361 55,367 Return on average common stockholders' equity (8.13)% (23.84)% (17.32)% (52.29)% 1.85% Book value per common share $ 4.62 $ 3.46 $ 6.43 $ 7.28 $12.48 * Net income (loss) per common share is computed using the weighted average number of common shares outstanding during the year after giving effect to the preferred stock dividend requirement. The inclusion of common stock equivalents (options) would not be dilutive. ** The 1995, 1994 and 1993 data reflects the adoption of the Financial Accounting Standards Board's ("FASB") Statement No. 113, "Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts" ("Statement No. 113"). ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OPERATING RESULTS FOR THE THREE YEARS ENDED DECEMBER 31, 1995 The loss before income taxes and other items for 1995 was $1,101,000. This loss was primarily driven by three factors: Foremost was adverse loss development on discontinued property and casualty products. This adverse development aggregated $2,400,000 which included a $1,200,000 year end reserve increase on the discontinued realtors' errors and omissions product. This adverse development was partially offset by a $500,000 favorable development on the discontinued medical business. The second factor was the incurral of legal fees related to the E&O program litigation during 1995, including the Company's legal action against the entities involved in the E&O program. These actions caused the incurral of legal fees of $550,000 in 1995. The Company was awarded $5.1 million against the marketing organization involved in the E&O program. No amounts have been received by the Company on its judgment and therefore the award has not been reflected in the 1995 consolidated statement of operations. Lastly, during 1995 the Company incurred approximately $350,000 in severance expenses related to departed employees. The loss before income taxes and other items for 1994 was $4,905,000. A significant portion of the 1994 loss is related to the write off of Galaxy ($3,829,000) and Galaxy's first quarter loss ($205,000), or a total Galaxy loss of $4,034,000. In addition, several discontinued property and casualty lines continued to show adverse loss development in 1994, partially offset by positive results from the credit and extended service contract product lines. The loss before income taxes and other items for 1993 was $5,626,000. The 1993 loss is primarily attributable to adverse loss development related to Galaxy's lines of business and several discontinued lines of medical and property and casualty business. The net underwriting losses and overhead in 1993 for these product lines were approximately; $3.1 million for Galaxy, $1.7 million for discontinued medical lines and $1.0 million for discontinued property and casualty lines. In addition, the Company wrote off the remaining goodwill ($1.6 million) associated with the original acquisition of Galaxy. Partially offsetting these losses were gains of $1.7 million and $300,000 related to two of the Company's core product lines, credit insurance and extended service contracts, respectively. The Company made concerted efforts in the last three years to reduce general and administrative expenses. Staffing has been reduced by 20%, 26% and 43% in 1995, 1994 and 1993, respectively. These expense control initiatives have allowed the Company to concentrate on its traditional profit producing lines of business (credit insurance and extended service contracts) and to begin programs in selected Property & Casualty lines in which the current management team has experience and expertise. The primary causes for the fluctuation in operating income (loss) before income taxes discussed above are easily identified by comparing policy benefits (claims, loss and loss adjustment expenses) to premiums earned. Except for general and administrative expenses, the remaining items are at expected levels based upon premium levels and product mix. See Table I on page 14. REVENUE Gross premium writings for 1995 were $55.4 million compared to $60.5 million for 1994. The decrease in 1995 was primarily the result of decreases in premium levels related to discontinued lines of business. See Table II on page 15. Gross premium writings for 1994 were $60.5 million compared to $95.8 million for 1993. The decrease in 1994 can be attributed to the following: vendor's single interest declined $13.1 million, medical products declined $8.7 million, discontinued property and casualty lines declined $3.4 million and Galaxy declined $12.4 million. As noted in Table II, there was approximately $5.5 million of return premium related to the VSI program. This was the result of entering into assumption reinsurance treaties with unaffiliated reinsurance companies, whereby the reinsurers assumed the in force unearned premium reserve and related claim liabilities. Since the profit margin on this line of business was minimal, the effect of this transaction had no material effect on the statements of operations for the periods presented. The credit and extended service contract products increased in 1994 by $2.4 million when compared to 1993. The Company has also experienced decreases in net investment income, excluding realized gains, since 1993. These decreases were caused by a decrease in invested assets due primarily to the run off of discontinued lines of business. The Company plans to concentrate its efforts on growing the credit, extended service contract and the newly introduced program product lines. LIQUIDITY AND CAPITAL RESOURCES The Company's cash flows from operations have generally been adequate for its current operating needs. Cash flows from operating activities in 1995 were adversely impacted by the reinsurance transaction dated December 29, 1995 described in Note F in the Notes to Consolidated Financial Statements. The Company's credit insurance policy terms and related liabilities are generally limited to a four-year period during which the consumer makes payments on the loan. The Company's liability on extended service contracts typically extends for either one-year or five-year periods. The Company, therefore, maintains liquidity in its investment portfolio to correspond with the liability outstanding on its lines of business. At December 31, 1995, the average maturity of investments in debt securities was approximately 4.8 years to the nearest call date. The Company's available for sale fixed maturity securities at December 31, 1995 include $26.9 million of mortgage-backed securities and $13.7 million of asset-backed collateralized securities. The mortgage and asset-backed securities are subject to risks associated with variable prepayments. As such, those securities may have a different actual maturity and yield than planned at the time of purchase. The degree to which a security is susceptible to either gains or losses is influenced by the difference between its amortized cost and par value, relative sensitivity of the underlying mortgages to prepayment risk in a changing interest rate environment and relative priority of the securities in the overall securitization. The Company limits the extent of its risks on fixed maturity securities by generally avoiding securities whose cost significantly exceeds par, by purchasing securities which are backed by stable collateral, and by concentrating on securities that are either planned amortization or sequential pay classes. The collateralized mortgage obligations and asset backed securities owned have primarily short to intermediate average lives. At December 31, 1995, the Company did not have a significant amount of higher risk mortgage or asset backed securities. There are negligible default risks on the mortgage and asset backed security portfolio as a whole as the vast majority of the assets are either guaranteed by U.S. government-sponsored entities or are supported in the securitization structure by junior securities enabling the assets to achieve high investment grade status. Ohio domiciled insurance companies are subject to Ohio law which regulates the ability of insurance companies to pay dividends. The regulation limits the annual dividend or distribution of an insurer to the greater of (1) net income of the previous year or (2) 10% of unassigned surplus as of the end of the previous year. In addition, all dividends must come from earned surplus to qualify as a non-extraordinary dividend. Amounts greater than this would be considered extraordinary dividends and could not be paid without permission of the Department of Insurance of the State of Ohio ("Ohio Department"). Based on this regulation, ALIC could pay a dividend of $8,000 and ANIC would require Ohio Department approval to pay any dividend to the registrant during 1996. The Company's cash flow projections for 1996 assume that certain events will take place in order to have sufficient cash to meet its debt service and other requirements. These events include the liquidation of AICL. The liquidation was in fact concluded in the first quarter of 1996. The Company will monitor its current and future debt service requirements to coincide with cash flow availability as well as explore various capital raising alternatives. The Company intends to use any proceeds from a judgement entered in its favor in a legal proceeding (see CERTAIN EVENTS) to repay $3,700,000 in advances received in 1992 and 1993 from the registrant's subsidiaries which are eliminated in consolidation. In July 1991, ACCEL issued $5,848,000 of subordinated notes (the "Subordinated Notes") in connection with the purchase of all outstanding common shares of RGL. See "Note K" in the Notes to Consolidated Financial Statements. The Subordinated Notes have a nine-year term with no principal payable until maturity, and bear interest at 10.125% per annum. Effective June 30, 1992, ACCEL amended the notes to permit the issuance of additional notes for the purpose of making interest payments, provided, however, that ACCEL could at its option pay cash in lieu of issuing additional notes in any denomination of less than $1,000. As a result, ACCEL issued additional notes totaling $569,000 and $515,000 for the 1995 and 1994 interest payments, respectively. Of the Subordinated Notes described above, $5,371,000 were initially issued to Ranger Insurance Company ("Ranger"), a company related through common ownership by a stockholder and director of the Company. In 1993, Ranger sold all of the subordinated notes held by it to Chase Insurance Holdings Corporation ("CIHC"). Additional Subordinated Notes in the amount of $506,000 and $458,000 were issued to related parties for the 1995 and 1994 interest payments, respectively. The total outstanding Subordinated Notes were $6,031,000 and $5,462,000 ($5,347,000 and $4,841,000 held by related parties at December 31, 1995 and 1994, respectively) and the fair value of these notes approximated $5,783,000 and $5,237,000 at December 31, 1995 and 1994, respectively. At December 31, 1994, the Company had an outstanding loan balance of $13,000,000 under the terms of a credit agreement (the "Credit Agreement") with a bank, and the effective interest rate was 6.25%. During 1993, the Company did not meet all the requirements contained in the various financial tests under the covenants contained in the Credit Agreement. On March 30, 1994, the bank and the Company agreed to a waiver of certain covenants of the Credit Agreement such that the Company would not be in default at December 31, 1993 and through January 1, 1995. Proceeds from the Credit Agreement were partially used in the purchase of RGL, and to fund general operating activities. During September 1994, the revolving loans under the Credit Agreement were converted to a $13,000,000 term loan, payable in full on September 23, 1998. At December 31, 1994, the effective interest rate and outstanding loan balance were 8.75% and $13,000,000, respectively. The fair value of this term loan approximated $13,000,000 at December 31, 1994. On February 7, 1995 the Company renegotiated the terms of its Credit Agreement. Under the amended Credit Agreement, the quarterly principal payments scheduled to begin in 1995 were waived. Specific principal payments totaling up to $1.5 million were due on June 30, 1995 and December 31, 1995, respectively, from the liquidation of AICL and the projected sale of the building used as the corporate home office. The loan was to be payable in full on June 30, 1997. The Credit Agreement also required that during the period the loan was outstanding, the Company had to maintain consolidated tangible net worth, as defined in the agreement. At December 31, 1994, required tangible net worth was $13,000,000. At December 31, 1994, the Company's consolidated tangible net worth, as defined, was $14,438,000. On December 29, 1995, the Company issued new senior notes (the "Senior Notes") totaling $16,500,000 at 9.50%, maturing on April 1, 2001. The proceeds from these notes were used to retire the loan outstanding under the aforementioned Credit Agreement and to liquidate an intercompany loan between ACCEL and an insurance subsidiary. In addition, as of January 1, 1996 ALIC entered into a reinsurance agreement with an unaffiliated company to reinsure its in-force Credit Business. This agreement is structured, such, that as future profits emerge on this block of business, a substantial portion of the Company's share of the profits will be used over the next four to five years to pay the interest thereon and redeem these Senior Notes. ACCEL's Board of Directors approved an Employee Stock Ownership Plan ("ESOP") during 1989. In 1990, the ESOP entered into an agreement with ALIC to borrow up to $1,000,000 for the purchase of ACCEL's common stock. Company contributions into the ESOP have been used to pay down the loan from ALIC and release shares into the participants' accounts as the Company's matching contribution. The ESOP purchased 136,887 shares (adjusted for the 1990 5% common stock dividend) under this loan agreement with ALIC at a cost of $1,000,000. In addition to the shares purchased under the loan agreement, the ESOP purchased 90,088 common shares at a cost of $603,000. The loan bears interest at 10%. At December 31, 1995, the loan had an unpaid balance of $525,239. The market value of the underlying shares was $161,000. The Company has revalued this loan to market value as of December 31, 1995. This will allow the release of shares to participants' accounts at an average price which more closely approximates recent market values on the Company's stock. The decrease in the loan has been reflected through a decrease in additional paid-in capital in the accompanying consolidated balance sheets. The unpaid balance of the loan ($161,000 at December 31, 1995) has been reflected as a reduction in common stockholders' equity in the accompanying consolidated financial statements. During 1995, 1994 and 1993, the Company incurred ESOP contribution expenses of $198,000, $178,000 and $160,000, respectively. During November 1989, ACCEL's Board of Directors also approved a stock buy back program to purchase up to 1,000,000 common shares in open market purchases. As of December 31, 1995, ACCEL had purchased 229,185 shares at a cost of $1,722,000 under this program. The buy back program had been funded from internal funds. No shares have been purchased since 1992. The Company currently has two business lines that are in run-off status: the realtors' errors and omissions line and the farmowner's multi-peril and ancillary inland marine products. Also, for information regarding Galaxy, see "Note K" in the Notes to Consolidated Financial Statements. The estimates for policy reserves are continually under review and adjusted as necessary, and as experience develops or new information becomes known, such adjustments are included in current operations. These liabilities are necessarily subject to the impact of future changes in claim severity, frequency and other factors. Although considerable variability is inherent in such estimates, based on recent evaluations conducted by experienced consultants and internal reviews, management believes that the current level of policy reserves will be adequate to cover anticipated claim liabilities. However, because the realtors' errors and omission risk was written from the first quarter 1986 through the first quarter of 1991; and considering the length of time involved in the settlement of some claims, there remains a lack of credible experience needed to determine whether actual incurred policy benefits will conform to the assumptions inherent in the determination of these liabilities. Accordingly, the ultimate amounts required for settlement of policy benefits may vary significantly from the amounts included in the accompanying consolidated financial statements. The Company has reviewed FASB Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" which becomes effective in 1996. The Company has also reviewed FASB Statement No. 123, "Accounting for Stock-Based Compensation" which becomes effective in 1996. The Company does not expect the impact of either of these FASB Statements to be material to the financial condition of the Company. Although the cumulative effects of inflation on premium growth cannot be fully determined, increases in the retail price of automobiles have generally resulted in increased amounts being financed which constitute the basis of premiums charged for credit insurance. Anticipated increases in automobile repairs also provides the primary basis for increases in extended service contract premium rates. CERTAIN EVENTS AUTO LOAN INDEMNITY: The Company was one of multiple defendants in a lawsuit which was settled in early 1994 in state court in Orange County, California, involving the loan loss indemnity product marketed from 1986 through 1988. The Company had previously settled with numerous other plaintiffs by a return of applicable premium. The Company's accrued reserves for this litigation were adequate to cover final settlement costs in 1994. WRITE OFF OF INVESTMENT IN RGL AND GALAXY: During December 1986, ACCEL invested $1,370,000 (a 20% interest) in RGL. RGL was formed to acquire all the outstanding shares of Galaxy Reinsurance Company, the name was ultimately changed to Galaxy. Galaxy was writing commercial property insurance, property and casualty, and assumed treaty reinsurance. During the second quarter of 1991, the Company purchased 11,000 additional common shares of RGL at a cost of $992,000. The additional investment increased the Company's ownership to 31% at June 30, 1991. In July 1991, the Company purchased the remaining 69% of RGL for cash and subordinated notes (see "Note D" in the Notes to Consolidated Financial Statements) of $2.1 million and $5.8 million, respectively. The purchase price included goodwill of $1.2 million. Members of CIHC held a 45% interest in RGL prior to the acquisition by ACCEL. For the three years ended December 31, 1993, RGL recorded losses and Galaxy's underwriting results deteriorated. The statutory capital and surplus of Galaxy declined significantly (from $7.3 million to $6.1 million to $2.9 million at December 31, 1991, 1992 and 1993, respectively), resulting in the New York Department of Insurance ("New York Department") placing a moratorium on all new business as of February 28, 1994. As a result of the unsatisfactory underwriting performance of Galaxy and the moratorium placed on Galaxy's underwriting operations by the New York Department, the Company elected to write-off the unamortized goodwill related to Galaxy, which resulted in a charge to operations (general and administrative expenses) for 1993 of $1,643,000. Due to significant loss development during 1994 on Galaxy's liability lines of business, the Company contracted with an independent actuarial consultant to review the adequacy of Galaxy's loss and LAE reserves as of June 30, 1994. The findings of this review indicated the need for additional reserves which resulted in the statutory insolvency of Galaxy at June 30, 1994. Statutory capital and surplus after the reserve strengthening was a negative $2.3 million. Due to the significance of the statutory loss and the loss of the Company's control of Galaxy as a result of the insolvency, the Company wrote off its investment in RGL ($3.8 million) during the second quarter of 1994. As a result of this action, the consolidated results of operations for 1994 include a charge to operations of $3.8 million, representing the Company's net investment in Galaxy as of April 1, 1994, in addition to operating losses of $205,000 incurred during the first quarter. The Company wrote down its investment in RGL to zero and deconsolidated RGL as of April 1, 1994. Pursuant to an Order of Liquidation dated October 7, 1994, issued by the Supreme Court of the State of New York, the Liquidation Bureau of the New York Department took control of Galaxy on October 11, 1994. ANIC, in the normal course of business, issued certain policy endorsements on Galaxy policies in 1992, some of which had pending claims open at the time of liquidation. Management believes that these endorsements will not have a material impact on the Company's financial condition. As of December 31, 1995, ANIC had not incurred any costs related to these endorsements. DISCONTINUED REALTORS' ERRORS AND OMISSIONS PROGRAM: As a result of the losses sustained in the realtors' errors and omissions program, and in particular, conduct discovered by the Company after it assumed responsibility for claims processing and handling, the Company filed suit in November 1991 against the non-affiliated marketing organization and broker involved in the program. The lawsuit sought to recover funds improperly withdrawn from the account established for the payment of claims under the program; for damages due to business expenses improperly charged against such funds; and for improper administration of the program. ACCEL and ANIC entered into an arrangement whereby ANIC's rights under the lawsuit were transferred to the Company in exchange for a $4,000,000 collateral loan issued to ANIC which was recorded as a capital contribution. The transaction and related agreements were approved by the Ohio Department. The loan agreement and accompanying promissory note called for interest at the 13 week Treasury Bill rate plus 100 basis points. The principal of $4,000,000 was paid in full on December 29, 1995. ACCEL pursued the litigation vigorously and in late 1995 ANIC was awarded $5.3 million in damages with $5.1 million thereof being obtained against the marketing organization. A settlement has been reached with the broker defendant, however, the remaining defendant has indicated its intention to appeal the verdict. The Company is aggressively pursuing efforts to collect on the remaining judgement. TABLE I Several key operating ratios of the Company are as follows: Consolidated Results ---------------------------- (Thousands of dollars, except ratios) 1995 1994 1993 -------- -------- -------- Gross premiums written $ 55,443 $ 60,504 $ 95,766 ======== ======== ======== Net premiums earned $ 40,853 $ 47,600 $ 61,649 ======== ======== ======== RATIOS: Policy benefits to net premiums earned 49.2% 52.5% 62.3% Commissions and selling expenses and general and administrative expenses to gross premiums written 52.9% 47.8% 46.2% Commissions and selling expenses, reinsurance expense recovery and change in deferred policy acquisition costs to net premiums earned 49.3% 43.6% 38.3% Taxes, licenses and fees to gross premiums written 3.1% 3.1% 2.5% TABLE II Changes in Gross Premiums Written Year Ended December 31 ---------------------- (Thousands of dollars, except ratios)
1995 1994 vs. % vs. % Gross Premiums Written 1995 1994 1993 1994 Change 1993 Change ====================== ======== ======== ======== ======== ======= ======== ====== Continuing lines of business: Credit $42,338 $43,905 $42,331 $(1,567) -3.6% $ 1,574 3.7% Extended service contracts 7,777 8,221 7,351 (444) -5.4% 870 11.8% Other 58 42 53 16 38.1% (11) -20.8% ------- ------- ------- ------- ------ -------- ------ Total continuing lines 50,173 52,168 49,735 (1,995) -3.8% 2,433 4.9% ------- ------- ------- ------- ------ -------- ------ Discontinued lines of business: Medical and miscellaneous life & health 776 1,751 10,491 (975) -55.7% (8,740) -83.3% Vendor's single interest (798) (5,451) 7,689 4,653 -85.4% (13,140) -170.9% Agriculture and other property & casualty 5,292 10,091 13,460 (4,799) -47.6% (3,369) -25.0% Galaxy Insurance Company - 1,945 14,391 (1,945) -100.0% (12,446) -86.5% ------- ------- ------- ------- ------ -------- ------ Total discontinued lines 5,270 8,336 46,031 (3,066) -36.8% (37,695) -81.9% ------- ------- ------- ------- ------ -------- ------ Gross premiums written $55,443 $60,504 $95,766 $(5,061) -8.4% $(35,262) -36.8% ======= ======= ======= ======== ====== ======== =====
ANNUAL REPORT ON FORM 10-K ITEM 8, ITEM 14 (a) (1) and (2), (c) and (d) FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES CERTAIN EXHIBITS FINANCIAL STATEMENT SCHEDULES YEAR ENDED DECEMBER 31, 1995 ACCEL INTERNATIONAL CORPORATION DUBLIN, OHIO INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders ACCEL International Corporation: We have audited the consolidated financial statements of ACCEL International Corporation and subsidiaries (the Company) as of December 31, 1995 and 1994, and for each of the years in the two-year period ended December 31, 1995, as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedules as of December 31, 1995 and 1994, and for each of the years in the two-year period ended December 31, 1995, as listed in the accompanying index. These consolidated financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedules 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. As discussed in Note D to the consolidated financial statements, on March 30, 1994, the Company and its principal lender agreed to waive compliance with certain loan agreement covenants through January 1, 1995. On February 7, 1995 the Company and the lender again renegotiated the credit agreement and certain of the covenants. The amended agreement stated that the loan was payable in full on June 30, 1997. On December 29, 1995, the Company issued senior notes with a different lender and retired the aforementioned credit agreement. The most recent loan agreement requires that during the period the loan is outstanding, the Company maintain consolidated tangible net worth, as defined. At December 31, 1995, required tangible net worth was $15,000,000 and the Company's consolidated tangible net worth, as defined, was $19,738,000. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of ACCEL International Corporation and subsidiaries as of December 31, 1995 and 1994, and the consolidated results of their operations and their cash flows for each of the years in the two-year period ended December 31, 1995, in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedules as of December 31, 1995 and 1994, and for each of the years in the two-year period ended December 31, 1995, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. /S/ KPMG Peat Marwick LLP ------------------------- KPMG Peat Marwick LLP Columbus, Ohio March 15, 1996 REPORT OF INDEPENDENT AUDITORS Stockholders and Board of Directors ACCEL International Corporation: We have audited the consolidated financial statements of ACCEL International Corporation and subsidiaries (the Company) for the year ended December 31, 1993, as listed in the accompanying index to financial statements (Item 14(a)). In connection with our audit of the consolidated financial statements, we also have audited the financial statement schedules as of December 31, 1993 and for the year then ended, as listed in the accompanying index. These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audit. We conducted our audit 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 audit provides a reasonable basis for our opinion. As more fully described in "Note D", at December 31, 1993, the Company did not meet all the requirements of certain covenants contained in a loan agreement with its principal lender. On March 30, 1994, the Company and the lender agreed to waive compliance with these covenants at December 31, 1993 and through January 1, 1995. The loan agreement also requires that during the period the loan is outstanding, the Company maintain consolidated tangible net worth, as defined in the agreement. At December 31, 1993, required tangible net worth was $27,500,000. At December 31, 1993, the Company's consolidated tangible net worth, as defined, was $27,549,000. In our opinion, the financial statements of ACCEL International Corporation and subsidiaries listed in the accompanying index to financial statements (Item 14(a)) present fairly, in all material respects, the consolidated results of their operations and their cash flows for the year ended December 31, 1993, in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedules as of December 31, 1993 and for the year ended December 31, 1993, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. As discussed in Note A to the consolidated financial statements, in 1993, the Company adopted the provisions of Financial Accounting Standards Board Statement No. 115 "Accounting for Certain Investments in Debt and Equity Securities". /S/ Ernst & Young LLP --------------------- Ernst & Young LLP Columbus, Ohio March 30, 1994 ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, 1995 1994 --------- ------- (Thousands of dollars) ASSETS Investments--Notes B and F: Investments available for sale, at fair value Fixed maturities (cost: 1995--$53,427,000; 1994--$91,422,000) $ 53,204 $ 84,782 Equity securities (cost: 1995--$5,433,000; 1994--$5,191,000) 5,451 5,159 Short-term investments (cost: 1995--$4,278,000; 1994--$7,684,000) 4,278 7,684 Other invested assets (cost: 1995--$364,000; 1994--$564,000) 364 564 --------- --------- 63,297 98,189 Cash 5,039 1,044 Receivables: Premiums in process of transmittal, less allowance (1995--$279,000; 1994--$255,000) 1,779 3,592 Amounts due from reinsurers--Note F 9,119 7,826 Recoverable federal income taxes--Note G 70 - --------- --------- 10,968 11,418 Accrued investment income 557 807 Prepaid reinsurance premiums--Note F 14,895 18,707 Reinsurance premium deposits--Note F 51,634 12,345 Deferred policy acquisition costs 31,839 31,089 Equipment--at cost, less accumulated depreciation (1995--$564,000; 1994--$523,000) 187 232 Property occupied by the Company--at cost, less accumulated depreciation (1995--$2,382,000; 1994--$2,226,000) 3,167 3,303 Other assets: Cost in excess of fair value of net assets of subsidiaries at dates of acquisition ($4,448,000) less accumulated amortization--Note K 822 929 Funds held under reinsurance agreements--Note F 829 1,098 Other 273 787 --------- --------- 1,924 2,814 --------- --------- $ 183,507 $ 179,948 ========= ========= See notes to consolidated financial statements. (Continued) ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS--(CONTINUED) December 31, 1995 1994 --------- -------- (Thousands of dollars) LIABILITIES AND COMMON STOCKHOLDERS' EQUITY Policy Reserves and Liabilities: Unearned premium reserves--Note F $ 82,080 $ 83,762 Insurance claims--Notes F and H 22,761 23,159 Other 11 15 -------- -------- 104,852 106,936 Other Liabilities: Funds held under reinsurance agreements--Note F 3,072 3,633 Accounts payable and other liabilities 2,353 2,257 Commissions payable 5,010 4,015 Amounts due reinsurers--Note F 4,442 6,459 Federal income taxes--Note G: Current - 52 Deferred 5,024 4,938 Deferred reinsurance commissions--Note F 15,663 17,830 Notes payable--Note D 22,531 18,462 -------- -------- 58,095 57,646 Commitments and Contingencies--Notes F and N Redeemable Preferred Stock: Authorized shares--1,000,000; no issued or outstanding shares - - Common stockholders' equity--Notes C, D, G and I: Common stock, $.10 par value Authorized shares--10,000,000 Issued shares--5,243,852 524 524 Additional paid-in capital 23,702 24,066 Retained earnings 3,299 4,759 Less 797,420 treasury shares at cost (6,599) (6,599) ESOP loan--Note L (161) (627) Net unrealized depreciation on investment securities--Note B (205) (6,672) Foreign currency translation adjustments--Note M - (85) -------- -------- Net common stockholders' equity 20,560 15,366 -------- -------- $183,507 $179,948 ======== ======== See notes to consolidated financial statements. ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Year Ended December 31, 1995 1994 1993 ---------- ---------- ------- (Thousands of dollars, except per share data) REVENUE: Gross premiums written--Note F $ 55,443 $ 60,504 $ 95,766 Less reinsurance ceded--Note F 12,147 12,495 30,261 ---------- ---------- ---------- Net premiums written 43,296 48,009 65,505 Increase in unearned premium reserves (2,443) (409) (3,856) ---------- ---------- ---------- Premiums earned--Note F 40,853 47,600 61,649 Net investment income--Note B: Interest and dividends 6,488 6,678 8,397 Realized gains 455 808 1,336 Service fees on extended service contracts 2,137 2,063 1,819 Other income 542 370 1,609 ---------- --------- ---------- 50,475 57,519 74,810 BENEFITS AND EXPENSES: Policy benefits--Notes F and H 20,118 24,997 38,431 Commissions and selling expenses 21,526 19,612 29,929 Reinsurance expense recovery--Note F (626) (927) (4,276) General and administrative--Note K 7,817 9,336 14,327 Taxes, licenses and fees 1,743 1,903 2,430 Interest--Note D 1,748 1,589 1,653 Decrease (increase) in deferred policy acquisition costs (750) 2,085 (2,058) Write off of subsidiary--Note K - 3,829 - ---------- ---------- ---------- 51,576 62,424 80,436 ---------- ---------- ---------- LOSS BEFORE FEDERAL INCOME TAXES (1,101) (4,905) (5,626) Federal income taxes--Note G: Current (benefit) 273 219 (703) Deferred 86 114 358 ---------- ---------- ---------- 359 333 (345) ---------- ---------- ---------- NET LOSS $ (1,460) $ (5,238) $ (5,281) ========== ========== ========== Net loss per common share $ (.33) $ (1.18) $ (1.19) ========== ========== ========== Weighted average number of common shares outstanding 4,446,432 4,446,432 4,446,432 ========== ========== ========== See notes to consolidated financial statements. ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY Three Years Ended December 31, 1995
Net unrealized appreciation (deprecia- tion) Foreign Addi- Common on invest- currency tional stock ment translation Common paid-in Retained held in ESOP secur- adjust- stock capital earnings Treasury loan ities ments Net (Thousands of dollars) Balances at December 31, 1992 $524 $24,066 $15,282 $(6,599) $ (803) $ 36 $ (145) $32,361 Dividends on preferred stock - - (4) - - - - (4) Payments on ESOP loan - - - - 83 - - 83 Change in unrealized appreciation on investment securities - - - - - 1,460 - 1,460 Change in foreign currency translation adjustment - - - - - - (36) (36) Net loss - - (5,281) - - - - (5,281) ---- ------- ------- ------- ----- ------ ------- ------- Balances at December 31, 1993 524 24,066 9,997 (6,599) (720) 1,496 (181) 28,583 Payments on ESOP loan - - - - 93 - - 93 Change in unrealized depreciation on investment securities - - - - - (8,168) - (8,168) Change in foreign currency translation adjustment - - - - - - 96 96 Net loss - - (5,238) - - - - (5,238) ---- ------- ------- ------- ----- ------ ------- ------- Balances at December 31, 1994 524 24,066 4,759 (6,599) (627) (6,672) (85) 15,366 Payments on and write down of ESOP loan--Note L - (364) - - 466 - - 102 Change in unrealized depreciation on investment securities - - - - - 6,467 - 6,467 Change in foreign currency translation adjustment - - - - - - 85 85 Net loss - - (1,460) - - - - (1,460) ---- ------- ------- ------- ----- ------ ------- ------- Balances at December 31, 1995 $524 $23,702 $ 3,299 $(6,599) $(161) $ (205) $ - $20,560 ==== ======= ======= ======= ===== ====== ======= ======= See notes to consolidated financial statements.
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended December 31, 1995 1994 1993 -------- -------- ----- (Thousands of dollars) OPERATING ACTIVITIES: Net loss $ (1,460) $ (5,238) $ (5,281) Adjustments to reconcile net loss to net cash used in operating activities: Change in premiums receivable 1,789 3,266 (3,100) Change in accrued investment income 250 191 338 Change in prepaid reinsurance premiums 3,812 9,208 (27,915) Change in reinsurance premium deposits (39,289) (1,251) (11,094) Change in funds held under reinsurance agreements (292) (1,196) (20,502) Change in unearned premium reserves (1,682) (7,449) 52,437 Change in insurance claim reserves (398) (12,435) 3,205 Change in amounts due reinsurers and amounts due from reinsurers (3,310) 7,298 (8,772) Change in other assets, other liabilities and accrued income taxes 1,683 (860) 5,606 Interest paid in kind 569 515 657 Accrual of discount on bonds (461) (128) (781) Amortization of premium on bonds 172 116 306 Amortization of deferred policy acquisition costs 20,743 24,414 25,518 Policy acquisition costs deferred (21,493) (22,329) (27,576) Reinsurance commissions earned (13,329) (12,763) (13,775) Reinsurance commissions received 11,162 11,708 16,786 Provision for depreciation and amortization 412 528 2,334 Write off of subsidiary - 3,829 - Net realized gains on investments (455) (808) (1,336) -------- -------- -------- NET CASH USED IN OPERATING ACTIVITIES (41,577) (3,384) (12,945) -------- -------- -------- INVESTING ACTIVITIES: Sale of investments available for sale 49,159 38,103 82,345 Purchase of investments available for sale (7,067) (35,574) (68,406) Other, net (122) (59) (29) -------- -------- -------- NET CASH PROVIDED BY INVESTING ACTIVITIES 41,970 2,470 13,910 -------- -------- -------- FINANCING ACTIVITIES: Payment on ESOP loan 102 93 83 Repayment of notes payable (13,000) - (1,000) Issuance of notes payable 16,500 - - Debentures redeemed - (900) (800) Redemption of redeemable stock - - (73) Cash dividends - - (6) -------- -------- -------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 3,602 (807) (1,796) -------- -------- -------- NET INCREASE (DECREASE) IN CASH 3,995 (1,721) (831) Cash at beginning of year 1,044 2,765 3,596 -------- -------- -------- CASH AT END OF YEAR $ 5,039 $ 1,044 $ 2,765 ======== ======== ======== See notes to consolidated financial statements. ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1995, 1994 AND 1993 NOTE A--SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION: The accompanying consolidated financial statements of ACCEL International Corporation ("ACCEL") and subsidiaries (collectively referred to herein as the "Company") have been prepared in accordance with generally accepted accounting principles which, as to the insurance company subsidiaries, differ in some respects from statutory accounting practices prescribed or permitted by state insurance departments. The significant accounting policies followed by the Company that materially affect financial reporting are summarized below. PRINCIPLES OF CONSOLIDATION: The accompanying consolidated financial statements include the accounts of ACCEL and its wholly-owned subsidiaries, except for Randjill Group Ltd. ("RGL") (see Note K). All significant intercompany accounts and transactions have been eliminated in the consolidated financial statements. DESCRIPTION OF BUSINESS: ACCEL is an insurance holding company incorporated in Delaware in June 1978 as the successor to an Ohio corporation, formerly Acceleration Corporation, organized in 1969. The Company has been engaged in the sale and underwriting of credit life and credit accident and health insurance, extended service contracts, vendor's single interest and other specialty casualty products. The credit insurance and extended service contract products continue to be offered to consumers, principally through automobile dealers, financial institutions and other business entities. The Company is subject to competition from other insurers throughout the states in which it writes business. The Company is also subject to regulation by the Insurance Departments of states in which it is licensed, and undergoes periodic examinations by those departments. The following is a description of the most significant risks facing life and health and property/casualty insurers and how the Company mitigates those risks: LEGAL/REGULATORY RISK is the risk that changes in the legal or regulatory environment in which an insurer operates will create additional expenses not anticipated by the insurer in pricing its products. That is, regulatory initiatives designed to reduce insurer profits, new legal theories or insurance company insolvencies through guaranty fund assessments may create costs for the insurer beyond those currently recorded in the consolidated financial statements. The Company mitigates this risk by operating throughout the United States, thus reducing its exposure to any single jurisdiction, and also by employing underwriting and loss adjusting practices which identify and minimize the adverse impact of this risk. CREDIT RISK is the risk that issuers of securities owned by the Company will default or that other parties, including reinsurers, which owe the Company money, will not pay. The Company minimizes this risk by adhering to a conservative investment strategy, by maintaining sound reinsurance and credit and collection policies and by providing for any amounts deemed uncollectible. INTEREST RATE RISK is the risk that interest rates will change and cause a decrease in the value of an insurer's investments. The Company mitigates this risk by attempting to match the maturity schedule of its assets with the expected payouts of its liabilities. To the extent that liabilities come due more quickly than assets mature, an insurer would have to borrow funds or sell assets prior to maturity and potentially recognize a gain or loss. ACCOUNTING ESTIMATES: In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosures of contingent assets and liabilities as of the date of the consolidated financial statements and revenues and expenses for the reporting period. Actual results could differ significantly from those estimates. ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) NOTE A--SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED) The most significant estimates include those used in determining deferred policy acquisition costs and the liability for unearned premium reserves and insurance claims. Although some variability is inherent in these estimates, management believes the amounts provided are adequate. The estimates are continually reviewed and adjusted as necessary. Such adjustments are generally reflected in current operations. INVESTMENTS: The Company classifies all of its fixed maturity and equity securities as available for sale, therefore these securities are carried at fair value and the unrealized appreciation or depreciation is reported as a separate component of common stockholders' equity after giving effect to applicable income taxes. Short-term investments which include U.S. Treasury securities, commercial paper and certificates of deposit are carried at cost which approximates fair value. Other invested assets are carried at cost which approximates fair value. Realized gains and losses on the disposal of investments are determined by specific identification and are included in the consolidated statements of operations. When an other than temporary decline in value is recognized, the specific investment is carried at estimated realizable value and its original book value is reduced to reflect such impairment of the investment. Such reductions in book value are reflected in realized investment losses for the period in which they were written down. For mortgage backed securities, the Company's accounting follows the provisions of Financial Accounting Standards Board Emerging Issues Tasks Force ("EITF") Consensus No. 93-18. This EITF requires that when the present value of estimated future cash flows discounted at a risk-free rate of return is less than the cost basis of the investment an impairment loss is to be recognized by writing the investment down to its fair value. FAIR VALUES OF FINANCIAL INSTRUMENTS: The fair value of a financial instrument is the amount at which the financial instrument could be exchanged in a current transaction between willing parties. In cases where quoted market prices are not available, fair value is based on estimates using present value or other valuation techniques. These techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Although fair value estimates are calculated using assumptions that management believes are appropriate, changes in assumptions could cause these estimates to vary materially. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in the immediate settlement of the instruments. The disclosure requirements related to financial instruments exclude certain assets and liabilities. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company. The tax ramifications of the related unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates. The carrying amounts reported in the consolidated balance sheets for cash, short-term investments, accrued investment income, premiums in process of transmittal, and amounts due from reinsurers approximate their fair value. Fair value for fixed maturity, equity and mortgage backed securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments at amortized value. The fair value of notes payable is estimated using discounted cash flow analyses, based on ACCEL's current incremental borrowing rates for similar types of borrowing arrangements. ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) NOTE A--SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED) DEFERRED POLICY ACQUISITION COSTS: The costs (principally commissions and certain expenses of policy issuance) of acquiring or renewing insurance business, all of which vary with and are directly related to the production of business, have been deferred. These deferred policy acquisition costs are amortized in a manner related to the recognition of premiums earned. Substantially all such deferred costs are amortized within a four-year period. Anticipated investment income is considered in determining recoverability of deferred costs. EQUIPMENT AND DEPRECIATION: Equipment is carried at cost less accumulated depreciation. Depreciation is provided using the straight-line method over an estimated useful asset life of five years. PROPERTY OCCUPIED BY COMPANY: Home office property is carried at cost less accumulated depreciation. Depreciation is provided using the straight-line method over an estimated life of thirty-five years. GOODWILL AMORTIZATION: Cost in excess of fair value of net assets of subsidiaries at dates of acquisition is being amortized primarily over a thirty-five year period. It is the Company's policy to account for goodwill at the lower of amortized cost or fair value. On an ongoing basis, management reviews the valuation and amortization of its goodwill. As a part of its ongoing review, management estimates the fair value of the Company's goodwill, taking into consideration any events and circumstances which might have diminished fair value. Believing such an event and circumstance had occurred in 1993, management reduced the carrying amount of its goodwill at December 31, 1993 by $1.6 million. See Note K regarding the write down of goodwill. PREMIUM INCOME RECOGNITION AND UNEARNED PREMIUM RESERVES: Unearned premium reserves on credit life and credit accident and health insurance are calculated primarily under the "Rule of 78's Method", which method results in premium income being recognized in decreasing proportions over the terms of the policies, which approximates the pattern of policy benefits incurred. Unearned premium reserves on the extended service contracts are based on the historical emergence pattern of claims. The Company's primary liability on new car contracts exists subsequent to the expiration of manufacturers' warranties. This method results in premium being recognized in direct proportion to the emergence of benefits on these contracts. Unearned premium reserves on property and casualty products are calculated on the pro rata method. INSURANCE CLAIMS: The liabilities for insurance claims are determined using statistical analyses and represent estimates of the ultimate net cost of all reported and unreported claims that are unpaid at year end. Considerable variability is inherent in such estimates and actual results will likely differ from those estimates. FEDERAL INCOME TAXES: ACCEL and its subsidiaries file a consolidated federal income tax return. The provision for income taxes is based on income for financial reporting purposes, after permanent differences. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under this method, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established when necessary to reduce the deferred tax assets to the amounts expected to be realized. ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) NOTE A--SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED) REINSURANCE: Reinsurance premiums ceded and reinsurance recoveries on policy benefits incurred are deducted from the respective income and expense accounts. Assets and liabilities related to reinsurance ceded are reported on a gross basis. Amounts related to reinsurance contracts, where it is not reasonably possible for the reinsurer to realize a significant loss, are recorded based on the deposit accounting method. DEFERRED REINSURANCE COMMISSIONS: Commissions and ceding fees received in connection with premiums ceded are deferred and amortized in a manner related to the recognition of premiums earned. Substantially all such commissions and ceding fees are amortized within a four-year period. Earned ceding fees, commissions and claims recovered are reported as reinsurance expense recoveries in the consolidated statements of operations. EARNINGS PER COMMON SHARE: Net income and net loss per common share are computed using the weighted average number of common shares outstanding during the period. The inclusion of common stock equivalents (options) would not be dilutive. RECLASSIFICATIONS: Certain amounts in the 1994 and 1993 consolidated financial statements have been reclassified to conform with the 1995 presentation. NOTE B--INVESTMENTS At December 31, 1995 and 1994, investments in cash and securities with a carrying value of $9,108,000 and $8,428,000, respectively, were on deposit with state insurance departments to satisfy regulatory requirements. Cash and securities with a carrying value of $19,879,000 and $39,710,000 at December 31, 1995 and 1994, respectively, were on deposit in security funds in connection with reinsurance treaties. The change in net unrealized gains (losses) on fixed maturity and equity securities is summarized as follows: Year Ended December 31, 1995 1994 1993 ------- ------- ----- (Thousands of dollars) Available for sale: Fixed maturities $ 6,417 $(8,054) $ 1,603 Equity securities 50 (114) 103 Held for investment: Fixed maturities - - (160) Equity securities - - (245) ------- ------- ------- $ 6,467 $(8,168) $ 1,301 ======= ======= ======= Realized gains (losses) on investments are summarized as follows: Securities available for sale: Fixed maturities: Gross realized gains $ 607 $ 194 $ 1,479 Gross realized losses (284) (35) (184) Equity securities: Gross realized gains 106 148 41 Gross realized losses - - - Other invested asset gains 26 501 - ------- ------- ------- $ 455 $ 808 $ 1,336 ======= ======= ======= ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) NOTE B--INVESTMENTS--(CONTINUED) The major sources of investment income are summarized as follows: Year Ended December 31, 1995 1994 1993 ------- ------- ----- (Thousands of dollars) Fixed maturities $ 5,669 $ 6,307 $ 8,079 Equity securities 181 113 47 Short-term investments 927 333 478 Other 431 469 402 ------- ------- ------- 7,208 7,222 9,006 Investment expenses (720) (544) (609) ------- ------- ------- Net investment income $ 6,488 $ 6,678 $ 8,397 ======= ======= ======= The amortized cost and estimated fair value of fixed maturity securities by category, all of which were available for sale, are as follows: Gross Gross Amortized unrealized unrealized Fair cost gains losses value -------- ---------- ---------- -------- (Thousands of dollars) December 31, 1995 ----------------- U.S. Treasury and U.S. government agency securities $ 9,310 $ 274 $ - $ 9,584 State and political subdivision securities 1,255 35 - 1,290 Mortgage-backed securities 41,214 322 (914) 40,622 U.S. corporate securities 1,000 26 - 1,026 Redeemable preferred stocks 648 34 - 682 -------- -------- -------- -------- Total $ 53,427 $ 691 $ (914) $ 53,204 ======== ======== ======== ======== December 31, 1994 ----------------- U.S. Treasury and U.S. government agency securities $ 11,465 $ 8 $ (355) $ 11,118 State and political subdivision securities 1,515 - (35) 1,480 Mortgage-backed securities 72,002 7 (5,992) 66,017 U.S. corporate securities 5,691 - (360) 5,331 Redeemable preferred stocks 749 87 - 836 -------- -------- -------- -------- Total $ 91,422 $ 102 $ (6,742) $ 84,782 ======== ======== ======== ======== The amortized cost and estimated fair value of fixed maturity securities, all of which were available for sale, at December 31, 1995, by contractual maturity, are summarized as follows: Amortized Fair Maturity cost value -------- --------- -------- (Thousands of dollars) Due in one year or less $ 1,227 $ 1,240 Due after one year through five years 8,632 8,847 Due after five years through ten years 1,845 1,961 Due after ten years 509 534 Mortgage-backed securities 41,214 40,622 -------- -------- Total $ 53,427 $ 53,204 ======== ======== ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) NOTE B--INVESTMENTS--(CONTINUED) The expected maturities in the foregoing table will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without penalty. Mortgage-backed securities owned have an expected weighted average maturity of over 5 years. Proceeds from the sale of securities available-for-sale during 1995, 1994 and 1993 were $45,531,000, $26,283,000 and $66,083,000, respectively. Gross gains of $713,000 ($342,000 in 1994 and $1,520,000 in 1993) and gross losses of $284,000 ($35,000 in 1994 and $184,000 in 1993) were realized on those sales. NOTE C--STOCKHOLDERS' EQUITY AND TRANSFER LIMITATIONS Generally, the net assets of the consolidated insurance subsidiaries available for transfer to ACCEL are limited to the amounts that the insurance subsidiaries' net assets, as determined in accordance with statutory accounting practices, exceed minimum statutory capital and surplus requirements; however, payments of such amounts as dividends from each insurance subsidiary are currently subject to regulation by Ohio law. Based on this law, ALIC could pay a dividend of $8,000 and ANIC would require Ohio Department approval to pay any dividend to the registrant during 1996. At December 31, 1995, $18,047,000 of net assets, as determined in accordance with prescribed and permitted statutory accounting practices, of the consolidated insurance subsidiaries are available for transfer, subject to regulatory approval, in the form of dividends, loans or advances to ACCEL (total statutory net assets of the consolidated insurance subsidiaries was $23,047,000 at December 31, 1995). The statutory basis capital and surplus and net income (loss) of the consolidated insurance subsidiaries, as reported to insurance regulatory authorities, are summarized as follows: Life/ Property/ Health Casualty ------ -------- (Thousands of dollars) Statutory capital and surplus at December 31: 1995 $13,010 $10,037 1994 13,841 14,190 Statutory net income (loss) for year ended December 31: 1995 $ (713) $(2,574) 1994 1,165 (1,537) 1993 219 (3,503) NOTE D--NOTES PAYABLE In July 1991, ACCEL issued $5,848,000 of subordinated notes (the "Subordinated Notes") in connection with the purchase of all outstanding common shares of RGL (see Note K). The Subordinated Notes have a nine-year term with no principal payable until maturity, and bear interest at 10.125% per annum. Effective June 30, 1992, ACCEL amended the notes to permit the issuance of additional notes for the purpose of making interest payments, provided, however, that ACCEL may at its option pay cash in lieu of issuing additional notes in any denomination of less than $1,000. As a result, ACCEL issued additional notes totaling $569,000 and $515,000 for the 1995 and 1994 interest payments, respectively. Of the Subordinated Notes described above, $5,371,000 were initially issued to Ranger Insurance Company ("Ranger"), a company related through common ownership by a stockholder and director of the Company. In 1993, Ranger sold all of the Subordinated Notes held by it to Chase Insurance Holdings Corporation ("CIHC"), another company related through common ownership by a stockholder and director of the Company. Additional Subordinated Notes in the amount of $506,000 and $458,000 were issued to related parties for the 1995 and 1994 interest payments, respectively. ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) NOTE D--NOTES PAYABLE--(CONTINUED) The total outstanding Subordinated Notes were $6,031,000 and $5,462,000 ($5,347,000 and $4,841,000 held by related parties at December 31, 1995 and 1994, respectively) and the fair value of these notes approximated $5,783,000 and $5,237,000 at December 31, 1995 and 1994, respectively. At December 31, 1994, the Company had an outstanding loan balance of $13,000,000 under the terms of a credit agreement (the "Credit Agreement") with a bank, and the effective interest rate was 6.25%. During 1993, the Company did not meet all of the requirements contained in the various financial tests under the covenants contained in the Credit Agreement. On March 30, 1994, the bank and the Company agreed to a waiver of certain covenants of the Credit Agreement such that the Company would not be in default at December 31, 1993 and through January 1, 1995. Proceeds from the Credit Agreement were partially used in the purchase of RGL, and to fund general operating activities. During September 1994, the revolving loans under the Credit Agreement were converted to a $13,000,000 term loan, payable in full on September 23, 1998. At December 31, 1994, the effective interest rate and outstanding loan balance were 8.75% and $13,000,000, respectively. The fair value of this term loan approximated $13,000,000 at December 31, 1994. On February 7, 1995 the Company renegotiated the terms of the Credit Agreement. Under the amended Credit Agreement, the quarterly principal payments scheduled to begin in 1995 were waived. Specific principal payments totaling up to $1.5 million were due on June 30, 1995 and December 31, 1995, respectively, from the liquidation of Acceleration Insurance Company Limited ("AICL"), a United Kingdom subsidiary, and the projected sale of the building used as the corporate home office. The loan was to be payable in full on June 30, 1997. The Credit Agreement also required that during the period the loan was outstanding, the Company maintain consolidated tangible net worth, as defined in the agreement. At December 31, 1994, required tangible net worth was $13,000,000. At December 31, 1994, the Company's consolidated tangible net worth, as defined, was $14,438,000. On December 29, 1995, the Company issued senior notes (the "Senior Notes") totaling $16,500,000 at 9.50%, maturing on April 1, 2001. The proceeds from these notes were used to retire the loan outstanding under the aforementioned Credit Agreement and to liquidate an intercompany loan between ACCEL and an insurance subsidiary. In addition, as of January 1, 1996, a subsidiary of the Company entered into a reinsurance agreement with an unaffiliated company to reinsure the in-force Credit Business. This agreement is structured, such, that as future profits emerge on this block of business, the Company's share of the profits will be used over the next four to five years to pay the interest thereon and redeem these Senior Notes. During 1995, 1994 and 1993, ACCEL paid interest on notes of $1,125,000, $974,000 and $924,000, respectively. NOTE E--DEBENTURES PAYABLE At January 1, 1994, ACCEL had $900,000 principal amount of sinking fund debentures outstanding bearing interest at 10 1/2% and maturing on September 1, 1994. These debentures were fully paid in 1994. During 1994 and 1993, ACCEL paid interest on these debentures of $63,000 and $151,000, respectively, and made mandatory sinking fund payments of $900,000 and $800,000 during 1994 and 1993, respectively. NOTE F--REINSURANCE The Company's reinsurance program includes an agreement covering certain of its direct credit business, the reinsurance of other direct business ceded on a quota share basis and direct business ceded to producer-owned reinsurance companies. ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) NOTE F--REINSURANCE--(CONTINUED) The ceding of insurance through reinsurance agreements does not discharge the primary liability of the original underwriter to the insured, but it is the practice of insurers to treat risks that have been reinsured with other companies, to the extent of the reinsurance, as though they were not risks for which the original insurer is liable. Should the reinsurer not be able to meet its obligations, those obligations are the ultimate responsibility of the Company. Therefore, in financial statement presentation, premiums and policy benefits are presented net of that portion of risks reinsured with other companies. DIRECT BUSINESS CEDED--CREDIT BUSINESS QUOTA SHARE: The Company has an agreement in place which covers a substantial portion of its credit insurance business. The agreement contains an experience adjustment computation that results in the ultimate cost of this agreement being a stated percentage related to the business covered by the agreement. The Company ultimately retains a substantial part of the insurance risk, the underwriting income or loss and the investment income on net funds, all of which are retained by the Company. The Company determined that deposit accounting is the appropriate method of accounting for this agreement since it is not reasonably possible for the reinsurer to realize a significant loss from the transaction. The consolidated financial statements have been prepared on this basis. The other effect of this agreement is to increase statutory capital and surplus of Acceleration Life Insurance Company ("ALIC"), a wholly owned subsidiary of ACCEL, by $14,512,000 and $15,740,000 as of December 31, 1995 and 1994, respectively. On January 1, 1996 the Company terminated this quota share reinsurance agreement and elected to recapture the liabilities subject to this treaty. The liabilities recaptured thereunder were then available for cession under the treaty described below. The unearned premium reserves and claim liabilities recaptured were $29,753,000 and $8,424,000, respectively. Concurrent with this termination, the Company entered into a reinsurance agreement with a different unaffiliated reinsurer (which is also the buyer of the Senior Notes discussed in Note D) to reinsure a substantial portion of the in-force credit life and accident and health insurance business, including the amounts recaptured. This agreement is structured in such a way that as future profits emerge on this block of business, a substantial portion of the Company's share of the profits will be used over the next four to five years to pay fees and interest to the reinsurer and redeem the new Senior Notes of $16,500,000. In connection with this agreement, approximately $40,000,000 of assets were transferred to the reinsurer on December 29, 1995, as agreed to by all parties. The unearned premium reserves and liability for insurance claims subject to cession under this treaty approximates $48,616,000 and $9,919,000, respectively, as of January 1, 1996. Prior to December 31, 1995, a security fund had been maintained, primarily comprised of fixed maturities, for the benefit of the reinsurer. Pursuant to the termination of the agreement effective January 1, 1996, as discussed above, certain investments were liquidated from the security fund on December 29, 1995. Proceeds from this liquidation, along with other funds, were transferred on December 29, 1995 to the reinsurer who is party to the agreement dated January 1, 1996. These amounts are included in "Reinsurance Premium Deposits" on the accompanying consolidated balance sheets as of December 31, 1995. ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) NOTE F--REINSURANCE--(CONTINUED) DIRECT BUSINESS CEDED--OTHER QUOTA SHARE: The Company reinsures a portion of its group life and health care insurance with several unaffiliated companies. The effect of this reinsurance is to transfer the risk, the underwriting income or loss, and the investment income related to the premiums ceded. In 1993, the Company entered into reinsurance agreements with unaffiliated reinsurers related to certain additional product lines. The effect of such reinsurance arrangements is to transfer 100% of the related risk to the reinsurers. Premiums ceded associated with these agreements and included in the accompanying consolidated statements of operations amounted to $694,000, $980,000 and $4,588,000 in 1995, 1994 and 1993, respectively. DIRECT BUSINESS CEDED--TO PRODUCER-OWNED REINSURANCE COMPANIES: The Company has agreements to cede certain credit life and credit accident and health insurance to reinsurance companies owned by certain automobile dealers, financial institutions or agents. Under these arrangements, the assuming entities participate in the profits or losses of the insurance produced by them, and the Company may retain a nominal percentage of the applicable business. These treaties generally provide that the Company receives a ceding fee and is reimbursed for certain commissions and claims. Written premiums included in the accompanying consolidated statements of operations that have been ceded, or which are subject to cession under all such agreements, amounted to $7,429,000, $10,284,000 and $8,855,000 in 1995, 1994 and 1993, respectively. OTHER REINSURANCE: Credit life and credit accident and health premiums assumed by the Company relating to business written in Pennsylvania by an unaffiliated carrier, amounted to $6,308,000, $7,640,000 and $7,154,000 in 1995, 1994 and 1993, respectively. Unearned premium reserves and the liability for insurance claims at December 31, 1995 include $10,904,000 and $3,243,000, respectively ($11,460,000 and $3,208,000 at December 31, 1994, respectively), for risks assumed under this agreement. As of December 31, 1992, the Company entered into a reinsurance agreement with unaffiliated reinsurers whereby the Company cedes 100% of the premiums written in connection with vendor's single interest insurance. In mid 1994, a substantial part of the remaining in-force business was assumed by an unaffiliated reinsurer, and resulted in a return of premiums. The VSI product was forced-placed when the borrower could not demonstrate coverage for the automobile that was securing the loan with the lending institution. Premiums ceded under this agreement were $(858,000), $(6,024,000) and $6,082,000 for 1995, 1994 and 1993, respectively. Policy benefit expense in 1995, 1994 and 1993, respectively, has been reduced by $104,000, $1,407,000 and $3,081,000 in conjunction with these agreements. The Company also entered into reinsurance agreements with several unaffiliated reinsurers related to certain property and casualty lines of business written by the Company. Unearned premium reserves and the liability for insurance claims associated with these agreements at December 31, 1995 are $2,645,000 and $2,240,000, respectively ($6,242,000 and $889,000 at December 31, 1994, respectively). The following data summarizes certain aspects of the Company's reinsurance activity for 1995, 1994 and 1993. ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) NOTE F--REINSURANCE--(CONTINUED) Premiums written and earned in 1995, 1994 and 1993 are summarized as follows: 1995 1994 1993 Written Earned Written Earned Written Earned -------- -------- -------- -------- -------- -------- (In thousands) Direct $ 49,135 $ 50,265 $ 52,864 $ 59,789 $ 87,546 $ 78,773 Assumed 6,308 6,864 7,640 7,004 8,220 9,309 Ceded (12,147) (16,276) (12,495) (19,193) (30,261) (26,433) -------- -------- -------- -------- -------- -------- Net premiums $ 43,296 $ 40,853 $ 48,009 $ 47,600 $ 65,505 $ 61,649 ======== ======== ======== ======== ======== ======== Policy benefits incurred in 1995, 1994 and 1993 are summarized as follows: 1995 1994 1993 ---- ---- ---- (In thousands) Direct $ 24,900 $ 31,567 $ 44,952 Assumed 3,973 3,754 5,240 Ceded (8,755) (10,324) (11,761) -------- -------- -------- Net policy benefits $ 20,118 $ 24,997 $ 38,431 ======== ======== ======== NOTE G--FEDERAL INCOME TAXES The Company files a consolidated income tax return with its subsidiaries, including its life insurance subsidiary. For tax purposes, certain amounts have been accumulated by the life insurance subsidiary in a memorandum tax account designated as "policyholders' surplus" that will be taxed only when distributed to shareholders. Policyholders' surplus on a tax basis was $4,489,000 at December 31, 1995. Management considers the likelihood of distributions from this account to be remote; therefore, no Federal income tax has been provided for such distributions in the accompanying consolidated financial statements. As of December 31, 1995, approximately $2,549,000 could be distributed to shareholders before a distribution would be designated as from the policyholders' surplus account. The federal income tax expense for 1995 includes a credit of $11,000 of foreign taxes related to AICL ($41,000 expense in 1994 and $36,000 credit in 1993). In 1995 and 1994, the Company paid $410,000 and $140,000, respectively, in federal income taxes. In 1993 the Company received a refund of $3,910,000 for federal income taxes. Total income tax expense (benefit) differed from the amount computed by applying the statutory federal income tax rate to loss before taxes as follows: ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) NOTE G--FEDERAL INCOME TAXES--(CONTINUED) Year Ended December 31, 1995 1994 1993 -------- -------- ---- (Thousands of dollars) Income tax (benefit) at statutory rate $ (374) $ (1,668) $ (1,913) Amortization of goodwill 36 36 605 Dividends-received deduction (54) (38) (37) Special deductions of life insurance subsidiaries - (297) (41) Tax-exempt interest (18) (21) (30) Valuation allowance 66 (1,130) 745 Write off of subsidiary - 1,302 - Benefit of non-life companies not utilized 622 531 - Other, net 81 1,618 326 -------- -------- -------- Federal income tax expense (benefit) $ 359 $ 333 $ (345) ======== ======== ======== The tax effects of temporary differences that give rise to significant components of the net deferred tax liability at December 31, 1995 and 1994 are summarized as follows: December 31 1995 1994 ---- ---- Deferred Tax Liabilities: Deferred policy acquisition costs $ 10,656 $ 10,461 Other 2,621 3,631 -------- -------- 13,277 14,092 -------- -------- Deferred Tax Assets: Deferred reinsurance commissions 5,420 6,149 Net operating loss carryforward 1,370 741 Insurance reserves 1,029 1,231 Unrealized losses on investments 119 2,287 Service contracts 1,757 1,482 Other 95 902 -------- -------- Total deferred tax assets 9,790 12,792 Valuation allowance (1,537) (3,638) -------- -------- Net deferred tax assets 8,253 9,154 -------- -------- Net deferred tax liability $ 5,024 $ 4,938 ======== ======== The Company has determined the valuation allowance related to the deferred tax assets based on its analysis of future deductible amounts. This analysis included a schedule of the deductibility of nonlife items against life company taxable income pursuant to Section 801 of the Internal Revenue Code and a determination of the realization of losses generated by available for sale securities. The Company had recorded a valuation allowance of $2,484,000 and $1,739,000 as of December 31, 1993 and January 1, 1993, respectively. The Company has $4,028,000 of net operating losses that are available to reduce future income taxes; $479,000, $35,000, $1,229,000 and $2,285,000 of the losses expire in 2007, 2008, 2009 and 2010, respectively. ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) NOTE H--LIABILITY FOR INSURANCE CLAIMS The following table provides a reconciliation of beginning and ending liability balances for the Company's insurance claims for 1995, 1994 and 1993. RECONCILIATION OF LIABILITY FOR INSURANCE CLAIMS 1995 1994 1993 -------------------------------- (In thousands) Liability for insurance claims at beginning of year $ 23,159 $ 49,919 $ 65,235 Less reinsurance recoverables (5,423) (11,801) (18,521) -------- -------- -------- Net balances at beginning of year 17,736 38,118 46,714 Policy benefits incurred: Policy benefits incurred for events of the current year 19,602 24,914 40,915 Policy benefits incurred for events of prior years 516 83 (2,484) -------- --------- -------- Total policy benefits incurred 20,118 24,997 38,431 -------- --------- -------- Galaxy unpaid losses and LAE at date of write off (see Note K) - 14,325 - Payments: Policy benefits for insured events of the current year 10,860 20,556 30,960 Policy benefits for insured events in prior years 10,097 10,498 16,067 -------- --------- -------- Total payments 20,957 31,054 47,027 -------- --------- -------- Net balances at end of year 16,897 17,736 38,118 Plus reinsurance recoverables 5,864 5,423 11,801 -------- --------- -------- Liability for insurance claims at end of year $ 22,761 $ 23,159 $ 49,919 ======== ========= ======== The table above reflects decreases in the liability for insurance claims resulting from discontinued lines of business and the write off of Galaxy Insurance Company ("Galaxy"), a wholly owned subsidiary of RGL (see Note K). In 1995 and 1994, increases in policy benefits incurred for events of prior years relate to management's reevaluation of discontinued lines of business. In establishing the liability for insurance claims, management considers facts currently known and the current state of the law and coverage litigation. Liabilities are recognized for known claims (including the cost of related litigation) when sufficient information has been developed to indicate the involvement of a specific insurance policy, and management can reasonably estimate its liability. In addition, liabilities have been established to cover additional exposures on both known and unasserted claims. Estimates of the liabilities are reviewed and updated continually. ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) NOTE I--COMMON STOCKS AND COMMON STOCK OPTIONS On June 2, 1992, the Board of Directors voted to suspend payment of cash dividends on the common stock until the Company returns to a level of profitability that will sustain the payment of cash dividends. ACCEL's Board of Directors approved an Employee Stock Ownership Plan ("ESOP") during 1989. In 1990, the ESOP entered into an agreement with ALIC to borrow up to $1,000,000 for the purchase of ACCEL's common stock. At December 31, 1995, the unpaid balance on this loan was $161,000. During November 1989, ACCEL's Board of Directors also approved a stock buy back program to repurchase up to 1,000,000 common shares in the open market. ACCEL has purchased 229,185 shares at a cost of $1,722,000 under this program. The buy back program was funded from internally generated funds. No shares have been purchased since 1992. During 1982, ACCEL adopted a stock option plan (the "82 Plan") under which shares of common stock are available to eligible officers and key personnel. Under the terms of the 82 Plan, the option price must be at least 100% of the fair market value at the date of grant, and, accordingly, there have been no charges to income resulting from grants. Options were granted at prices ranging from $2.769 to $11.750 per share from April 1982 through April 1992. The options become exercisable after one year of continuous employment in installments of 50% at the end of the first and the second year from the date of grant and expire ten years from the date of grant. A total of 300,000 (349,672 after giving effect to all subsequent stock dividends) shares have been reserved for options under the 82 Plan. The following table summarizes activity under this plan. The 82 Plan 1995 1994 1993 ----------- ---- ---- ---- Options lapsed 44,596 36,660 34,758 Of the 67,401 options outstanding under the 82 Plan at December 31, 1995, 67,401 were exercisable. No additional shares may be granted under the 82 Plan. During 1987, ACCEL adopted the 1987 Incentive Stock Option Plan (the "87 Plan"). The 87 Plan provided for incentive stock options with respect to a maximum of 300,000 (347,287 after giving effect to all subsequent stock dividends) shares of common stock of ACCEL prior to the expiration of the 87 Plan in April 1997. During June of 1991, ACCEL's Board of Directors and shareholders approved the First Restatement of the 1987 Stock Incentive Plan (the "Restated Plan"). The Restated Plan replaced the 87 Plan except as to options granted and outstanding under the 87 Plan. The Restated Plan reserved an additional 450,000 shares for key employees and 50,000 shares for non- employee directors. Options may be granted prior to expiration of the Restated Plan covering shares subject to lapsed or terminated options. Of the 539,569 options outstanding under the Restated Plan, 455,819 were exercisable at December 31, 1995. At December 31, 1995, 275,643 shares were reserved for future grants. During May, 1995, two new Key Employees were granted stock options under ACCEL's Restated Plan. Under the terms of their arrangement with ACCEL, both were granted stock options for ACCEL's common stock in lieu of salary for their first year of service. Options for 150,000 shares were granted at an option price per share of $2.125, the fair value of ACCEL's common stock on the date of grant. The options vest immediately and become exercisable one year following the date of grant; however, they would become exercisable immediately upon either a) a change of control of ACCEL, or b) an involuntary termination. The options would be forfeited if employment with ACCEL was voluntarily terminated prior to May 23, 1996. The options lapse five years from the effective date of grant. ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) NOTE I--COMMON STOCK OPTIONS--(CONTINUED) The following table summarizes activity under the Restated Plan. The Restated Plan-Employees - ---------------------------------- 1995 1994 1993 ---- ---- ---- Options granted 231,500 89,000 144,000 Average option price per share $ 2.125 $ 4.50 $ 3.8125 Options lapsed 25,000 118,759 51,842 Options exercised - - - Average exercised price - - - The Restated Plan-Non Employee Directors ---------------------------------------- 1995 1994 1993 ---- ---- ---- Options granted 9,000 8,000 8,000 Average option price per share $ 2.236 $ 4.50 $ 3.50 Options lapsed - - - Options exercised - - - Average exercised price - - - NOTE J--SEGMENT INFORMATION The Company operates primarily in the life/health and property/casualty insurance industries. There are no intersegment sales. The allocations of certain general expenses and investment income within segments are based on a number of assumptions, and the reported operating results would change if different methods were applied. Depreciation and capital expenditures are not considered material. Information relating to revenue, loss before income taxes, and identifiable assets by segment are summarized as follows (see Note K regarding 1994 Property/Casualty amounts): Year Ended December 31, 1995 1994 1993 -------- -------- ------ (Thousands of dollars) Revenue: Life/Health $ 38,878 $ 37,097 $ 45,093 Property/Casualty 11,454 20,185 29,282 Other 143 237 435 -------- -------- -------- Total $ 50,475 $ 57,519 $ 74,810 ======== ======== ======== Loss before income taxes: Life/Health $ 3,055 $ 3,123 $ 1,407 Property/Casualty (2,236) (6,333) (4,484) Other (1,920) (1,695) (2,549) -------- -------- -------- Total $ (1,101) $ (4,905) $ (5,626) ======== ======== ======== December 31, 1995 1994 1993 -------- -------- ------ (Thousands of dollars) Identifiable assets: Life/Health $144,164 $139,262 $139,557 Property/Casualty 38,977 40,428 94,983 Other 366 258 1,641 -------- -------- -------- Total $183,507 $179,948 $236,181 ======== ======== ======== ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) NOTE K--WRITE OFF OF INVESTMENT IN RANDJILL GROUP LTD. AND GALAXY INSURANCE COMPANY During December 1986, ACCEL invested $1,370,000 (a 20% interest) in RGL. RGL was formed to acquire all the outstanding shares of Galaxy Reinsurance Company, the name was ultimately changed to Galaxy, a New York domiciled property and casualty insurance company. Galaxy wrote commercial property insurance, property and casualty, and assumed treaty reinsurance. During the second quarter of 1991, the Company purchased 11,000 additional common shares of RGL at a cost of $992,000. The additional investment increased the Company's ownership to 31% at June 30, 1991. In July 1991, the Company purchased the remaining 69% of RGL for cash and subordinated notes (see Note D) of $2.1 million and $5.8 million, respectively. The purchase price included goodwill of $1.2 million. Members of CIHC held a 45% interest in RGL prior to the acquisition by ACCEL. For the three years ended December 31, 1993, RGL recorded losses and Galaxy's underwriting results deteriorated. The statutory capital and surplus of Galaxy declined significantly (from $7.3 million to $6.1 million to $2.9 million at December 31, 1991, 1992 and 1993, respectively), resulting in the New York Department of Insurance ("New York Department") placing a moratorium on all new business as of February 28, 1994. As a result of the unsatisfactory underwriting performance of Galaxy and the moratorium placed on Galaxy's underwriting operations by the New York Department, the Company elected to write-off the unamortized goodwill related to Galaxy, which resulted in a charge to operations (general and administrative expenses) for 1993 of $1,643,000. Due to significant loss development during 1994 on Galaxy's liability lines of business, the Company contracted with an independent actuarial consultant to review the adequacy of Galaxy's loss and loss adjustment expense reserves as of June 30, 1994. The findings of this review indicated the need for additional reserves which resulted in the statutory insolvency of Galaxy at June 30, 1994. Statutory capital and surplus after the reserve strengthening was a negative $2.3 million. Due to the significance of the statutory loss and the loss of the Company's control of Galaxy as a result of the insolvency, the Company wrote off its investment in RGL ($3.8 million) during the second quarter of 1994. As a result of this action, the consolidated results of operations for 1994 include a charge to operations of $3.8 million, representing the Company's net investment in Galaxy as of April 1, 1994, in addition to operating losses of $205,000 incurred during the first quarter. The Company wrote its investment in RGL to zero and deconsolidated RGL as of April 1, 1994. Pursuant to an Order of Liquidation dated October 7, 1994, issued by the Supreme Court of the State of New York, the Liquidation Bureau of the New York Department took control of Galaxy on October 11, 1994. Acceleration National Insurance Company ("ANIC"), a wholly owned subsidiary of ACCEL, in the normal course of business, issued certain policy endorsements on Galaxy policies in 1992, some of which had pending claims open at the time of liquidation. Management believes that these endorsements will not have a material impact on the Company's financial condition. As of December 31, 1995, ANIC had not incurred any costs related to these endorsements. NOTE L--RETIREMENT SAVINGS AND STOCK OWNERSHIP PLAN The Acceleration Retirement Savings Plan became effective in 1985. During 1989, ACCEL's Board of Directors approved changes to this plan to include an ESOP and concurrently changed the plan name to the "Acceleration Retirement Savings and Stock Ownership Plan" ("PLAN"). For 1993, ACCEL's Board of Directors authorized a contribution to the plan of $160,000. For 1994 and 1995 the Board authorized contributions to the PLAN at a level that would fund a 100% match of the first 6% of each participating employees tax deferred contributions. The Company incurred a contribution expense for 1995, 1994 and 1993 of $198,000, $178,000 and $160,000, respectively. ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) NOTE L--RETIREMENT SAVINGS AND STOCK OWNERSHIP PLAN--(CONTINUED) The PLAN allows all employees who meet certain eligibility requirements and choose to participate to defer a percentage of their salary and contribute to the PLAN on a tax deferred basis. The employee contributions to the PLAN are used to fund the savings element of the PLAN. The Company contributions become part of the Plan and are used to purchase shares of ACCEL's common stock in the open market. In 1990, the PLAN entered into an agreement with ALIC to borrow up to $1,000,000 for the purchase of ACCEL's common stock. The PLAN purchased 136,887 shares (adjusted for the 1990 5% common stock dividend) under this loan agreement with ALIC at a cost of $1,000,000. In addition to the shares purchased under the loan agreement, the Plan has purchased 90,088 common shares at a cost of $603,000. The loan, which bears interest at 10%, is being repaid from Company contributions to the PLAN. At December 31, 1995, the loan had an unpaid balance of $525,000. The market value of the underlying shares was $161,000. The Company has revalued this loan to market value as of December 31, 1995. This will release shares to participants accounts at an average price which more closely approximates recent market values on the Company's stock. The decrease in the loan has been reflected through a decrease in paid in capital in the accompanying consolidated balance sheets. The unpaid balance of the loan ($161,000 at December 31, 1995), has been reflected as a reduction in common stockholders' equity. NOTE M--FOREIGN CURRENCY TRANSLATION AND OPERATING RESULTS The financial statements of AICL have been translated into U.S. dollars using the British pound as the functional currency. The balance sheets of AICL have been translated into U.S. dollars using exchange rates at December 31, 1995 and 1994, respectively. The operating results of AICL have been translated into U.S. dollars using the average exchange rates in effect during the period. The consolidated results of operations include $(137,000), $(82,000) and $25,000 of pre-tax income (loss) from AICL for the years ended December 31, 1995, 1994 and 1993, respectively. Included in foreign currency translation adjustments are unrealized exchange gains of $85,000 in 1995 and $96,000 in 1994. During 1995, the Company redeemed most of its shares of AICL, which resulted in proceeds approximating the Company's original investment in AICL. The transaction was approved by the Department of Trade and Insurance (United Kingdom). On February 7, 1996, the Company received the final proceeds for redemption of its remaining shares, and AICL ceased to exist. NOTE N--COMMITMENTS AND CONTINGENCIES Due to the nature of its operations, the Company is at all times subject to pending and threatened legal actions that arise in the normal course of its activities. In management's opinion, based on the advice of outside counsel, the accompanying consolidated financial statements would not be materially affected by the ultimate outcome of any legal proceedings or contingent liabilities. In late 1995, the Company was awarded $5.3 million in damages related to certain litigation involving the discontinued Realtors' Errors and Omissions Program. $5.1 million of this award was obtained against the marketing organization; the remainder against a broker defendant. A settlement has been reached with the broker defendant, however, the remaining defendant has indicated its intention to appeal the verdict. The Company is aggressively pursuing efforts to collect on the remaining judgement. As the judgement is currently under negotiation, no amounts have been recognized in the 1995 consolidated statement of operations. ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) NOTE N--COMMITMENTS AND CONTINGENCIES--(CONTINUED) The Company currently leases office space under an operating lease which expires in 2000. The lease is accounted for as an operating lease. Minimum rental commitments in effect at December 31, 1995 are as follows: Year Payable Annual Minimum Rentals ------------ ---------------------- 1996 $ 67,706 1997 69,308 1998 70,910 1999 72,513 2000 55,286 -------- Total $335,723 ======== The amount of rent charged to operations was $19,902 in 1995. NOTE O--RELATED PARTY TRANSACTIONS At December 31, 1994, the Company had a $1,250,000 (256,200 shares, 17%) investment in First International Bancorp. First International Bancorp is affiliated with CIHC. During 1995, the Company sold its investment in First International Bancorp to entities associated with CIHC. The sales price was $1,250,000; no gain or loss was realized on the disposition. As more fully described in Note D, the Company currently has subordinated notes outstanding with CIHC. At December 31, 1995 and 1994, total subordinated notes outstanding to related parties were 5,347,000 and 4,841,000, respectively. Interest expense on these subordinated notes was $509,000, $461,000 and $608,000 for 1995, 1994 and 1993, respectively. NOTE P--RISK BASED CAPITAL In 1993, the National Association of Insurance Commissioners ("NAIC") adopted the life and health and property and casualty Risk-Based Capital (RBC) formulas. These model acts require every insurer to calculate its total adjusted capital and RBC requirement, and provides for an insurance commissioner to intervene if the insurer experiences financial difficulty. These model acts will become law in Ohio, the Company's insurance subsidiaries' state of domicile, in March, 1996. The formula includes components for asset risk, liability risk, interest rate exposure, and other factors. Each of the Company's insurance subsidiaries exceed all required RBC levels as of December 31, 1995. NOTE Q--QUARTERLY CONSOLIDATED RESULTS OF OPERATIONS (UNAUDITED) Quarterly consolidated results of operations for 1995 and 1994 are summarized as follows: First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- ------- (Thousands of dollars, except per share data) 1995 ---- Premiums written $13,247 $15,125 $15,297 $11,774 Premiums earned 9,787 9,833 10,321 10,912 Benefits and expenses 11,688 11,738 12,273 15,877 Net income (loss) 268 399 165 (2,292) Net income (loss) per common share .06 .09 .04 (.52) 1994 ----Premiums written $16,606 $16,990 $11,188 $15,720 Premiums earned 13,008 11,359 11,231 12,002 Benefits and expenses 15,792 17,834 13,894 14,904 Net income (loss) 255 (4,244) (662) (587) Net income (loss) per common share .06 (.96) (.15) (.13) ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) NOTE R--SUBSEQUENT EVENT On March 21, 1996, the property occupied by the Company was sold by ALIC for a price of $3.5 million. The Company will remain in the building and occupy approximately 16,000 square feet of home office space under a five-year lease at an annual rental of approximately $256,000. ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURES Not Applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT In accordance with General Instruction G(3), the information required by this Item 10 is incorporated by reference herein from the material under the headings "Election of Directors" and "Executive Compensation" contained in the Company's definitive proxy statement filed with the Commission relating to the annual meeting of stockholders to be held on June 11, 1996. The executive officers, their respective ages and business experience are as follows: Thomas H. Friedberg (56), Chairman of the Board, President and Chief Executive Officer; Douglas J. Coats (62), Executive Vice President; Nicholas Z. Alexander (60), Senior Vice President, Secretary and General Counsel; Larry L. Main (47), Senior Vice President-Auto After Market Group; Kurt L. Mueller (47), Vice President and Controller; and Alan M. Weiner (45), Vice President and Treasurer. Mr. Friedberg joined the Company on May 23, 1995, when he was appointed Chairman, President & CEO. Prior thereto, he was Chairman, President and CEO of Ranger Insurance Company, Houston, Texas for more than five years. Mr. Coats joined the Company on May 23, 1995, when he was appointed Executive Vice President and a member of the Board of Directors. Prior thereto, he was Executive Vice President of Ranger Insurance Company, Houston, Texas for more than five years. Mr. Alexander was named Senior Vice President, Secretary and General Counsel of the Company in 1992 and prior thereto was Vice President, Secretary and General Counsel of the Company for more than five years. Mr. Main was named Senior Vice President in 1992 and prior thereto was Vice President of the Company for more than five years. Mr. Mueller was named Vice President and Controller of the Company in 1994 and prior thereto had been Vice President- General Accounting of the subsidiaries of the Company for more than five years. Mr. Weiner was named Treasurer of the Company in 1994 and prior thereto had been Vice President- Reinsurance Accounting of the subsidiaries of the Company for more than five years. ITEM 11. EXECUTIVE COMPENSATION In accordance with General Instruction G(3), the information required by this Item 11 is incorporated by reference herein from the material under the headings "Executive Compensation" and "Incentive Stock Option Plans" contained in the Company's definitive proxy statement filed with the Commission relating to the Company's annual meeting of stockholders to be held on June 11, 1996. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT In accordance with General Instruction G(3), the information required by this Item 12 is incorporated by reference herein from the material under the headings "Security Ownership and Certain Beneficial Owners" contained in the Company's definitive proxy statement filed with the Commission relating to the Company's annual meeting of stockholders to be held on June 11, 1996. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS In accordance with General Instruction G(3), the information required by this Item 13 is incorporated by reference herein from the material under the heading "Certain Relationships" contained in the Company's definitive proxy statement filed with the Commission relating to the Company's annual meeting of stockholders to be held on June 11, 1996. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K ITEM 14 (A) (L) AND (2)--INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES COVERED BY INDEPENDENT AUDITORS' REPORT The following consolidated financial statements of ACCEL International Corporation and subsidiaries are included in Item 8: Independent Auditors' Reports Consolidated balance sheets--December 31, 1995 and 1994 Consolidated statements of operations--Years ended December 31, 1995, 1994 and 1993 Consolidated statements of common stockholders' equity--Years ended December 31, 1995, 1994 and 1993 Consolidated statements of cash flows--Years ended December 31, 1995, 1994, and 1993 Notes to consolidated financial statements The following financial statement schedules of ACCEL International Corporation and subsidiaries are included in Item 14 (d): Schedule I -- Summary of Investments - Other than Investments in Related Parties Schedule II -- Condensed Financial Information of Registrant Schedule III -- Supplementary Insurance Information Schedule IV -- Reinsurance All other schedules to the consolidated financial statements required by Article 7 of Regulation S-X are not required under the related instructions or are inapplicable or the required information is provided in the consolidated financial statements, and the schedules therefore have been omitted. ITEM 14 (C)--EXHIBITS Page Numbers Exhibit In Exhibit Number Description Volume - ------- ---------------------------------------------- ------------ (3) Articles of Incorporation and By-Laws. 1(a) Certificate of Incorporation, as amended, of Registrant. (Incorporated by reference to Exhibit A of Registrant's definitive Proxy Statement as filed with the Commission on June 9, 1978.) 1(b) Restated Certificate of Incorporation of the Registrant. (Incorporated by reference to Exhibit (3)1(g) of Registrant's Report on Form 10-K for the year ended December 31, 1989.) 2(a) By-laws of Registrant. (Incorporated by reference to Exhibit B of the Registrant's definitive Proxy Statement as filed with the Commission on June 9, 1978.) 2(b) Amendment to Article III, Section 3.02 of the Registrant's By-Laws as passed by the Board of Directors of the Registrant on December 1, 1978. (Incorporated by reference to Exhibit (9)(b) of the Registrant's Report on Form 10-Q for the quarter ended March 31, 1979.) 2(c) Amendment to Article II, Section 2.04 of the Registrant's By-Laws as passed by the Board of Directors of the Registrant on October 23, 1981. (Filed with the Registrant's Amendment #1 to the Registration Statement on Form S-7 as Exhibit (4)3(c) and incorporated herein by reference.) 2(d) Amendment to Article II, Section 2.02 of the Registrant's By-Laws as approved by the Board of Directors of the Registrant on June 18, 1985. (Incorporated by reference to Exhibit (3) 2(d) to Registrant's Report on Form 10-K for the year ended December 31, 1985.) 2(e) Amendment to Article II, Section 2.02 of the Registrant's By-Laws as approved by the Board of Directors of the Registrant on March 29, 1988. (Incorporated by reference to Exhibit (3)2(e) of Registrants Report on Form 10-K for the year ended December 31, 1989.) 2(f) Amendment to Article VIII and the redesignation and alteration of the former Article VIII as Article IX. (Incorporated by reference to Exhibit (3)2(f) of Registrant's Report on Form 10-K for the year ended December 31, 1989.) (4) Instruments defining rights of security holders.* 1. Certificate of Designation, Preferences, Rights and Limitations of Series A, 8% Cumulative Preferred Stock, $1 Par Value, of Registrant, dated August 23, 1978. (Incorporated by reference to Exhibit 3 to Registrant's Report on Form 10-K for the year ended December 31, 1979.) (10) Material Contracts. Previously filed Material Contracts which are either terminated or deemed to be in the ordinary course of business to the Registrant are no longer identified. 1(a) Verification of coverage of current 1 Directors and Officers Liability Policy for ACCEL International Corporation as issued by Reliance Insurance Company, indicating coverage for the period from June 1, 1994 to June 1, 1995. 2. The Company's 1982 Incentive Stock Option Plan. (Incorporated by reference to Exhibit A to the Company's definitive Proxy Statement for the 1982 annual meeting of stockholders of the Company.) 3. The Company's 1987 Incentive Stock Option Plan. (Incorporated by reference to Exhibit (10) 7. to the Registrant's Report on Form 10-K for the year ended December 31, 1987.) 3(a) The Company's first restatement of the 1987 Stock Incentive Plan. (Incorporated by reference to Exhibit A to the Company's definitive Proxy Statement for the 1990 annual meeting of stockholders of the Company.) 4. The Company's Short Term Incentive Compensation Plan, effective July 1, 1983. (Incorporated by reference to Exhibit 28 to Registrant's Report on Form 10-K for the year ended December 31, 1986.) 5.(a) Stock Purchase Agreement by and between United Coasts Corporation and Acceleration National Insurance Company dated January 20, 1989. (Incorporated by reference to Exhibit (10)8(a) to Registrant's Report on Form 10-K for year ended December 31, 1988.) 5.(b) Stock Purchase Agreement by and between ACMAT Corporation and Acceleration National Insurance Company dated January 20, 1989. (Incorporated by reference to Exhibit (10)8(b) to Registrant's Report on Form 10-K for year ended December 31, 1988.) (10) 5. (c) Non-Competition Agreement by and Cont. between ACCEL International Corporation and United Coastal Insurance Company dated January 20, 1989. (Incorporated by reference to Exhibit (10)8(c) to Registrant's Report on Form 10-K for year ended December 31, 1988.) 5. (d) Non-Competition Agreement by and between ACCEL International Corporation and ACMAT Corporation dated January 20, 1989. (Incorporated by reference to Exhibit (10)8(d) to Registrant's Report on Form 10-K for year ended December 31, 1988.) 6(a) Joint Venture Agreement dated June 16, 1987 by and between Consumers Life Insurance Company and Acceleration Life Insurance Company of Pennsylvania and Acceleration National Service Corporation with Exhibits E and F. (Incorporated by reference to Exhibit (10) 9(a) to Registrant's Report on Form 10-K for year ended December 31, 1987.) 6(b) Quota Share Reinsurance Agreement dated June 16, 1987 by and between Consumers Life Insurance Company and Acceleration Life Insurance Company. (Incorporated by reference to Exhibit (10) 9(b) to Registrant's Report on Form 10-K for year ended December 31, 1987.) 6(b) 1. Amendment to the Quota Share Reinsurance Agreement effective October 1, 1987. (Incorporated by reference to Exhibit (10)9(b) of the Registrant's Report on Form 10-K for year ended December 31, 1988.) 6(c) Custodial Account Agreement effective July 1, 1987 by and between Acceleration Life Insurance Company, Consumers Life Insurance Company, and Fifth-Third Bank. (Incorporated by reference to Exhibit (10) 9(c) of the Registrant's Report on Form 10-K for year ended December 31, 1987.) 6(d) Service Contract, Agreement and Schedules - Joint Venture Agreement Exhibit B by and between Consumers Life Insurance Company and Acceleration Life Insurance Company. (Incorporated by reference to Exhibit (10) 9(d) of the Registrant's Report on Form 10-K for year ended December 31, 1987.) 6(e) Service Contract Settlement - Joint Venture Agreement Exhibit C effective July 1, 1987 by and between Consumers Life Insurance Company and Acceleration Life Insurance Company. (Incorporated by reference to Exhibit (10) 9(e) of the Registrant's Report on Form 10-K for year ended December 31, 1987.) (10) 6(f) Security Agreement - Joint Venture Cont. Agreement effective July 1, 1987 by and between Acceleration Life Insurance Company, Consumers Life Insurance Company, and Fifth- Third Bank. (Incorporated by reference to Exhibit (10) 9(f) of the Registrant's Report on Form 10-K for year ended December 31, 1987.) 6(g) Marketing Representation Agreement dated June 16, 1987 by and between Consumers Financial Corporation, ACCEL International Corporation, and Pennsylvania Auto Association Insurance Agency, Inc. (Incorporated by reference to Exhibit (10) 9(g) of the Registrant's Report on Form 10-K for year ended December 31, 1987.) 6(h) Unconditional Irrevocable Guaranty dated June 16, 1987 by Consumers Financial Corporation and Consumers Life Insurance Company. (Incorporated by reference to Exhibit (10) 9(h) of the Registrant's Report on Form 10-K for year ended December 31, 1987.) 6(i) Unconditional Irrevocable Guaranty dated June 16, 1987 by ACCEL International Corporation. (Incorporated by reference to Exhibit (10) 9(i) of the Registrant's Report on Form 10-K for year ended December 31, 1987.) 7. Employment Agreement dated August 1, 1990 by and between ACCEL International Corporation and R. Max Williamson, Chairman of the Board, President and Chief Executive Officer of Registrant. (Incorporated by reference to Exhibit (10) 9 of the Registrant's Report on Form 10-K for the year ended December 31, 1990.) 8. Special Severance Policy of Key Employees of ACCEL International Corporation dated effective September 21, 1989. (Incorporated by reference to Exhibit (10) 10 of the Registrant's Report on Form 10-K for year ended December 31, 1990.) 9. Stock Purchase Agreement dated December 20, 1990 by and between ACCEL International Corporation and Eli I. Zborowski. (Incorporated by reference to Exhibit (10) 11 of the Registrant's Report on Form 10-K for year ended December 31, 1990.) (10) 10. Purchase Agreement dated July 31, 1991 Cont. by and between ACCEL International Corporation and Karl Albert, in connection with Registrant's purchase of all remaining shares outstanding of Randjill Group Ltd. A total of six separate such agreements were entered into as part of the described transaction, with the agreements varying only as to the number of shares being purchased, total compensation being paid and whether consideration constituted all cash, cash and notes or all notes. Registrant hereby agrees to furnish copies of the other agreements to the Commission upon request. (Incorporated by reference to Exhibit (10) 10 of the Registrant's Report on Form 10-K for year ended December 31, 1991.) 11. Credit Life and Accident and Health Quota Share Reinsurance Contract effective December 31, 1994 issued to Acceleration Life Insurance Company. The Company executed Amendment No. 3 to a Credit Agreement with the Fifth Third Bank, Cincinnati, Ohio, a copy of which is not included herewith as an exhibit. Registrant agrees to furnish to the Commission a copy thereof upon request. 12. Note Agreement pertaining to $16,500,000 2-56 9.5% Senior Notes, due April 1, 2001, dated as of December 15, 1995, with The Lincoln National Life Insurance Company. 13. Reinsurance Agreement between 57-90 Acceleration Life Insurance Company and The Lincoln National Life Insurance Company executed December 29, 1995 and by amendment thereto, made effective January 1, 1996. (21) Subsidiaries of the Registrant 91-92 (1) See Organizational Chart - all such Companies are incorporated herein by reference and are presently doing business under their respective INCORPORATED NAMES. (23) Consent of Independent Auditors' 93 (24) Powers of Attorney 94-101 * The total amount of securities authorized under any instrument with respect to long- term debt does not exceed 10% of the total assets of the Registrant and its subsidiaries on a consolidated basis. The Registrant hereby agrees to furnish a copy of any such instrument to the Commission upon request. ITEM 14 (D)--SCHEDULES SCHEDULE I - SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN RELATED PARTIES ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES DECEMBER 31, 1995 ____________________________________________________________________________ Column A Column B Column C Column D ____________________________________________________________________________ Amount at Which Shown in the Fair Balance Type of Investment Cost* Value Sheet ____________________________________________________________________________ (Thousands of dollars) Available for sale securities: Fixed maturities: United States Government and govern- ment agencies and authorities $ 9,310 $ 9,584 $ 9,584 States, municipalities and political subdivisions 1,255 1,290 1,290 Mortgage-backed securities 41,214 40,622 40,622 All other corporate bonds 1,000 1,026 1,026 Redeemable preferred stocks 648 682 682 --------- --------- --------- Total 53,427 53,204 53,204 Equity securities: Common stocks: Banks, trusts and insurance companies 5,433 5,451 5,451 Other long-term investments 364 364 364 Short-term investments 4,278 4,278 4,278 --------- --------- --------- Total investments $ 63,502 $ 63,297 $ 63,297 ========= ========= ========= * Original cost of equity securities, adjusted for any permanent write down, and, as to fixed maturities, original cost reduced by repayments and adjusted for amortization of premiums or accrual of discounts. See accompanying independent auditors' report. SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT BALANCE SHEETS ACCEL INTERNATIONAL CORPORATION (PARENT COMPANY) December 31, 1995 1994 --------- --------- (Thousands of dollars) ASSETS Investments $ 1 $ 50 Cash 443 203 Notes and receivables from consolidated subsidiaries* 391 221 Deferred federal income tax 251 3 Investments in subsidiaries** 48,596 39,233 Other 4 5 --------- --------- $ 49,686 $ 39,715 ========= ========= LIABILITIES AND COMMON STOCKHOLDERS' EQUITY Accounts payable and other liabilities $ 296 $ 240 Accounts payable to subsidiaries* 5,954 5,302 Current federal income tax 345 345 Notes payable 22,531 18,462 --------- --------- 29,126 24,349 Common stockholders' equity: Common stock 524 524 Additional paid-in capital 23,702 24,066 Retained earnings (including undistributed earnings of subsidiaries and affiliates: 1995--$8,770,000; 1994--$8,803,000) 3,299 4,759 Treasury shares at cost (6,599) (6,599) ESOP loan (161) (627) Net unrealized depreciation on investment securities (representing amounts attributable to investments of subsidiaries 1995--($205,000); 1994--($6,672,000) (205) (6,672) Foreign currency translation adjustment - (85) --------- --------- 20,560 15,366 --------- --------- $ 49,686 $ 39,715 ========= ========= * Eliminated in consolidation ** Eliminated in consolidation except for portion related to goodwill and ESOP loan. The condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto of ACCEL International Corporation and subsidiaries. See accompanying independent auditors' report. SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF OPERATIONS ACCEL INTERNATIONAL CORPORATION (PARENT COMPANY) Year Ended December 31, 1995 1994 1993 -------- -------- ----- (Thousands of dollars) INCOME Net investment income: Dividends from consolidated subsidiaries* $ 803 $ 631 $ 650 Interest 1 13 58 Realized gains - 122 - Other income 143 105 320 -------- -------- -------- 947 871 1,028 EXPENSES General and administrative 315 345 1,346 Interest 2,307 2,007 2,052 Loss on write-off of subsidiary - 3,829 - -------- -------- -------- 2,622 6,181 3,398 -------- -------- -------- LOSS BEFORE INCOME TAXES AND OTHER ITEMS (1,675) (5,310) (2,370) Federal income taxes (benefit) (248) - (191) Other item--equity in undistributed net income (loss) of consolidated subsidiaries* (33) 72 (3,102) -------- -------- -------- NET LOSS $ (1,460) $ (5,238) $ (5,281) ======== ======== ======== * Eliminated in consolidation The condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto of ACCEL International Corporation and subsidiaries. See accompanying independent auditors' report. SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF CASH FLOWS ACCEL INTERNATIONAL CORPORATION (PARENT COMPANY) Year Ended December 31, 1995 1994 1993 -------- -------- -------- (Thousands of dollars) OPERATING ACTIVITIES: Net loss $(1,460) $(5,238) $(5,281) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Change in amounts due from consolidated subsidiaries 830 118 24 Change in accounts payable to consolidated subsidiaries 652 115 438 Change in other assets, other liabilities, and accrued income taxes (191) (112) 336 Interest paid in kind 569 515 657 Amortization of premium on bonds - 5 33 Equity in gains losses of subsidiaries and affiliates 33 (72) 3,102 Provision for amortization of goodwill 107 108 1,284 Write off of subsidiary - 3,829 - Net realized gains on investments - (122) - ------- ------- ------- TOTAL PROVIDED BY (USED IN) OPERATIONS 540 (854) 593 INVESTING ACTIVITIES: Purchase of investments - - (1,437) Investment in subsidiary (4,000) - - Sale, maturity, or repayment of investments 49 1,599 1,143 ------- ------- ------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (3,951) 1,599 (294) FINANCING ACTIVITIES: Repayment of notes payable (13,000) - (1,000) Issuance of notes payable 16,500 - - Repayment of note to subsidiary (1,000) - - Write down of ESOP Loan (364) - - Stock redemption of subsidiary 1,483 - - Cash dividends - - (6) Debentures redeemed - (900) (800) Redemption of redeemable stock - - (73) Other net 32 366 - ------- ------ ------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 3,651 (534) (1,879) ------- ------ ------- INCREASE (DECREASE) IN CASH 240 211 (1,580) Cash (Overdraft) at beginning of year 203 (8) 1,572 ------- ------ ------- CASH (OVERDRAFT) AT END OF YEAR $ 443 $ 203 $ (8) ======= ====== ======= The condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto of ACCEL International Corporation and subsidiaries. See accompanying independent auditors' report. SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------------------------------------------------------- Column A Column B Column C Column D Column E Column F Column G Column H Column I Column J Column K - --------------------------------------------------------------------------------------------------------------------------------- December 31, Year Ended December 31, ------------------------------------------ ---------------------------------------------------------------- Amorti- Benefits, zation claims, of Reserve Other Net losses deferred Deferred for policy invest- and policy Other policy future claim and ment settle- acqui- oper- acqui- policy Unearned benefits Premium in- ment sition ating Premiums sition benefits premiums payable revenue come expenses costs expenses written Segment costs (1) (2) (1) - ---------------------------------------------------------------------------------------------------------------------------------- (Thousands of dollars) 1995 ---- Life/Health $31,357 $ 11 $67,850 $15,568 $24,411 $ 5,172 $12,775 $(1,795) $24,843 $43,144 Property/Casualty 482 - 14,230 7,193 16,442 1,631 7,343 1,045 5,302 12,299 Other - - - - - 140 - - 2,063 - ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- TOTAL $31,839 $ 11 $82,080 $22,761 $40,853 $ 6,943 $20,118 $ (750) $32,208 $55,443 ======= ======= ======= ======= ======= ======= ======= ======= ======= ======= 1994 ---- Life/Health $29,563 $ 15 $65,387 $16,781 $32,059 $ 4,972 $12,350 $(2,563) $24,188 $35,577 Property/Casualty 1,526 - 18,375 6,378 15,541 2,380 12,647 4,648 9,223 12,432 Other - - - - - 134 - - 1,932 - ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- TOTAL $31,089 $ 15 $83,762 $23,159 $47,600 $ 7,486 $24,997 $ 2,085 $35,343 $48,009 ======= ======= ======= ======= ======= ======= ======= ======= ======= ======= 1993 ---- Life/Health $26,999 $ 775 $59,911 $18,091 $38,640 $ 5,426 $18,759 $(2,657) $27,583 $40,599 Property/Casualty 7,128 - 35,652 31,828 23,009 4,250 19,672 599 13,495 24,906 Other - - - - - 57 - - 2,985 - ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- TOTAL $34,127 $ 775 $95,563 $49,919 $61,649 $ 9,733 $38,431 $(2,058) $44,063 $65,505 ======= ======= ======= ======= ======= ======= ======= ======= ======= ======= (1) Allocations of net investment income and other operating expenses are based on a number of assumptions and results would change if different methods were applied. Net investment income includes realized gains and losses. Other operating expenses at December 31, 1994 include the write off of Randjill Group Limited ($3,829,280). (2) Represents the net (increase) decrease in deferred policy acquisition costs. See accompanying independent auditors' report.
SCHEDULE IV - REINSURANCE ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES Column A Column B Column C Column D Column E Column F Percentage Ceded to Assumed of amount Gross other from other Net assumed to amount companies companies amount net (Thousands of dollars) Year Ended December 31, 1995 - ---------------------------- Life insurance in-force $1,523,926 $(432,311) $ 320,466 $1,412,081 22.7% ========== ========= ========= ========== Premiums Life $ 15,301 $ 2,604 $ 2,255 $ 14,952 15.1% Accident and health 21,463 4,108 4,053 21,408 18.9% Property and casualty 12,371 5,435 - 6,936 .0% ---------- --------- --------- ---------- Total premiums $ 49,135 $ 12,147 $ 6,308 $ 43,296 14.6% ========== ========= ========= ========== Year Ended December 31, 1994 - ---------------------------- Life insurance in-force $1,172,278 $(290,673) $ 336,153 $1,217,758 27.6% ========== ========= ========= ========== Premiums Life $ 15,149 $ (4,932) $ 2,794 $ 13,011 21.4% Accident and health 22,909 (5,189) 4,846 22,566 21.5% Property and casualty 14,806 (2,374) - 12,432 .0% ---------- --------- --------- ---------- Total premiums $ 52,864 $ (12,495) $ 7,640 $ 48,009 15.9% ========== ========= ========= ========== Year Ended December 31, 1993 - ---------------------------- Life insurance in-force $1,094,298 $(268,648) $ 331,834 $1,157,484 28.7% ========== ========= ========= ========== Premiums Life $ 16,320 $ (4,127) $ 2,745 $ 14,938 18.4% Accident and health 28,578 (8,150) 5,232 25,660 20.4% Property and casualty 42,648 (17,984) 243 24,907 1.0% ---------- --------- --------- ---------- Total premiums $ 87,546 $ (30,261) $ 8,220 $ 65,505 12.5% ========== ========= ========= ========== See accompanying independent auditors' report. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ACCEL INTERNATIONAL CORPORATION BY: /S/ Kurt L. Mueller ----------------------------------- Kurt L. Mueller Vice President & Controller DATE: March 28, 1996 ----------------------------------- Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. SIGNATURE TITLE DATE - ------------------------------ ------- -------------- Director - ------------------------------ -------------- Robert Betagole /S/ David T. Chase* Director March 11, 1996 - ------------------------------ -------------- David T. Chase /S/ Douglas J. Coats* Director March 7, 1996 - ------------------------------ -------------- Douglas J. Coats /S/ Raymond H. Deck* Director March 8, 1996 - ------------------------------ -------------- Raymond H. Deck Director - ------------------------------ -------------- Robert E. Fowler III /S/ Thomas H. Friedberg* Director March 12, 1996 - ------------------------------ -------------- Thomas H. Friedberg SIGNATURE TITLE DATE - ------------------------------ ------- -------------- /S/ Kermit G. Hicks* Director March 9, 1996 - ------------------------------ -------------- Kermit G. Hicks /S/ Stephen M. Qua* Director March 7, 1996 - ------------------------------ -------------- Stephen M. Qua /S/ Milton J. Taylor, Sr.* Director March 8, 1996 - ------------------------------ -------------- Milton J. Taylor, Sr. /S/ Paul R. Whitters* Director March 19, 1996 - ------------------------------ -------------- Paul R. Whitters *By: /S/ Nicholas Z. Alexander March 28, 1996 ----------------------------- -------------- Nicholas Z. Alexander Attorney-in-Fact EX-1 2 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-K EXHIBIT VOLUME (Mark One) [X] ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) FOR THE TRANSITION PERIOD FROM TO --------------- ---------------- COMMISSION FILE NUMBER 0-8162 ACCEL INTERNATIONAL CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 31-0788334 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 475 METRO PLACE NORTH, DUBLIN, OHIO 43017 (Address of principal executive offices) (Zip Code) 614-764-7000 (Registrant's Telephone Number) SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Title of each class COMMON STOCK, $.10 PAR VALUE Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulations S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. --- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- The aggregate market value of Common Stock held by non-affiliates on January 31, 1996 was approximately $7,280,000. As of January 31, 1996, there were 4,456,432 shares of Common Stock, $.10 par value per share outstanding. DOCUMENTS INCORPORATED BY REFERENCE: Portions of the definitive proxy statement furnished to stockholders of the registrant in connection with the annual meeting of stockholders to be held on June 11, 1996 are incorporated by reference into Part III. Page Numbers Exhibit In Exhibit Number Description Volume - ------- ---------------------------------------------- ------------ (3) Articles of Incorporation and By-Laws. 1(a) Certificate of Incorporation, as amended, of Registrant. (Incorporated by reference to Exhibit A of Registrant's definitive Proxy Statement as filed with the Commission on June 9, 1978.) 1(b) Restated Certificate of Incorporation of the Registrant. (Incorporated by reference to Exhibit (3)1(g) of Registrant's Report on Form 10-K for the year ended December 31, 1989.) 2(a) By-laws of Registrant. (Incorporated by reference to Exhibit B of the Registrant's definitive Proxy Statement as filed with the Commission on June 9, 1978.) 2(b) Amendment to Article III, Section 3.02 of the Registrant's By-Laws as passed by the Board of Directors of the Registrant on December 1, 1978. (Incorporated by reference to Exhibit (9)(b) of the Registrant's Report on Form 10-Q for the quarter ended March 31, 1979.) 2(c) Amendment to Article II, Section 2.04 of the Registrant's By-Laws as passed by the Board of Directors of the Registrant on October 23, 1981. (Filed with the Registrant's Amendment #1 to the Registration Statement on Form S-7 as Exhibit (4)3(c) and incorporated herein by reference.) 2(d) Amendment to Article II, Section 2.02 of the Registrant's By-Laws as approved by the Board of Directors of the Registrant on June 18, 1985. (Incorporated by reference to Exhibit (3) 2(d) to Registrant's Report on Form 10-K for the year ended December 31, 1985.) 2(e) Amendment to Article II, Section 2.02 of the Registrant's By-Laws as approved by the Board of Directors of the Registrant on March 29, 1988. (Incorporated by reference to Exhibit (3)2(e) of Registrants Report on Form 10-K for the year ended December 31, 1989.) 2(f) Amendment to Article VIII and the redesignation and alteration of the former Article VIII as Article IX. (Incorporated by reference to Exhibit (3)2(f) of Registrant's Report on Form 10-K for the year ended December 31, 1989.) (4) Instruments defining rights of security holders.* 1. Certificate of Designation, Preferences, Rights and Limitations of Series A, 8% Cumulative Preferred Stock, $1 Par Value, of Registrant, dated August 23, 1978. (Incorporated by reference to Exhibit 3 to Registrant's Report on Form 10-K for the year ended December 31, 1979.) (10) Material Contracts. Previously filed Material Contracts which are either terminated or deemed to be in the ordinary course of business to the Registrant are no longer identified. 1(a) Verification of coverage of current 1 Directors and Officers Liability Policy for ACCEL International Corporation as issued by Reliance Insurance Company, indicating coverage for the period from June 1, 1994 to June 1, 1995. 2. The Company's 1982 Incentive Stock Option Plan. (Incorporated by reference to Exhibit A to the Company's definitive Proxy Statement for the 1982 annual meeting of stockholders of the Company.) 3. The Company's 1987 Incentive Stock Option Plan. (Incorporated by reference to Exhibit (10) 7. to the Registrant's Report on Form 10-K for the year ended December 31, 1987.) 3(a) The Company's first restatement of the 1987 Stock Incentive Plan. (Incorporated by reference to Exhibit A to the Company's definitive Proxy Statement for the 1990 annual meeting of stockholders of the Company.) 4. The Company's Short Term Incentive Compensation Plan, effective July 1, 1983. (Incorporated by reference to Exhibit 28 to Registrant's Report on Form 10-K for the year ended December 31, 1986.) 5.(a) Stock Purchase Agreement by and between United Coasts Corporation and Acceleration National Insurance Company dated January 20, 1989. (Incorporated by reference to Exhibit (10)8(a) to Registrant's Report on Form 10-K for year ended December 31, 1988.) 5.(b) Stock Purchase Agreement by and between ACMAT Corporation and Acceleration National Insurance Company dated January 20, 1989. (Incorporated by reference to Exhibit (10)8(b) to Registrant's Report on Form 10-K for year ended December 31, 1988.) (10) 5. (c) Non-Competition Agreement by and Cont. between ACCEL International Corporation and United Coastal Insurance Company dated January 20, 1989. (Incorporated by reference to Exhibit (10)8(c) to Registrant's Report on Form 10-K for year ended December 31, 1988.) 5. (d) Non-Competition Agreement by and between ACCEL International Corporation and ACMAT Corporation dated January 20, 1989. (Incorporated by reference to Exhibit (10)8(d) to Registrant's Report on Form 10-K for year ended December 31, 1988.) 6(a) Joint Venture Agreement dated June 16, 1987 by and between Consumers Life Insurance Company and Acceleration Life Insurance Company of Pennsylvania and Acceleration National Service Corporation with Exhibits E and F. (Incorporated by reference to Exhibit (10) 9(a) to Registrant's Report on Form 10-K for year ended December 31, 1987.) 6(b) Quota Share Reinsurance Agreement dated June 16, 1987 by and between Consumers Life Insurance Company and Acceleration Life Insurance Company. (Incorporated by reference to Exhibit (10) 9(b) to Registrant's Report on Form 10-K for year ended December 31, 1987.) 6(b) 1. Amendment to the Quota Share Reinsurance Agreement effective October 1, 1987. (Incorporated by reference to Exhibit (10)9(b) of the Registrant's Report on Form 10-K for year ended December 31, 1988.) 6(c) Custodial Account Agreement effective July 1, 1987 by and between Acceleration Life Insurance Company, Consumers Life Insurance Company, and Fifth-Third Bank. (Incorporated by reference to Exhibit (10) 9(c) of the Registrant's Report on Form 10-K for year ended December 31, 1987.) 6(d) Service Contract, Agreement and Schedules - Joint Venture Agreement Exhibit B by and between Consumers Life Insurance Company and Acceleration Life Insurance Company. (Incorporated by reference to Exhibit (10) 9(d) of the Registrant's Report on Form 10-K for year ended December 31, 1987.) 6(e) Service Contract Settlement - Joint Venture Agreement Exhibit C effective July 1, 1987 by and between Consumers Life Insurance Company and Acceleration Life Insurance Company. (Incorporated by reference to Exhibit (10) 9(e) of the Registrant's Report on Form 10-K for year ended December 31, 1987.) (10) 6(f) Security Agreement - Joint Venture Cont. Agreement effective July 1, 1987 by and between Acceleration Life Insurance Company, Consumers Life Insurance Company, and Fifth- Third Bank. (Incorporated by reference to Exhibit (10) 9(f) of the Registrant's Report on Form 10-K for year ended December 31, 1987.) 6(g) Marketing Representation Agreement dated June 16, 1987 by and between Consumers Financial Corporation, ACCEL International Corporation, and Pennsylvania Auto Association Insurance Agency, Inc. (Incorporated by reference to Exhibit (10) 9(g) of the Registrant's Report on Form 10-K for year ended December 31, 1987.) 6(h) Unconditional Irrevocable Guaranty dated June 16, 1987 by Consumers Financial Corporation and Consumers Life Insurance Company. (Incorporated by reference to Exhibit (10) 9(h) of the Registrant's Report on Form 10-K for year ended December 31, 1987.) 6(i) Unconditional Irrevocable Guaranty dated June 16, 1987 by ACCEL International Corporation. (Incorporated by reference to Exhibit (10) 9(i) of the Registrant's Report on Form 10-K for year ended December 31, 1987.) 7. Employment Agreement dated August 1, 1990 by and between ACCEL International Corporation and R. Max Williamson, Chairman of the Board, President and Chief Executive Officer of Registrant. (Incorporated by reference to Exhibit (10) 9 of the Registrant's Report on Form 10-K for the year ended December 31, 1990.) 8. Special Severance Policy of Key Employees of ACCEL International Corporation dated effective September 21, 1989. (Incorporated by reference to Exhibit (10) 10 of the Registrant's Report on Form 10-K for year ended December 31, 1990.) 9. Stock Purchase Agreement dated December 20, 1990 by and between ACCEL International Corporation and Eli I. Zborowski. (Incorporated by reference to Exhibit (10) 11 of the Registrant's Report on Form 10-K for year ended December 31, 1990.) (10) 10. Purchase Agreement dated July 31, 1991 Cont. by and between ACCEL International Corporation and Karl Albert, in connection with Registrant's purchase of all remaining shares outstanding of Randjill Group Ltd. A total of six separate such agreements were entered into as part of the described transaction, with the agreements varying only as to the number of shares being purchased, total compensation being paid and whether consideration constituted all cash, cash and notes or all notes. Registrant hereby agrees to furnish copies of the other agreements to the Commission upon request. (Incorporated by reference to Exhibit (10) 10 of the Registrant's Report on Form 10-K for year ended December 31, 1991.) 11. Credit Life and Accident and Health Quota Share Reinsurance Contract effective December 31, 1994 issued to Acceleration Life Insurance Company. The Company executed Amendment No. 3 to a Credit Agreement with the Fifth Third Bank, Cincinnati, Ohio, a copy of which is not included herewith as an exhibit. Registrant agrees to furnish to the Commission a copy thereof upon request. 12. Note Agreement pertaining to $16,500,000 2-56 9.5% Senior Notes, due April 1, 2001, dated as of December 15, 1995, with The Lincoln National Life Insurance Company. 13. Reinsurance Agreement between 57-90 Acceleration Life Insurance Company and The Lincoln National Life Insurance Company executed December 29, 1995 and by amendment thereto, made effective January 1, 1996. (21) Subsidiaries of the Registrant 91-92 (1) See Organizational Chart - all such Companies are incorporated herein by reference and are presently doing business under their respective INCORPORATED NAMES. (23) Consent of Independent Auditors' 93 (24) Powers of Attorney 94-101 * The total amount of securities authorized under any instrument with respect to long- term debt does not exceed 10% of the total assets of the Registrant and its subsidiaries on a consolidated basis. The Registrant hereby agrees to furnish a copy of any such instrument to the Commission upon request. EX-2 3 ITEM 10 -1(a) Discription of Document: DIRECTORS AND OFFICERS LIABILITY POLICY ISSUED BY THE RELIANCE INSURANCE GROUP. POLICY NUMBER NDA 1363224-95 -------------- THIS IS A CLAIMS-MADE POLICY. COVERAGE OF POLICY IS LIMITED TO LIABILITY FOR ACTS FOR WHICH CLAIMS ARE FIRST MADE AGAINST THE INSURED WHILE THE POLICY IS IN FORCE. POLICY PERIOD: FROM 12:01 a.m. ON JUNE 1, 1995 TO 12:01 a.m. ON JUNE 1, 1996 ITEM 10-1(a) Page 1 EX-3 4 ACCEL INTERNATIONAL CORPORATION NOTE AGREEMENT Dated as of December 15, 1995 Re: $16,500,000 9.50% Senior Notes Due April 1, 2001 ITEM 10 - 12 Page 2 TABLE OF CONTENTS (Not a part of the Agreement) SECTION HEADINGPAGE PAGE Parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 SECTION 1. DESCRIPTION OF NOTES AND COMMITMENT. . . . . . . . . . 1 Section 1.1. Description of Notes . . . . . . . . . . . . . . . 1 Section 1.2. Commitment, Closing Date . . . . . . . . . . . . . 1 SECTION 2. PREPAYMENT OF NOTES. . . . . . . . . . . . . . . . . . 2 Section 2.1. Optional Prepayment . . . . . . . . . . . . . . . 2 Section 2.2. Prepayment upon Change of Control . . . . . . . . 2 Section 2.3. Notice of Optional Prepayments . . . . . . . . . . 4 Section 2.4. Application of Prepayments . . . . . . . . . . . . 5 Section 2.5. Direct Payment . . . . . . . . . . . . . . . . . . 5 SECTION 3. REPRESENTATIONS. . . . . . . . . . . . . . . . . . . . 5 Section 3.1. Representations of the Company . . . . . . . . . . 5 Section 3.2. Representations of the Purchaser . . . . . . . . . 5 SECTION 4. CLOSING CONDITIONS . . . . . . . . . . . . . . . . . . 6 Section 4.1. Conditions . . . . . . . . . . . . . . . . . . . . 6 Section 4.2. Waiver of Conditions . . . . . . . . . . . . . . . 7 SECTION 5. COMPANY COVENANTS . . . . . . . . . . . . . . . . . . . 7 Section 5.1. Corporate Existence, Etc . . . . . . . . . . . . . 7 Section 5.2. Insurance . . . . . . . . . . . . . . . . . . . . 7 Section 5.3. Taxes, Claims for Labor and Materials, Compliance with Laws7 Section 5.4. Maintenance, Etc . . . . . . . . . . . . . . . . . 8 Section 5.5. Nature of Business . . . . . . . . . . . . . . . . 8 Section 5.6. Consolidated Tangible Net Worth . . . . . . . . . 8 Section 5.7. Limitations on Indebtedness . . . . . . . . . . . 8 Section 5.8. Limitation on Liens . . . . . . . . . . . . . . . 9 Section 5.9. Limitation on Long-Term Leases and Sale and Leasebacks10 Section 5.10. Restricted Payments . . . . . . . . . . . . . . . 10 Section 5.11. Investments . . . . . . . . . . . . . . . . . . . 11 Section 5.12. Mergers, Consolidations and Sales of Assets . . . 12 Section 5.13. Guaranties . . . . . . . . . . . . . . . . . . . . 14 Section 5.14. Repurchase of Notes . . . . . . . . . . . . . . . 14 Section 5.15. Transactions with Affiliates . . . . . . . . . . . 14 ITEM 10 - 12 Page 3 Section 5.16.Termination of Pension Plans14 Section 5.17. Reports and Rights of Inspection . . . . . . . . . 14 Section 5.18. Information Required by Rule 144A . . . . . . . . 17 Section 5.19. Certain Subsidiary Restrictions . . . . . . . . . 17 Section 5.20. Amendment of Subordinated Notes . . . . . . . . . 18 SECTION 6. EVENTS OF DEFAULT AND REMEDIES THEREFOR . . . . . . . 18 Section 6.1. Events of Default . . . . . . . . . . . . . . . . 18 Section 6.2. Notice to Holders . . . . . . . . . . . . . . . . 19 Section 6.3. Acceleration of Maturities . . . . . . . . . . . . 19 Section 6.4. Rescission of Acceleration . . . . . . . . . . . . 20 SECTION 7. AMENDMENTS, WAIVERS AND CONSENTS . . . . . . . . . . 20 Section 7.1. Consent Required . . . . . . . . . . . . . . . . . 20 Section 7.2. Solicitation of Holders . . . . . . . . . . . . . 21 Section 7.3. Effect of Amendment or Waiver . . . . . . . . . . 21 SECTION 8. INTERPRETATION OF AGREEMENT; DEFINITIONS . . . . . . 21 Section 8.1. Definitions . . . . . . . . . . . . . . . . . . . 21 Section 8.2. Accounting Principles . . . . . . . . . . . . . . 27 Section 8.3. Directly or Indirectly . . . . . . . . . . . . . . 27 SECTION 9. MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . 27 Section 9.1. Registered Notes . . . . . . . . . . . . . . . . . 27 Section 9.2. Exchange of Notes . . . . . . . . . . . . . . . . 28 Section 9.3. Loss, Theft, Etc. of Notes . . . . . . . . . . . . 28 Section 9.4. Expenses, Stamp Tax Indemnity . . . . . . . . . . 28 Section 9.5. Powers and Rights Not Waived; Remedies Cumulative 29 Section 9.6. Notices . . . . . . . . . . . . . . . . . . . . . 29 Section 9.7. Successors and Assigns . . . . . . . . . . . . . . 29 Section 9.8. Survival of Covenants and Representations . . . . 29 Section 9.9. Severability . . . . . . . . . . . . . . . . . . . 29 Section 9.10. Governing Law . . . . . . . . . . . . . . . . . . 30 Section 9.11. Captions . . . . . . . . . . . . . . . . . . . . . 30 Signature Page . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 ITEM 10 - 12 Page 4 ATTACHMENTS TO NOTE AGREEMENT: Schedule I - Liens Securing Funded Debt (including Capitalized Leases) as of September 30, 1995 Exhibit A - Form of 9.50% Senior Note due April 1, 2001 Exhibit B - Representations and Warranties of the Company Exhibit C - Description of Special Counsel's Closing Opinion Exhibit D - Description of Closing Opinion of Counsel to the Company Exhibit E - Subordination Provisions Applicable to Subordinated Funded Debt ITEM 10 - 12 Page 5 ACCEL INTERNATIONAL CORPORATION 475 METRO PLACE NORTH DUBLIN, OHIO 43017-0701 NOTE AGREEMENT Re: $16,500,000 9.50% Senior Notes Due April 1, 2001 Dated as of December 15, 1995 The Lincoln National Life Insurance Company c/o Lincoln Investment Management, Inc. 200 East Berry Street Fort Wayne, Indiana 46802 The undersigned, ACCEL INTERNATIONAL CORPORATION, a Delaware corporation (the "Company"), agrees with the above named Purchaser (the "Purchaser") as follows: SECTION 1. DECSCRIPTION OF NOTES AND COMMITMENT. Section 1.1. Description of Notes. The Company will authorize the issue and sale of $16,500,000 aggregate principal amount of its 9.50% Senior Notes (the "Notes") to be dated the date of issue, to bear interest from such date at the rate of 9.50% per annum, payable annually on the first day of each April in each year (commencing April 1, 1996) and at maturity and to bear interest on overdue principal (including any overdue required or optional prepayment of principal) and premium, if any, and (to the extent legally enforceable) on any overdue installment of interest at the rate of 13.50% per annum after the date due, whether by acceleration or otherwise, until paid, to be expressed to mature on April 1, 2001, and to be substantially in the form attached hereto as Exhibit A. Interest on the Notes shall be computed on the basis of a 360-day year of twelve 30-day months. The Notes are subject to prepayment or redemption at the option of the Company prior to maturity as set forth in Section 2 of this Agreement. The term "Notes" as used herein shall include each Note delivered pursuant to this Agreement. Section 1.2. Commitment, Closing Date. Subject to the terms and conditions hereof and on the basis of the representations and warranties hereinafter set forth, the Company agrees to issue and sell to the Purchaser, and the Purchaser agrees to purchase from the Company the entire issue of the Notes at a price equal to the principal amount thereof on the Closing Date or Dates hereinafter mentioned. ITEM 10 - 12 Page 6 Delivery of the Notes will be made at the offices of Chapman and Cutler, 111 West Monroe Street, Chicago, Illinois 60603, against payment therefor in Federal Reserve or other funds current and immediately available at the principal office of The Fifth Third Bank in Columbus, Ohio for the account of the Company in the amount of the purchase price at 10:00 a.m. Chicago time, on January 12, 1996 or such earlier date as shall mutually be agreed upon by the Company and the Purchaser in writing; provided that the parties may agree to issue and close the purchase of the Notes in two installments, in which event there will be two closings at the offices of Chapman and Cutler as herein provided, the first closing to be on such date (the "First Closing Date") and with respect to such principal amount of Notes as shall be mutually agreed upon by the Company and the Purchaser in writing on or before such First Closing Date and the second closing to be on January 12, 1996 or such earlier date as shall be mutually agrees upon by the Company and the Purchaser in writing on or before such second date (the "Second Closing Date"), on which Second Closing Date the balance in principal amount of the Notes shall be issued and delivered against payment therefor. Each date on which Notes are to be so issued and delivered against payment therefor is referred to herein as a "Closing Date" and each reference herein to a "Closing Date" means each of the First Closing Date and the Second Closing Date if there are two Closing Dates. The Notes delivered to the Purchaser on a Closing Date will be delivered to the Purchaser in the form of a single registered Note in the form attached hereto as Exhibit A for the full amount of the Purchaser's purchase (unless different denominations are specified by the Purchaser), registered in the Purchaser's name or in the name of the Purchaser's nominee, all as the Purchaser may specify at any time prior to the date fixed for delivery. SECTION 2. PREPAYMENT OF NOTES. Section 2.1. Optional Prepayment. Upon compliance with Section 2.3 the Company shall have the privilege, at any time and from time to time, of prepaying the outstanding Notes, either in whole or in part (but if in part then in a minimum principal amount of $250,000) by payment of the principal amount of the Notes, or portion thereof to be prepaid, and accrued interest thereon to the date of such prepayment, without any penalty or premium. Section 2.2. Prepayment upon Change of Control. In the event the Company has knowledge of a Change of Control or an impending Change of Control, the Company will give written notice (a "Control Change Notice") of such fact to all Holders at least 60 days prior to any proposed Change of Control Date; provided, however, that if the Company shall not then have knowledge of such fact, such Control Change Notice shall be delivered promptly upon receipt of such knowledge, but in no event later than three (3) business days after the Change of Control Date. The Control Change Notice shall (i) describe the facts and circumstances of such Change of Control (including the Change of Control Date or proposed Change of Control Date) in reasonable detail, (ii) make reference to this Section 2.2 and the rights of the Holders to require the Company to prepay their Notes on the terms and conditions provided for herein, (iii) state that the Holder must make a declaration of its intent to have the Notes held by it prepaid, and (iv) specify the outside date (calculated as provided below) by which the Holder must respond to such Control Change Notice pursuant to this Section 2.2 in order to make such declaration. ITEM 10 - 12 Page 7 Upon the receipt of such Control Change Notice or, if no Control Change Notice is given, upon receipt of actual knowledge of a Change of Control, the Holder of any Notes shall have the privilege, upon written notice (the "Declaration Notice") to the Company, of declaring all Notes held by such Holder serving such Declaration Notice to become due and payable and thereupon such Notes shall become due and payable on such date (the "Control Change Payment Date") as the Company shall specify in a written notice delivered to such Holder, which notice shall be delivered by the Company to such Holder not later than 20 days prior to the Control Change Payment Date. The Control Change Payment Date shall be not later than 30 days after the Change of Control Date, in the event that such Declaration Notice is served on or prior to the Change of Control Date or 20 days after the date such Declaration Notice is served, if such Declaration Notice is not served on or prior to the Change of Control Date. The Company covenants and agrees to prepay in full on the Control Change Payment Date all Notes held by such Holder serving such Declaration Notice to the Company. In the event that a Control Change Notice has in fact been given as hereinabove required, such Declaration Notice shall be served prior to 60 days after receipt of such Control Change Notice, and in the event that a Control Change Notice has not been given as hereinabove required, such Declaration Notice shall be served prior to 30 days after the Holder serving such Declaration Notice shall have actual knowledge of such Change of Control. In the event that a Control Change Notice is given and a Holder fails to provide a Declaration Notice within the time period set forth above, the Notes held by such Holder shall not become due and payable as a result of such Change of Control. In the event that any Holder shall have declared all of the Notes held thereby to become due and payable pursuant to this Section 2.2, then the Company shall promptly, but in any event within 15 days after the receipt of the Declaration Notice, deliver written notice of such declaration to each other Holder and, notwithstanding the provisions of the immediately preceding paragraph, the right of each such other Holder to declare all of the Notes held thereby to become due and payable pursuant to this Section 2.2 shall remain in effect until the later to occur of (i) 60 days after receipt by such Holders of the Control Change Notice and (ii) 30 days after receipt by such Holders of the notice required to be delivered pursuant to this paragraph; provided, however, that the provisions of this paragraph shall only apply with respect to notices required to be delivered pursuant to this paragraph to the extent that such notices relate to declarations made by Holders prior to the expiration of the periods specified in the immediately preceding paragraph. As used herein, the term "Change of Control" shall mean any of the following events or circumstances: (1) any "person" or "group" (as such terms are used in Section 13(d) and 14(d) of the Exchange Act and the regulations thereunder), other than the D.T. Chase Family, directly or indirectly purchases or otherwise becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act) or has the right to acquire such beneficial ownership (whether or not such right is exercisable immediately, with the passage of time, or subject to any condition), of Voting Stock representing at least a majority of the combined voting power of all outstanding Voting Stock of the Company; ITEM 10 - 12 Page 8 (2)during any period of two consecutive years, the individuals who at the beginning of such period constitute the Company's Board of Directors (together with any new director whose election by the Company's Board of Directors or whose nomination for election by the Company's shareholders was approved by a vote of at least a majority of the directors then still in office who either were directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason (other than death or disability) to constitute at least a majority of the members thereof then in office; (3) the shareholders of the Company shall approve an agreement to merge or consolidate the Company with or into another corporation as a result of which less than 50% of the outstanding Voting Stock of the surviving or resulting entity are or are to be owned by the Persons who were the shareholders of the Company immediately prior to the consummation of such transaction; (4) the shareholders of the Company shall approve the sale of all or substantially all of the Company's business and/or assets to a person or entity that is not a Wholly-owned Subsidiary of the Company; or (5) Thomas H. Friedberg shall cease to be the President and Chief Operating Officer of the Company for any reason, including without limitation his death or legal disability. As used herein, the term "Change of Control Date" shall mean any date upon which a Change of Control shall occur. As used herein, the term "D.T. Chase Family" shall mean (i) David T. Chase, Rhoda L. Chase and children of David T. and Rhoda L. Chase and trusts for such children; (ii) the spouses, lineal descendants and spouses of the lineal descendants of the persons named in clause (i); (iii) the estates or legal representatives of the persons named in clause (i) and (ii); and (iv) Chase Insurance Holdings Corporation so long as more than 51% of the Voting Stock of such corporation is owned and controlled by the persons or their estates or legal representatives described in clauses (i), (ii) and (iii). All prepayments on the Notes pursuant to this Section 2.2 shall be made by the payment of the aggregate principal amount remaining unpaid on such Notes and accrued interest thereon to the date of such prepayment. Any prepayment of less than all of the outstanding Notes made pursuant to this Section 2.2 shall be applied to the payment in full of the Notes held by the Holders providing a Declaration Notice. Section 2.3. Notice of Optional Prepayments. The Company will give notice of any prepayment of the Notes pursuant to Section 2.1 to each Holder thereof not less than 30 days nor more than 60 days before the date fixed for such optional prepayment specifying (i) such date, (ii) the principal amount of the Holder's Notes to be prepaid on such date, (iii) that a premium is not payable, and (iv) the accrued interest applicable to the prepayment. Notice of prepayment having been so given, the aggregate principal amount of the Notes specified ITEM 10 - 12 Page 9 in such notice, together with accrued interest thereon and the premium, if any, payable with respect thereto shall become due and payable on the prepayment date specified in said notice. Section 2.4. Application of Prepayments. All partial prepayments pursuant to Section 2.1 shall be applied on all outstanding Notes ratably in accordance with the unpaid principal amounts thereof. Section 2.5. Direct Payment. Notwithstanding anything to the contrary contained in this Agreement or the Notes, in the case of any Note owned by the Purchaser or any Holder that is an Institutional Holder which has given written notice to the Company requesting that the provisions of this Section 2.5 shall apply, the Company will punctually pay when due the principal thereof, interest thereon and premium, if any, due with respect to said principal, without any presentment thereof, directly to such Holder at its address set forth herein or such other address as such Holder may from time to time designate in writing to the Company or, if a bank account with a United States bank is so designated for such Holder, the Company will make such payments in immediately available funds to such bank account, marked for attention as indicated, or in such other manner or to such other account in any United States bank as such Holder may from time to time direct in writing. SECTION 3. REPRESENTATIONS. Section 3.1. Representations of the Company. The Company represents and warrants that all representations and warranties set forth in Exhibit B are true and correct as of the date hereof and are incorporated herein by reference with the same force and effect as though herein set forth in full. Section 3.2. Representations of the Purchaser. You represent, and in entering into this Agreement, and in issuing the Notes hereunder and thereunder the Company has relied and will be relying on its understanding that you (i) are an "accredited investor" as such term is defined in Rule 501 of Regulation D promulgated under the Securities Act of 1933, as amended (the "1933 Act"), (ii) have such knowledge and experience in financial and business matters, alone or together with your advisors, that you are capable of evaluating the merits and risks of the investment in the Notes to be made by you hereunder, and (iii) are acquiring the Notes for the purpose of investment and not with a view to the distribution thereof, have no present intention of selling, negotiating or otherwise disposing of the Notes being acquired by you hereunder and shall not sell, negotiate or otherwise dispose of such Notes unless such sale is pursuant to an effective registration statement under the 1933 Act or is exempt from the registration requirements under the 1933 Act as of the time of any proposed sale; it being understood, however, that the disposition of your property shall at all times be and remain within your control. You further represent that at least one of the following statements is an accurate representation as to the source of funds to be used by you to pay the purchase price of the Notes purchased by you hereunder: (1) the source of funds to be used by you to pay the purchase price of the Notes is an "insurance company general account" within the meaning of Department of Labor Prohibited Transaction Exemption 95-60 ("PTE") (issued July 12, 1995) and ITEM 10 - 12 Page 10 there is no "employee benefit plan" (within the meaning of Section 3(3) of ERISA or Section 4975(e)(1) of the Code), treating as a single plan, all plans maintained by the same employer or employee organization, with respect to which the amount of the general account reserves and liabilities for all contracts held by or on behalf of such plan, exceed ten percent (10%) of the total reserves and liabilities of such general account (exclusive of separate account liabilities) plus surplus, as set forth in the National Association of Insurance Commissioners Annual Statement filed with your state of domicile; or (2) the source of funds to be used by you to pay the purchase price of the Notes is an "insurance company general account" within the meaning of Department of Labor Prohibited Transaction Exemption 95-60 ("PTE") (issued July 12, 1995) and the purchase of the Original Notes by you is eligible for and satisfies the requirements of PTE 95-60. SECTION 4. CLOSING CONDITIONS. Section 4.1. Conditions;. The obligation of the Purchaser to purchase the Notes on a Closing Date shall be subject to the performance by the Company of its agreements hereunder which by the terms hereof are to be performed at or prior to the time of delivery of the Notes and to the following further conditions precedent: (a) Closing Certificate. The Purchaser shall have received a certificate dated the Closing Date, signed by the President or a Vice President of the Company, the truth and accuracy of which shall be a condition to the Purchaser's obligation to purchase the Notes proposed to be sold to the Purchaser on such Closing Date and to the effect that (i) the representations and warranties of the Company set forth in Exhibit B hereto are true and correct on and with respect to the Closing Date, (ii) the Company has performed all of its obligations hereunder which are to be performed on or prior to the Closing Date, and (iii) no Default or Event of Default has occurred and is continuing. (b) Legal Opinions. The Purchaser shall have received from Chapman and Cutler, who are acting as special counsel to the Purchaser in this transaction, and from Squire, Sanders & Dempsey, counsel for the Company, and Nicholas Z. Alexander Senior Vice President, Secretary and General Counsel of the Company, their respective opinions dated the Closing Date, in form and substance satisfactory to the Purchaser, and covering the matters set forth in Exhibits C and D, respectively, hereto. (c) Reinsurance Agreement. Acceleration Life Insurance Company, a Wholly-owned Subsidiary of the Company, shall have (i) entered into a reinsurance agreement with the Purchaser on or before the earlier of December 28, 1995 or the First Closing Date, which reinsurance agreement shall be in effect with no defaults thereunder as of the Closing Date and (ii) paid the reinsurance premium due under Section B, paragraph 2 of that reinsurance agreement to the Purchaser. ITEM 10 - 12 Page 11 (d)Satisfactory Proceedings. All proceedings taken in connection with the transactions contemplated by this Agreement, and all documents necessary to the consummation thereof, shall be satisfactory in form and substance to the Purchaser and the Purchaser's special counsel, and the Purchaser shall have received a copy (executed or certified as may be appropriate) of all legal documents or proceedings taken in connection with the consummation of said transactions. Section 4.2. Waiver of Conditions. If on a Closing Date the Company fails to tender to the Purchaser the Notes to be issued to the Purchaser on such date or if the conditions specified in Section 4.1 have not been fulfilled, the Purchaser may thereupon elect to be relieved of all further obligations under this Agreement. Without limiting the foregoing, if the conditions specified in Section 4.1 have not been fulfilled, the Purchaser may waive compliance by the Company with any such condition to such extent as the Purchaser may in its sole discretion determine. Nothing in this Section 4.2 shall operate to relieve the Company of any of its obligations hereunder or to waive the Purchaser's rights against the Company. SECTION 5. COMPANY COVENANTS. From and after the Closing Date, or the First Closing Date if there are two Closing Dates, and continuing so long as any amount remains unpaid on any Note: Section 5.1. Corporate Existence, Etc. The Company will preserve and keep in full force and effect, and will cause each Subsidiary to preserve and keep in full force and effect, its corporate existence and all licenses and permits necessary to the proper conduct of its business; provided, however, that the foregoing shall not prevent any transaction permitted by Section 5.12. Section 5.2. Insurance. The Company will maintain, and will cause each Subsidiary to maintain, insurance coverage by financially sound and reputable insurers in such forms and amounts and against such risks as are customary for corporations of established reputation engaged in the same or a similar business and owning and operating similar properties. Section 5.3. Taxes, Claims for Labor and Materials, Compliance with Laws. The Company will promptly pay and discharge, and will cause each Subsidiary promptly to pay and discharge, all lawful taxes, assessments and governmental charges or levies imposed upon the Company or such Subsidiary, respectively, or upon or in respect of all or any part of the property or business of the Company or such Subsidiary, all trade accounts payable in accordance with usual and customary business terms, and all claims for work, labor or materials, which if unpaid might become a Lien upon any property of the Company or such Subsidiary; provided, however, that the Company or such Subsidiary shall not be required to pay any such tax, assessment, charge, levy, account payable or claim if (i) the validity, applicability or amount thereof is being contested in good faith by appropriate actions or proceedings which will prevent the forfeiture or sale of any property of the Company or such Subsidiary or any material interference with the use thereof by the Company or such Subsidiary, and (ii) the Company or such Subsidiary shall set aside on its books, reserves ITEM 10 - 12 Page 12 deemed by it to be adequate with respect thereto. The Company will promptly comply and will cause each Subsidiary to comply with all laws, ordinances or governmental rules and regulations to which it is subject including, without limitation, the Occupational Safety and Health Act of 1970, as amended, ERISA and all laws, ordinances, governmental rules and regulations relating to environmental protection in all applicable jurisdictions, the violation of which could materially and adversely affect the properties, business, prospects, profits or condition of the Company and its Subsidiaries or would result in any Lien not permitted under Section 5.8. Section 5.4. Maintenance, Etc. The Company will maintain, preserve and keep, and will cause each Subsidiary to maintain, preserve and keep, its properties which are used or useful in the conduct of its business (whether owned in fee or a leasehold interest) in good repair and working order and from time to time will make all necessary repairs, replacements, renewals and additions so that at all times the efficiency thereof shall be maintained. Section 5.5. Nature of Business. Neither the Company nor any Subsidiary will engage in any business if, as a result, the general nature of the business, taken on a consolidated basis, which would then be engaged in by the Company and its Subsidiaries would be substantially changed from the general nature of the business engaged in by the Company and its Subsidiaries on the date of this Agreement. Section 5.6. Consolidated Tangible Net Worth. The Company will at all times keep and maintain Consolidated Tangible Net Worth at an amount not less than $15,000,000. Section 5.7. Limitations on Indebtedness. (a) The Company will not, and will not permit any Subsidiary to, create, assume or incur or in any manner be or become liable in respect of any Indebtedness, except: (1) Indebtedness evidenced by the Notes; (2) Indebtedness of the Company (other than the Subordinated Notes) and its Subsidiaries reflected on the consolidated balance sheet of the Company and its Subsidiaries as at September 30, 1995 and outstanding as of the date of this Agreement after application of the net proceeds from the sale of the Notes as described in paragraph 14 of Exhibit B; (3) Subordinated Funded Debt of the Company, provided, however, that at the time of issuance thereof and after giving effect thereto and to the application of the proceeds thereof the Consolidated Funded Debt of the Company and its Subsidiaries shall not at any time exceed an amount equal to $2,000,000; and (4) The Subordinated Notes; provided that the aggregate principal amount of the Subordinated Notes shall not at any time exceed the sum of (i) the principal amount of the Subordinated Notes outstanding on the date hereof, plus (ii) the amount of interest on the Subordinated Notes paid in additional Subordinated Notes, less (iii) any amount paid on the Subordinated Notes. ITEM 10 - 12 Page 13 (b)Any corporation which becomes a Subsidiary after the date hereof shall for all purposes of this Section 5.7 be deemed to have created, assumed or incurred at the time it becomes a Subsidiary all Funded Debt of such corporation existing immediately after it becomes a Subsidiary. (c) Indebtedness evidenced by the Subordinated Notes shall be amended as provided in Section 5.20 hereof. Section 5.8. Limitation on Liens. The Company will not, and will not permit any Subsidiary to, create or incur, or suffer to be incurred or to exist, any Lien on its or their property or assets, whether now owned or hereafter acquired, or upon any income or profits therefrom, or transfer any property for the purpose of subjecting the same to the payment of obligations in priority to the payment of its or their general creditors, or acquire or agree to acquire, or permit any Subsidiary to acquire, any property or assets upon conditional sales agreements or other title retention devices, except: (a) Liens for property taxes and assessments or governmental charges or levies and Liens securing claims or demands of mechanics and materialmen, provided payment thereof is not at the time required by Section 5.3; (b) Liens of or resulting from any judgment or award, the time for the appeal or petition for rehearing of which shall not have expired, or in respect of which the Company or a Subsidiary shall at any time in good faith be prosecuting an appeal or proceeding for a review and in respect of which a stay of execution pending such appeal or proceeding for review shall have been secured; (c) Liens incidental to the conduct of business or the ownership of properties and assets (including Liens in connection with worker's compensation, unemployment insurance and other like laws, warehousemen's and attorneys' liens and statutory landlords' liens) and Liens to secure the performance of bids, tenders or trade contracts, or to secure statutory obligations, surety or appeal bonds or other Liens of like general nature incurred in the ordinary course of business and not in connection with the borrowing of money; provided in each case, the obligation secured is not overdue or, if overdue, is being contested in good faith by appropriate actions or proceedings; (d) minor survey exceptions or minor encumbrances, easements or reservations, or rights of others for rights-of-way, utilities and other similar purposes, or zoning or other restrictions as to the use of real properties, which are necessary for the conduct of the activities of the Company and its Subsidiaries or which customarily exist on properties of corporations engaged in similar activities and similarly situated and which do not in any event materially impair their use in the operation of the business of the Company and its Subsidiaries; and (e) Liens securing Indebtedness of a Subsidiary to the Company. ITEM 10 - 12 Page 14 Section 5.9.Limitation on Long-Term Leases and Sale and Leasebacks. (a) The Company will not, and will not permit any Subsidiary to, become obligated, as lessee, under any Long-Term Lease if, at the time of entering into such Long-Term Lease and after giving effect thereto, the aggregate Rentals payable by the Company and all of its Subsidiaries on a consolidated basis in any one fiscal year thereafter under all Long-Term Leases would exceed 5.0% of Consolidated Tangible Net Worth. (b) The Company will not, and will not permit any Subsidiary to, enter into any arrangement whereby the Company or any Subsidiary shall sell or transfer any property owned by the Company or any Subsidiary to any Person other than the Company or a Subsidiary and thereupon the Company or any Subsidiary shall lease or intend to lease, as lessee, the same property; provided that this provision shall not prevent the Company from selling the real estate and related properties constituting its headquarters building at 475 Metro Place North, Dublin, Ohio 43017-0701 (the "Metro Place Sale"), and leasing back, pursuant to a customary office space lease, up to 30% of the rental square feet in such building for its offices. Section 5.10. Restricted Payments. The Company will not except as hereinafter provided: (a) Declare or pay any dividends, either in cash or property, on any shares of its capital stock of any class (except dividends or other distributions payable solely in shares of capital stock of the Company); (b) Directly or indirectly, or through any Subsidiary, purchase, redeem or retire any shares of its capital stock of any class or any warrants, rights or options to purchase or acquire any shares of its capital stock (other than in exchange for or out of the net cash proceeds to the Company from the substantially concurrent issue or sale of other shares of capital stock of the Company or warrants, rights or options to purchase or acquire any shares of its capital stock); (c) Make any other payment or distribution, either directly or indirectly or through any Subsidiary, in respect of its capital stock; or (d) Make, or permit any Subsidiary to make, any Restricted Investment; (such declarations or payments of dividends, purchases, redemptions or retirements of capital stock and warrants, rights or options and all such other payments or distributions and such Restricted Investments are herein collectively called "Restricted Payments"), if after giving effect thereto any Default shall have occurred and be continuing or the sum of the aggregate amount of Restricted Payments made during the period from and after January 1, 1996 to and including the date of the making of the Restricted Payment in question, would exceed the sum of 50% of Consolidated Net Income for such period, computed on a cumulative basis for said entire period (or if such Consolidated Net Income is a deficit figure, then minus 100% of such deficit). ITEM 10 - 12 Page 15 The Company will not declare any dividend which constitutes a Restricted Payment payable more than 60 days after the date of declaration thereof. For the purposes of this Section 5.10, the amount of any Restricted Payment declared, paid or distributed in property shall be deemed to be the greater of the book value of fair market value (as determined in good faith by the Board of Directors of the Company) of such property at the time of the making of the Restricted Payment in question. Section 5.11. Investments. The Company will not, and will not permit any Subsidiary to, make any Investments, other than: (a) Investments by the Company and its Subsidiaries in and to Subsidiaries, including any Investment in a corporation which, after giving effect to such Investment, will become a Subsidiary, provided, however, that so long as the Notes are outstanding and unpaid, the Company shall not have or make Investments in any Subsidiaries which are not Wholly-owned Subsidiaries; (b) Investments in commercial paper maturing in 270 days or less from the date of issuance which, at the time of acquisition by the Company or any Subsidiary, is accorded the highest rating by Standard & Poor's Ratings Group, Moody's Investors Service, Inc. or other nationally recognized credit rating agency of similar standing; (c) Investments in direct obligations of the United States of America or any agency or instrumentality of the United States of America, the payment or guarantee of which constitutes a full faith and credit obligation of the United States of America, in either case, maturing in twelve months or less from the date of acquisition thereof; (d) Investments in certificates of deposit maturing within one year from the date of issuance thereof, issued by a bank or trust company organized under the laws of the United States or any state thereof, having capital, surplus and undivided profits aggregating at least $100,000,000 and whose long-term certificates of deposit are, at the time of acquisition thereof by the Company or a Subsidiary, rated AA or better by Standard & Poor's Ratings Group or Aa or better by Moody's Investors Service, Inc.; (e) loans or advances in the usual and ordinary course of business to officers, directors and employees for expenses (including moving expenses related to a transfer) incidental to carrying on the business of the Company or any Subsidiary; and (f) receivables arising from the sale of goods and services in the ordinary course of business of the Company and its Subsidiaries; (g) in the case the Company's insurance company Subsidiaries, any Investments permitted by applicable law, provided that (i) at least 70% of the total investments of any such Subsidiaries shall be fixed income securities having an NAIC rating of 1 or 2; ITEM 10 - 12 Page 16 (ii)no such Subsidiary shall make or hold any investment, directly or indirectly, in any entities or ventures in which any Affiliate has a direct or indirect interest; (iii) no such Subsidiary shall invest or hold investments, directly or indirectly, in real estate assets or investments in an aggregate amount exceeding 8% of the total investments of such Subsidiary, including investments in entities whose primary assets consist of, or whose primary business is the investment in or management of, real estate; and (iv) not more than 10% of the total investments of any such Subsidiary shall be invested, directly or indirectly, in (A) investments that do not have a rating from one or more nationally recognized statistical rating organizations (as that term is used in Rule 15c3-1(c)(2)(vi)(F) under the Securities Exchange Act of 1934), or that have such a rating but are not rated in one of the four highest generic rating categories of any of such organizations, (B) investments that have been designated by the Securities Valuation Office of the NAIC as having a lower quality than 2, and (C) investments (including without limitation debt or equity investments through interests in stocks, bonds, preferred stock, debentures, partnership interests or joint venture interests) that are not listed and traded on the New York Stock Exchange, the American Stock Exchange or the National Association of Securities Dealers Automated Quotation System; and (h) in the case of a Metro Place Sale, a purchase money note (the "Metro Place Sale Note") secured by a valid and perfected first and paramount mortgage lien and security interests on the property sold in an amount not to exceed 90% of the sale price and bearing interest at a market rate. In valuing any Investments for the purpose of applying the limitations set forth in this Section 5.11, such Investments shall be taken at the original cost thereof, without allowance for any subsequent write-offs or appreciation or depreciation therein, but less any amount repaid or recovered on account of capital or principal. For purposes of this Section 5.11, at any time when a corporation becomes a Subsidiary, all Investments of such corporation at such time shall be deemed to have been made by such corporation, as a Subsidiary, at such time. Section 5.12. Mergers, Consolidations and Sales of Assets. (a) The Company will not, and will not permit any Subsidiary to, (i) consolidate with or be a party to a merger with any other corporation or (ii) sell, lease or otherwise dispose of all or any substantial part (as defined in paragraph (d) of this Section 5.12) of the assets of the Company and its Subsidiaries; provided, however, that: (1) any Subsidiary may merge or consolidate with or into the Company or any Wholly-owned Subsidiary so long as in any merger or consolidation involving the Company, the Company shall be the surviving or continuing corporation; ITEM 10 - 12 Page 17 (2)the Company may consolidate or merge with any other corporation if (i) the Company shall be the surviving or continuing corporation, (ii) at the time of such consolidation or merger and after giving effect thereto no Default or Event of Default shall have occurred and be continuing, and (iii) after giving effect to such consolidation or merger the Company would be permitted to incur at least $1.00 of additional Consolidated Funded Debt under the provisions of Section 5.7; and (3) any Subsidiary may sell, lease or otherwise dispose of all or any substantial part of its assets to the Company or any Wholly-owned Subsidiary. (b) The Company will not permit any Subsidiary to issue or sell any shares of stock of any class (including as "stock" for the purposes of this Section 5.12, any warrants, rights or options to purchase or otherwise acquire stock or other Securities exchangeable for or convertible into stock) of such Subsidiary to any Person other than the Company or a Wholly-owned Subsidiary, except for the purpose of qualifying directors. (c) The Company will not sell, transfer or otherwise dispose of any shares of stock of any Subsidiary (except to qualify directors) or any Indebtedness of any Subsidiary, and will not permit any Subsidiary to sell, transfer or otherwise dispose of (except to the Company or a Wholly-owned Subsidiary) any shares of stock or any Indebtedness of any other Subsidiary, unless: (1) simultaneously with such sale, transfer, or disposition, all shares of stock and all Indebtedness of such Subsidiary at the time owned by the Company and by every other Subsidiary shall be sold, transferred or disposed of as an entirety; (2) the Board of Directors of the Company shall have determined, as evidenced by a resolution thereof, that the proposed sale, transfer or disposition of said shares of stock and Indebtedness is in the best interests of the Company; (3) said shares of stock and Indebtedness are sold, transferred or otherwise disposed of to a Person, for a cash consideration and on terms reasonably deemed by the Board of Directors to be adequate and satisfactory; (4) the Subsidiary being disposed of shall not have any continuing investment in the Company or any other Subsidiary not being simultaneously disposed of; and (5) such sale or other disposition does not involve a substantial part (as hereinafter defined) of the assets of the Company and its Subsidiaries. (d) As used in this Section 5.12, a sale, lease or other disposition of assets shall be deemed to be a "substantial part" of the assets of the Company and its Subsidiaries if the book value of such assets, when added to the book value of all other assets sold, leased or otherwise disposed of by the Company and its Subsidiaries (other than in the ordinary course of business) during the 12-month period ending with the date of such sale, lease or other ITEM 10 - 12 Page 18 disposition, exceeds 10% of the Consolidated Tangible Net Worth, determined as of the end of the immediately preceding fiscal year. Section 5.13. Guaranties. The Company will not, and will not permit any Subsidiary to, become or be liable in respect of any Guaranty except Guaranties by the Company or a Subsidiary which are limited in amount to a stated maximum dollar exposure and which are incurred in compliance with the provisions of this Agreement. Section 5.14. Repurchase of Notes. Neither the Company nor any Subsidiary or Affiliate, directly or indirectly, may repurchase or make any offer to repurchase any Notes unless an offer has been made to repurchase Notes, pro rata, from all Holders at the same time and upon the same terms. In case the Company repurchases or otherwise acquires any Notes, such Notes shall immediately thereafter be canceled and no Notes shall be issued in substitution therefor. Without limiting the foregoing, upon the repurchase or other acquisition of any Notes by the Company, any Subsidiary or any Affiliate (or upon the agreement of Company, any Subsidiary or any Affiliate to purchase or otherwise acquire any Notes), such Notes shall no longer be outstanding for purposes of any section of this Agreement relating to the taking by the Holders of any actions with respect hereto, including, without limitation, Section 6.3, Section 6.4 and Section 7.1. Section 5.15. Transactions with Affiliates. The Company will not, and will not permit any Subsidiary to, enter into or be a party to any transaction or arrangement with any Affiliate (including, without limitation, the purchase from, sale to or exchange of property with, or the rendering of any service by or for, any Affiliate), except in the ordinary course of and pursuant to the reasonable requirements of the Company's or such Subsidiary's business and upon fair and reasonable terms no less favorable to the Company or such Subsidiary than would obtain in a comparable arm's-length transaction with a Person other than an Affiliate. Section 5.16. Termination of Pension Plans. The Company will not and will not permit any Subsidiary to withdraw from any Multiemployer Plan or permit any employee benefit plan maintained by it to be terminated if such withdrawal or termination could result in withdrawal liability (as described in Part 1 of Subtitle E of Title IV of ERISA) or the imposition of a Lien on any property of the Company or any Subsidiary pursuant to Section 4068 of ERISA. Section 5.17. Reports and Rights of Inspection. The Company will keep, and will cause each Subsidiary to keep, proper books of record and account in which full and correct entries will be made of all dealings or transactions of, or in relation to, the business and affairs of the Company or such Subsidiary, in accordance with GAAP consistently applied (except for changes disclosed in the financial statements furnished to the Holders pursuant to this Section 5.17 and concurred in by the independent public accountants referred to in Section 5.17(B) hereof), and will furnish to each Institutional Holder (in duplicate if so specified below or otherwise requested): ITEM 10 - 12 Page 19 (a)Quarterly Statements. As soon as available and in any event within 45 days after the end of each quarterly fiscal period (except the last) of each fiscal year, copies of: (1) consolidated and consolidating balance sheets of the Company and its Subsidiaries as of the close of such quarterly fiscal period, setting forth in comparative form the consolidated figures for the fiscal year then most recently ended; (2) consolidated and consolidating statements of income of the Company and its Subsidiaries for such quarterly fiscal period and for the portion of the fiscal year ending with such quarterly fiscal period, in each case setting forth in comparative form the consolidated figures for the corresponding periods of the preceding fiscal year; and (3) consolidated and consolidating statements of cash flows of the Company and its Subsidiaries for the portion of the fiscal year ending with such quarterly fiscal period, setting forth in comparative form the consolidated figures for the corresponding period of the preceding fiscal year. all in reasonable detail and certified as complete and correct by an authorized financial officer of the Company; (b) Annual Statements. As soon as available and in any event within 90 days after the close of each fiscal year of the Company, copies of: (1) consolidated and consolidating balance sheets of the Company and its Subsidiaries as of the close of such fiscal year, and (2) consolidated and consolidating statements of income and retained earnings and cash flows of the Company and its Subsidiaries for such fiscal year, in each case setting forth in comparative form the consolidated figures for the preceding fiscal year, all in reasonable detail and accompanied by a report thereon of a firm of independent public accountants of recognized national standing selected by the Company to the effect that the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company and its Subsidiaries as of the end of the fiscal year being reported on and the consolidated results of the operations and cash flows for said year in conformity with GAAP and that the examination of such accountants in connection with such financial statements has been conducted in accordance with generally accepted auditing standards and included such tests of the accounting records and such other auditing procedures as said accountants deemed necessary in the circumstances; ITEM 10 - 12 Page 20 (c)Audit Reports. Promptly upon receipt thereof, one copy of each interim or special audit made by independent accountants of the books of the Company or any Subsidiary and any management letter received from such accountants; (d) Insurance Regulatory Reports. As soon as available and in any event within 45 days after the end of each quarterly fiscal period, copies of the Quarterly Reports filed by the Company and its Subsidiaries with the Insurance Regulators, and as soon as available and in any event within 90 days after the end of each fiscal year, copies of the Annual Reports filed by the Company and its Subsidiaries with the Insurance Regulators; (e) SEC and Other Reports. Promptly upon their becoming available, one copy of each financial statement, report, notice or proxy statement sent by the Company to stockholders generally and of each regular, periodic or special report, schedule or other material and any registration statement or prospectus required to be filed by the Company or any Subsidiary with any Insurance Regulator or any securities exchange or the Securities and Exchange Commission (the "SEC") or any successor agency, and copies of any orders in any proceedings to which the Company or any of its Subsidiaries is a party, issued by any governmental agency, Federal or state, having jurisdiction over the Company or any of its Subsidiaries and, copies of all examinations, reports or other material (other than routine correspondence) sent or received by the Company or any Subsidiary to or from the SEC, any Insurance Regulators or the National Association of Insurance Commissioners (the "NAIC"), and news releases sent to financial analysts or stockholders and annual reports relating to the Company and any of its Subsidiaries; (f) ERISA Reports. Promptly upon the occurrence thereof, written notice of (i) a Reportable Event with respect to any Plan; (ii) the institution of any steps by the Company, any ERISA Affiliate, the PBGC or any other person to terminate any Plan; (iii) the institution of any steps by the Company or any ERISA Affiliate to withdraw from any Plan; (iv) a non-exempt "prohibited transaction" within the meaning of Section 406 of ERISA in connection with any Plan; (v) any material increase in the contingent liability of the Company or any Subsidiary with respect to any post-retirement welfare liability; or (vi) the taking of any action by, or the threatening of the taking of any action by, the Internal Revenue Service, the Department of Labor or the PBGC with respect to any of the foregoing; (g) Officer's Certificates. Within the periods provided in paragraphs (a) and (b) above, a certificate of an authorized financial officer of the Company stating that such officer has reviewed the provisions of this Agreement and setting forth: (i) the information and (except in the case of Section 5.14) computations (in sufficient detail) required in order to establish whether the Company was in compliance with the requirements of Section 5.6 through Section 5.16 at the end of the period covered by the financial statements then being furnished, and (ii) whether there existed as of the date of such financial statements and whether, to the best of such officer's knowledge, there exists on the date of the certificate or existed at any time during the period covered by such ITEM 10 - 12 Page 21 financial statements any Default or Event of Default and, if any such condition or event exists on the date of the certificate, specifying the nature and period of existence thereof and the action the Company is taking and proposes to take with respect thereto; (h) Accountant's Certificates. Within the period provided in paragraph (b) above, a certificate of the accountants who render an opinion with respect to such financial statements, stating that they have reviewed this Agreement and stating further whether, in making their audit, such accountants have become aware of any Default or Event of Default under any of the terms or provisions of this Agreement insofar as any such terms or provisions pertain to or involve accounting matters or determinations, and if any such condition or event then exists, specifying the nature and period of existence thereof; (i) Requested Information. With reasonable promptness, such other data and information as such Institutional Holder may reasonably request. Without limiting the foregoing, the Company will permit each Institutional Holder (or such Persons as such Institutional Holder may designate), to visit and inspect, under the Company's guidance, any of the properties of the Company or any Subsidiary, to examine all of their books of account, records, reports and other papers, to make copies and extracts therefrom and to discuss their respective affairs, finances and accounts with their respective officers, employees, and independent public accountants (and by this provision the Company authorizes said accountants to discuss with any Institutional Holder the finances and affairs of the Company and its Subsidiaries) all at such reasonable times and as often as may be reasonably requested. The Company shall not be required to pay or reimburse any Holder for expenses which such Holder may incur in connection with any such visitation or inspection, except that if such visitation or inspection is made during any period when a Default or an Event of Default shall have occurred and be continuing, the Company agrees to reimburse such Holder for all such expenses promptly upon demand. Section 5.18. Information Required by Rule 144A. The Company covenants that it will, upon the request of the holder of any Note, provide such holder, and any qualified institutional buyer designated by such holder, such financial and other information as such holder may reasonably determine to be necessary in order to permit compliance with the information requirements of Rule 144A under the Securities Act in connection with the resale of Notes, except at such times as the Company is subject to and in compliance with the reporting requirements of section 13 or 15(d) of the Exchange Act, provided that the necessary information is disclosed in such reports. For the purpose of this Section 5.18, the term "qualified institutional buyer" shall have the meaning specified in Rule 144A under the Securities Act. Section 5.19. Certain Subsidiary Restrictions. The Company covenants that it will not and it will not permit any Subsidiary to enter into any agreement which would limit or restrict the ability of the Subsidiary to pay dividends to the Company or any other Subsidiary. ITEM 10 - 12 Page 22 Section 5.20.Amendment of Subordinated Notes. If any Notes are outstanding and unpaid as of December 31, 1999, then, on or before January 15, 2000, the Subordinated Notes shall be amended to extend the maturity thereof to provide that no payments of principal will be due or payable prior to October 1, 2001; provided, that, (i) in the event the Company is unable to obtain the extension of the maturity of any of the Subordinated Notes as specified above by January 15, 2000, the entire remaining principal amount of the Notes and all interest accrued and unpaid thereon through January 15, 2000 shall become due and payable on January 15, 2000, and (ii) without the prior written consent of the Holders holding at least 66 2/3% in aggregate principal amount of the outstanding Notes, no payment of principal on the Subordinated Notes shall be made prior to the payment of the Notes in full in cash. SECTION 6. EVENTS OF DEFAULT AND REMEDIES THEREFOR. Section 6.1. Events of Default. Any one or more of the following shall constitute an "Event of Default" as such term is used herein: (a) Default shall occur in the payment of interest on any Note when the same shall have become due and such default shall continue for more than five days; or (b) Default shall occur in the making of any required prepayment on any of the Notes as provided in Section 2.2; or (c) Default shall occur in the making of any other payment of the principal of any Note or premium, if any, thereon at the expressed or any accelerated maturity date or at any date fixed for prepayment; or (d) Default shall be made in the payment when due (whether by lapse of time, by declaration, by call for redemption or otherwise) of the principal of or interest on any Funded Debt or Current Debt (other than the Notes) of the Company or any Subsidiary and such default shall continue beyond the period of grace, if any, allowed with respect thereto; or (e) Default or the happening of any event shall occur under any indenture, agreement or other instrument under which any Funded Debt or Current Debt of the Company or any Subsidiary may be issued and such default or event shall continue for a period of time sufficient to permit the acceleration of the maturity of any Funded Debt or Current Debt of the Company or any Subsidiary outstanding thereunder; or (f) Default shall occur in the observance or performance of any covenant or agreement contained in Section 5.6 through Section 5.16 or Section 5.20; or (g) Default shall occur in the observance or performance of any other provision of this Agreement which is not remedied within 30 days after the earlier of (i) the day on which the Company first obtains knowledge of such default, or (ii) the day on which written notice thereof is given to the Company by any Holder, provided that if such Default is curable but can not be cured with diligence within such 30-day period, then the same shall not constitute an Event of Default hereunder if corrective ITEM 10 - 12 Page 23 action is instituted by the Company within such 30-day period and is diligently pursued so that the Default is cured within not more than an additional 60 days; or (h) Any representation or warranty made by the Company herein, or made by the Company in any statement or certificate furnished by the Company in connection with the consummation of the issuance and delivery of the Notes or furnished by the Company pursuant hereto, is untrue in any material respect as of the date of the issuance or making thereof; or (i) Final judgment or judgments for the payment of money aggregating in excess of $100,000 is or are outstanding against the Company or any Subsidiary or against any property or assets of either and any one of such judgments has remained unpaid, unvacated, unbonded or unstayed by appeal or otherwise for a period of 30 days from the date of its entry; or (j) A custodian, liquidator, trustee or receiver is appointed for the Company or any Subsidiary or for the major part of the property of either and is not discharged within 30 days after such appointment; or (k) The Company or any Subsidiary becomes insolvent or bankrupt, is generally not paying its debts as they become due or makes an assignment for the benefit of creditors, or the Company or any Subsidiary applies for or consents to the appointment of a custodian, liquidator, trustee or receiver for the Company or such Subsidiary or for the major part of the property of either; or (l) Bankruptcy, reorganization, arrangement or insolvency proceedings, or other proceedings for relief under any bankruptcy or similar law or laws for the relief of debtors, are instituted by or against the Company or any Subsidiary and, if instituted against the Company or any Subsidiary, are consented to or are not dismissed within 60 days after such institution. Section 6.2. Notice to Holders. When any Event of Default described in the foregoing Section 6.1 has occurred, or if any Holder or the holder of any other evidence of Funded Debt or Current Debt of the Company gives any notice or takes any other action with respect to a claimed default, the Company agrees to give notice within three business days of such event to all Holders. Section 6.3. Acceleration of Maturities. When any Event of Default described in paragraph (a), (b) or (c) of Section 6.1 has happened and is continuing, any Holder may, and when any Event of Default described in paragraphs (d) through (j), inclusive, of said Section 6.1 has happened and is continuing, any Holder or Holders holding 25% or more of the principal amount of Notes at the time outstanding may, by notice to the Company, declare the entire principal and all interest accrued on all Notes to be, and all Notes shall thereupon become, forthwith due and payable, without any presentment, demand, protest or other notice of any kind, all of which are hereby expressly waived. When any Event of Default described in paragraph (k) or (l) of Section 6.1 has occurred, then all outstanding Notes shall immediately ITEM 10 - 12 Page 24 become due and payable without presentment, demand or notice of any kind. Upon the Notes becoming due and payable as a result of any Event of Default as aforesaid, the Company will forthwith pay to the Holders, the entire principal and interest accrued on the Notes. No course of dealing on the part of the Holder or Holders nor any delay or failure on the part of any Holder to exercise any right shall operate as a waiver of such right or otherwise prejudice such Holder's rights, powers and remedies. The Company further agrees, to the extent permitted by law, to pay to the Holder or Holders all costs and expenses incurred by them in the collection of any Notes upon any default hereunder or thereon, including reasonable compensation to such Holder's or Holders' attorneys for all services rendered in connection therewith. Section 6.4. Rescission of Acceleration. The provisions of Section 6.3 are subject to the condition that if the principal of and accrued interest on all or any outstanding Notes have been declared immediately due and payable by reason of the occurrence of any Event of Default described in paragraphs (a) through (j), inclusive, of Section 6.1, the Holders holding 66-2/3% in aggregate principal amount of the Notes then outstanding may, by written instrument filed with the Company, rescind and annul such declaration and the consequences thereof, provided that at the time such declaration is annulled and rescinded: (a) no judgment or decree has been entered for the payment of any monies due pursuant to the Notes or this Agreement; (b) all arrears of interest upon all the Notes and all other sums payable under the Notes and under this Agreement (except any principal, interest or premium on the Notes which has become due and payable solely by reason of such declaration under Section 6.3) shall have been duly paid; and (c) each and every other Default and Event of Default shall have been made good, cured or waived pursuant to Section 7.1; and provided further, that no such rescission and annulment shall extend to or affect any subsequent Default or Event of Default or impair any right consequent thereto. SECTION 7. AMENDMENTS, WAIVERS AND CONSENTS. Section 7.1. Consent Required. Any term, covenant, agreement or condition of this Agreement may, with the consent of the Company, be amended or compliance therewith may be waived (either generally or in a particular instance and either retroactively or prospectively), if the Company shall have obtained the consent in writing of the Holders holding at least 66-2/3% in aggregate principal amount of outstanding Notes; provided, however, that without the written consent of all of the Holders, no such amendment or waiver shall be effective (i) which will change the time of payment of the principal of or the interest on any Note or change the principal amount thereof or change the rate of interest thereon, or (ii) which will change any of the provisions with respect to optional prepayments, or (iii) which will change the percentage of Holders required to consent to any such amendment or waiver of any of the provisions of this Section 7 or Section 6. ITEM 10 - 12 Page 25 Section 7.2.Solicitation of Holders. So long as there are any Notes outstanding, the Company will not solicit, request or negotiate for or with respect to any proposed waiver or amendment of any of the provisions of this Agreement or the Notes unless each Holder (irrespective of the amount of Notes then owned by it) shall be informed thereof by the Company and shall be afforded the opportunity of considering the same and shall be supplied by the Company with sufficient information to enable it to make an informed decision with respect thereto. The Company will not, directly or indirectly, pay or cause to be paid any remuneration, whether by way of supplemental or additional interest, fee or otherwise, to any Holder as consideration for or as an inducement to entering into by any Holder of any waiver or amendment of any of the terms and provisions of this Agreement or the Notes unless such remuneration is concurrently offered, on the same terms, ratably to all Holders. Section 7.3. Effect of Amendment or Waiver. Any such amendment or waiver shall apply equally to all of the Holders and shall be binding upon them, upon each future Holder and upon the Company, whether or not any Note shall have been marked to indicate such amendment or waiver. No such amendment or waiver shall extend to or affect any obligation not expressly amended or waived or impair any right consequent thereon. SECTION 8. INTERPRETATION OF AGREEMENT; DEFINITIONS. Section 8.1. Definitions. Unless the context otherwise requires, the terms hereinafter set forth when used herein shall have the following meanings and the following definitions shall be equally applicable to both the singular and plural forms of any of the terms herein defined: "Affiliate" shall mean any Person (other than a Subsidiary) (i) which directly or indirectly through one or more intermediaries controls, or is controlled by, or is under common control with, the Company, (ii) which beneficially owns or holds 5% or more of any class of the Voting Stock of the Company or (iii) 5% or more of the Voting Stock (or in the case of a Person which is not a corporation, 5% or more of the equity interest) of which is beneficially owned or held by the Company or a Subsidiary. The term "control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of Voting Stock, by contract or otherwise. "Agreement" shall mean this Note Agreement. "Capitalized Lease" shall mean any lease the obligation for Rentals with respect to which is required to be capitalized on a consolidated balance sheet of the lessee and its subsidiaries in accordance with GAAP. "Capitalized Rentals" of any Person shall mean as of the date of any determination thereof the amount at which the aggregate Rentals due and to become due under all Capitalized Leases under which such Person is a lessee would be reflected as a liability on a consolidated balance sheet of such Person. ITEM 10 - 12 Page 26 "Code" shall mean the Internal Revenue Code of 1986, as amended. "Company" shall mean ACCEL International Corporation, a Delaware corporation, and any Person who succeeds to all, or substantially all, of the assets and business of ACCEL International Corporation. "Consolidated Funded Debt" shall mean all Funded Debt of the Company and its Subsidiaries, determined on a consolidated basis eliminating intercompany items. "Consolidated Net Income" for any period shall mean the gross revenues of the Company and its Subsidiaries for such period less all expenses and other proper charges (including taxes on income), determined on a consolidated basis after eliminating earnings or losses attributable to outstanding Minority Interests, but excluding in any event: (a) any gains or losses on the sale or other disposition of Investments or fixed or capital assets, and any taxes on such excluded gains and any tax deductions or credits on account of any such excluded losses; (b) the proceeds of any life insurance policy; (c) net earnings and losses of any Subsidiary accrued prior to the date it became a Subsidiary; (d) net earnings and losses of any corporation (other than a Subsidiary), substantially all the assets of which have been acquired in any manner by the Company or any Subsidiary, realized by such corporation prior to the date of such acquisition; (e) net earnings and losses of any corporation (other than a Subsidiary) with which the Company or a Subsidiary shall have consolidated or which shall have merged into or with the Company or a Subsidiary prior to the date of such consolidation or merger; (f) net earnings of any business entity (other than a Subsidiary) in which the Company or any Subsidiary has an ownership interest unless such net earnings shall have actually been received by the Company or such Subsidiary in the form of cash distributions; (g) any portion of the net earnings of any Subsidiary which for any reason is unavailable for payment of dividends to the Company or any other Subsidiary; (h) earnings resulting from any reappraisal, revaluation or write-up of assets; (i) any deferred or other credit representing any excess of the equity in any Subsidiary at the date of acquisition thereof over the amount invested in such Subsidiary; ITEM 10 - 12 Page 27 (j)any gain arising from the acquisition of any Securities of the Company or any Subsidiary; and (k) any reversal of any contingency reserve, except to the extent that provision for such contingency reserve shall have been made from income arising during such period. "Consolidated Net Tangible Assets" shall mean as of the date of any determination thereof the total amount of all Tangible Assets of the Company and its Subsidiaries after deducting therefrom all Restricted Investments and all items which in accordance with GAAP would be included on the liability and equity side of a consolidated balance sheet, except deferred income taxes, deferred investment tax credits, capital stock of any class, surplus and Consolidated Funded Debt. "Consolidated Tangible Net Worth" shall mean as of the date of any determination thereof Consolidated Net Tangible Assets less all outstanding Funded Debt, deferred income taxes and deferred investment tax credits of the Company and its Subsidiaries. "Current Debt" of any Person shall mean as of the date of any determination thereof (i) all Indebtedness of such Person for borrowed money other than Funded Debt of such Person and (ii) Guaranties by such Person of Current Debt of others. "Default" shall mean any event or condition the occurrence of which would, with the lapse of time or the giving of notice, or both, constitute an Event of Default. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended, and any successor statute of similar import, together with the regulations thereunder, in each case as in effect from time to time. References to sections of ERISA shall be construed to also refer to any successor sections. "ERISA Affiliate" shall mean any corporation, trade or business that is, along with the Company, a member of a controlled group of corporations or a controlled group of trades or businesses, as described in section 414(b) and 414(c), respectively, of the Code or Section 4001 of ERISA. "Event of Default" shall have the meaning set forth in Section 6.1. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. "Funded Debt" of any Person shall mean (i) all Indebtedness of such Person for borrowed money or which has been incurred in connection with the acquisition of assets in each case having a final maturity of one or more than one year from the date of origin thereof (or which is renewable or extendible at the option of the obligor for a period or periods more than one year from the date of origin), including all payments in respect thereof that are required to be made within one year from the date of any determination of Funded Debt, whether or not the obligation to make such payments shall constitute a current ITEM 10 - 12 Page 28 liability of the obligor under GAAP, (ii) all Capitalized Rentals of such Person, and (iii) all Guaranties by such Person of Funded Debt of others. "GAAP" shall mean generally accepted accounting principles at the time in the United States. "Guaranties" by any Person shall mean all obligations (other than (i) endorsements in the ordinary course of business of negotiable instruments for deposit or collection and (ii) guaranties and other obligations issued or incurred by the Company or any Subsidiary pursuant to insurance contracts or statutory assessments made or incurred in the ordinary course of conducting its business as an insurance company) of such Person guaranteeing, or in effect guaranteeing, any Indebtedness, dividend or other obligation of any other Person (the "primary obligor") in any manner, whether directly or indirectly, including, without limitation, all obligations incurred through an agreement, contingent or otherwise, by such Person: (i) to purchase such Indebtedness or obligation or any property or assets constituting security therefor, (ii) to advance or supply funds (x) for the purchase or payment of such Indebtedness or obligation, (y) to maintain working capital or other balance sheet condition or otherwise to advance or make available funds for the purchase or payment of such Indebtedness or obligation, (iii) to lease property or to purchase Securities or other property or services primarily for the purpose of assuring the owner of such Indebtedness or obligation of the ability of the primary obligor to make payment of the Indebtedness or obligation, or (iv) otherwise to assure the owner of the Indebtedness or obligation of the primary obligor against loss in respect thereof. For the purposes of all computations made under this Agreement, a Guaranty in respect of any Indebtedness for borrowed money shall be deemed to be Indebtedness equal to the principal amount of such Indebtedness for borrowed money which has been guaranteed, and a Guaranty in respect of any other obligation or liability or any dividend shall be deemed to be Indebtedness equal to the maximum aggregate amount of such obligation, liability or dividend. "Holder" shall mean any Person which is, at the time of reference, the registered Holder of any Note. "Indebtedness" of any Person shall mean and include all obligations of such Person which in accordance with GAAP shall be classified upon a balance sheet of such Person as liabilities of such Person, and in any event shall include all (i) obligations of such Person for borrowed money or which has been incurred in connection with the acquisition of property or assets, (ii) obligations secured by any Lien upon property or assets owned by such Person, even though such Person has not assumed or become liable for the payment of such obligations, (iii) obligations created or arising under any conditional sale or other title retention agreement with respect to property acquired by such Person, notwithstanding the fact that the rights and remedies of the seller, lender or lessor under such agreement in the event of default are limited to repossession or sale of property, (iv) Capitalized Rentals and (v) Guaranties of obligations of others of the character referred to in this definition. "Institutional Holder" shall mean any Holder which is a Purchaser or an insurance company, bank, savings and loan association, trust company, investment company, charitable ITEM 10 - 12 Page 29 foundation, employee benefit plan (as defined in ERISA) or other institutional investor or financial institution and, for purposes of the direct payment provisions of this Agreement, shall include any nominee of any such Holder. "Investments" shall mean all investments, in cash or by delivery of property made, directly or indirectly in any Person, whether by acquisition of shares of capital stock, indebtedness or other obligations or Securities or by loan, advance, capital contribution or otherwise; provided, however, that "Investments" shall not mean or include routine investments in property to be used or consumed in the ordinary course of business. "Insurance Regulators" shall mean the office of the Superintendent of Insurance of the State of Ohio and the comparable insurance regulatory authority of each jurisdiction in which the Company or any Subsidiary of the Company is domiciled or is licensed or authorized to offer insurance. "Lien" shall mean any interest in property securing an obligation owed to, or a claim by, a Person other than the owner of the property, whether such interest is based on the common law, statute or contract, and including but not limited to the security interest lien arising from a mortgage, encumbrance, pledge, conditional sale or trust receipt or a lease, consignment or bailment for security purposes. The term "Lien" shall include reservations, exceptions, encroachments, easements, rights-of-way, covenants, conditions, restrictions, leases and other title exceptions and encumbrances (including, with respect to stock, stockholder agreements, voting trust agreements, buy-back agreements and all similar arrangements) affecting property. For the purposes of this Agreement, the Company or a Subsidiary shall be deemed to be the owner of any property which it has acquired or holds subject to a conditional sale agreement, Capitalized Lease or other arrangement pursuant to which title to the property has been retained by or vested in some other Person for security purposes and such retention or vesting shall constitute a Lien. "Long-Term Lease" shall mean any lease of real or personal property (other than a Capitalized Lease) having an original term, including any period for which the lease may be renewed or extended at the option of the lessor, of more than three years. "Minority Interests" shall mean any shares of stock of any class of a Subsidiary (other than directors' qualifying shares as required by law) that are not owned by the Company and/or one or more of its Subsidiaries. Minority Interests shall be valued by valuing Minority Interests constituting preferred stock at the voluntary or involuntary liquidating value of such preferred stock, whichever is greater, and by valuing Minority Interests constituting common stock at the book value of capital and surplus applicable thereto adjusted, if necessary, to reflect any changes from the book value of such common stock required by the foregoing method of valuing Minority Interests in preferred stock. "Multiemployer Plan" shall have the same meaning as in ERISA. "PBGC" means the Pension Benefit Guaranty Corporation and any entity succeeding to any or all of its functions under ERISA. ITEM 10 - 12 Page 30 "Person" shall mean an individual, partnership, corporation, trust or unincorporated organization, and a government or agency or political subdivision thereof. "Plan" means a "pension plan," as such term is defined in ERISA, established or maintained by the Company or any ERISA Affiliate or as to which the Company or any ERISA Affiliate contributed or is a member or otherwise may have any liability. "Purchaser" shall have the meaning set forth in Section 1.1. "Rentals" shall mean and include as of the date of any determination thereof all fixed payments (including as such all payments which the lessee is obligated to make to the lessor on termination of the lease or surrender of the property) payable by the Company or a Subsidiary, as lessee or sublessee under a lease of real or personal property, but shall be exclusive of any amounts required to be paid by the Company or a Subsidiary (whether or not designated as rents or additional rents) on account of maintenance, repairs, insurance, taxes and similar charges. Fixed rents under any so-called "percentage leases" shall be computed solely on the basis of the minimum rents, if any, required to be paid by the lessee regardless of sales volume or gross revenues. "Reportable Event" shall have the same meaning as in ERISA. "Restricted Investments" shall mean all Investments, other than Investments described in clauses (a) through (f) of Section 5.11. "Security" shall have the same meaning as in Section 2(1) of the Securities Act of 1933, as amended. "Senior Funded Debt" shall mean all Consolidated Funded Debt, other than Subordinated Funded Debt. "Subordinated Funded Debt" shall mean all unsecured Funded Debt of the Company which shall contain or have applicable thereto subordination provisions substantially in the form set forth in Exhibit E attached hereto providing for the subordination thereof to other Funded Debt of the Company, including, without limitation, the Notes, or such other provisions as may be approved in writing by the Holders holding not less than 66-2/3% in aggregate principal amount of the outstanding Notes. "Subordinated Notes" shall mean the 10.125% Subordinate Notes of the Company currently payable to the order of Chase Insurance Holdings Corporation and Ranger Insurance Company and Alvin B. Moss in the aggregate principal amount of $5,884,000 as of September 30, 1995, and all additional notes issued in payment of interest thereof and all extensions, renewals, replacements and substitutions therefor; provided that any such additional notes and any extensions, renewals, replacements or substitutions therefor shall contain or have applicable thereto substantially the same subordination provisions as contained in such Subordinated Notes outstanding on the date hereof under which the Notes ITEM 10 - 12 Page 31 shall constitute Senior Indebtedness. It is expressly acknowledged, intended and agreed that the Notes constitute "Senior Indebtedness" as defined in the Subordinated Notes. The term "subsidiary" shall mean as to any particular parent corporation any corporation of which more than 50% (by number of votes) of the Voting Stock shall be beneficially owned, directly or indirectly, by such parent corporation. The term "Subsidiary" shall mean a subsidiary of the Company. "Tangible Assets" shall mean as of the date of any determination thereof the total amount of all assets of the Company and its Subsidiaries, at net book value, after deducting depreciation, depletion and other properly deductible valuation reserves and also after deducting good will, patents, trade names, trade marks, copyrights, franchises, experimental expense, organization expense, unamortized debt discount and expense, deferred assets other than prepaid insurance and prepaid taxes, the excess of cost of shares acquired over book value of related assets and such other assets as are properly classified as "intangible assets" in accordance with GAAP. "Voting Stock" shall mean Securities of any class or classes, the holders of which are ordinarily, in the absence of contingencies, entitled to elect a majority of the corporate directors (or Persons performing similar functions). "Wholly-owned" when used in connection with any Subsidiary shall mean a Subsidiary of which all of the issued and outstanding shares of stock (except shares required as directors' qualifying shares) and all Funded Debt and Current Debt shall be owned by the Company and/or one or more of its Wholly-owned Subsidiaries. Section 8.2. Accounting Principles. Where the character or amount of any asset or liability or item of income or expense is required to be determined or any consolidation or other accounting computation is required to be made for the purposes of this Agreement, the same shall be done in accordance with GAAP, to the extent applicable, except where such principles are inconsistent with the requirements of this Agreement. Section 8.3. Directly or Indirectly. Where any provision in this Agreement refers to action to be taken by any Person, or which such Person is prohibited from taking, such provision shall be applicable whether the action in question is taken directly or indirectly by such Person. SECTION 9. MISCELLANEOUS. Section 9.1. Registered Notes. The Company shall cause to be kept at its principal office a register for the registration and transfer of the Notes (hereinafter called the "Note Register"), and the Company will register or transfer or cause to be registered or transferred as hereinafter provided any Note issued pursuant to this Agreement. At any time and from time to time any Holder of a Note which has been duly registered as hereinabove provided may transfer such Note upon surrender thereof at the ITEM 10 - 12 Page 32 principal office of the Company duly endorsed or accompanied by a written instrument of transfer duly executed by the Holder or its attorney duly authorized in writing. The Person in whose name any registered Note shall be registered shall be deemed and treated as the owner and holder thereof and a Holder for all purposes of this Agreement. Payment of or on account of the principal, premium, if any, and interest on any registered Note shall be made to or upon the written order of such Holder. Section 9.2. Exchange of Notes. At any time and from time to time, upon not less than ten days' notice to that effect given by the Holder of any Note initially delivered or of any Note substituted therefor pursuant to Section 9.1, this Section 9.2 or Section 9.3, and, upon surrender of such Note at its office, the Company will deliver in exchange therefor, without expense to such Holder, except as set forth below, a Note for the same aggregate principal amount as the then unpaid principal amount of the Note so surrendered, or Notes in the denomination of $100,000 or any amount in excess thereof as such Holder shall specify, dated as of the date to which interest has been paid on the Note so surrendered or, if such surrender is prior to the payment of any interest thereon, then dated as of the date of issue, registered in the name of such Person or Persons as may be designated by such Holder, and otherwise of the same form and tenor as the Notes so surrendered for exchange. The Company may require the payment of a sum sufficient to cover any stamp tax or governmental charge imposed upon such exchange or transfer. Section 9.3. Loss, Theft, Etc. of Notes. Upon receipt of evidence satisfactory to the Company of the loss, theft, mutilation or destruction of any Note, and in the case of any such loss, theft or destruction upon delivery of a bond of indemnity in such form and amount as shall be reasonably satisfactory to the Company, or in the event of such mutilation upon surrender and cancellation of the Note, the Company will make and deliver without expense to the Holder thereof, a new Note, of like tenor, in lieu of such lost, stolen, destroyed or mutilated Note. If an Institutional Holder is the owner of any such lost, stolen or destroyed Note, then the affidavit of an authorized officer of such owner, setting forth the fact of loss, theft or destruction and of its ownership of such Note at the time of such loss, theft or destruction shall be accepted as satisfactory evidence thereof and no further indemnity shall be required as a condition to the execution and delivery of a new Note other than the written agreement of such owner to indemnify the Company. Section 9.4. Expenses, Stamp Tax Indemnity. Whether or not the transactions herein contemplated shall be consummated, the Company agrees to pay directly all of the Purchaser's out-of-pocket expenses in connection with the preparation, execution and delivery of this Agreement and the transactions contemplated hereby, including but not limited to the reasonable charges and disbursements of Chapman and Cutler, special counsel to the Purchaser, duplicating and printing costs and charges for shipping the Notes, adequately insured to the Purchaser's home office or at such other place as the Purchaser may designate, and all such expenses of the Holders relating to any amendment, waivers or consents pursuant to the provisions hereof, including, without limitation, any amendments, waivers, or consents resulting from any work-out, renegotiation or restructuring relating to the performance by the Company of its obligations under this Agreement and the Notes. ITEM 10 - 12 Page 33 The Company also agrees that it will pay and save the Purchaser harmless against any and all liability with respect to stamp and other taxes, if any, which may be payable or which may be determined to be payable in connection with the execution and delivery of this Agreement or the Notes, whether or not any Notes are then outstanding. The Company agrees to protect and indemnify the Purchaser against any liability for any and all brokerage fees and commissions payable or claimed to be payable to any Person in connection with the transactions contemplated by this Agreement. Section 9.5. Powers and Rights Not Waived; Remedies Cumulative. No delay or failure on the part of any Holder in the exercise of any power or right shall operate as a waiver thereof; nor shall any single or partial exercise of the same preclude any other or further exercise thereof, or the exercise of any other power or right, and the rights and remedies of each Holder are cumulative to, and are not exclusive of, any rights or remedies any such Holder would otherwise have. Section 9.6. Notices. All communications provided for hereunder shall be in writing and, if to a Holder, delivered or mailed prepaid by registered or certified mail or overnight air courier, or by facsimile communication, in each case addressed to such Holder at its address appearing beneath its signature at the foot of this Agreement or such other address as any Holder may designate to the Company in writing, and if to the Company, delivered or mailed by registered or certified mail or overnight air courier, or by facsimile communication, to the Company at the address beneath its signature at the foot of this Agreement or to such other address as the Company may in writing designate to the Holders; provided, however, that a notice to a Holder by overnight air courier shall only be effective if delivered to such Holder at a street address designated for such purpose in accordance with this Section 9.6, and a notice to such Holder by facsimile communication shall only be effective if made by confirmed transmission to such Holder at a telephone number designated for such purpose in accordance with this Section 9.6 and promptly followed by the delivery of such notice by registered or certified mail or overnight air courier, as set forth above. Section 9.7. Successors and Assigns. This Agreement shall be binding upon the Company and its successors and assigns and shall inure to the benefit of the Purchaser and its successor and assigns, including each successive Holder. Section 9.8. Survival of Covenants and Representations. All covenants, representations and warranties made by the Company herein and in any certificates delivered pursuant hereto, whether or not in connection with the Closing Date, shall survive the closing and the delivery of this Agreement and the Notes. Section 9.9. Severability. Should any part of this Agreement for any reason be declared invalid or unenforceable, such decision shall not affect the validity or enforceability of any remaining portion, which remaining portion shall remain in force and effect as if this Agreement had been executed with the invalid or unenforceable portion thereof eliminated and it is hereby declared the intention of the parties hereto that they would have executed the remaining portion of this Agreement without including therein any such part, parts or portion which may, for any reason, be hereafter declared invalid or unenforceable. ITEM 10 - 12 Page 34 Section 9.10.Governing Law. This Agreement and the Notes issued and sold hereunder shall be governed by and construed in accordance with Ohio law. Section 9.11. Captions. The descriptive headings of the various Sections or parts of this Agreement are for convenience only and shall not affect the meaning or construction of any of the provisions hereof. ITEM 10 - 12 Page 35 The execution hereof by the Purchaser shall constitute a contract among the Company and the Purchaser for the uses and purposes hereinabove set forth. This Agreement may be executed in any number of counterparts, each executed counterpart constituting an original but all together only one agreement. ACCEL INTERNATIONAL CORPORATION By /S/ Thomas H. Friedberg ----------------------- Its Chairman, Pres. & CEO ACCEL INTERNATIONAL CORPORATION 475 Metro Place North Dublin, Ohio 43017-0701 Attention: Telefacsimile: Confirmation: ITEM 10 - 12 Page 36 Accepted as of December 15, 1995: THE LINCOLN NATIONAL LIFE INSURANCE COMPANY By /S/ Kenneth J. Clark -------------------- Its Sr. VP THE LINCOLN NATIONAL LIFE INSURANCE COMPANY c/o Lincoln Investment Management, Inc. 200 East Berry Street Fort Wayne, Indiana 46802 Attention: David Patch with a copy to: Kenneth J. Clark Senior Vice President THE LINCOLN NATIONAL LIFE INSURANCE COMPANY One Reinsurance Place 1700 Magnavox Way P.O. Box 7807 Fort Wayne, Indiana 46801-7808 ITEM 10 - 12 Page 37 LIENS SECURING FUNDED DEBT (INCLUDING CAPITALIZED LEASES) AS OF SEPTEMBER 30, 1995 NONE ITEM 10 - 12 Page 38 ACCEL INTERNATIONAL CORPORATION 9.50% Senior Note Due April 1, 2001 PPN: 004299A*4 ----------No. R-1 December 29, 1995 $ ACCEL International Corporation, a Delaware corporation (the "Company"), for value received, hereby promises to pay to THE LINCOLN NATIONAL LIFE INSURANCE COMPANY or registered assigns on the first day of April, 2001 the principal amount of SIXTEEN MILLION FIVE HUNDRED THOUSAND AND 00/100 DOLLARS ($16,500,000) and to pay interest (computed on the basis of a 360-day year of twelve 30-day months) on the principal amount from time to time remaining unpaid hereon at the rate of 9.50% per annum from the date hereof until maturity, payable annually on the first day of each April in each year (commencing on the first such date after the date hereof) and at maturity. The Company agrees to pay interest on overdue principal (including any overdue required or optional prepayment of principal) and premium, if any, and (to the extent legally enforceable) on any overdue installment of interest, at the rate of 13.50% per annum after the due date, whether by acceleration or otherwise, until paid. Both the principal hereof and interest hereon are payable at the principal office of the Company in Dublin, Ohio in coin or currency of the United States of America which at the time of payment shall be legal tender for the payment of public and private debts. This Note is one of the 9.50% Senior Notes due April 1, 2001 (the "Notes") of the Company in the aggregate principal amount of $16,500,000 issued or to be issued under and pursuant to the terms and provisions of the Note Agreement dated as of December 15, 1995 (the "Note Agreement"), entered into by the Company with the original Purchaser therein referred to, and this Note and the holder hereof are entitled equally and ratably with the holders of all other Notes outstanding under the Note Agreement to all the benefits provided for thereby or referred to therein. Reference is hereby made to the Note Agreement for a statement of such rights and benefits. ITEM 10 - 12 Page 39 This Note and the other Notes outstanding under the Note Agreement may be declared due prior to their expressed maturity dates and certain prepayments are required to be made thereon, all in the events, on the terms and in the manner and amounts as provided in the Note Agreement. The Notes are subject to prepayment at the option of the Company prior to their expressed maturity dates without premium or penalty on the terms and conditions and in the amounts set forth in the Note Agreement. This Note is registered on the books of the Company and is transferable only by surrender thereof at the principal office of the Company duly endorsed or accompanied by a written instrument of transfer duly executed by the registered holder of this Note or its attorney duly authorized in writing. Payment of or on account of principal, premium, if any, and interest on this Note shall be made only to or upon the order in writing of the registered holder. ACCEL INTERNATIONAL CORPORATION By /S/ Thomas H. Friedberg ----------------------- Its President and Chief Executive Officer ITEM 10 - 12 Page 40 REPRESENTATIONS AND WARRANTIES The Company represents and warrants to the Purchaser as follows: 1. Subsidiaries. Annex A attached hereto states the name of each of the Company's Subsidiaries, its jurisdiction of incorporation and the percentage of its Voting Stock owned by the Company and/or its Subsidiaries. The Company and each Subsidiary has good and marketable title to all of the shares it purports to own of the stock of each Subsidiary, free and clear in each case of any Lien. All such shares have been duly issued and are fully paid and non-assessable. 2. Corporate Organization and Authority. The Company, and each Subsidiary, (a) is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation; (b) has all requisite power and authority and all necessary licenses and permits to own and operate its properties and to carry on its business as now conducted and as presently proposed to be conducted; and (c) is duly licensed or qualified and is in good standing as a foreign corporation in each jurisdiction wherein the nature of the business transacted by it or the nature of the property owned or leased by it makes such licensing or qualification necessary. 3. Business and Property. The Purchaser has heretofore been furnished with the following information generally describing the business conducted and proposed to be conducted by the Company and its Subsidiaries (the "Information"). (a) the 1994 Annual Statement of Acceleration Life Insurance Company (the "Life Subsidiary"); (b) the 1994 Form 10-K of the Company; (c) the September 30, 1995 Form 10-Q of the Company; (d) the July, 1995 Actuarial Appraisal of the Acceleration Insurance Group as of December 31, 1994, prepared by CreditRe Corporation, plus attachments, plus updates dated October 18, November 8 and November 17; (e) tax calculation for the Life Subsidiary dated November 27, 1995; (f) financial projection of business assumed from Consumers Life Insurance Company dated December 5, 1995; ITEM 10 - 12 Page 41 (g)financial projection of direct written business dated November 16, 1995; (h) facsimile from Angela Hammerly (CreditRe Corporation) dated December 4, 1995, concerning Retroactive Accounts; (i) printout of Life Subsidiary's Disability Claim Reserve Development; and (j) display of Life Subsidiary's business by original term as of January 31, 1995. 4. Financial Statements. (a) The consolidated balance sheets of the Company and its consolidated Subsidiaries as of December 31 in each of the years 1990 to 1994, both inclusive, and the statements of income and retained earnings and changes in financial position or cash flows for the fiscal years ended on said dates, each accompanied by a report thereon containing an opinion unqualified as to scope limitations imposed by the Company and otherwise without qualification except as therein noted, by Ernst & Young (as to years 1990 to 1993) and KPMG Peat Marwick LLP (as to year 1994), have been prepared in accordance with GAAP consistently applied except as therein noted, are correct and complete and present fairly the financial position of the Company and its Subsidiaries as of such dates and the results of their operations and changes in their financial position or cash flows for such periods. The unaudited consolidated balance sheets of the Company and its consolidated Subsidiaries as of September 30, 1995, and the unaudited statements of income and retained earnings and cash flows for the nine-month period ended on said date prepared by the Company have been prepared in accordance with GAAP consistently applied, are correct and complete and present fairly the financial position of the Company and its consolidated Subsidiaries as of said date and the results of their operations and changes in their financial position or cash flows for such period. (b) Since December 31, 1994, there has been no change in the condition, financial or otherwise, of the Company and its consolidated Subsidiaries as shown on the consolidated balance sheet as of such date except changes in the ordinary course of business, none of which individually or in the aggregate has been materially adverse. 5. Indebtedness. Annex B attached hereto correctly describes all Current Debt, Funded Debt, Capitalized Leases and Long-Term Leases of the Company and its Subsidiaries outstanding on September 30, 1995. 6. Full Disclosure. Neither the financial statements referred to in paragraph 4 hereof nor the Agreement, the Information or any other written statement furnished by the Company to the Purchaser in connection with the negotiation of the sale of the Notes, contains any untrue statement of a material fact or omits a material fact necessary to make the statements contained therein or herein not misleading. There is no fact peculiar to the Company or its Subsidiaries which the Company has not disclosed to the Purchaser in writing which materially affects adversely nor, so far as the Company can now foresee, will materially affect adversely the properties, business, prospects, profits or condition (financial or otherwise) of the Company and its Subsidiaries, taken as a whole. ITEM 10 - 12 Page 42 7.Pending Litigation. There are no proceedings pending or, to the knowledge of the Company, threatened against or affecting the Company or any Subsidiary in any court or before any governmental authority or arbitration board or tribunal which involve the possibility of materially and adversely affecting the properties, business, prospects, profits or condition (financial or otherwise) of the Company and its Subsidiaries. There are ordinary course of business claims pending under insurance policies written by the Company's insurance Subsidiaries for which adequate reserves have been established and will be maintained. 8. Title to Properties. The Company and each Subsidiary has good and marketable title in fee simple (or its equivalent under applicable law) to all material parcels of real property and has good title to all the other material items of property it purports to own, including that reflected in the most recent balance sheet referred to in paragraph 4 hereof, except as sold or otherwise disposed of in the ordinary course of business and except for Liens permitted by the Agreement. 9. Patents and Trademarks. The Company and each Subsidiary owns or possesses all the patents, trademarks, trade names, service marks, copyright, licenses and rights with respect to the foregoing necessary for the present and planned future conduct of its business, without any known conflict with the rights of others. 10. Sale is Legal and Authorized. The sale of the Notes and compliance by the Company with all of the provisions of the Agreement and the Notes - (a) are within the corporate powers of the Company; (b) will not violate any provisions of any law or any order of any court or governmental authority or agency and will not conflict with or result in any breach of any of the terms, conditions or provisions of, or constitute a default under the Restated Certificate of Incorporation or By-laws of the Company or any indenture or other agreement or instrument to which the Company is a party or by which it may be bound or result in the imposition of any Liens or encumbrances on any property of the Company; and (c) have been duly authorized by proper corporate action on the part of the Company (no action by the stockholders of the Company being required by law, by the Restated Certificate of Incorporation or By-laws of the Company or otherwise), executed and delivered by the Company and the Agreement and the Notes constitute the legal, valid and binding obligations, contracts and agreements of the Company enforceable in accordance with their respective terms. 11. No Defaults. No Default or Event of Default has occurred and is continuing. Neither the Company nor any Subsidiary is in default in the payment of principal or interest on any Funded Debt or Current Debt or is in default under any instrument or instruments or agreements under and subject to which any Funded Debt or Current Debt has been issued, and no event has occurred and is continuing under the provisions of any such instrument or ITEM 10 - 12 Page 43 agreement which with the lapse of time or the giving of notice, or both, would constitute an event of default thereunder. 12. Governmental Consent. Other than the authorization of the Superintendent of Insurance of the State of Ohio, which has been obtained and is in full force and effect, no approval, consent or withholding of objection on the part of any regulatory body, state, Federal or local, is necessary in connection with the execution and delivery by the Company of the Agreement or the Notes or compliance by the Company with any of the provisions of the Agreement or the Notes. 13. Taxes. All tax returns required to be filed by the Company or any Subsidiary in any jurisdiction have, in fact, been filed, and all taxes, assessments, fees and other governmental charges upon the Company or any Subsidiary or upon any of their respective properties, income or franchises, which are shown to be due and payable in such returns have been paid. For all taxable years ending on or before December 31, 1992, the Federal income tax liability of the Company and its Subsidiaries has been satisfied and either the period of limitations on assessment of additional Federal income tax has expired or the Company and its Subsidiaries have entered into an agreement with the Internal Revenue Service closing conclusively the total tax liability for the taxable year. The Company does not know of any proposed additional tax assessment against it for which adequate provision has not been made on its accounts, and no material controversy in respect of additional Federal or state income taxes due since said date is pending or to the knowledge of the Company threatened. The provisions for taxes on the books of the Company and each Subsidiary are adequate for all open years, and for its current fiscal period. 14. Use of Proceeds. The net proceeds from the sale of the Notes will be used to pay all Indebtedness due The Fifth Third Bank under its Credit Agreement with the Issuer dated as of September 24, 1991, as amended, and the Issuer's Amended and Restated Term Note dated September 23, 1994 and restated February 7, 1995 issued thereunder, to pay all Indebtedness due Acceleration National Insurance Company (a Wholly-owned Subsidiary of the Company) and for other corporate purposes. None of the transactions contemplated in the Agreement (including, without limitation thereof, the use of proceeds from the issuance of the Notes) will violate or result in a violation of Section 7 of the Securities Exchange Act of 1934, as amended, or any regulation issued pursuant thereto, including, without limitation, Regulations G, T and X of the Board of Governors of the Federal Reserve System, 12 C.F.R., Chapter II. Neither the Company nor any Subsidiary owns or intends to carry or purchase any "margin stock" within the meaning of said Regulation G. None of the proceeds from the sale of the Notes will be used to purchase, or refinance any borrowing the proceeds of which were used to purchase, any "security" within the meaning of the Securities Exchange Act of 1934, as amended. 15. Private Offering. Neither the Company, directly or indirectly, nor any agent on its behalf has offered or will offer the Notes or any similar Security or has solicited or will solicit an offer to acquire the Notes or any similar Security from or has otherwise approached or negotiated or will approach or negotiate in respect of the Notes or any similar Security with any Person other than the Purchaser. Neither the Company, directly or ITEM 10 - 12 Page 44 indirectly, nor any agent on its behalf has offered or will offer the Notes or any similar Security or has solicited or will solicit an offer to acquire the Notes or any similar Security from any Person so as to bring the issuance and sale of the Notes within the provisions of Section 5 of the Securities Act of 1933, as amended. 16. ERISA. The consummation of the transactions provided for in the Agreement and compliance by the Company with the provisions thereof and the Notes issued thereunder will not involve any prohibited transaction within the meaning of ERISA or Section 4975 of the Internal Revenue Code of 1986, as amended. Each Plan complies in all material respects with all applicable statutes and governmental rules and regulations, and (a) no Reportable Event has occurred and is continuing with respect to any Plan, (b) neither the Company nor any ERISA Affiliate has withdrawn from any Plan or Multiemployer Plan or instituted steps to do so, and (c) no steps have been instituted to terminate any Plan. No condition exists or event or transaction has occurred in connection with any Plan which could result in the incurrence by the Company or any ERISA Affiliate of any material liability, fine or penalty. Neither the Company nor any ERISA Affiliate has a "defined benefit" Plan as defined in ERISA. Neither the Company nor any ERISA Affiliate has any contingent liability with respect to any post-retirement "welfare benefit plan" (as such term is defined in ERISA) except as has been disclosed to the Purchaser. 17. Compliance with Law. Neither the Company nor any Subsidiary (a) is in violation of any law, ordinance, franchise, governmental rule or regulation to which it is subject; or (b) has failed to obtain any license, permit, franchise or other governmental authorization necessary to the ownership of its property or to the conduct of its business, which violation or failure to obtain would materially adversely affect the business, prospects, profits, properties or condition (financial or otherwise) of the Company and its Subsidiaries, taken as a whole, or impair the ability of the Company to perform its obligations contained in the Agreement or the Notes. Neither the Company nor any Subsidiary is in default with respect to any order of any court or governmental authority or arbitration board or tribunal. 18. Compliance with Environmental Laws. Neither the Company nor any Subsidiary is in violation of any applicable Federal, state, or local laws, statutes, rules, regulations or ordinances relating to public health, safety or the environment, including, without limitation, relating to releases, discharges, emissions or disposals to air, water, land or ground water, to the withdrawal or use of ground water, to the use, handling or disposal of polychlorinated biphenyls (PCBs), asbestos or urea formaldehyde, to the treatment, storage, disposal or management of hazardous substances (including, without limitation, petroleum, crude oil or any fraction thereof, or other hydrocarbons), pollutants or contaminants, to exposure to toxic, hazardous or other controlled, prohibited or regulated substances which violation could have a material adverse effect on the business, prospects, profits, properties or condition (financial or otherwise) of the Company and its Subsidiaries, taken as a whole. The Company does not know of any liability or class of liability of the Company or any Subsidiary under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended (42 U.S.C. Section 9601 et seq.), or ITEM 10 - 12 Page 45 the Resource Conservation and Recovery Act of 1976, as amended (42 U.S.C. Section 6901 et seq.). ITEM 10 - 12 Page 46 SUBSIDIARIES OF THE COMPANY PERCENTAGE OF NAME OF SUBSIDIARY JURISDICTION OFVOTING STOCK OWNED INCORPORATION BY THE COMPANY Acceleration Life Insurance Company Ohio 100% Acceleration National Service Corporation Ohio 100% Acceleration National Insurance Company Ohio 100% Acceleration Insurance Agency, Inc. Ohio 100% Acceleration Insurance Agency of Indiana Indiana 100% Dublin International Limited Turks and Caicos 100% Acceleration Insurance Agency of Pennsylvania Pennsylvania 100% Acceleration Insurance Company Limited United Kingdom 100% Randjill Group Limited New York 100% Acceleration Life Insurance Agency, Inc. Ohio 100% ITEM 10 - 12 Page 47 DESCRIPTION OF DEBT AND LEASES 1. Current Debt of the Company and its Subsidiaries outstanding on September 30, 1995 is as follows: Indebtedness to The Fifth Third Bank under Credit Agreement dated as of September 24, 1991, as amended, in the aggregate principal amount of $12,800,000 (the "Bank Debt"). Indebtedness to holders of Subordinated Notes in the aggregate principal amount of $5,884,000. Indebtedness to Acceleration National Insurance Company in the aggregate principal amount of $4,000,000 (the "ANIC Debt"). The entire outstanding balance of the Bank Debt and the ANIC Debt will be paid from the proceeds of the sale of the Notes and other funds of the Company. 2. Funded Debt (other than Capitalized Rentals) of the Company and its Subsidiaries outstanding on September 30, 1995 is as follows: None. 3. Long-Term Leases of the Company and its Subsidiaries outstanding on September 30, 1995 are as follows: Lessee: Acceleration Life Insurance Company/Signer Acceleration National Service Corp./Payee Lessor: Oliver Allen Corporation Equipment Lease: AS/400 Computer Hardware Lease Terms: 24 Month Lease beginning May 1994 Monthly payment $8,293. plus tax Purchase Option at lease Expiration: Fair Market Value Lessee: Acceleration National Service Corp. Lessor: Xerox Corporation Equipment Lease: Xerox 4850 Highlight Color Laser Printer Lease Terms: 54 Month Lease beginning June 1993 Monthly Payment: $3,187. plus tax Purchase Option at lease Expiration: Fair Market Value ITEM 10 - 12 Page 48 Lessee: Acceleration National Service Corporation Lessor: Norstan Financial Services Equipment Lease: Rolm 9751 Model 10 Telephone System Lease Terms: 60 Month Lease beginning August 1991 Monthly Payment: $2,287. plus tax Purchase Option at lease Expiration: Fair Market Value Lessee: Acceleration Life Insurance Company/Signer Acceleration National Service Corp./Payee Lessor: Xerox Corporation Equipment Lease: 5335 Copier Lease Terms: One Year Automatic Renewal after original lease expiration: Renewal period beginning October 1995. Monthly Payment: $416. plus tax Lessee: Acceleration National Insurance Corporation Lessor: NEC America, Inc. Equipment Lease: Electra Prof level II Telephone System with Voice Mail 60 Month Lease beginning November 1995 Lease Terms: Monthly Payment: $362. Purchase Option at Lease Termination: $1. Lessee: Acceleration National Insurance Corporation Lessor: NEC America, Inc. Equipment Lease: Prosignia 300 Model Computer System Lease Terms: 36 Month Lease beginning November 1995 Monthly Payment: $1,272. Purchase Option at Lease Termination: $1. Lessee: Acceleration National Insurance Corporation Lessor: Sanwa Leasing Corp. Equipment Lease: Panasonic Copier/Sorter, Olympia Fax Machine, IBM Typewrite Lease Terms: 36 Month Lease beginning November 1995 Monthly Payment: $319. One Year Automatic Renewal after original lease expiration Lessee: Acceleration National Insurance Corporation Lessor: Pitney Bowes Credit Corporation Equipment Lease: Mail/Postage Equipment Lease Terms: Quarterly Payments: 4 Qtr. @ $271. 13 Qtr. @ $284. Renewal Option after original lease expiration ITEM 10 - 12 Page 49 Lessee: Acceleration National Insurance Corporation Lessor: American Southwest Properties Office Lease: 6410 Sq. Ft.: 12603 Southwest Freeway Stafford, TX Base Rental: $352,550. over Five (5) Years 4. Capitalized Leases of the Company and its Subsidiaries outstanding on September 30, 1995 are as follows: None ITEM 10 - 12 Page 50 DESCRIPTION OF SPECIAL COUNSEL'S CLOSING OPINION The closing opinion of Chapman and Cutler, special counsel to the Purchaser, called for by Section 4.1 of the Note Agreement, shall be dated the Closing Date and addressed to the Purchaser, shall be satisfactory in form and substance to the Purchaser and shall be to the effect that: 1. The Company is a corporation, validly existing and in good standing under the laws of the State of Delaware and has the corporate power and the corporate authority to execute and deliver the Note Agreement and to issue the Notes. 2. The Note Agreement has been duly authorized by all necessary corporate action on the part of the Company, has been duly executed and delivered by the Company and constitutes the legal, valid and binding contract of the Company enforceable in accordance with its terms, subject to bankruptcy, insolvency, fraudulent conveyance and similar laws affecting creditors' rights generally, and general principles of equity (regardless of whether the application of such principles is considered in a proceeding in equity or at law). 3. The Notes have been duly authorized by all necessary corporate action on the part of the Company, and the Notes being delivered on the date hereof have been duly executed and delivered by the Company and constitute the legal, valid and binding obligations of the Company enforceable in accordance with their terms, subject to bankruptcy, insolvency, fraudulent conveyance and similar laws affecting creditors' rights generally, and general principles of equity (regardless of whether the application of such principles is considered in a proceeding in equity or at law). 4. The issuance, sale and delivery of the Notes under the circumstances contemplated by the Note Agreement do not, under existing law, require the registration of the Notes under the Securities Act of 1933, as amended, or the qualification of an indenture under the Trust Indenture Act of 1939, as amended. The opinion of Chapman and Cutler shall also state that the opinion of Squire, Sanders & Dempsey is satisfactory in scope and form to Chapman and Cutler and that, in their opinion, the Purchaser is justified in relying thereon. In rendering the opinion set forth in paragraph 1 above, Chapman and Cutler may rely, as to matters referred to in paragraph 1, solely upon an examination of the Restated Certificate of Incorporation certified by, and a certificate of good standing of the Company from, the Secretary of State of the State of Delaware, the By-laws of the Company and the general business corporation law of the State of Delaware. The opinion of Chapman and Cutler is limited to the laws of the State of Illinois, the general business corporation law of the State of Delaware and the Federal laws of the United States. ITEM 10 - 12 Page 51 With respect to matters of fact upon which such opinion is based, Chapman and Cutler may rely on appropriate certificates of public officials and officers of the Company and upon representations of the Company and the Purchaser delivered in connection with the issuance and sale of the Notes. ITEM 10 - 12 Page 52 DESCRIPTION OF CLOSING OPINION OF COUNSEL TO THE COMPANY The closing opinion of Squire, Sanders & Dempsey, counsel for the Company, which is called for by Section 4.1 of the Note Agreement, shall be dated the Closing Date and addressed to the Purchaser, shall be satisfactory in scope and form to the Purchaser and shall be to the following effect; provided that as to qualification, licensure and good standing in jurisdictions other than Delaware and Ohio, the matters in paragraph 2 and matters in paragraph 6 respecting agreements or instruments other than the Company's Restated Certificate of Incorporation and By-laws, the Purchaser will accept the opinion of Nicholas Z. Alexander, Senior Vice President, Secretary and General Counsel of the Company. 1. The Company is a corporation, duly incorporated, validly existing and in good standing under the laws of the State of Delaware, has the corporate power and the corporate authority to execute and perform the Note Agreement and to issue the Notes and has the full corporate power and the corporate authority to conduct the activities in which it is now engaged and is duly licensed or qualified and is in good standing as a foreign corporation in each jurisdiction in which the character of the properties owned or leased by it or the nature of the business transacted by it makes such licensing or qualification necessary. 2. Each Subsidiary is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation and is duly licensed or qualified and is in good standing in each jurisdiction in which the character of the properties owned or leased by it or the nature of the business transacted by it makes such licensing or qualification necessary and all of the issued and outstanding shares of capital stock of each such Subsidiary have been duly issued, are fully paid and non-assessable and are owned by the Company. 3. The Note Agreement has been duly authorized by all necessary corporate action on the part of the Company, has been duly executed and delivered by the Company and constitutes the legal, valid and binding contract of the Company enforceable in accordance with its terms, subject to bankruptcy, insolvency, fraudulent conveyance and similar laws affecting creditors' rights generally, and general principles of equity (regardless of whether the application of such principles is considered in a proceeding in equity or at law). 4. The Notes have been duly authorized by all necessary corporate action on the part of the Company, have been duly executed and delivered by the Company and constitute the legal, valid and binding obligations of the Company enforceable in accordance with their terms, subject to bankruptcy, insolvency, fraudulent conveyance and similar laws affecting creditors' rights generally, and general principles of equity (regardless of whether the application of such principles is considered in a proceeding in equity or at law). ITEM 10 - 12 Page 53 5.Other than the authorization of the Superintendent of Insurance of the State of Ohio, which has been obtained and is in full force and effect, no approval, consent or withholding of objection on the part of, or filing, registration or qualification with, any governmental body, Federal or state, is necessary in connection with the execution and delivery of the Note Agreement or the Notes. 6. The issuance and sale of the Notes and the execution, delivery and performance by the Company of the Note Agreement do not conflict with or result in any breach of any of the provisions of or constitute a default under or result in the creation or imposition of any Lien upon any of the property of the Company pursuant to the provisions of the Restated Certificate of Incorporation or By-laws of the Company or any agreement or other instrument known to such counsel to which the Company is a party or by which the Company may be bound. 7. The issuance, sale and delivery of the Notes under the circumstances contemplated by the Note Agreement do not, under existing law, require the registration of the Notes under the Securities Act of 1933, as amended, or the qualification of an indenture under the Trust Indenture Act of 1939, as amended. The opinion of Squire, Sanders & Dempsey shall cover such other matters relating to the sale of the Notes as the Purchaser may reasonably request. With respect to matters of fact on which such opinion is based, such counsel shall be entitled to rely on appropriate certificates of public officials and officers of the Company. ITEM 10 - 12 Page 54 SUBORDINATION PROVISIONS APPLICABLE TO SUBORDINATED FUNDED DEBT (a) The indebtedness evidenced by the subordinated notes* and any renewals or extensions thereof, shall at all times be wholly subordinate and junior in right of payment to any and all indebtedness of the Company [here insert description of indebtedness to which Subordinated Funded Debt is Subordinated which in all events must include the Notes] (herein called "Superior Indebtedness"), in the manner and with the force and effect hereafter set forth: (1) In the event of any liquidation, dissolution or winding up of the Company, or of any execution, sale, receivership, insolvency, bankruptcy, liquidation, readjustment, reorganization or other similar proceeding relative to the Company or its property, all principal and interest owing on all Superior Indebtedness shall first be paid in full before any payment is made upon the indebtedness evidenced by the subordinated notes; and in any such event any payment or distribution of any kind or character, whether in cash, property or securities (other than in securities, including equity securities, or other evidences of indebtedness, the payment of which is subordinated to the payment of all Superior Indebtedness which may at the time be outstanding) which shall be made upon or in respect of the subordinated notes shall be paid over to the holders of such Superior Indebtedness, pro rata, for application in payment thereof unless and until such Superior Indebtedness shall have been paid or satisfied in full; (2) In the event that the subordinated notes are declared or become due and * Or debentures or other designation as may be appropriate. payable because of the occurrence of any event of default hereunder (or under the agreement or Indenture, as appropriate) or otherwise than at the option of the Company, under circumstances when the foregoing clause (l) shall not be applicable, the holders of the subordinated notes shall be entitled to payments only after there shall first have been paid in full all Superior Indebtedness outstanding at the time the subordinated notes so become due and payable because of any such event, or payment shall have been provided for in a manner satisfactory to the holders of such Superior Indebtedness; and (3) During the continuance of any default with respect to any Superior Indebtedness permitting the holders thereof to accelerate the maturity of such Superior Indebtedness, no payment of principal, premium or interest shall be made on the subordinated notes, if either (i) notice of such default in writing or by telegram has been given to the Company by any holder or holders of any Superior Indebtedness, provided that judicial proceedings shall be commenced with respect to such default (x) within one hundred twenty (120) days thereafter in the case such default relates to the non-payment of principal, interest or premium on such Superior Indebtedness or (y) within 90 days after the giving of such notice in the case of any other event or condition causing such default, or (ii) judicial proceedings shall be pending in respect ITEM 10 - 12 Page 55 of such default. The holders of Superior Indebtedness shall not be entitled to give notice pursuant to this clause (3) more than once with respect to any default which was specified in such a notice and which has continued without interruption since the date such notice was given, nor shall such holders be entitled to give a separate notice with respect to any default not so specified which (to the knowledge of any holder giving such notice) was existing on the date notice shall have been given pursuant to this clause (3) and which has continued without interruption from the date such notice was given. Upon receipt of any notice from the holders of Superior Indebtedness pursuant to this clause (3), the Company shall forthwith send a copy thereof to each holder of the subordinated notes at the time outstanding. (b) The holder of each subordinated note undertakes and agrees for the benefit of each holder of Superior Indebtedness to execute, verify, deliver and file any proofs of claim which any holder of Superior Indebtedness may at any time require in order to prove and realize upon any rights or claims pertaining to the subordinated notes and to effectuate the full benefit of the subordination contained herein; and upon failure of the holder of any subordinated note so to do, any such holder of Superior Indebtedness shall be deemed to be irrevocably appointed the agent and attorney-in-fact of the holder of such note to execute, verify, deliver and file any such proofs of claim. (c) No right of any holder of any Superior Indebtedness to enforce subordination as herein provided shall at any time or in any way be affected or impaired by any failure to act on the part of the Company or the holders of Superior Indebtedness, or by any noncompliance by the Company with any of the terms, provisions and covenants of the subordinated notes or the agreement under which they are issued, regardless of any knowledge thereof that any such holder of Superior Indebtedness may have or be otherwise charged with. (d) The Company agrees, for the benefit of the holders of Superior Indebtedness, that in the event that any subordinated note is declared due and payable before its expressed maturity because of the occurrence of a default hereunder, (i) the Company will give prompt notice in writing of such happening to the holders of Superior Indebtedness and (ii) all Superior Indebtedness shall forthwith become immediately due and payable upon demand, regardless of the expressed maturity thereof. (e) The foregoing provisions are solely for the purpose of defining the relative rights of the holders of Superior Indebtedness on the one hand, and the holders of the subordinated notes on the other hand, and nothing herein shall impair, as between the Company and the holders of the subordinated notes, the obligation of the Company which is unconditional and absolute, to pay the principal, premium, if any, and interest on the subordinated notes in accordance with their terms, nor shall anything herein prevent the holders of the subordinated notes from exercising all remedies otherwise permitted by applicable law or hereunder upon default hereunder, subject to the rights of the holders of Superior Indebtedness as herein provided for. ITEM 10 - 12 Page 56 EX-4 5 REINSURANCE AGREEMENT Between ACCELERATION LIFE INSURANCE COMPANY of Dublin, Ohio and THE LINCOLN NATIONAL LIFE INSURANCE COMPANY of Fort Wayne, Indiana Inspected By Date Doc. CCN/Agmt. No. ITEM 10 - 13 Page 57 TABLE OF CONTENTS Page ---- A. REINSURANCE COVERAGE 1 B. PAYMENTS BY CEDING COMPANY 1 C. PAYMENTS BY REINSURER 2 D. COINSURANCE AND MODIFIED COINSURANCE RESERVES 2 E. REPORTS AND ACCOUNTING FOR REINSURANCE 2 F. TERMS OF REINSURANCE 4 G. MATERIAL CHANGES 4 H. ARBITRATION 4 I. INSOLVENCY OF THE CEDING COMPANY 5 J. ACKNOWLEDGEMENTS 6 K. TERMINATION 7 L. PAYMENTS AND ACCOUNTING UPON TERMINATION OF AGREEMENT 8 M. INTERMEDIARY 9 N. OFFSET 9 O. MISCELLANEOUS 9 P. EXECUTION 11 DEFINITION OF TERMS 12 ITEM 10 - 13 Page 58 TABLE OF CONTENTS (CONTINUED) SCHEDULE I QUOTA SHARE AND POLICIES SUBJECT TO REINSURANCE 17 SCHEDULE II, PART A SUMMARY OF MONETARY TRANSACTIONS 18 SCHEDULE II, PART B SUMMARY OF MONETARY TRANSACTIONS 20 SCHEDULE III ANNUAL REPORT 21 SCHEDULE IV ALLOWANCES 22 SCHEDULE V PROFIT SHARING 23 SCHEDULE VI INVESTMENT INCOME RATE 25 SCHEDULE VII ARBITRATION SCHEDULE 26 SCHEDULE VIII SECTION 1.848-2(g) (8) ELECTION 28 SCHEDULE IX DEFERRED PROFIT SHARING ACCOUNT 30 ITEM 10 - 13 Page 59 I N D E M N I T Y R E I N S U R A N C E A G R E E M E N T between ACCELERATION LIFE INSURANCE COMPANY of Dublin, Ohio, referred to as the "CEDING COMPANY," and THE LINCOLN NATIONAL LIFE INSURANCE COMPANY of Fort Wayne, Indiana, Referred to as the "REINSURER." A. REINSURANCE COVERAGE 1. The CEDING COMPANY shall cede, and the REINSURER shall accept, reinsurance of a Quota Share of the Policies. Reinsurance shall be ceded on a coinsurance and modified coinsurance basis. 2. The liability of the REINSURER shall begin simultaneously with that of the CEDING COMPANY, but in no event prior to the Effective Date or until this Agreement has been executed by both the CEDING COMPANY and REINSURER. 3. The Effective Date of this Agreement is December 31, 1995. 4. Reinsurance of a Policy shall be maintained in force without reduction so long as the liability of the CEDING COMPANY under such Policy remains in force without reduction, unless reinsurance is terminated or reduced as provided herein. 5. In no event shall reinsurance be in force under this Agreement for a Policy unless the Policy's issue and delivery complies with the laws of all applicable jurisdictions and the ISSUING INSURER'S corporate charter. B. PAYMENTS BY CEDING COMPANY 1. To effect reinsurance on Policies in force on the Effective Date, the CEDING COMPANY shall pay the REINSURER an initial reinsurance premium on the Execution Date equal to the Coinsurance Reserves as of the Effective Date minus the Initial Policy Expense Allowance. 2. A preliminary estimate of the initial reinsurance premium shall be paid by the CEDING COMPANY to the REINSURER in two installments. The first ITEM 10 - 13 Page 60 installment in the amount of $27,500,000 shall be paid no later than December 28, 1995. The second installment in the amount of $12,500,000 shall be paid no later than January 11, 1996. 3. For each Accounting Period the CEDING COMPANY shall pay the REINSURER a reinsurance premium equal to: (a) the Quota Share of the premiums written by the CEDING COMPANY during an Accounting Period net of return premiums pursuant to the Policies; plus (b) any Adverse Development Premium; less (c) the Mean Reserve Adjustment; less (d) the Periodic Allowance; less (e) the Quota Share of Unusual Expenses; less (f) any earned distribution from the Deferred Profit Sharing Account in accordance with Schedule IX; provided that (g) each of the amounts listed above shall be computed less similar amounts paid by the CEDING COMPANY pursuant to Other Reinsurance; and (h) if the above calculation produces a negative amount, the REINSURER shall pay the CEDING COMPANY the absolute value of such amount. C. PAYMENTS BY REINSURERS The REINSURER shall reimburse its Quota Share of Benefits paid by the CEDING COMPANY during the Accounting Period less any Benefits paid by the CEDING COMPANY pursuant to Other Reinsurance. D. COINSURANCE AND MODIFIED COINSURANCE RESERVES Reinsurance shall be ceded on a combined coinsurance and modified coinsurance basis. The CEDING COMPANY shall be responsible for the Modified Coinsurance Reserves and the REINSURER shall be responsible for the Coinsurance Reserves. The amount of total Reserves and Reserves attributable to coinsurance and modified coinsurance shall be determined as of the last day of each Accounting Period in accordance with the terms of this Agreement. E. REPORTS AND ACCOUNTING FOR REINSURANCE 1. The CEDING COMPANY shall notify the REINSURER of reinsurance ceded pursuant to this Agreement by means of the reports specified in this section. 2. The CEDING COMPANY shall summarize all monetary transactions under this Agreement by submitting a written report within thirty (30) days following the end of each calendar quarter. The report shall be ITEM 10 - 13 Page 61 formatted as set forth in Schedule II, parts A and B. If any amount cannot be determined on an exact basis on the date the final monetary summary and reconciliation is due, an estimated payment shall be made and any final adjustments shall be made as soon as practicable. Any amounts shown in such reports as due from the CEDING COMPANY shall be paid in cash by the CEDING COMPANY when submitting the reports to the REINSURER. If a report shows an amount due from the REINSURER, the amount shall be paid in cash by the REINSURER within thirty (30) days of its receipt of such report. Notwithstanding the above, amounts arising as distributions from the Deferred Profit Sharing Account may be paid in kind either in whole or in part using the ACCEL Note valued at the principal amount. 3. Amounts due from either party pursuant to this Agreement may be paid net of amounts due from the other party. 4. The CEDING COMPANY shall provide the REINSURER with information which the REINSURER may need to prepare its tax, statutory and GAAP financial statements, including but not limited to information described in Schedule II and III. Such information shall be submitted at the end of each calendar year. A preliminary report shall be provided within ten (10) days following the end of each calendar year and a final report shall be provided within sixty (60) days following the end of the calendar year. 5. The CEDING COMPANY shall provide the REINSURER with a copy of its most recent financial reports prepared in accordance with GAAP and its most recent statutory statement as soon as they are available. 6. If the CEDING COMPANY ever becomes aware that its summary of monetary transactions for an Accounting Period as required in this section did not accurately reflect the actual experience of the Policies during the Accounting Period, it shall promptly submit a revised summary to the REINSURER. Any amount shown by the revised summary as owed by either the CEDING COMPANY or the REINSURER to the other shall be paid promptly. 7. The REINSURER may unilaterally change Schedules II and III in order to obtain the data it reasonably needs to properly administer this Agreement or to prepare its financial statements. ITEM 10 - 13 Page 62 F. TERMS OF REINSURANCE 1. All monetary amounts expressed in this Agreement are expressed in United States dollars and all amounts payable pursuant to this Agreement are payable in United States dollars. 2. This is an Agreement for indemnity reinsurance solely between the CEDING COMPANY and the REINSURER. The acceptance of reinsurance hereunder shall not create any right or legal relation whatever between the REINSURER and any person other than the CEDING COMPANY. 3. The parties elect to have this Agreement treated in accordance with Section 1.848-2(g)(8) of the Income Tax Regulations issued December 1992 under Section 848 of the Internal Revenue Code of 1986. Specific details of this election are set forth in Schedule VIII. G. MATERIAL CHANGES 1. The CEDING COMPANY shall promptly notify the REINSURER of any Material Change in the terms of the Policies, in the method used to calculate Reserves for the Policies or in its Other Reinsurance. 2. Following a Material Change, the REINSURER may in its sole discretion (a) continue to reinsure the Policies under current terms, (b) require that an additional premium be paid to compensate for the Material Change, or (c) implement any combination of (a) and (b). H. ARBITRATION 1. If the CEDING COMPANY and the REINSURER cannot mutually resolve a dispute regarding the interpretation or operation of this Agreement, the dispute shall be decided through arbitration as set forth in the Arbitration Schedule. The arbitrators shall base their decision on the terms and conditions of this Agreement. However, if the terms and conditions of this Agreement do not explicitly dispose of an issue in dispute between the parties, the arbitrators may base their decision on the customs and practices of the insurance and reinsurance industry rather than solely on an interpretation of applicable law. The arbitrators' decision shall take into account the right to offset mutual debts and credits as provided in this Agreement. There shall be no appeal from the arbitrators' decision. Any court having jurisdiction over the subject matter and over the parties may reduce the arbitrators' decision to judgment. ITEM 10 - 13 Page 63 2.The parties intend this section to be enforceable in accordance with the Federal Arbitration Act (9 U.S.C., Section 1) including any amendments to that Act which are subsequently adopted. In the event that either party refuses to submit to arbitration as required by paragraph 1, the other party may request a United States Federal District Court to compel arbitration in accordance with the Federal Arbitration Act. Both parties consent to the jurisdiction of such court to enforce this section and to confirm and enforce the performance of any award of the arbitrators. I. INSOLVENCY OF THE CEDING COMPANY 1. The REINSURER'S liability, when such liability is ascertained, shall be payable upon demand by the CEDING COMPANY at the same time as the CEDING COMPANY shall pay its net retained portion of such an obligation, with reasonable provision for verification before payment, and the reinsurance shall be payable by the REINSURER on the basis of the liability of the CEDING COMPANY under the Policies without diminution because of the insolvency of the CEDING COMPANY. In the event of insolvency and the appointment of a conservator, liquidator or statutory successor of the CEDING COMPANY, such portion shall be payable to such conservator, liquidator or statutory successor immediately upon demand, with reasonable provisions for verification, on the basis of claims allowed against the CEDING COMPANY by any court of competent jurisdiction or by any conservator, liquidator or statutory successor of the CEDING COMPANY having authority to allow such claims, without diminution because of such insolvency or because such conservator, liquidator or statutory successor has failed to pay all or a portion of any claims. 2. The CEDING COMPANY'S conservator, liquidator, or statutory successor shall give the REINSURER written notice of the pendency of a claim against the CEDING COMPANY indicating the Policy, within a reasonable time after such claim is filed. The REINSURER may interpose, at its own expense, in the proceeding where such claim is to be adjudicated, any defense or defenses which the REINSURER may deem available to the CEDING COMPANY, or its conservator, liquidator or statutory successor. 3. Any expense incurred by the REINSURER pursuant to paragraph 2, above, shall be payable subject to court approval out of the estate of the CEDING COMPANY as part of the expense of conservation or liquidation to ITEM 10 - 13 Page 64 the extent of the REINSURER'S liability of the benefit which may accrue to the CEDING COMPANY in conservation or liquidation, solely as a result of the defense undertaken by the REINSURER. Where two or more reinsurers are participating in the same claim and a majority in interest elect to interpose defense to such claim, the expense shall be apportioned in accordance with the terms of this Agreement as though such expense had been incurred by the CEDING COMPANY. J. ACKNOWLEDGEMENTS 1. The CEDING COMPANY acknowledges having provided the REINSURER with the following documents and materials prior to the Execution Date: (a) the 1994 Annual Statement of the CEDING COMPANY; (b) the 1994 Form 10-K of ACCEL International Corporation; (c) the September 30, 1995, Form 10-Q of ACCEL International Corporation; (d) the July 1995 Actuarial Appraisal of the Acceleration Insurance Group as of December 31, 1994, prepared by CreditRe Corporation, plus attachments, plus updates dated October 18, November 8 and November 17; (e) tax calculation for the CEDING COMPANY dated November 27, 1995; (f) financial projection of the net interest of the CEDING COMPANY in the business assumed from Consumers Life Insurance Company dated December 5, 1995; (g) financial projection of direct written business dated November 16, 1995; (h) facsimile from Angela Hammerly (CreditRe Corporation) dated December 4, 1995, concerning Retroactive Accounts; (i) printout of CEDING COMPANY'S Disability Claim Reserve Development; (j) display of CEDING COMPANY'S business by original term as of January 31, 1995; and (k) facsimile dated December 15, 1995, of the breakdown of the CEDING COMPANY'S statutory reserves as of June 30, 1995, representing those reserves the CEDING COMPANY expected to cede to the REINSURER. 2. The CEDING COMPANY affirms that all assumptions made in compiling the documents and materials listed and described in paragraph 1 were based upon informed judgment and are consistent with sound actuarial ITEM 10 - 13 Page 65 principles. Further, the CEDING COMPANY affirms that all factual information contained in these documents was, as of the date of their making, correct and accurate. 3. The CEDING COMPANY affirms that there has been no Material Change in the CEDING COMPANY'S financial condition and the expected profitability of the Policies between the "as of" date of the documents listed and described in paragraph 1 and the Execution Date. 4. The CEDING COMPANY acknowledges that the REINSURER has relied on the accuracy of the information contained in the documents and materials listed and described in paragraph 1 in entering into this Agreement. 5. The CEDING COMPANY acknowledges its responsibility for independently forming its own conclusions regarding: (a) the compliance of this Agreement with the laws and regulations of any particular state or jurisdiction; (b) the statutory or other accounting impact of this Agreement on the CEDING COMPANY'S financial statements, and (c) the tax impact of this Agreement on the CEDING COMPANY. 6. Unless otherwise explicitly provided for herein, the CEDING COMPANY and the REINSURER shall each be solely responsible for determining and discharging any state or federal income tax liability resulting from this Agreement, including any tax liability resulting from the initial monetary transactions. K. TERMINATION 1. Except as otherwise provided in this section, this Agreement shall be unlimited in duration. 2. Either the CEDING COMPANY or the REINSURER may terminate this Agreement as of the end of any quarter but only with respect to reinsurance not yet placed in force by giving the other party thirty (30) days' advance written notice of termination. 3. The CEDING COMPANY may terminate this Agreement with respect to all reinsurance hereunder as of the end of any calendar quarter in which unearned premiums outstanding total less than $250,000 by giving the REINSURER ninety (90) days' advance written notice of termination. 4. If none of the Policies are in force as of the end of any Accounting Period, this Agreement shall automatically terminate as of the day the last Policy terminated. ITEM 10 - 13 Page 66 5.If the CEDING COMPANY fails to pay reinsurance premiums when due, the REINSURER may terminate this Agreement with respect to all reinsurance hereunder. To effect such termination, the REINSURER shall give the CEDING COMPANY written notice of termination. The CEDING COMPANY may avoid termination by paying all delinquent reinsurance premiums, plus all additional reinsurance premiums that may have become due, within thirty (30) days following its receipt of notice of termination. Termination shall be effective as of the last date to which reinsurance premiums had been paid. 6. The termination of this Agreement or of any reinsurance hereunder shall not affect any rights or obligations of either party applicable to the period prior to the effective date of termination. L. PAYMENTS AND ACCOUNTING UPON TERMINATION OF AGREEMENT 1. Except for termination with respect to reinsurance not yet placed in force, if this Agreement is terminated, the CEDING COMPANY shall summarize all monetary transactions for the Terminal Accounting Period and report its summary to the REINSURER within thirty (30) days of the later of the effective date of termination or of notice of termination. The report shall be in the form of Schedule II, parts A and B. 2. A profit sharing for the Terminal Accounting Period shall be calculated in accordance with Schedule V. If the terminal profit sharing calculation produces a positive amount, such amount shall be paid by the REINSURER to the CEDING COMPANY within thirty (30) days of the later of (a) its receipt of the summary of monetary transactions for the Terminal Accounting Period or (b) payment in full of the ACCEL Note. If the terminal profit sharing calculation produces a negative amount, the CEDING COMPANY shall pay the absolute value of such amount to the REINSURER when submitting the summary of monetary transactions for the Terminal Accounting Period. However, if this Agreement terminates automatically because none of the Policies are in force at the end of an Accounting Period and the terminal profit sharing calculation produces a negative amount, the CEDING COMPANY shall not pay the absolute value of such amount to the REINSURER. 3. Following the summarization of all monetary transactions and payment of the amount due for the Terminal Accounting Period, including the ITEM 10 - 13 Page 67 calculation and payment of the profit sharing for the Terminal Accounting Period, neither the CEDING COMPANY nor the REINSURER shall owe the other any additional payment or amount pursuant to this Agreement. 4. The CEDING COMPANY shall provide the REINSURER with information the REINSURER may need to prepare its tax, statutory and GAAP financial statements for the Terminal Accounting Period as required by section E. 5. If the CEDING COMPANY ever becomes aware that its summary of monetary transactions for the Terminal Accounting Period as required in this section did not accurately reflect the actual experience of the Policies during the Terminal Accounting Period, it shall promptly submit a revised summary to the REINSURER, and the terminal profit sharing shall be recalculated. Any amount shown by the revised summary and recalculated terminal profit sharing as owed by either the CEDING COMPANY or the REINSURER to the other shall be paid promptly. M. INTERMEDIARY LINCOLN NATIONAL INTERMEDIARIES, INC., 1300 S. Clinton, Fort Wayne, Indiana, 46801 is hereby recognized as the intermediary negotiating this Agreement for all reinsurance hereunder. All communications between the CEDING COMPANY and the REINSURER relating to this Agreement shall be transmitted through Lincoln National Intermediaries, Inc. Payments by the CEDING COMPANY to the intermediary shall be deemed to constitute payment to the REINSURER. Payments by the REINSURER to the intermediary shall be deemed to constitute payment to the CEDING COMPANY only to the extent that such payments are actually received by the CEDING COMPANY. N. OFFSET Any debts or credits, matured or unmatured, liquidated or unliquidated, regardless of when they arose or were incurred, in favor of or against either the CEDING COMPANY or the REINSURER with respect to this Agreement are deemed to be mutual debts and credits and shall be set off and only the balance shall be allowed or paid. O. MISCELLANEOUS 1. Certain terms used in this Agreement are defined in the Definitions of Terms schedule and are to be interpreted in accordance with such ITEM 10 - 13 Page 68 definitions. In the absence of a specific definition, a term used in this Agreement is to be interpreted in accordance with customary insurance and reinsurance industry practices. 2. Any Error made by either the CEDING COMPANY or the REINSURER in the administration of reinsurance under this Agreement shall be corrected by submitting revised reports and restoring both the CEDING COMPANY and the REINSURER to the positions they would have occupied had no Error occurred. 3. The REINSURER may audit, at any reasonable time and at its own expense, all records and procedures relating to reinsurance under this Agreement. The CEDING COMPANY shall cooperate in the audit, including providing any information requested by the REINSURER in advance of the audit. Further, the CEDING COMPANY agrees to complete, at the request of the REINSURER and in a manner acceptable to the REINSURER, a process which confirms the existence of the Policies. 4. In the event that a significant portion of the Policies are continued into Continuation Policies issued by the Issuing Insurer, its successor or any of its affiliates, the Continuation Policies shall automatically be reinsured under this Agreement unless the REINSURER, in its sole discretion, chooses not to reinsure such Policies. 5. Neither the CEDING COMPANY nor the REINSURER may assign any of the rights and obligations under this Agreement, nor may either party sell, assumption reinsure or transfer the Policies without the prior written consent of the other party. Consent will not be withheld if the assignment, sale, assumption reinsurance or transfer does not have a material effect on the risks transferred or the expected economic results to the party requested to consent. This provision shall not prohibit the REINSURER from reinsuring the Policies on an indemnity basis. 6. This Agreement represents the entire agreement between the CEDING COMPANY and the REINSURER and supersede, with respect to its subject matter, any prior oral or written agreements between the parties. 7. No modification or waiver of any provision of this Agreement shall be effective unless set forth in writing. A waiver shall constitute a waiver only with respect to the particular circumstance for which it is given and not a waiver of any future circumstance. ITEM 10 - 13 Page 69 8.References in this Agreement to specific lines, pages and exhibits of the statutory financial statement refer to such lines, pages and exhibits as of the Effective Date. Changes in the statutory financial statement which affect such items shall modify references in this Agreement so as to keep such references current with the statutory financial statement, provided such modification does not alter the rights and obligations of either party. P. EXECUTION IN WITNESS WHEREOF, ACCELERATION LIFE INSURANCE COMPANY of Dublin, Ohio, and THE LINCOLN NATIONAL LIFE INSURANCE COMPANY of Fort Wayne, Indiana, have by their respective officers executed this Agreement in duplicate on the dates shown below. ACCELERATION LIFE INSURANCE COMPANY Signed at Dublin, Ohio ------------------- By /S/ Thomas H. Friedberg By /S/ Kurt L. Mueller ---------------------------- --------------------------------------- Title Chairman, President & CEO Title Vice President & Controller ------------------------- ------------------------------------ Date December 27, 1995 Date December 27, 1995 -------------------------- ------------------------------------- THE LINCOLN NATIONAL LIFE INSURANCE COMPANY Signed at Fort Wayne, Indiana By /S/ Kenneth Clark By /S/ ----------------- ---------------------------- --------------------------------------- Sr. Vice President Assistant Secretary Date December 29, 1995 Date December 29, 1995 -------------------------- ------------------------------------- ITEM 10 - 13 Page 70 DEFINITION OF TERMS ACCEL Note - The 9.5% Senior Notes due April 1, 2001, issued by ACCEL International Corporation and purchased by the REINSURER, and held by the REINSURER, or any affiliate of the REINSURER, or any direct or indirect retrocessionaire of the REINSURER. Accounting Period - for the year in which this Agreement becomes effective, the period beginning on the Effective Date and ending on the Last Day Of The Current Accounting Period. Thereafter, the period beginning on the day following the Last Day Of The Preceding Accounting Period and ending on the Last Day Of The Current Accounting Period. Adverse Development Premium - the amount equal to any adverse development from the Effective Date in the amount of losses incurred prior to the Effective Date, subject to a $1,000,000 cumulative cap over the life of this Agreement. Agreement - this document and all Schedules and amendments to it. Benefits - the life insurance and accident and health benefits provided or reimbursed by the CEDING COMPANY pursuant to the Policies. Coinsurance Reserves - the Reserves less the Modified Coinsurance Reserves. Continuation Policy - a new Policy changing or replacing a Policy made or issued either (1) in compliance with the terms of the Policy or (2) without the same new underwriting information that the ISSUING INSURER would obtain in the absence of the Policy, without a suicide exclusion period or contestable period as long as those contained in new issues of the ISSUING INSURER, or without the payment of the same commissions in the first year that the ISSUING INSURER would have paid in the absence of the Policy. Cumulative Reinsurance Profit - the sum, as of the Last Day Of The Current Accounting Period, of all Reinsurance Profits from the Effective Date to the Last Day Of The Current Accounting Period. ITEM 10 - 13 Page 71 DEFINITION OF TERMS (CONTINUED) Deferred Profit Sharing Account - a fund maintained by the REINSURER out of Reinsurance Profit as described in Schedule IX. Effective Date - the date set forth in section A, paragraph 3. Error - any isolated, inadvertent deviation from the terms of this Agreement resulting from the act or omission of an employee of either the CEDING COMPANY or the REINSURER whose principal function is administrative in nature. Execution Date - the date this Agreement is signed by the last of the parties to sign it. Fixed Interest Rate - l.4375% per calendar quarter. Increase in Coinsurance Reserves - shall be an amount equal to the Coinsurance Reserve on the Last Day Of The Current Accounting Period less the Coinsurance Reserve on the Last Day Of The Preceding Accounting Period. Initial Policy Expense Allowance - the amount set forth in Schedule IV. Interest Earned - Interest earned and received by the REINSURER on the ACCEL Note less any capital losses on the ACCEL Note. Interest on Deferred Profit Sharing Account - equals the Deferred Profit Sharing Account as of the Last Day Of The Preceding Accounting Period times the Fixed Interest Rate. Interest on Net Coinsurance Reserves - equals the Fixed Interest Rate times the arithmetic average of the Net Coinsurance Reserves as of the Last Day Of The Preceding Accounting Period and the Net Coinsurance Reserves as of the Last Day Of The Current Accounting Period. Investment Income Rate - the interest rate set forth in Schedule VI which is used in calculating the Mean Reserve Adjustment. ITEM 10 - 13 Page 72 DEFINITION OF TERMS (CONTINUED) ISSUING INSURER - the CEDING COMPANY with respect to business directly written and Consumers Life Insurance Company with respect to business assumed by the CEDING COMPANY. Last Day Of The Current Accounting Period - shall refer to the last day of the calendar quarter for which the calculation is being made, except that for the Terminal Accounting Period, such term shall refer to the moment Immediately prior to termination. Last Day Of The Preceding Accounting Period - shall refer to the last day of the preceding calendar quarter, except that for the initial Accounting Period, such term shall refer to the Effective Date. Loss Carryforward - the absolute value of any negative Reinsurance Profit after adjustment to the Deferred Profit Sharing Account. Material Change - a change that a prudent insurance executive would consider as likely to have a material impact on the REINSURER'S experience under this Agreement. Mean Reserve Adjustment - equals (a) minus (b) minus the quantity [(c) times (d) times the sum of (a) plus (b)], where (a) equals the Modified Coinsurance Reserves on the Last Day Of The Current Accounting Period, and (b) equals the Modified Coinsurance Reserves on the Last Day Of The Preceding Accounting Period, and (c) equals the Investment Income Rate, and (d) equals one-half, except that for the initial Accounting Period, (d) shall equal zero. Modified Coinsurance Reserves - 70% of the Reserves on the Reinsurer's Quota Share of the life insurance business reinsured hereunder. Net Coinsurance Reserves - an amount equal to the Coinsurance Reserves minus the book value of the ACCEL Note. ITEM 10 - 13 Page 73 DEFINITION OF TERMS (CONTINUED) Other Reinsurance - reinsurance other than portfolio quota share reinsurance which inures to the CEDING COMPANY'S benefit with respect to the Policies. Periodic Allowance - the amount described in Schedule IV. Policy(ies) - the insurance policy(ies) identified in Schedule I which are reinsured pursuant to this Agreement. Quota Share - the percentage of the Policies set forth in Schedule I which is ceded by the CEDING COMPANY to the REINSURER pursuant to this Agreement. REINSURER'S Scheduled Charge - the amounts defined in Part C of Schedule V. Reinsurance Profit - the amount described in Part B of Schedule V. Reserves - shall equal the Quota Share of the CEDING COMPANY'S statutory reserve liability (including, as appropriate, unearned premium reserves, mortality reserves, claim reserves and liabilities, active life reserves, disabled life reserves, accrued retroactive commissions and any other liabilities for which the REINSURER is responsible) calculated on the basis used by the CEDING COMPANY in compiling its statutory financial statement as required by the laws of its state of domicile, net of Other Reinsurance. Terminal Accounting Period - the period commencing on the day following the Last Day Of The Preceding Accounting Period and ending on the effective date of termination pursuant to any notice of termination given under this Agreement or such other date as shall be mutually agreed to in writing. ITEM 10 - 13 Page 74 DEFINITION OF TERMS (CONTINUED) Unusual Expenses - non-routine charges incurred by the ISSUING INSURER in defending or investigating a claim for policyholder benefits or in rescinding a Policy, including penalties, attorney's fees, and interest imposed automatically by statute against the ISSUING INSURER and arising solely out of a judgment rendered against the ISSUING INSURER in a suit for policyholder benefits, provided that the following categories of expenses or liabilities shall not be considered "Unusual Expenses": (a) routine investigative or administrative expenses; (b) expenses incurred in connection with a dispute or contest arising out of conflicting claims of entitlement to policyholder benefits which the ISSUING INSURER admits are payable; (c) expenses, fees, settlements, or judgments arising out of or in connection with claims against the ISSUING INSURER for punitive or exemplary damages; (d) expenses, fees, settlements, or judgments arising out of or in connection with claims made against the ISSUING INSURER and based on alleged or actual bad faith, failure to exercise good faith, or tortious conduct; and (e) policy premium reimbursement or return arising out of or in connection with an action of the type set forth in (c) or (d) above. ITEM 10 - 13 Page 75 SCHEDULE I QUOTA SHARE AND POLICIES SUBJECT TO REINSURANCE The Quota Share shall be 100% of all credit life and credit disability insurance written by the CEDING COMPANY or accepted as reinsurance by the CEDING COMPANY from Consumers Life Insurance Company of Camp Hill, Pennsylvania, and in force as of the Effective Date except for all business ceded directly or indirectly to producer-owned reinsurance companies. ITEM 10 - 13 Page 76 SCHEDULE II, PART A SUMMARY OF MONETARY TRANSACTIONS for the period from to ------------------ ------------------ 1. Initial reinsurance premium (first Accounting Period only) 2. Reinsurance Premium (Net of Other Reinsurance) (a) Premiums, plus (b) any Adverse Development Premium, less (c) Mean Reserve Adjustment, less (d) Periodic Allowance, less (e) Unusual Expenses, Subtotal: , less ------------------------- (f) any earned distribution from Deferred Profit Sharing Account Total Reinsurance Premium: ---------------------------------- 3. Life Benefits 4. Accident and Health Benefits 5. Life Benefits - Other Reinsurance 6. Accident and Health Benefits - Other Reinsurance 7. Net Benefits [(3) + (4) - (5) - (6)] 8. Coinsurance Reserves - Last Day Of The Preceding Accounting Period 9. Coinsurance Reserves - Last Day Of The Current Accounting Period 10. Increase in Coinsurance Reserves [(9) - (8), except (9) First Accounting Period only] 11. Book value of ACCEL Note - Last Day Of The Preceding Accounting Period 12. Book value of ACCEL Note - Last Day Of The Current Accounting Period 13. Fixed Interest Rate 14. Interest on Net Coinsurance Reserves [1/2 times (13) times ((8) + (9) (11) - (12))] 15. Deferred Profit Sharing Account - Last Day Of The Preceding Accounting Period 16. Deferred Profit Sharing Account - Last Day Of The Current Accounting Period 17. Interest on Deferred Profit Sharing Account ((13) times (15)) 18. Interest Earned 19. REINSURER'S Scheduled Charge 20. Loss Carryforward from Preceding Accounting Period 21. Interest on Loss Carryforward 22. Reinsurance Profit [(1) + (2 Subtotal) - (7) - (10) + (14) + (17) + (18) - (19) - (20) - (21)] ITEM 10 - 13 Page 77 SCHEDULE II, PART A (CONTINUED) 23. Cumulative Reinsurance Profit 24. Modified Coinsurance Reserves - Last Day Of The Preceding Accounting Period 25. Modified Coinsurance Reserves - Last Day Of The Current Accounting Period 26. Investment Income Rate 27. Investment Income [1/2 times (26) times ((24) + (25))] 28. Mean Reserve Adjustment [(25) - (24)] (first Accounting Period only) [(25) - (24) - (27)] (all other Accounting Periods) 29. Reserves - Last Day Of The Current Accounting Period 30. Breakdown of Reserves - Last Day Of The Current Accounting Period Unearned Premium Reserves Claim Reserves Claim Liabilities Active Life Reserves Disabled Life Reserves Accrued Retroactive Commissions Other ITEM 10 - 13 Page 78 SCHEDULE II, PART B SUMMARY OF MONETARY TRANSACTIONS for the period from to ------------------ -------------------- 1. Due REINSURER Initial reinsurance premium (1) (first period only) Reinsurance premiums (2) Total Due - REINSURER 2. Due CEDING COMPANY Net Benefits (5) Total Due - CEDING COMPANY 3. Due REINSURER (1 less 2), if positive 4. Due CEDING COMPANY (2 less 1), if positive ITEM 10 - 13 Page 79 SCHEDULE III ANNUAL REPORT The annual report shall provide the following information: - - Exhibits 8, 9 and 11 from the NAIC-prescribed annual statement - - Schedules H and O from the NAIC-prescribed annual statement - - an actuarial opinion on the reported reserves - - tax reserves and required interest - - "Analysis of Increase in Reserves" from the NAIC-prescribed annual statement - - "Exhibit of Accident and Health Insurance" from the NAIC-prescribed annual statement - - "Exhibit of Life Insurance" from the NAIC-prescribed annual statement ITEM 10 - 13 Page 80 SCHEDULE IV ALLOWANCES Initial Policy Expense Allowance The Initial Policy Expense Allowance shall be equal to the excess of (a) over (b), but in no event greater than $10,000,000, where (a) equals 47.5% of the unearned premium reserves developed on the rule of 78 basis for life business and mean basis for accident and health business reinsured hereunder as of the Effective Date, and (b) equals $16,500,000. Periodic Allowance The Periodic Allowance equals the sum of the Reinsurer's Quota Share of the business reinsured hereunder of (a) commissions paid net of return commissions, plus (b) 2.25% of the premiums earned, plus (c) premium taxes paid net of credit for return premiums. ITEM 10 - 13 Page 81 SCHEDULE V PROFIT SHARING A. General Beginning in 1996, a profit sharing calculation shall be made for each Accounting Period. An amount equal to (a) times (b) shall be added to the Deferred Profit Sharing Account if such amount is positive, and subtracted from the account, if negative, where (a) equals the Reinsurance Profit, and (b) equals 95% for the first $20,000,000 of Cumulative Reinsurance Profit, and 75% to the extent that Cumulative Reinsurance Profit exceeds $20,000,000. If the profit sharing calculation results in a negative balance for the Deferred Profit Sharing Account, a Loss Carryforward equal to the absolute value of such negative balance shall be created and the Deferred Profit Sharing Account set to zero. B. Reinsurance Profit Reinsurance Profit for each Accounting Period shall equal the result of the following computation determined with respect to such Accounting Period: (a) payments by the CEDING COMPANY as described in section B before deduction for any earned distribution from the Deferred Profit Sharing Account for the Accounting Period, plus (b) Interest on Deferred Profit Sharing Account, plus (c) Interest on Net Coinsurance Reserves, plus (d) Interest Earned, less (e) payments by the REINSURER as described in section C, less (f) the Increase in Coinsurance Reserves, less (g) the REINSURER'S Scheduled Charge, less (h) any Loss Carryforward from the prior Accounting Period, accrued with Interest for one Accounting Period at an annual rate of 10%, less (i) in the event this Agreement terminates, the total of any future REINSURER'S Scheduled Charges scheduled to be charged against profit sharing after the Last Day Of The Current Accounting Period. ITEM 10 - 13 Page 82 SCHEDULE V (CONTINUED) C. REINSURER'S Scheduled Charge The REINSURER'S Scheduled Charge shall be equal to the annual amounts scheduled below. One-fourth of each year's REINSURER'S Scheduled Charge shall be charged against profit sharing on a quarterly basis. Year REINSURER'S Scheduled Charge ---- ---------------------------- 1996 $6,500,000 1997 $4,000,000 1998 $2,500,000 1999 $1,000,000 2000+ $ 0 ITEM 10 - 13 Page 83 SCHEDULE VI INVESTMENT INCOME RATE The Investment Income Rate for the current Accounting Period shall be calculated as follows: Rate = 2 * (I + CG) * 25% ------------------ A+B-I-CG Where, based on the CEDING COMPANY'S current year results, I equals Net Investment Income (Exhibit 2, Line 16) CG equals (1) Realized Capital Gains and Losses on Investments (Exhibit 3, Line 10, Column 4), plus (2) Unrealized Capital Gains and Losses on Investments (Exhibit 4, Line 10, Column 4), and A (Current Year) equals (1) Subtotals, cash and invested assets (Page 2, Item 10A, Col. 1), plus (2) Investment income due and accrued (Page 2, Line 16, Col. 1), less (3) Borrowed money (Page 3, Line 22, Col. 1) B (Previous Year) equals (1) Subtotals, cash and invested assets (Page 2, Line 10A, Col. 2), plus (2) Investment income due and accrued (Page 2, Line 16, Col. 2), less (3) Borrowed money (Page 3, Line 22, Col. 2) All references in this schedule to exhibits, lines, and pages are references to the NAIC model statutory financial statement as in effect on December 31, 1995. All such references shall be deemed modified as necessary to correspond to changes to the NAIC model statutory financial statement. ITEM 10 - 13 Page 84 SCHEDULE VII ARBITRATION SCHEDULE To initiate arbitration, either the CEDING COMPANY or the REINSURER shall notify the other party in writing of its desire to arbitrate, stating the nature of its dispute and the remedy sought. The party to which the notice is sent shall respond to the notification in writing within ten (10) days of its receipt. The arbitration hearing shall be before a panel of three arbitrators, each of whom must be a present or former officer of a life insurance company. An arbitrator may not be a present or former officer, attorney, or consultant of the CEDING COMPANY or the REINSURER or either's affiliates. The CEDING COMPANY and the REINSURER shall each name five (5) candidates to serve as an arbitrator. The CEDING COMPANY and the REINSURER shall each choose one candidate from the other party's list, and these two candidates shall serve as the first two arbitrators. If one or more candidates so chosen shall decline to serve as an arbitrator, the party which named such candidate shall add an additional candidate to its list, and the other party shall again choose one candidate from the list. This process shall continue until two arbitrators have been chosen and have accepted. The CEDING COMPANY and the REINSURER shall each present their initial lists of five (5) candidates by written notification to the other party within twenty-five (25) days of the date of the mailing of the notification initiating the arbitration. Any subsequent additions to the list which are required shall be presented within ten (10) days of the date the naming party receives notice that a candidate that has been chosen declines to serve. The two arbitrators shall then select the third arbitrator from the eight (8) candidates remaining on the lists of the CEDING COMPANY and the REINSURER within fourteen (14) days of the acceptance of their positions as arbitrators. If the two arbitrators cannot agree on the choice of a third, then this choice shall be referred back to the CEDING COMPANY and the REINSURER. The CEDING COMPANY and the REINSURER shall take turns striking the name of one of the remaining candidates from the initial eight (8) candidates until only one candidate remains. If the candidate so chosen shall decline to serve as the third arbitrator, the candidate whose name was stricken last shall be nominated as the third arbitrator. This process shall continue until a candidate has been chosen and has accepted. This candidate shall serve as the third arbitrator. The first turn at striking the name of a candidate shall belong to the party that is responding to the other party's initiation of the arbitration. Once chosen, the arbitrators are empowered to decide all substantive and procedural issues by a majority of votes. It is agreed that each of the three arbitrators should be impartial regard- ing the dispute and should resolve the dispute on the basis described in the "ARBITRATION" section. Therefore, at no time will either the CEDING COMPANY or the REINSURER contact or otherwise communicate with any person who is to be or has been designated as a candidate to serve as an arbitrator concerning the dispute, except upon the basis of jointly drafted communications (which may include independently prepared statements) provided by both the CEDING COMPANY and the REINSURER to inform those candidates actually chosen as arbitrators of the nature and facts of the dispute. Likewise, any written or oral arguments provided to the arbitrators concerning the dispute ITEM 10 - 13 Page 85 SCHEDULE VII (CONTINUED) shall be coordinated with the other party and shall be provided simultaneously to the other party or shall take place in the presence of the other party. Further, at no time shall any arbitrator be informed that the arbitrator has been named or chosen by one party or the other. The arbitration hearing shall be held on the date fixed by the arbitrators. In no event shall this date be later than six (6) months after the appointment of the third arbitrator. The arbitration hearing shall be held in the city where the home office of the party responding to the arbitration is located. As soon as possible, the arbitrators shall establish pre-arbitration procedures as warranted by the facts and issues of the particular case. At least ten (10) days prior to the arbitration hearing, each party shall provide the other party and the arbitrators with a detailed statement of the facts and arguments it will present at the arbitration hearing. The arbitrators may consider any relevant evidence; they shall give the evidence such weight as they deem it entitled to after consideration of any objections raised concerning it. The party initiating the arbitration shall have the burden of proving its case by a preponderance of the evidence. Each party may examine any witnesses who testify at the arbitration hearing. Within twenty (20) days following the end of the arbitration hearing, the arbitrators shall issue a written decision which shall set forth their decision and the factual basis for their decision. In their written decision the arbitrators shall demonstrate that they have off-set mutual debts and credits as provided in this Agreement. In no event, however, may the arbitrators award punitive or exemplary damages. In their decision, the arbitrators shall also apportion the costs of arbitration, which shall include, but not be limited to, their own fees and expenses. ITEM 10 - 13 Page 86 SCHEDULE VIII SECTION 1.848-2(G)(8) ELECTION The CEDING COMPANY and the REINSURER agree to the following pursuant to Section 1.848-2(g)(8) of the Income Tax Regulations issued December 1992 under Section 848 of the Internal Revenue Code of 1986 (hereinafter "Section 1.848- 2(g)(8)"). 1. As used below, the term "party" will refer to the CEDING COMPANY or the REINSURER as appropriate. 2. As used below, the phrases "net positive consideration", "capitalize specified policy acquisition expenses", "general deductions limitation", and "net consideration" shall have the meaning used in Section 1.848-2(g)(8). 3. The party with net positive consideration for this Agreement for any taxable year beginning with the taxable year prescribed in paragraph 5 below will capitalize specified policy acquisition expenses with respect to this Agreement without regard to the general deductions limitation. 4. The parties agree to exchange information pertaining to the amount of net consideration under this Agreement to ensure consistency. This will be accomplished as follows: (a) The CEDING COMPANY shall submit to the REINSURER by the fifteenth day of May in each year its calculation of the net consideration for the preceding calendar year. Such calculation will be accompanied by a statement signed by an officer of the CEDING COMPANY stating that the CEDING COMPANY will report such net consideration in its tax return for the preceding calendar year. (b) The REINSURER may contest such calculation by providing an alternative calculation to the CEDING COMPANY in writing within thirty (30) days of the REINSURER'S receipt of the CEDING COMPANY'S calculation. If the REINSURER does not so notify the CEDING COMPANY, the REINSURER will report the net consideration as determined by the CEDING COMPANY in the REINSURER'S tax return for the previous calendar year. (c) If the REINSURER contests the CEDING COMPANY'S calculation of the net consideration, the parties will act in good faith to reach an agreement as to the current amount within thirty (30) days of the date the REINSURER submits its alternative calculation. ITEM 10 - 13 Page 87 SCHEDULE VIII (CONTINUED) If the CEDING COMPANY and the REINSURER reach agreement on an amount of net consideration, each party shall report such amount in their respective tax returns for the preceding calendar year. 5. This election shall be effective for 1995 and all subsequent taxable years for which the Reinsurance Agreement remains in effect. ITEM 10 - 13 Page 88 SCHEDULE IX DEFERRED PROFIT SHARING ACCOUNT The REINSURER shall maintain a Deferred Profit Sharing Account during the term of this Agreement in the amount defined below. The value of the Deferred Profit Sharing Account shall be zero as of the Effective Date of this Agreement. Additions to and subtractions from the Deferred Profit Sharing Account shall be made in accordance with Schedule V, Part A; but in no event shall the resulting balance be less than zero nor greater than the maximum amount. The maximum amount shall be determined as (a) plus (b) minus (c) plus (d) where (a) equals the principal amount of the ACCEL Note held by the REINSURER, its affiliates and/or its direct or indirect retrocessionaires, and (b) equals the total of the REINSURER'S Scheduled Charges across all years, and (c) equals the total of the REINSURER'S Scheduled Charges assessed to date, and (d) equals the Loss Carryforward, if any. Should the calculated balance in the Deferred Profit Sharing Account exceed the maximum amount, such excess amount over the maximum amount shall be paid to the CEDING COMPANY in the form of a reduction of premium as provided for in Section B, paragraph 2, of this Agreement. Only amounts in excess of the maximum amount shall be deemed earned. ITEM 10 - 13 Page 89 AMENDMENT to the Reinsurance Agreement (the "Agreement") effective December 31, 1995, between ACCELERATION LIFE INSURANCE COMPANY of Dublin, Ohio, hereinafter referred to as the "CEDING COMPANY," and THE LINCOLN NATIONAL LIFE INSURANCE COMPANY of Fort Wayne, Indiana, hereinafter referred to as the "REINSURER." 1. The parties not having intended this Agreement to be effective December 31, 1995, and wishing to correct this error, Section A, paragraph 3 is replaced with the following: "3. The Effective Date of this Agreement is January 1, 1996." 2. The provisions of this amendment shall be subject to all the terms and conditions of the Agreement which do not conflict with the terms hereof. IN WITNESS WHEREOF the parties hereto have caused this amendment to be executed in duplicate on the dates shown below. ACCELERATION LIFE INSURANCE COMPANY Signed at Dublin, Ohio ------------------- By /S/ Thomas H. Friedberg By /S/ Kurt L. Mueller ------------------------------ --------------------------------------- Title Chairman, President & CEO Title Vice President & Controller -------------------------- ----------------------------------- Date January 4, 1996 Date January 4, 1996 ---------------------------- ------------------------------------- THE LINCOLN NATIONAL LIFE INSURANCE COMPANY Signed at Fort Wayne, Indiana By /S/ Kenneth Clark By /S/ ------------------ ------------------------ --------------------------------------------- Sr. Vice President Assistant Secretary Date January 5, 1996 Date January 5, 1996 ------------------------------- ------------------------------- 960005/2911/H10NIRL6 Agreement No. 5/Revision No. 1 ITEM 10 - 13 Page 90 EX-5 6 ITEM 2. ORGANIZATIONAL CHART The following sets forth organizational chart information for ACCEL as of January 1, 1996: (1) ACCEL International Corporation, a Delaware domiciled insurance holding company (2) Acceleration Life Insurance Company, an Ohio domiciled, legal reserve life insurance company (Directors qualifying shares outstanding) (3) Acceleration National Service Corporation, an Ohio corporation (4) Acceleration National Insurance Company, an Ohio domiciled, stock property and casualty company formerly known as ACC Insurance Company (5) Acceleration Insurance Agency, Inc., an Ohio corporation (6) Acceleration Insurance Agency of Indiana, Inc., an Indiana corporation (7) Dublin International Limited, an Exempted Turks and Caicos domiciled company (8) Acceleration Insurance Agency of Pennsylvania, Inc., a Pennsylvania corporation (9) Randjill Group Limited, a New York insurance holding company (10) Acceleration Life Insurance Agency, Inc., an Ohio domiciled corporation All corporations are wholly owned by the companies indicated on the following chart except as noted. (Report continued on following page) ITEM 21 Page 91 ORGANIZATIONAL CHART CHASE INSURANCE HOLDINGS CORPORATION (38.9%) 10 Acceleration Life Insurance Agency, Inc. (100%) "ALIA" 9 Randjill Group Limited (100%) "RANDJILL" 8 Acceleration Insurance Agency of Pennsylvania, Inc. (100%) "AIA-PA" 7 Dublin International Limited (100%) "DIL" 6 Acceleration Insurance Agency of Indiana, Inc. (100%) "AIA-IN" 5 Acceleration Insurance Agency, Inc. (100%) "AIA" 4 Acceleration National Insurance Company (100%) "ANIC" 3 Acceleration National Service Corporation (100%) "ANSC" 2 Acceleration Life Insurance Company (100%) "ALIC" 1 ACCEL International Corporation ITEM 21 Page 92 EX-6 7 EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS' The Board of Directors ACCEL International Corporation: We consent to the incorporation by reference in Registration Statements (Forms S-8 No. 33-48023, No. 33-19191 and No. 2-82736) pertaining to the First Restatement of the 1987 Stock Incentive Plan, the 1987 Incentive Stock Option Plan, and the 1982 Incentive Stock Option Plan, respectively, and in the related Prospectus, of our report dated March 15, 1996, relating to the consolidated financial statements of ACCEL International Corporation and subsidiaries (the Company) as of December 31, 1995 and for the year then ended, and all related schedules (all as listed in the index in Item 14(a) in Form-10K), which report appears in the December 31, 1995 annual report on Form-10K of ACCEL International Corporation and subsidiaries. Our report dated March 15, 1996 contains an explanatory paragraph that states that as discussed in Note D to the consolidated financial statements, on March 30, 1994, the Company and its principal lender agreed to waive compliance with certain loan agreement covenants through January 1, 1995. On February 7, 1995 the Company and the lender again renegotiated the credit agreement and certain of the covenants. The amended agreement stated that the loan was payable in full on June 30, 1997. On December 29, 1995, the Company issued senior notes with a different lender and retired the aforementioned credit agreement. The most recent loan agreement requires that during the period the loan is outstanding, the Company maintain consolidated tangible net worth, as defined. At December 31, 1995, required tangible net worth was $15,000,000 and the Company's consolidated tangible net worth, as defined, was $19,738,000. /S/ KPMG Peat Marwick LLP KPMG Peat Marwick LLP Columbus, Ohio March 15, 1996 ITEM 23 Page 93 EX-7 8 POWER OF ATTORNEY OFFICERS AND DIRECTORS OF ACCEL INTERNATIONAL CORPORATION The undersigned officer and/or director of ACCEL International Corporation, a Delaware corporation, which anticipates filing a Form 10-K under the provisions of the Securities Act of 1934 with the Securities and Exchange Commission, Washington, D.C., hereby constitutes and appoints Thomas H. Friedberg and Nicholas Z. Alexander, and each of them, severally, with full power of substitution and resubstitution, as attorneys or attorney to sign for the undersigned in any and all capacities such Form 10-K and any and all amendments thereto, and any and all applications or other documents to be filed with the Securities and Exchange Commission pertaining to such Form 10-K with full power and authority to do and perform any and all acts and things whatsoever required and necessary to be done in the premises, as fully to all intents and purposes as the undersigned could do if personally present. The undersigned hereby ratifies and confirms all that said attorneys-in-fact and agents or their or his substitute or substitutes may lawfully do or cause to be done by virtue hereof. EXECUTED this 11th day of March , 1996. ------- ------- /S/ David T. Chase ------------------------------------ David T. Chase Director ITEM 24 Page 94 POWER OF ATTORNEY OFFICERS AND DIRECTORS OF ACCEL INTERNATIONAL CORPORATION The undersigned officer and/or director of ACCEL International Corporation, a Delaware corporation, which anticipates filing a Form 10-K under the provisions of the Securities Act of 1934 with the Securities and Exchange Commission, Washington, D.C., hereby constitutes and appoints Thomas H. Friedberg and Nicholas Z. Alexander, and each of them, severally, with full power of substitution and resubstitution, as attorneys or attorney to sign for the undersigned in any and all capacities such Form 10-K and any and all amendments thereto, and any and all applications or other documents to be filed with the Securities and Exchange Commission pertaining to such Form 10-K with full power and authority to do and perform any and all acts and things whatsoever required and necessary to be done in the premises, as fully to all intents and purposes as the undersigned could do if personally present. The undersigned hereby ratifies and confirms all that said attorneys-in-fact and agents or their or his substitute or substitutes may lawfully do or cause to be done by virtue hereof. EXECUTED this 7th day of March , 1996. ------- ------- /S/ Douglas J. Coats ------------------------------------ Douglas J. Coats Director and Executive Vice President ITEM 24 Page 95 POWER OF ATTORNEY OFFICERS AND DIRECTORS OF ACCEL INTERNATIONAL CORPORATION The undersigned officer and/or director of ACCEL International Corporation, a Delaware corporation, which anticipates filing a Form 10-K under the provisions of the Securities Act of 1934 with the Securities and Exchange Commission, Washington, D.C., hereby constitutes and appoints Thomas H. Friedberg and Nicholas Z. Alexander, and each of them, severally, with full power of substitution and resubstitution, as attorneys or attorney to sign for the undersigned in any and all capacities such Form 10-K and any and all amendments thereto, and any and all applications or other documents to be filed with the Securities and Exchange Commission pertaining to such Form 10-K with full power and authority to do and perform any and all acts and things whatsoever required and necessary to be done in the premises, as fully to all intents and purposes as the undersigned could do if personally present. The undersigned hereby ratifies and confirms all that said attorneys-in-fact and agents or their or his substitute or substitutes may lawfully do or cause to be done by virtue hereof. EXECUTED this 8th day of March , 1996. ------- ------- /S/ Raymond H. Deck ------------------------------------ Raymond H. Deck Director ITEM 24 Page 96 POWER OF ATTORNEY OFFICERS AND DIRECTORS OF ACCEL INTERNATIONAL CORPORATION The undersigned officer and/or director of ACCEL International Corporation, a Delaware corporation, which anticipates filing a Form 10-K under the provisions of the Securities Act of 1934 with the Securities and Exchange Commission, Washington, D.C., hereby constitutes and appoints Thomas H. Friedberg and Nicholas Z. Alexander, and each of them, severally, with full power of substitution and resubstitution, as attorneys or attorney to sign for the undersigned in any and all capacities such Form 10-K and any and all amendments thereto, and any and all applications or other documents to be filed with the Securities and Exchange Commission pertaining to such Form 10-K with full power and authority to do and perform any and all acts and things whatsoever required and necessary to be done in the premises, as fully to all intents and purposes as the undersigned could do if personally present. The undersigned hereby ratifies and confirms all that said attorneys-in-fact and agents or their or his substitute or substitutes may lawfully do or cause to be done by virtue hereof. EXECUTED this 12th day of March , 1996. ------- ------- /S/ Thomas H. Friedberg ------------------------------------ Thomas H. Friedberg Chairman of the Board, President and Chief Executive Officer ITEM 24 Page 97 POWER OF ATTORNEY OFFICERS AND DIRECTORS OF ACCEL INTERNATIONAL CORPORATION The undersigned officer and/or director of ACCEL International Corporation, a Delaware corporation, which anticipates filing a Form 10-K under the provisions of the Securities Act of 1934 with the Securities and Exchange Commission, Washington, D.C., hereby constitutes and appoints Thomas H. Friedberg and Nicholas Z. Alexander, and each of them, severally, with full power of substitution and resubstitution, as attorneys or attorney to sign for the undersigned in any and all capacities such Form 10-K and any and all amendments thereto, and any and all applications or other documents to be filed with the Securities and Exchange Commission pertaining to such Form 10-K with full power and authority to do and perform any and all acts and things whatsoever required and necessary to be done in the premises, as fully to all intents and purposes as the undersigned could do if personally present. The undersigned hereby ratifies and confirms all that said attorneys-in-fact and agents or their or his substitute or substitutes may lawfully do or cause to be done by virtue hereof. EXECUTED this 9th day of March , 1996. ------- ------- /S/ Kermit G. Hicks ------------------------------------ Kermit G. Hicks Director ITEM 24 Page 98 POWER OF ATTORNEY OFFICERS AND DIRECTORS OF ACCEL INTERNATIONAL CORPORATION The undersigned officer and/or director of ACCEL International Corporation, a Delaware corporation, which anticipates filing a Form 10-K under the provisions of the Securities Act of 1934 with the Securities and Exchange Commission, Washington, D.C., hereby constitutes and appoints Thomas H. Friedberg and Nicholas Z. Alexander, and each of them, severally, with full power of substitution and resubstitution, as attorneys or attorney to sign for the undersigned in any and all capacities such Form 10-K and any and all amendments thereto, and any and all applications or other documents to be filed with the Securities and Exchange Commission pertaining to such Form 10-K with full power and authority to do and perform any and all acts and things whatsoever required and necessary to be done in the premises, as fully to all intents and purposes as the undersigned could do if personally present. The undersigned hereby ratifies and confirms all that said attorneys-in-fact and agents or their or his substitute or substitutes may lawfully do or cause to be done by virtue hereof. EXECUTED this 7th day of March , 1996. ------- ------- /S/ Stephen M. Qua ------------------------------------ Stephen M. Qua Director ITEM 24 Page 99 POWER OF ATTORNEY OFFICERS AND DIRECTORS OF ACCEL INTERNATIONAL CORPORATION The undersigned officer and/or director of ACCEL International Corporation, a Delaware corporation, which anticipates filing a Form 10-K under the provisions of the Securities Act of 1934 with the Securities and Exchange Commission, Washington, D.C., hereby constitutes and appoints Thomas H. Friedberg and Nicholas Z. Alexander, and each of them, severally, with full power of substitution and resubstitution, as attorneys or attorney to sign for the undersigned in any and all capacities such Form 10-K and any and all amendments thereto, and any and all applications or other documents to be filed with the Securities and Exchange Commission pertaining to such Form 10-K with full power and authority to do and perform any and all acts and things whatsoever required and necessary to be done in the premises, as fully to all intents and purposes as the undersigned could do if personally present. The undersigned hereby ratifies and confirms all that said attorneys-in-fact and agents or their or his substitute or substitutes may lawfully do or cause to be done by virtue hereof. EXECUTED this 8th day of March , 1996. ------- ------- /S/ Milton J. Taylor, Sr. ------------------------------------ Milton J. Taylor, Sr. Director ITEM 24 Page 100 POWER OF ATTORNEY OFFICERS AND DIRECTORS OF ACCEL INTERNATIONAL CORPORATION The undersigned officer and/or director of ACCEL International Corporation, a Delaware corporation, which anticipates filing a Form 10-K under the provisions of the Securities Act of 1934 with the Securities and Exchange Commission, Washington, D.C., hereby constitutes and appoints Thomas H. Friedberg and Nicholas Z. Alexander, and each of them, severally, with full power of substitution and resubstitution, as attorneys or attorney to sign for the undersigned in any and all capacities such Form 10-K and any and all amendments thereto, and any and all applications or other documents to be filed with the Securities and Exchange Commission pertaining to such Form 10-K with full power and authority to do and perform any and all acts and things whatsoever required and necessary to be done in the premises, as fully to all intents and purposes as the undersigned could do if personally present. The undersigned hereby ratifies and confirms all that said attorneys-in-fact and agents or their or his substitute or substitutes may lawfully do or cause to be done by virtue hereof. EXECUTED this 19th day of March , 1996. ------- ------- /S/ Paul R. Whitters ------------------------------------ Paul R. Whitters Director ITEM 24 Page 101 EX-27 9
7 This schedule contains summary information extracted form ACCEL International Corporation's Annual Report on Form 10-K for the year ended December 31, 1995, and is qualified in its entirety by reference to such Form 10-K. 0000001985 ACCEL INTERNATIONAL CORPORATION 1,000 U.S. Dollars 12-MOS DEC-31-1995 JAN-01-1995 DEC-31-1995 0.00001 53,204 0 0 5,451 0 0 63,297 5,039 0 31,839 183,507 22,761 82,080 11 0 22,531 524 0 0 0 183,507 40,853 6,488 455 2,679 20,118 31,458 0 (1,101) 359 (1,460) 0 0 0 (1,460) (.33) 0 23,159 0 0 0 0 22,761 0
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