-----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, P2dV5uLVaNjXNlxH9hi16Q9bb3DhuV346C8Q/velPXJNP/29uTelSQIYu1ivyI6+ FW1F4haaZVvVvH55FR1NRA== 0000950131-96-001382.txt : 19960402 0000950131-96-001382.hdr.sgml : 19960402 ACCESSION NUMBER: 0000950131-96-001382 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960401 SROS: CSX SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: AON CORP CENTRAL INDEX KEY: 0000315293 STANDARD INDUSTRIAL CLASSIFICATION: LIFE INSURANCE [6311] IRS NUMBER: 363051915 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-07933 FILM NUMBER: 96542743 BUSINESS ADDRESS: STREET 1: 123 N WACKER DR CITY: CHICAGO STATE: IL ZIP: 60606 BUSINESS PHONE: 3127013000 FORMER COMPANY: FORMER CONFORMED NAME: COMBINED INTERNATIONAL CORP DATE OF NAME CHANGE: 19870504 10-K405 1 FORM 10-K405 ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] COMMISSION FILE NUMBER: 1-7933 Aon CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) --------------------- DELAWARE 36-3051915 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 123 NORTH WACKER DRIVE, 60606 CHICAGO, ILLINOIS (Zip Code) (Address of Principal Executive Offices) (312) 701-3000 (Telephone Number) -------------------- SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED - ------------------------------------------ ------------------------ Common Stock, $1 par value New York Stock Exchange* 8% Cumulative Perpetual Preferred Stock New York Stock Exchange 6-1/4% Cumulative Convertible Exchangeable Preferred Stock New York Stock Exchange 6.875% Notes Due 1999 New York Stock Exchange 7.40% Notes Due 2002 New York Stock Exchange SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE *The Common Stock of the Registrant is also listed for trading on the Chicago Stock Exchange and The International Stock Exchange London. -------------------- 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 [_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation 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. [X] Aggregate market value of the voting stock held by non-affiliates of the Registrant as of February 28, 1996 was $4,575,244,569. Number of shares of $1.00 par value Common Stock outstanding as of February 28, 1996: 108,413,284. DOCUMENTS FROM WHICH INFORMATION IS INCORPORATED BY REFERENCE: Annual Report to Stockholders of the Registrant for the Year 1995 (Parts I, II and IV) Notice of Annual Meeting of Holders of Common Stock and Series C Cumulative Preferred Stock and Proxy Statement for Annual Meeting of Stockholders on April 19, 1996 of the Registrant (Part III) ================================================================================ PART I ITEM 1. BUSINESS. The Registrant is an insurance holding company. Incorporated in 1979, it is the parent corporation of long established and more recently formed companies. In early 1996, one of the Registrant's wholly-owned subsidiaries, Rollins Hudig Hall Group, Inc. changed its name to Aon Group, Inc. ("Aon Group"). Several of Aon Group's subsidiaries also changed their names in early 1996 including Aon Risk Services Companies, Inc. (formerly Rollins Hudig Hall Co.); Aon Holdings bv (formerly Rollins Hudig Hall Holdings bv); and Aon Consulting Worldwide, Inc. (formerly Godwins International, Inc.). These newly named corporations join Aon Specialty Group, Inc.; Aon Re Worldwide, Inc.; and Nicholson Leslie Group Limited to comprise Aon Group. Aon Group and its subsidiaries provide reinsurance intermediary services, benefits consulting and commercial insurance brokerage services. In fourth quarter 1995, the Registrant and Combined Insurance Company of America ("Combined Insurance") executed definitive agreements to sell two of Combined Insurance's insurance subsidiaries, Union Fidelity Life Insurance Company ("UFLIC") and The Life Insurance Company of Virginia ("LOV"). The parties have received the necessary regulatory consents, and the sales of these two subsidiaries are expected to close on or around April 1,1996. Combined Insurance and Ryan Insurance Group, Inc. engage in the marketing of life and accident and health insurance products. Ryan Insurance Group, Inc.; Virginia Surety Company, Inc.; and London General Insurance Company Limited, also subsidiaries of the Registrant, offer extended warranty and specialty insurance products. Beginning in fourth quarter 1995, all insurance underwriting operations are presented as one segment and primarily include life, accident and health insurance and extended warranty products. The Registrant hereby incorporates by reference the four inside cover pages and pages 6 and 7 of the Annual Report to Stockholders of the Registrant for the Year 1995 ("Annual Report"). COMPETITION AND INDUSTRY POSITION (1) INSURANCE BROKERAGE AND CONSULTING SERVICES Aon Risk Services Companies, Inc. ("Aon Risk Services Companies"); Aon Holdings bv ("Aon Holdings"); Aon Specialty Group, Inc. ("Aon Specialty Group"); Aon Consulting Worldwide, Inc. ("Aon Consulting"); Aon Re Worldwide, Inc. ("Aon Re"); and Nicholson Leslie Group Limited ("Nicholson Leslie"). Aon Group, Inc. ("Aon Group"), formerly Rollins Hudig Hall Group, Inc., is the holding company for the Registrant's commercial brokerage and consulting operation. Aon Group is the second largest brokerage and consulting services firm in the world. The Aon Group companies have more than 350 offices around the world and employ approximately 14,000 professionals and support personnel who serve the diverse needs of clients. Aon Risk Services Companies' (formerly Rollins Hudig Hall Co.) subsidiaries operate in a highly competitive industry and compete with a large number of retail insurance brokerage and agency firms as well as individual brokers and agents and direct writers of insurance coverage. Aon Risk Services Companies' subsidiaries offer comprehensive services to clients including insurance placement, specialized brokerage services, program development and administration, premium financing services, risk management and loss control consulting. It has also developed certain specialist niche areas such as marine, aviation, directors and officers liability, financial institutions, construction, energy, municipalities, media, entertainment and fine art. 2 Aon Holdings (formerly Rollins Hudig Hall Holdings bv) traces its commercial broking roots to 1688 and is one of the premier brokers in Continental Europe with more than 90 offices and approximately 3,000 employees. Aon Holdings has subsidiaries in more than 30 countries and, in 1995, acquired the remaining interest in a joint venture that owns a network of insurance broking offices in Southeast Asia. Subsidiaries of Aon Risk Services Companies and Aon Holdings operate through owned offices in North America and Europe, as well as in Latin America and Asia/Pacific. In 1995, Aon Holdings subsidiaries opened offices in Australia, Germany, France, Denmark, Belgium, Ireland, Sweden, Spain, Portugal, The Netherlands, and the United Kingdom. The Registrant became the latest insurance organization licensed to open a representative office in Beijing, China, in 1995. Aon Specialty Group addresses the highly specialized product development, consulting and administrative needs of professional groups, service businesses, governments, health care providers and commercial organizations nationwide. It also provides specialized managing general underwriting and wholesale brokerage services for insurance organizations. Aon Specialty Group operating subsidiaries' market and broker both the primary and reinsurance risks of these programs. Aon Direct Group is Aon Specialty Group's primary direct marketer of specialty insurance products for associations and affinity groups. Media/Professional (MPI), a subsidiary of Aon Specialty Group, is one of the largest brokers of libel and other insurance to the broadcast and print media in the United States. Its Bankers Insurance Service Corp. subsidiary is an underwriting manager that serves the mortgage banking industry. Its Scarborough & Co. subsidiary provides similar underwriting services to community banks, mortgage and savings institutions. Subsidiaries of Aon Consulting (formerly Godwins International, Inc.) and the European benefits operations of Aon Holdings serve the employee benefit needs of clients around the world. Aon Consulting is one of the world's largest integrated human resources consulting organizations. In the United States, the benefits environment continues to change as companies look for ways to manage their benefits costs while increasing the choices offered to their employees. Aon Consulting, with its expertise in all areas of benefits and compensation, and its access to the Registrant's other subsidiaries, is well-positioned to serve this market. Existing business continues to be influenced by a sluggish benefits consulting environment in the United States. Benefits issues in foreign countries are becoming more complicated, and Aon Holdings and Aon Consulting anticipate increased demand for their services in these markets. The late-1994 acquisition of HRStrategies Inc. marked an important expansion for Aon Consulting. HRStrategies specializes in human resources strategy development, employee selection, and identification and development of employee skills and skills assessment systems. In 1995, Aon Consulting acquired Hutchison & Associates, Inc. This acquisition strengthens the nationwide capabilities, client base and service range of Aon Consulting and also integrates the various aspects of the benefits consulting and human resource fields. As employers contend with increased competition for skilled workers, the ability to identify, motivate and compensate those workers becomes increasingly important. Aon Re is the second largest reinsurance intermediary in the world. Aon Re serves the alternative market with reinsurance placement, alternative risk services, captive management services and catastrophe information forecasting. In 1993, Aon Re was formed as a holding company to coordinate all reinsurance operations. Agricultural Risk Management Limited in London, specializing in the evaluation of agricultural risk, was acquired in early 1995. Nicholson Leslie is a London-based Lloyd's broker that places wholesale and reinsurance business in the London and international markets and serves the needs of a wide range of clients around the world. A majority of Nicholson Leslie's revenue is derived from sources unaffiliated with Aon. The late-1994 acquisition of Lloyd's broker Jenner Fenton Slade Group Limited (JFS) expanded the Registrant's expertise in the area of energy insurance. 3 (2) INSURANCE UNDERWRITING Combined Insurance Company of America ("Combined Insurance"); Combined Life Insurance Company of New York ("CLICNY"); Ryan Insurance Group, Inc. ("Ryan"); Virginia Surety Company, Inc. ("VSC"); and London General Insurance Company Limited ("London General"). Following the Registrant's and Combined Insurance's execution in late 1995 of definitive agreements to sell Combined Insurance's direct response life and health subsidiary, Union Fidelity Life Insurance Company ("UFLIC") and Combined Insurance's capital accumulation insurance subsidiary, The Life Insurance Company of Virginia ("LOV"), the Registrant reclassified its operating segments to reflect the focus of its continuing operations. Beginning in fourth quarter 1995, all insurance underwriting operations are presented as one segment based on the related nature, distribution channels and markets of the continuing products. The Registrant's insurance underwriting subsidiaries are part of a highly competitive industry that serves individual consumers in North America, Europe, Latin America and Asia/Pacific by providing accident and health coverage, traditional life insurance, extended warranties and credit insurance through global distribution networks that are directly owned by the Registrant's subsidiaries. The accident and health distribution network encompasses the agents of Combined Insurance and the automobile dealers that market the products of Ryan. With more than five million policyholders, Combined Insurance has more individual accident and health policies in force than any other United States company. Combined Insurance, the Registrant's principal accident and health insurer, has a direct sales force of several thousand career agents calling on individuals to sell a broad spectrum of accident and health products. It is one of the few companies with agents that call on customers every six months to renew coverage and to sell additional coverage. Combined Insurance offers a wide range of accident-only and sickness-only insurance products, including short- term disability, cancer aid, Medicare supplement and disability income coverage. Combined Insurance's products are primarily fixed indemnity obligations, thereby not subject to escalating medical costs. Combined Insurance offers a simplified accident and sickness long-term disability policy. Combined Insurance and its wholly-owned subsidiary CLICNY (which operates exclusively in the State of New York) market whole life products through direct sales career agents in the United States. Combined Insurance ranked among the top 100 life insurance companies in the United States in terms of total life premiums in 1994. Life insurance business is conducted by the Registrant's life insurance subsidiaries in 49 states, Canada, the United Kingdom, Ireland, Germany, Australia and New Zealand. Ryan is a major marketer of extended warranties and credit-related life and disability products for the automotive industry. In January 1995, Globe Life Insurance Company was merged with Combined Insurance. Ryan subsidiaries operate in a highly competitive industry, competing against numerous insurers and insurance agents engaged in selling credit life and disability insurance, including some which also provide finance and consulting services to automobile dealers. Substantially all of the credit insurance sold by Ryan subsidiaries is generated through dealers who have no legal obligation or commitment to continue as agents for Ryan and are free to terminate such relationships and act as agents for, and place insurance with, Ryan's competitors. The Registrant's extended warranty and specialty insurance business, conducted by subsidiaries VSC in North America and London General in Europe, is composed primarily of extended warranty insurance products, professional liability insurance coverages, workers' compensation and specialty financial institution coverages. VSC and London General continue to be one of the world's largest underwriters of consumer extended warranties. Ryan's automobile warranty products are sold in the United Kingdom, 4 Ireland, France, The Netherlands, Belgium and Spain. Aon Warranty Group handles the administration of certain extended warranty products on automobiles, electronic goods, personal computers and appliances. It serves manufacturers, distributors and wholesalers in North America and in Europe. (3) DISCONTINUED OPERATIONS The Life Insurance Company of Virginia ("LOV") and Union Fidelity Life Insurance Company ("UFLIC"). In fourth quarter 1995, the Registrant and Combined Insurance executed definitive agreements to sell Combined Insurance's insurance subsidiaries, LOV and UFLIC. The parties have received the necessary regulatory consents, and the sales of these two subsidiaries are expected to close on or around April 1, 1996. Their results are therefore classified in the consolidated statements of income in the Annual Report to Stockholders of the Registrant for the Year 1995 as discontinued operations. The business written by LOV primarily includes capital accumulation products and some other life products. UFLIC operates in the United States in the highly competitive direct response life and health marketing segment of the industry. LICENSING AND REGULATION Insurance companies must comply with laws and regulations of the jurisdictions in which they do business. These laws and regulations are designed to ensure financial solvency of insurance companies and to require fair and adequate service and treatment for policyholders. They are enforced by the states in the United States, by industry self-regulating agencies in the United Kingdom, and by various regulatory agencies in other countries through the granting and revoking of licenses to do business, licensing of agents, monitoring of trade practices, policy form approval, minimum loss ratio requirements, limits on premium and commission rates, and minimum reserve and capital requirements. Compliance is monitored by the state insurance departments through periodic regulatory reporting procedures and periodic examinations. The quarterly and annual financial reports to the regulators in the United States utilize accounting principles which are different from the generally accepted accounting principles used in stockholders' reports. The statutory accounting principles, in keeping with the intent to assure the protection of policyholders, are based, in general, on a liquidation concept while generally accepted accounting principles are based on a going-concern concept. The state insurance regulators are members of the National Association of Insurance Commissioners ("NAIC"). This Association seeks to promote uniformity of, and to enhance the state regulation of, insurance. Both the NAIC and the individual states continue to focus on the solvency of insurance companies. This focus is reflected in additional regulatory oversight by the states and emphasis on the enactment or adoption of a series of NAIC model laws and regulations designed to promote solvency. The increase in any solvency-related oversight by the states will not have any significant impact on the insurance business of the Registrant. Several years ago, the NAIC developed a formula for analyzing insurers called risk based capital ("RBC"). RBC is intended to establish "minimum" capital threshold levels that vary with the size and mix of a company's business. It is designed to identify companies with the capital levels that may require regulatory attention. RBC does not have any significant impact on the insurance business of the Registrant. 5 Insurance companies are generally not subject to any federal regulation of their insurance business because of the existence of a federal law commonly known as the McCarran-Ferguson Act. McCarran-Ferguson provides the insurance industry with immunity from certain aspects of the federal anti-trust law and exempts the business of insurance from federal regulation. In the past several years there have been a number of recommendations that McCarran-Ferguson be repealed entirely or modified to remove the industry's anti-trust exemption and subject it to federal regulation. If McCarran-Ferguson were to be repealed or modified, state regulation of the insurance business would continue. The result could be an additional layer of federal regulation. The Registrant expects that any repeal of anti-trust exemptions available to insurers under the McCarran- Ferguson Act would not have a significant impact on its operations. The state insurance holding company laws require prior notice to and approval of the domestic state insurance department of intracorporate transfers of assets within the holding company structure, including the payment of dividends by insurance company subsidiaries. In addition, sales of credit insurance by Ryan's agents and premium finance loans by Cananwill, Inc., an indirect wholly-owned subsidiary of the Registrant, are subject to one or more of truth-in-lending and credit regulations, insurance premium finance acts, retail installment sales acts and other similar consumer protection legislation. Failure to comply with such laws or regulations can result in the temporary suspension or permanent loss of the right to engage in business in a particular jurisdiction as well as other penalties. Regulatory authorities in the states in which the operating subsidiaries of Aon Group conduct business may require individual or company licensing to act as brokers, agents, third party administrators, managing general agents, reinsurance intermediaries or adjusters. Under the laws of most states, regulatory authorities have relatively broad discretion with respect to granting, renewing and revoking brokers' and agents' licenses to transact business in the state. The manner of operating in particular states may vary according to the licensing requirements of the particular state, which may require, among other things, that a firm operate in the state through a local corporation. In a few states, licenses are issued only to individual residents or locally-owned business entities. In such cases, Aon Group subsidiaries have arrangements with residents or business entities licensed to act in the state. There continues to be activity in the area of health care reform at the state levels in the United States. Numerous states have had legislation introduced to reform the health care system and such legislation has passed in several states. While it is impossible to forecast the precise nature of future state health care changes, the Registrant does not expect a major impact on its operations because of the supplemental nature of most of the policies issued by its insurance subsidiaries and because the coverages are primarily purchased to provide, on a fixed-indemnity basis, protection against loss-of-time or disability benefits. If health care reform does not provide for a significant role for insurance companies currently writing primary medical coverage, the Registrant expects that some of those companies would increase their participation in other segments of the insurance underwriting business, perhaps heightening the competition with Combined Insurance. Combined Insurance and its subsidiaries currently operate successfully in several foreign countries which have national health plans in effect. MORTGAGE LOANS AND REAL ESTATE INVESTMENTS Mortgage loans and real estate investments held by the Registrants' subsidiaries at December 31, 1995 were $632 million and $36.5 million, respectively. Approximately 95% of these mortgage loans and substantially all of the real estate investments at December 31, 1995 are held by LOV. Commercial mortgage loans represent over 98% of total mortgage loans at December 31, 1995. Mortgage loans and real estate in the South Atlantic region totaled $320 million and $25.8 million, respectively, at December 31, 1995. The five states carrying the highest concentrations of these mortgage loans and real estate investments are listed below by each category. 6 (millions)
MORTGAGE LOANS 1995 1994 REAL ESTATE 1995 1994 - -------------- ------ ------ -------------- ------ ------ Virginia $124.9 $126.1 Virginia $15.8 $14.5 Maryland 63.1 60.2 New Jersey 6.0 2.9 Florida 62.3 56.0 South Carolina 4.2 3.4 Texas 60.9 41.9 Georgia 3.1 2.9 New Jersey 45.3 53.2 Florida 2.6 3.9
CAPITAL ACCUMULATION INVESTMENT TYPE CONTRACTS Investment-type contracts (as defined by Statement of Financial Accounting Standards No. 97) are annuities (approximately 77% are single premium deferred annuities) and guaranteed investment contracts. These investment-type contracts primarily relate to discontinued operations. Significant terms and conditions of these contracts are described below. SINGLE PREMIUM DEFERRED ANNUITIES (SPDAS): The Registrant's insurance subsidiaries had approximately $1.7 billion of SPDA reserves in force at December 31, 1995. SPDAs are single premium accumulation vehicles with one, three or five year interest rate guarantees, after which declared one year guaranteed renewal rates are set based on prevailing economic conditions. There is a minimum guaranteed interest rate of 4% on most policies. GUARANTEED INVESTMENT CONTRACTS (GICS): The Registrant's insurance subsidiaries had approximately $1.7 billion in GIC contracts outstanding at December 31, 1995. Of these, 76% are fixed rate contracts originally written with a maturity from two to six years. The average maturity of the fixed rate GIC pool was 2.2 years at December 31, 1995. The remaining 24% of the GICs are variable rate contracts which have rates that float monthly based on an index relating to money market yields. Most of the GICs are benefit sensitive to varying degrees. As of December 31, 1995, most GIC contracts were for the benefit of qualified retirement plans. The terms of these investment type contracts are typical of similar products sold by competitors. CLIENTELE No significant part of the Registrant's or its subsidiaries' business is dependent upon a single client or on a few clients, the loss of any one of which would have a material adverse effect on the Registrant. EMPLOYEES The Registrant's subsidiaries had approximately 27,000 employees at the end of 1995 of whom approximately two-thirds are salaried and hourly employees and the remaining one-third are sales representatives who are generally compensated wholly or primarily by commission. Employees included in the Registrant's discontinued operations represent less than 10% of the total at the end of 1995. ITEM 2. PROPERTIES. The Registrant's subsidiaries own and occupy office buildings in nine states and certain foreign countries, and lease office space elsewhere in the United States and in various foreign cities. Loss of the 7 use of any owned or leased property, while potentially disruptive, would have no material impact on the Registrant. ITEM 3. LEGAL PROCEEDINGS. The Registrant hereby incorporates by reference note 12 of the Notes to Consolidated Financial Statements on page 32 of the Annual Report. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. EXECUTIVE OFFICERS OF THE REGISTRANT Executive officers of the Registrant are regularly elected by its Board of Directors at the annual meeting of the Board which is held following each annual meeting of the stockholders of the Registrant. The executive officers of the Registrant were elected to their current positions on April 20, 1995 to serve until the meeting of the Board following the annual meeting of stockholders on April 19, 1996. Ages shown are as of December 31, 1995. For information concerning certain executive officers of the Registrant, see item 10 below. As of March 29, 1996, the following individuals are also executive officers of the Registrant as defined in Rule 16a-1(f): 8
HAS CONTINUOUSLY SERVED AS AN OFFICER OF REGISTRANT OR NAME, AGE, AND ONE OR CURRENT OFFICE MORE OF ITS OR PRINCIPAL SUBSIDIARIES BUSINESS EXPERIENCE POSITION SINCE PAST 5 YEARS - ------------------------- ---------------- ---------------------------------- Harvey N. Medvin, 59 1972 Mr. Medvin became Vice President Executive Vice President, and Chief Financial Officer of the Chief Financial Officer Registrant in 1982 and was elected and Treasurer to his current position in 1987. He also serves as a Director or Officer of certain of the Registrant's subsidiaries. Daniel T. Cox, 49 1986 Mr. Cox was elected to his current Executive Vice President position in 1991 and has served as Chairman and Chief Executive Officer of LOV since 1988 and of Union Fidelity since 1989. Mr. Cox has headed the Registrant's benefits consulting operation since 1987. He also serves as Director or Officer of certain of the Registrant's subsidiaries. Michael A. Conway, 48 1990 Mr. Conway was Vice President of Senior Vice President and Combined Insurance from 1980 to Senior Investment Officer 1984. Following other employment, Mr. Conway rejoined the Registrant in 1990 as Senior Vice President of Combined Insurance and was elected to his current position in 1991. He also serves as Director or Officer of certain of the Registrant's subsidiaries.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS. The Registrant's $1.00 par value common shares ("Common Shares") are traded on the New York, Chicago and London stock exchanges. The Registrant hereby incorporates by reference the "Dividends paid per share" and "Price range" data on page 35 of the Annual Report. The Registrant had approximately 13,400 holders of record of its Common Shares as of February 28, 1996. The Registrant hereby incorporates by reference note 8 of the Notes to Consolidated Financial Statements on pages 27 and 28 of the Annual Report. ITEM 6. SELECTED FINANCIAL DATA. The Registrant hereby incorporates by reference the "Selected Financial Data" table on page 34 of the Annual Report. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The Registrant hereby incorporates by reference "Management's Analysis of Operating Results and Financial Condition" on pages 9 through 15 of the Annual Report. 9 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The Registrant hereby incorporates by reference the following statements, notes and data from the Annual Report.
Page(s) ------- Consolidated Financial Statements...................................... 16-20 Notes to Consolidated Financial Statements............................. 21-32 Report of Ernst & Young LLP, Independent Auditors...................... 33 Quarterly Financial Data............................................... 35
ITEM 9. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not Applicable. 10 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The Registrant hereby incorporates by reference the information on pages 3 and 7 of the Notice of Annual Meeting of Holders of Common Stock and Series C Preferred Stock and Proxy Statement For Annual Meeting of the Stockholders on April 19, 1996, of the Registrant ("Proxy Statement") concerning the following Directors of the Registrant, each of whom also serves as an executive officer of the Registrant as defined in Rule 16a-1(f): Patrick G. Ryan and Raymond I. Skilling. Information concerning additional executive officers of the Registrant is contained in Part I hereof, pursuant to General Instruction G(3) and Instruction 3 to Item 401(b) of Regulation S-K. ITEM 11. EXECUTIVE COMPENSATION. The Registrant hereby incorporates by reference the information under the headings "Executive Compensation," "Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values," "Option Grants in 1995 Fiscal Year" and "Pension Plan Table" on pages 13 through 15 of the Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The Registrant hereby incorporates by reference the share ownership data contained on pages 2, 8 and 9 of the Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The Registrant hereby incorporates by reference the information under the heading "Transactions With Management" on page 20 of the Proxy Statement. 11 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a)(1) AND (2). The Registrant has incorporated by reference from the Annual Report (see Item 8) the following consolidated financial statements of the Registrant and subsidiaries:
Annual Report Page(s) - --------------------------------------------------------------------------------------------- Consolidated Statements of Financial Position -- As of December 31, 1995 and 1994 16-17 Consolidated Statements of Income -- Years Ended December 31, 1995, 1994 and 1993 18 Consolidated Statements of Stockholders' Equity -- Years Ended December 31, 1995, 1994 and 1993 19 Consolidated Statements of Cash Flows -- Years Ended December 31, 1995, 1994 and 1993 20 Notes to Consolidated Financial Statements 21-32 Report of Ernst & Young LLP, Independent Auditors 33 Financial statement schedules of the Registrant and consolidated subsidiaries not included in the Annual Report but filed herewith: Consolidated Financial Statement Schedules --
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Schedule - -------------------------------------------------------------------------------- Summary of Investments-Other than Investments in Related Parties I Parent Company Condensed Financial Statements II Supplementary Insurance Information III Reinsurance IV Valuation and Qualifying Accounts V Schedule VI is omitted as it is immaterial
(a)(3). Exhibits (a) Second Restated Certificate of Incorporation of the Registrant -- incorporated by reference to Exhibit 3(a) to the Registrant's Annual Report to the Securities and Exchange Commission on Form 10-K for the year ended December 31, 1991 (the "1991 Form 10-K"). (b) Certificate of Amendment of the Registrant's Second Restated Certificate of Incorporation--incorporated by reference to Exhibit 3 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1994 (the "First Quarter 1994 Form 10-Q"). (c) Bylaws of the Registrant -- incorporated by reference to Exhibit (d) to the Registrant's Annual Report to the Securities and Exchange Commission on Form 10-K for the year ended December 31, 1982 (the "1982 Form 10-K"). 12 (d) Indenture dated September 15, 1992 between the Registrant and Continental Bank Corporation (now known as Bank of America Illinois), as Trustee -- incorporated by reference to Exhibit 4(a) to the Registrant's Current Report on Form 8-K dated September 23, 1992. (e) Resolutions establishing terms of 6.875% Notes Due 1999 and 7.40% Notes Due 2002 -- incorporated by reference to Exhibit 4(d) to the Registrant's Annual Report to the Securities and Exchange Commission on Form 10-K for the year ended December 31, 1992 (the "1992 Form 10-K"). (f) Resolutions establishing the terms of 6.70% Notes Due 2003 and 6.30% Notes Due 2004 incorporated by reference to Exhibits 4(c) and 4(d) of the Registrant's Annual Report to the Securities and Exchange Commission on Form 10-K for the year ended December 31, 1993 (the "1993 Form 10-K"). (g) Certificate of Designation for the Registrant's 8% Cumulative Perpetual Preferred Stock, $1.00 par value -- incorporated by reference to Exhibit 4(a) to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1992 (the "Third Quarter 1992 Form 10-Q"). (h) Certificate of Designation for the Registrant's 6 1/4% Cumulative Convertible Exchangeable Preferred Stock, $1.00 par value -- incorporated by reference to Exhibit 4(b) to the Third Quarter 1992 Form 10-Q. (i) Certificate of Designation for the Registrant's Series C Cumulative Preferred Stock -- incorporated by reference to Exhibit 4.1 to the Registrant's Current Report on Form 8-K dated February 9, 1994. (j) Registration Rights Agreement dated November 2, 1992 by and between the Registrant and Frank B. Hall & Co. Inc. -- incorporated by reference to Exhibit 4(c) to the Third Quarter 1992 Form 10-Q. (k) Registration rights agreement by and among the Registrant and certain affiliates of Ryan Insurance Group, Inc. (including Patrick G. Ryan and Andrew J. McKenna) -- incorporated by reference to Exhibit (f) to the 1982 Form 10-K. (l) Deferred Compensation Agreement by and among the Registrant and Registrant's directors who are not salaried employees of Registrant or Registrant's affiliates -- incorporated by reference to Exhibit 10(i) to the Registrant's Annual Report to the Securities and Exchange Commission on Form 10-K for the year ended December 31, 1987 (the "1987 Form 10-K"). (m) Amendment and Waiver Agreement dated as of November 4, 1991 among the Registrant and each of Patrick G. Ryan, Shirley Ryan, Ryan Enterprises Corporation and Harvey N. Medvin -- incorporated by reference to Exhibit 10(j) to the 1991 Form 10-K. (n) Statement regarding Computation of Per Share Earnings. (o) Statement regarding Computation of Ratio of Earnings to Fixed Charges. (p) Statement regarding Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends. (q) Aon Corporation 1994 Amended and Restated Outside Director Stock Award Plan -- incorporated by reference to Exhibit 10(b) to the First Quarter 1994 Form 10-Q. (r) Annual Report to Stockholders of the Registrant for the year ended December 31, 1995 (for information, and not to be deemed filed, except for those portions specifically incorporated by reference herein). 13 (s) List of subsidiaries of the Registrant. (t) Consent of Ernst & Young LLP to the incorporation by reference into Aon's Annual Report on Form 10-K of its report included in the 1995 Annual Report to Stockholders and into Aon's Registration Statement Nos. 2-79114, 2-82791, 33-27984, 33-42575, 33-57562, and 33-59037. (u) Annual Report to the Securities and Exchange Commission on Form 11-K for the Aon Savings Plan for the year ended December 31, 1995 -- to be filed by amendment as provided in Rule 15d-21(b). (v) Executive Compensation Plans and Arrangements: (A) Aon Stock Option Plan -- incorporated by reference to Exhibit 10(a) to the Registrant's Annual Report to the Securities and Exchange Commission on Form 10-K for the year ended December 31, 1990 (the "1990 Form 10-K"). (B) First Amendment to Aon Stock Option Plan -- incorporated by reference to Exhibit 10(b) to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1994 (the "Second Quarter 1994 Form 10-Q"). (C) Second Amendment to Aon Stock Option Plan -- incorporated by reference to Exhibit 10(c) to the Second Quarter 1994 Form 10-Q. (D) 1994 Restatement of Aon Savings Plan -- incorporated by reference to Exhibit 10(f) of the 1994 Form 10-K. (E) 1994 Restatement of Aon Employee Stock Ownership Plan -- incorporated by reference to Exhibit 10(g) of the 1994 Form 10-K. (F) Ryan Insurance Group, Inc. Stock Option Plan together with Stock Option Assumption Agreement providing for amendment of the plan -- incorporated by reference to Exhibit 4(b) to Registration Statement No. 2-79114 on Form S-8. (G) Aon Stock Award Plan, as amended -- incorporated by reference to Exhibit 10(a) to the First Quarter 1994 Form 10-Q. (H) First Amendment to the Aon Stock Award Plan -- incorporated by reference to Exhibit 10(b) to the Second Quarter 1994 Form 10-Q. (I) Second Amendment to Aon Stock Award Plan -- incorporated by reference to Exhibit 10(d) to the Second Quarter 1994 Form 10-Q. (J) 1994 Restatement of Aon Pension Plan -- incorporated by reference to Exhibit 10(h) of the 1994 Form 10-K. (K) Aon Corporation 1995 Senior Officer Incentive Compensation Plan. (L) Aon Deferred Compensation Plan and First Amendment to the Aon Deferred Compensation Plan. (w) Asset Purchase Agreement dated July 24, 1992 between the Registrant and Frank B. Hall & Co. Inc. -- incorporated by reference to Exhibit 10(c) to the Registrant's Quarterly Report on Form 10-Q for the period ended June 30, 1992. 14 (x) Stock Purchase Agreement by and among the Registrant, Combined Insurance Company of America, Union Fidelity Life Insurance Company and General Electric Capital Corporation dated as of November 11, 1995. (y) Stock Purchase Agreement by and among the Registrant; Combined Insurance Company of America; The Life Insurance Company of Virginia; Forth Financial Resources, Ltd.; Newco Properties, Inc.; and General Electric Capital Corporation dated as of December 22, 1995. (b) Reports on Form 8-K. The Registrant filed no Current Reports on Form 8-K during the last quarter of the Registrant's year ended December 31, 1995. 15 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, ON THE 29TH DAY OF MARCH, 1996. Aon Corporation By /s/PATRICK G. RYAN -------------------------------- Patrick G. Ryan, Chairman, President and Chief Executive Officer 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 --------- ----- ---- /s/PATRICK G. RYAN Chairman, President, Chief March 29, 1996 - ----------------------------- Executive Officer and Director Patrick G. Ryan (Principal Executive Officer) /s/DANIEL T. CARROLL Director March 29, 1996 - ----------------------------- Daniel T. Carroll /s/FRANKLIN A. COLE Director March 29, 1996 - ----------------------------- Franklin A. Cole /s/EDGAR D. JANNOTTA Director March 29, 1996 ---------------------------- Edgar D. Jannotta /s/PERRY J. LEWIS Director March 29, 1996 - ----------------------------- Perry J. Lewis /s/JOAN D. MANLEY Director March 29, 1996 - ----------------------------- Joan D. Manley
16 /s/ANDREW J. MCKENNA Director March 29, 1996 ---------------------------- Andrew J. McKenna /s/NEWTON N. MINOW Director March 29, 1996 - ----------------------------- Newton N. Minow /s/PEER PEDERSEN Director March 29, 1996 - ----------------------------- Peer Pedersen /s/DONALD S. PERKINS Director March 29, 1996 - ----------------------------- Donald S. Perkins /s/JOHN W. ROGERS, JR. Director March 29, 1996 - ----------------------------- John W. Rogers, Jr. /s/GEORGE A. SCHAEFER Director March 29, 1996 - ----------------------------- George A. Schaefer /s/RAYMOND I. SKILLING Director March 29, 1996 - ----------------------------- Raymond I. Skilling /s/FRED L. TURNER Director March 29, 1996 - ----------------------------- Fred L. Turner /s/ARNOLD R. WEBER Director March 29, 1996 - ----------------------------- Arnold R. Weber /s/HARVEY N. MEDVIN Executive Vice President, March 29, 1996 - ----------------------------- Chief Financial Officer Harvey N. Medvin and Treasurer (Principal Financial and Accounting Officer)
17 SCHEDULE I Aon Corporation and Subsidiaries CONSOLIDATED SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN RELATED PARTIES AS OF DECEMBER 31, 1995
Amount shown in Statement (millions) Amortized Fair of Financial Cost Value Position --------- ------ ------------- Fixed Maturities - available for sale: U.S. government and agencies............. $ 150.8 $ 155.1 $ 155.1 States and political subdivisions........ 443.9 474.7 474.7 Debt securities of foreign governments not classified as loans................. 798.6 831.7 831.7 Corporate securities.................... 3,246.8 3,289.3 3,289.3 Public utilities........................ 799.3 802.9 802.9 Mortgage-backed securities.............. 2,033.1 2,034.9 2,034.9 Other fixed maturities.................. 100.1 98.5 98.5 -------- -------- -------- TOTAL FIXED MATURITIES AVAILABLE FOR SALE......................... 7,572.6 7,687.1 7,687.1 -------- -------- -------- Equity securities - available for sale: Common stocks: Banks, trusts, and insurance companies... 76.8 108.3 108.3 Industrial, miscellaneous, and all other. 152.4 191.6 191.6 Nonredeemable preferred stocks........... 698.8 706.4 706.4 -------- -------- -------- TOTAL EQUITY SECURITIES............... 928.0 $1,006.3 1,006.3 -------- -------- -------- Mortgage loans on real estate.............. 657.6 * 632.0 * Real estate - net of depreciation.......... 36.5 36.5 Policy loans............................... 226.3 226.3 Other long-term investments................ 117.8 * 112.6 * Short-term investments..................... 938.3 938.3 --------- --------- TOTAL INVESTMENTS................ $10,477.1 $10,639.1 ========= =========
* The fair value for fixed maturity and equity securities relating to the discontinued operations are based on the underlying purchase agreements. Differences between amortized costs and amounts shown in Statements of Financial Position for investments other than fixed maturity and equity securities result from certain valuation allowances. 18 SCHEDULE II Aon Corporation (Parent Company) CONDENSED STATEMENTS OF FINANCIAL POSITION
As of December 31, ------------------ (millions) 1995 1994 -------- -------- ASSETS Investments in subsidiaries ............. $3,617.2 $3,024.7 Notes receivable - subsidiaries ......... 468.2 468.3 Other assets............................. 8.7 8.6 -------- -------- Total Assets...................... $4,094.1 $3,501.6 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Short-term borrowings ................... $ 352.7 $ 243.9 6.3% long-term debt securities .......... 99.7 99.7 7.4% long-term debt securities .......... 99.8 99.8 6.875% long-term debt securities ........ 99.8 99.8 6.7% long-term debt securities .......... 149.7 149.6 Notes payable - other.................... 15.7 22.0 Notes payable - subsidiaries ............ 457.0 372.7 Debt guarantee of employee stock ownership plan ....................... 56.8 65.5 Accrued expenses and other liabilities... 39.2 41.2 -------- -------- Total Liabilities ................ 1,370.4 1,194.2 -------- -------- Redeemable Preferred Stock............... 50.0 50.0 STOCKHOLDERS' EQUITY Preferred stock ......................... 8.1 11.1 Common stock ............................ 111.4 110.6 Paid-in additional capital............... 431.8 485.2 Net unrealized investment gains (losses) of subsidiaries....................... 123.1 (142.8) Net foreign exchange gains (losses) of subsidiaries.......................... 1.8 (19.7) Retained earnings........................ 2,212.1 1,998.1 Less treasury stock at cost.............. (97.3) (72.9) Less deferred compensation............... (117.3) (112.2) -------- -------- Total Stockholders' Equity ........ 2,673.7 2,257.4 -------- -------- Total Liabilities and Stockholders' Equity......................... $4,094.1 $3,501.6 ======== ========
See notes to condensed financial statements. 19 SCHEDULE II (Continued) Aon Corporation (Parent Company) CONDENSED STATEMENTS OF INCOME
Years ended December 31 -------------------------- 1995 1994 1993 ------- ------ ------ (millions) REVENUE Dividends from subsidiaries ....... $199.3 $166.2 $248.7 Other investment income............ 34.3 34.8 10.8 Realized investment losses......... (4.1) 0.0 (2.1) ------ ------ ------ Total Revenue............. 229.5 201.0 257.4 EXPENSES Operating and administrative (1)... 3.0 2.3 4.7 Interest - subsidiaries............ 20.0 12.2 5.2 Interest - other................... 53.6 45.1 41.3 ------ ------ ------ Total Expenses............ 76.6 59.6 51.2 ------ ------ ------ INCOME BEFORE EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARIES AND CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES.............. 152.9 141.4 206.2 Equity in undistributed income of subsidiaries.......................... 249.9 218.6 117.6 ------ ------ ------ NET INCOME................ $402.8 $360.0 $323.8 ====== ====== ======
- -------------------------------------------------------------------------------- See notes to condensed financial statements (1) Interest expense - other allocated to discontinued operations was $18 million, $14 million and $13 million for the years ended December 31, 1995, 1994 and 1993, respectively. 20 SCHEDULE II (Continued) Aon Corporation (Parent Company) CONDENSED STATEMENTS OF CASH FLOWS
Years ended December 31 --------------------------- 1995 1994 1993 ------- ------- ------- (millions) Cash Flows From Operating Activities.............. $ 164.5 $ 164.1 $ 186.3 Cash Flows From Investing Activities: Investments in subsidiaries.................... (62.6) (31.3) (178.9) Notes receivable from subsidiaries............. 1.5 (15.5) 34.8 ------- ------- ------- Cash Used by Investing Activities......... (61.1) (46.8) (144.1) ------- ------- ------- Cash Flows From Financing Activities: Treasury stock transactions - net.............. (46.4) (15.4) 11.4 Issuance of short-term borrowings - net........ 108.8 75.3 53.5 Issuance of long-term debt..................... 73.6 174.5 154.5 Repayment of long-term debt.................... 0.0 (125.0) (100.0) Retirement of preferred stock.................. (75.4) (58.3) (7.3) Cash dividends to stockholders................. (171.3) (162.3) (151.0) ------- ------- ------- Cash Used by Financing Activities......... (110.7) (111.2) (38.9) ------- ------- ------- Increase (Decrease) in Cash and Cash Equivalents.. (7.3) 6.1 3.3 Cash and Cash Equivalents at Beginning of Year.... 9.4 3.3 -- ------- ------- ------- Cash and Cash Equivalents at End of Year.......... $ 2.1 $ 9.4 $ 3.3 ------- ------- -------
See notes to condensed financial statements. 21 SCHEDULE II (Continued) Aon Corporation (Parent Company) NOTES TO CONDENSED FINANCIAL STATEMENTS (1) See notes to consolidated financial statements incorporated by reference from the Annual Report. (2) Payments made as assessments by state guaranty funds to cover losses to policyholders of insurance companies under regulatory supervision for the years ended December 31, 1995, 1994 and 1993 were $5 million, $6.9 million and $5.8 million, respectively. In addition, Aon's reserve for the recognition of probable assessments for known industry insolvencies was $7 million and $9.9 million at December 31, 1995 and 1994, respectively. (3) Generally, the net assets of Aon's insurance subsidiaries available for transfer to the parent company are limited to the amounts that the insurance subsidiaries' statutory net assets exceed minimum statutory capital requirements; however, payments of the amounts as dividends in excess of $297 million may be subject to approval by regulatory authorities. 22 Aon Corporation (Parent Company) NOTES TO CONDENSED FINANCIAL STATEMENTS (4) Below is a reconciliation of the combined statutory stockholders' equity and net income of Aon's insurance subsidiaries to the consolidated stockholders' equity and net income on a basis in accordance with generally accepted accounting principles (GAAP): (millions)
As of December 31, 1995 As of December 31, 1994 -------------------------- -------------------------- Life/A&H P&C Combined Life/A&H P&C Combined -------- --- -------- -------- --- -------- Statutory Stockholders' Equity $766.2 $296.6 $1,062.8 $714.1 $284.0 $998.1 Insurance business related adjustments: Deferred policy acquisition costs 1,177.9 83.6 1,261.5 1,120.3 61.3 1,181.6 Cost of insurance purchased 87.2 - 87.2 109.1 - 109.1 Excess of cost over net assets purchased 143.4 - 143.4 148.4 - 148.4 Policy liabilities and reinsurance assets 100.3 - 100.3 131.3 - 131.3 Deferred income taxes (301.8) 32.1 (269.7) (209.1) 42.5 (166.6) Investment valuation reserves 176.3 - 176.3 171.1 - 171.1 Non Admitted Assets 79.6 5.1 84.6 70.5 4.7 75.1 Unrealized capital gains (losses) (FAS 115) 74.8 40.2 115.0 (168.6) 10.6 (158.0) -------------------------- -------------------------- Subtotal $2,303.9 $457.6 2,761.4 $2,087.1 $403.1 2,490.1 ================= ================= Investment in other operations and other 855.8 534.6 -------- -------- Investments in subsidiaries 3,617.2 3,024.7 Elimination of parent company contributions (943.5) (767.3) -------- -------- Consolidated Stockholders' Equity $2,673.7 $2,257.4 ======== ========
Year Ended Year Ended Year Ended December 31, 1995 December 31, 1994 December 31, 1993 --------------------------- -------------------------- -------------------------- Life/A&H P&C Combined Life/A&H P&C Combined Life/A&H P&C Combined --------- --- -------- -------- --- -------- -------- --- -------- Statutory Net Income * $196.7 $57.5 $254.2 $271.9 $34.1 $306.0 $255.0 $62.1 $317.1 Insurance business related adjustments: Deferred policy acquisition costs 325.6 84.7 410.3 337.7 76.8 414.5 269.6 56.3 325.9 Amortization of deferred policy acquisition costs (240.3) (62.4) (302.7) (227.7) (48.5) (276.2) (204.1) (53.6) (257.7) Amortization of cost of insurance purchased (10.4) - (10.4) (13.9) - (13.9) (15.5) - (15.5) Amortization of excess of cost over net assets purchased (4.9) - (4.9) (4.8) - (4.8) (5.0) - (5.0) Policy liabilities and reinsurance assets (31.0) - (31.0) 19.2 - 19.2 10.5 - 10.5 Deferred income taxes (17.1) (7.8) (24.9) (64.7) (6.9) (71.6) 26.3 2.7 29.0 Change in valuation reserves 5.6 - 5.6 26.6 - 26.6 (39.2) - (39.2) Deferred capital losses 34.3 5.9 40.2 - - - - - - Realized (gain)/loss on transfer of subsidiary 7.0 - 7.0 (89.4) - (89.4) (3.4) - (3.4) ------------------------ ------------------------ ------------------------ Subtotal $265.5 $77.9 343.4 $254.9 $55.5 310.4 $294.2 $67.5 361.7 =============== =============== =============== Investment in other operations and other 59.4 49.6 (37.9) ------ ------ ------ Consolidated Net Income - GAAP Basis $402.8 $360.0 $323.8 ====== ====== ====== * net of intercompany dividends
23 SCHEDULE III Aon Corporation and Subsidiaries SUPPLEMENTARY INSURANCE INFORMATION
Future policy Unearned Deferred benefits, premiums policy losses, claims and other Net Commissions, acquisition and loss policyholders' Premium investment fees costs (2) expenses funds revenue income (3) & other ----------- -------------- ------------ ------- ---------- ----------- (millions) Year ended December 31, 1995 Insurance brokerage and consulting services................. $ - $ - $ - $ - $ 73.1 $1,628.2 Insurance underwriting............. 1,348.7 2,446.0 7,110.4 1,426.5 168.5 44.9 Corporate and other.................... - - - - 87.8 36.7 -------- -------- -------- -------- ------ -------- Total.................... $1,348.7 $2,446.0 $7,110.4 $1,426.5 $329.4 $1,709.8 ======== ======== ======== ======== ====== ======== Year ended December 31, 1994 (1) Insurance brokerage and consulting services................. $ - $ - $ - $ - $ 46.6 $1,375.5 Insurance underwriting............. 1,290.6 2,378.7 6,931.7 1,322.3 142.3 44.9 Corporate and other.................... - - - - 68.2 41.4 -------- -------- -------- -------- ------ -------- Total.................... $1,290.6 $2,378.7 $6,931.7 $1,322.3 $257.1 $1,461.8 ======== ======== ======== ======== ====== ======== Year ended December 31, 1993 (1) Insurance brokerage and consulting services................. $ - $ - $ - $ - $ 37.5 $1,177.5 Insurance Underwriting............. 1,100.1 2,326.3 6,450.0 1,277.4 145.5 41.5 Corporate and other.................... - - - - 44.2 47.2 -------- -------- -------- -------- ------ -------- Total.................... $1,100.1 $2,326.3 $6,450.0 $1,277.4 $227.2 $1,266.2 ======== ======== ======== ======== ====== ======== Benefits, Amortization claims, of deferred losses and policy Other settlement acquisition operating Premiums expenses costs (2) expenses written (4) ---------- ------------ --------- ----------- (millions) Year ended December 31, 1995 Insurance brokerage and consulting services................. $ - $ - $1,496.6 $ - Insurance underwriting............. 698.5 207.5 487.5 1,596.2 Corporate and other.................... - - 117.6 - ------ ------ -------- -------- Total.................... $698.5 $207.5 $2,101.7 $1,596.2 ====== ====== ======== ======== Year ended December 31, 1994 (1) Insurance brokerage and consulting services................. $ - $ - $1,263.3 $ - Insurance underwriting............. 626.2 189.7 458.3 1,478.2 Corporate and other.................... - - 106.7 - ------ ------ -------- -------- Total.................... $626.2 $189.7 $1,828.3 $1,478.2 ====== ====== ======== ======== Year ended December 31, 1993 (1) Insurance brokerage and consulting services................. $ - $ - $1,086.9 $ - Insurance Underwriting............. 622.2 179.1 451.1 1,317.2 Corporate and other.................... - - 99.9 - ------ ------ -------- -------- Total.................... $622.2 $179.1 $1,637.9 $1,317.2 ====== ====== ======== ========
(1) Income statement data has been reclassified to reflect continuing operations. (2) Includes cost of insurance purchased. (3) The above results reflect allocations of investment income and certain expense elements considered reasonable under the circumstances. (4) Net of reinsurance ceded. 24
SCHEDULE IV Aon Corporation and Subsidiaries REINSURANCE Year Ended December 31, 1995 --------------------------------------------------------- Percentage Ceded to Assumed of amount Gross other from other Net assumed to (millions) amount companies companies amount net --------- --------- ---------- --------- ---------- Life insurance in force (1)......... $80,176.6 $27,936.6 $ 991.4 $53,231.4 1.9% ========= ========= ======== ========= === Premiums and policy fees Life Insurance..................... $ 251.9 $ 83.9 $ 4.0 $ 172.0 2.3% A&H Insurance...................... 1,032.9 98.5 5.1 939.5 0.5 Specialty Property & Casualty (2).................. 375.0 133.9 73.9 315.0 23.5 --------- --------- -------- --------- ---- Total premiums and policy fees..... $ 1,659.8 $ 316.3 $ 83.0 $ 1,426.5 5.8% ========= ========= ======== ========= ==== Year Ended December 31, 1994 --------------------------------------------------------- Percentage Ceded to Assumed of amount Gross other from other Net assumed to (millions) amount companies companies amount net --------- --------- ---------- --------- ---------- Life insurance in force (1)......... $74,047.9 $25,109.7 $1,173.9 $50,112.1 2.3% ========= ========= ======== ========= ==== Premiums and policy fees Life Insurance..................... $ 245.0 $ 81.7 $ 5.1 $ 168.4 3.0% A&H Insurance...................... 996.2 98.6 6.4 904.0 0.7 Specialty Property & Casualty (2).................. 309.9 139.1 79.1 249.9 31.7 --------- --------- -------- --------- ---- Total premiums and policy fees(3).. $ 1,551.1 $ 319.4 $ 90.6 $ 1,322.3 6.9% ========= ========= ======== ========= ==== Year Ended December 31, 1993 --------------------------------------------------------- Percentage Ceded to Assumed of amount Gross other from other Net assumed to (millions) amount companies companies amount net --------- --------- ---------- --------- ---------- Life insurance in force (1)......... $70,936.8 $24,800.0 $1,223.9 $47,360.7 2.6% ========= ========= ======== ========= ==== Premiums and policy fees Life Insurance..................... $ 228.7 $ 74.7 $ 4.8 $ 158.8 3.0% A&H Insurance...................... 942.2 90.6 6.2 857.8 0.7 Specialty Property & Casualty (2).................. 281.6 130.7 109.9 260.8 42.1 --------- --------- -------- --------- ---- Total premiums and policy fees(3)... $ 1,452.5 $ 296.0 $ 120.9 $ 1,277.4 9.5% ========= ========= ======== ========= ====
(1) Includes credit life insurance. (2) Includes mechanical repair insurance sold through automobile dealers, appliance warranty insurance and property liability insurance. (3) Income statement data has been reclassified to reflect continuing operations. 25
SCHEDULE V Aon CORPORATION VALUATION AND QUALIFYING ACCOUNTS Years Ended December 31, 1995, 1994 and 1993 (millions) Additions ------------------------ Charged/ Balance at Charged to (credited) Balance beginning cost and to other Deductions at end Description of year expenses accounts (1) of year - --------------------------------------------------- ---------- ---------- ---------- ---------- ------- Year ended December 31, 1995 - ---------------------------- Reserve for losses (2) (deducted from mortgage loans on real estate) $29.7 $ - $ (4.1) $ - $25.6 Reserve for losses (2) (deducted from other long-term investments) 6.7 - 1.0 (2.5) 5.2 Allowance for doubtful accounts (3) (deducted from insurance brokerage and consulting services receivables) 45.2 6.0 - (3.8) 47.4 Allowance for doubtful accounts (3) (deducted from premiums and other) 3.2 2.0 - (1.3) 3.9 Year ended December 31, 1994 - ---------------------------- Reserve for losses (2) (deducted from mortgage loans on real estate) $42.0 $ - $(12.3) $ - $29.7 Reserve for losses (deducted from long-term bonds) 11.7 - - (11.7) - Reserve for losses (2) (deducted from other long-term investments) 9.3 - (2.6) - 6.7 Allowance for doubtful accounts (3) (deducted from insurance brokerage and consulting services receivables) 41.2 7.0 1.3 (4.3) 45.2 Allowance for doubtful accounts (3) (deducted from premiums and other) 3.1 1.4 - (1.3) 3.2 Year ended December 31, 1993 - ---------------------------- Reserve for losses (2) (deducted from mortgage loans on real estate) $23.8 $ - $ 25.7 $ (7.5) $42.0 Reserve for losses (2) (deducted from long-term bonds) - - 11.7 - 11.7 Reserve for losses (2) (deducted from other long-term investments) - - 21.0 (11.7) 9.3 Allowance for doubtful accounts (3) (deducted from insurance brokerage and consulting services receivables) 34.6 2.3 6.4 (2.1) 41.2 Allowance for doubtful accounts (3) (deducted from premiums and other) 5.0 1.4 - (3.3) 3.1 (1) Amounts deemed to be uncollectible. (2) Amounts shown in additions charged/(credited) to other accounts represent realized investment (gains)/losses. (3) Amounts shown in additions charged to other accounts represent reserves related to acquired business.
26 Cross Reference Sheet, Pursuant to General Instruction G(4)
ITEM IN FORM 10-K INCORPORATED BY REFERENCE TO - ----------------- ---------------------------- Part I Item 1. Business Four inside cover pages of the Annual Report to Stockholders of the Registrant for the Year 1995 ("Annual Report") and pages 6 and 7. Item 3. Legal Proceedings Annual Report page 32 (note 12 of Notes to Consolidated Financial Statements). Part II Item 5. Market for the Annual Report pages 27 and 28 (note 8 Registrant's Common Stock and of Notes to Consolidated Financial Related Security Holder Matters Statements) and page 35 ("Dividends paid per share" and "Price range"). Item 6. Selected Financial Data Annual Report page 34. Item 7. Management's Discussion and Annual Report pages 9 through 15. Analysis of Financial Condition and Results of Operations Item 8. Financial Statements and Annual Report pages 16 through 33 and Supplementary Data 35. Part III Item 10. Directors and Executive Notice of Annual Meeting of Holders Officers of the Registrant of Common Stock and Series C Preferred Stock and Proxy Statement For Annual Meeting of Stockholders on April 19, 1996 of the Registrant ("Proxy Statement") pages 3 and 7. Item 11. Executive Compensation Proxy Statement pages 13 through 15. Item 12. Security Ownership of Certain Proxy Statement pages 2, 8 and 9. Beneficial Owners and Management Item 13. Certain Relationships and Proxy Statement page 20 Related Transactions ("Transactions With Management"). Part IV Item 14. Exhibits, Financial Statement Annual Report pages 16 through 33. Schedules, and Reports on Form 8-K
27 EXHIBIT INDEX
Exhibit Number Page Number of Regulation Sequentially S-K Item 601 Numbered Copy - ------------ ------------- (3) Articles of incorporation and bylaws: (a) Second Restated Certificate of Incorporation of the Registrant -- incorporated by reference to Exhibit 3(a) to the 1991 Form 10-K. (b) Certificate of Amendment of the Registrant's Second Restated Certificate of Incorporation -- incorporated by reference to Exhibit 3 to the First Quarter 1994 Form 10-Q. (c) Bylaws of the Registrant -- incorporated by reference to Exhibit (d) to the 1982 Form 10-K. (d) Certificate of Designation for the Registrant's 8% Cumulative Perpetual Preferred Stock, $1.00 par value -- incorporated by reference to Exhibit 4(a) to the Third Quarter 1992 Form 10-Q. (e) Certificate of Designation for the Registrant's 6 1/4% Cumulative Convertible Exchangeable Preferred Stock, $1.00 par value -- incorporated by reference to Exhibit 4(b) to the Third Quarter 1992 Form 10-Q. (f) Certificate of Designation for the Registrant's Series C Cumulative Preferred Stock -- incorporated by reference to Exhibit 4.1 to the Registrant's Current Report on Form 8-K dated February 9, 1994. (4) Instruments defining the rights of security holders, including indentures: (a) Indenture dated September 15, 1992 between the Registrant and Continental Bank Corporation (now known as Bank of America Illinois), as Trustee -- incorporated by reference to Exhibit 4(a) of the Registrant's Current Report on Form 8-K dated September 23, 1992. (b) Resolutions establishing terms of 6.875% Notes Due 1999 and 7.40% Notes Due 2002 -- incorporated by reference to Exhibit 4(d) to the 1992 Form 10-K. (c) Resolutions establishing the terms of 6.70% Notes Due 2003 incorporated by reference to Exhibit 4(c) to the 1993 Form 10-K. (d) Resolutions establishing the terms of 6.30% Notes Due 2004 incorporated by reference to Exhibit 4(d) to the 1993 Form 10-K. (10) Material Contracts: (a) Aon Stock Option Plan -- incorporated by reference to Exhibit 10(a) to the 1990 Form 10-K.
28
EXHIBIT INDEX Exhibit Number Page Number of Regulation Sequentially S-K, Item 601 Numbered Copy - ------------- ------------- (b) First Amendment to Aon Stock Option Plan -- incorporated by reference to the Exhibit 10(a) to the Second Quarter 1994 Form 10-Q. (c) Second Amendment to Aon Stock Option Plan -- incorporated by reference to Exhibit 10(c) to the Second Quarter 1994 Form 10-Q. (d) Ryan Insurance Group, Inc. Stock Option Plan together with Stock Option Assumption Agreement providing for amendment of the plan -- incorporated by reference to Exhibit 4(b) to the Registration Statement No. 2-79114 on Form S-8. (e) Registration Rights Agreement by and among the Registrant and certain affiliates of Ryan Insurance Group, Inc. (including Patrick G. Ryan and Andrew J. McKenna) -- incorporated by reference to Exhibit (f) to the 1982 Form 10-K. (f) 1994 Restatement of Aon Savings Plan -- incorporated by reference to Exhibit 10(f) of the 1994 Form 10-K. (g) 1994 Restatement of Aon Employee Stock Ownership Plan -- incorporated by reference to Exhibit 10(g) of the 1994 Form 10-K. (h) 1994 Restatement of Aon Pension Plan -- incorporated by reference to Exhibit 10(h) of the 1994 Form 10-K. (i) Deferred Compensation Agreement by and among Registrant and Registrant's directors who are not salaried employees of Registrant or Registrant's affiliates -- incorporated by reference to Exhibit 10(i) to the 1987 Form 10-K. (j) Aon Stock Award Plan, as amended -- incorporated by reference to Exhibit 10(a) to the First Quarter 1994 Form 10-Q. (k) Amendment and Waiver Agreement dated as of November 4, 1991 among the Registrant and each of Patrick G. Ryan, Shirley Ryan, Ryan Enterprises Corporation and Harvey N. Medvin -- incorporated by reference to Exhibit 10(j) to the 1991 Form 10-K. (l) Registration Rights Agreement dated November 2, 1992 by and between the Registrant and Frank B. Hall & Co. Inc. -- incorporated by reference to exhibit 4(c) to the Third Quarter 1992 Form 10-Q. (m) Aon Corporation 1994 Amended and Restated Outside Director Stock Award Plan -- incorporated by reference to Exhibit 10(b) to the First Quarter 1994 Form 10-Q. (n) First Amendment to the Aon Stock Award Plan--incorporated by reference to Exhibit 10(b) to the Second Quarter 1994 Form 10-Q.
29
EXHIBIT INDEX Exhibit Number Page Number of Regulation Sequentially S-K, Item 601 Numbered Copy - ------------- ------------- (o) Second Amendment to Aon Stock Award Plan--incorporated by reference to Exhibit 10(d) to the Second Quarter 1994 Form 10-Q. (p) Aon Corporation 1995 Senior Officer Incentive Compensation Plan. (q) Aon Deferred Compensation Plan and First Amendment to the Aon Deferred Compensation Plan. (r) Asset Purchase Agreement dated July 24, 1992 between the Registrant and Frank B. Hall & Co. Inc. -- incorporated by reference to Exhibit 10(c) to the Registrant's Quarterly Report on Form 10-Q for the period ended June 30, 1992. (s) Stock Purchase Agreement by and among the Registrant, Combined Insurance Company of America, Union Fidelity Life Insurance Company and General Electric Capital Corporation dated as of November 11, 1995. (t) Stock Purchase Agreement by and among the Registrant; Combined Insurance Company of America; The Life Insurance Company of Virginia; Forth Financial Resources, Ltd.; Newco Properties, Inc.; and General Electric Capital Corporation dated as of December 22, 1995. (11) Statement regarding Computation of Per Share Earnings. (12) Statements regarding Computation of Ratios. (a) Statement regarding Computation of Ratio of Earnings to Fixed Charges. (b) Statement regarding Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends. (13) Annual Report to Stockholders of the Registrant for the year ended December 31, 1995 (for information, and not to be deemed filed, except for those portions specifically incorporated by reference herein). (21) List of subsidiaries of the Registrant. (23) Consent of Ernst & Young LLP to the incorporation by reference into Aon's Annual Report on Form 10-K of their report included in the 1995 Annual Report to Stockholders and into Aon's Registration Statement Nos. 2-79114, 2-82791, 33-27984, 33-42575, 33-57562, and 33-59037. (99) Annual Report to the Securities and Exchange Commission on Form 11-K for the Aon Savings Plan for the year ended December 31, 1995 -- to be filed by amendment as provided in Rule 15d-21(b).
30 EX-10.P 2 SENIOR OFFICER INCENTIVE COMPENSATION PLAN EXHIBIT 10.P AON CORPORATION 1995 SENIOR OFFICER INCENTIVE COMPENSATION PLAN 1. PURPOSE The purpose of the Aon Corporation 1995 Senior Officer Incentive Compensation Plan (the "Plan") is to encourage the highest level of performance by key employees of operating subsidiaries and affiliates of Aon Corporation (which subsidiaries and affiliates are herein referred to as the "Corporation") by making appropriate levels of cash awards following satisfaction of quantifiable performance goals. 2. PLAN ADMINISTRATION The Plan shall be administered by the Organization and Compensation Committee (the "Committee") of the Aon Corporation Board of Directors (the "Board"). All questions involving eligibility for awards, interpretations of the provisions of the Plan, or the operation of the Plan shall be decided by the Committee. No member of the Committee shall be eligible to receive an award under the Plan. All determinations of the Committee shall be conclusive. The Committee may obtain such advice or assistance as it deems appropriate from persons not serving on the Committee. 3. ELIGIBILITY Participation in the Plan is limited to key salaried employees of the Corporation selected by the Committee (a "Participant"). Participation may be revoked at any time by the Committee. An employee whose participation is revoked will be notified, in writing, of such revocation as soon as practicable following such action. An individual who becomes eligible to participate in the Plan during the Plan Year (the one year period beginning January 1 and ending on December 31 of each calendar year) may be approved by the Committee for a partial year of participation. In such case, the Participant's award shall be prorated based on the number of full months of participation. 4. TERMS AND CONDITIONS OF AWARDS Each Participant will be entitled to receive a maximum award equal to 180% of Base Pay (the "Award") subject to the performance measured described below. Base Pay is the salary earned while participating in the Plan in the current Plan Year. The maximum amount payable under the Plan to a Participant, in any given Plan Year, is equal to the lesser of 180% of Base Pay or $3,000,000. Within the first 90 days of the Plan Year the Committee shall determine the specific Corporate Performance Thresholds which must be met prior to the payment of any Awards determined pursuant to this paragraph. The Corporate Performance Thresholds will be based upon either a certain singular business criteria, such as Earnings Per Share, Return on Equity, Total Shareholder Return, or Operating Income, or a combination of one or more business criteria. At the end of each Plan Year, Awards will be computed for each participant. Payment of Awards will be made in cash, subject to applicable tax withholding, as soon as practicable after the achievement of Corporate Performance Thresholds and other material terms of the Plan are certified, and individual Awards are approved, by the Committee; provided, however that the Committee may in its sole discretion reduce individual Awards determined pursuant to this paragraph. 5. EMPLOYMENT TERMINATION In the event a Participant's employment is terminated due to death or disability during a Plan Year, the Participant's Award will be reduced to reflect the partial year of participation. This reduction will be determined by multiplying the award by a fraction, the numerator of which is the Participant's total months of participation in the current Plan Year through the date of termination rounded up to whole months, and the denominator of which is twelve (12). The Participant's reduced Award will be paid in accordance with Section 4 hereinabove. In the event a Participant's employment is terminated for reasons other than death or disability, all rights to an award for the Plan Year will be forfeited. 6. NO RIGHT TO CONTINUED EMPLOYMENT Nothing in the Plan shall confer on a Participant any right to continue in the employ of the Corporation or in any way affect the Corporation's right to terminate the Participant's employment at any time without prior notice and for any or no reason. 7. BENEFICIARY Each Participant under the Plan may, from time to time, name any beneficiary or beneficiaries (who may be named contingently or successively) to whom any benefit under the Plan is to be paid in case of his death before he receives any or all of such benefit. Each designation will revoke all prior designations by the same Participant, shall be in a form prescribed by the Committee, and will be effective only when filed by the Participant in writing with the Committee during his lifetime. In the absence of any such designation, or if for any reason such designation is ineffective, in whole or in part, benefits remaining unpaid at the Participant's death shall be paid to his estate. 8. TAX WITHHOLDING Any and all payments made under the Plan shall be subject to applicable federal, state, or local taxes required by the law to be withheld. 9. IMPACT ON OTHER BENEFITS Amounts paid under this Plan will not be considered compensation for purposes of other benefit plans offered by the Corporation unless specifically provided for in such plans. 10. TERMINATION OR AMENDMENT OF THE PLAN The Plan may be modified, amended, or terminated at any time by the Board. The existence of the Plan does not obligate or bind the Corporation to pay an Award to any Participant (or beneficiary) nor does any Participant (or beneficiary) attain any vested, non-forfeitable right to an Award until the Award has been finalized and approved for payment by the Committee. 11. NON-TRANSFERABILITY Except as specifically provided herein or as may otherwise be required by law, no undistributed Award payable to the Participant may be sold, transferred, or assign or encumbered, in whole or in part, by a Participant, and any attempt to so alienate or subject any such amount shall be void. 12. EFFECTIVE DATE OF THE PLAN The Plan shall become effective as of January 1, 1995. EX-10.Q 3 DEFERRED COMPENSATION PLAN EXHIBIT 10.Q --------------------- Aon DEFERRED COMPENSATION PLAN --------------------- AON DEFERRED COMPENSATION PLAN TABLE OF CONTENTS
PAGE ---- SECTION 1 DEFINITION OF TERMS - --------- ------------------- 1.01 Accounts........................................... 2 1.02 Aon Common Stock Account........................... 2 1.03 Aon General Account................................ 2 1.04 Beneficiary........................................ 2 1.05 Board.............................................. 2 1.06 Change of Control.................................. 2 1.07 Code............................................... 3 1.08 Committee.......................................... 3 1.09 Company............................................ 3 1.10 Compensation....................................... 3 1.11 Employee........................................... 3 1.12 Participant........................................ 4 1.13 Performance........................................ 4 1.14 Plan............................................... 4 1.15 Subsidiary......................................... 4 SECTION 2 ELIGIBILITY AND PARTICIPATION - --------- ----------------------------- 2.01 Eligibility........................................ 4 2.02 Participation...................................... 4 SECTION 3 ELECTION TO DEFER - --------- ----------------- 3.01 Irrevocable Election............................... 5 3.02 First Calendar Year Election....................... 5 3.03 Election as to Period Deferral..................... 5 3.04 Election as to Aon Common Stock Account or Aon General Account.............................. 5 3.05 Failure to Make an Election........................ 5 SECTION 4 DEFERRED COMPENSATION AMOUNTS - --------- ----------------------------- 4.01 Deferral Period Subaccounts........................ 6 4.02 Amounts Credited to the Aon Common Stock Account.......................................... 6 4.03 Amounts Credited to the Aon General Account........ 6 4.04 Dividends Credited to Aon Common Stock Account..... 7 SECTION 5 METHOD OF DISTRIBUTION OF DEFERRED COMPENSATION - --------- ----------------------------------------------- 5.01 Election of Distribution........................... 7 5.02 Method of Distribution............................. 7 5.03 Installment Payments............................... 8 5.04 Termination of Employment Prior to Distribution Date................................ 8 5.05 Hardship Withdrawals............................... 8 5.06 Distribution Upon Death after Payments Have Commenced................................... 9 5.07 Distribution to Beneficiaries...................... 9 5.08 Distributions from Aon Common Stock Account........ 10 SECTION 6 MISCELLANEOUS - --------- ------------- 6.01 Other Benefit Plans................................ 10 6.02 Participant's Rights............................... 10 6.03 Change of Control.................................. 11 6.04 Nonalienability and Nontransferability............. 11 6.05 Plan Administrator................................. 12 6.06 Amendment and Termination.......................... 12 SECTION 7 GENERAL PROVISIONS - --------- ------------------ 7.01 Notices............................................ 12 7.02 Controlling Law.................................... 12 7.03 Gender and Number.................................. 12 7.04 Captions........................................... 13 7.05 Action by the Company.............................. 13 7.06 Facility of Payment................................ 13 7.07 Withholding Payroll Taxes.......................... 13 7.08 Severability....................................... 13 7.09 Liability.......................................... 13 7.10 Successors......................................... 14 7.11 Unfunded Status of the Plan........................ 14
Aon Deferred Compensation Plan ------------------------------ Preamble -------- The name of this plan is the Aon Deferred Compensation Plan (the "Plan"). Its purpose is to provide certain select management or highly compensated employees of Aon Corporation and its subsidiaries with the opportunity to defer amounts earned as an employee. The Plan shall be effective as of October 1, 1994. SECTION 1 --------- DEFINITIONS ----------- 1.01 "Accounts" shall mean the Aon Common Stock Account and the Aon General Account. 1.02 "Aon Common Stock Account" shall mean the account established on the books of the Company or a Subsidiary for a Participant who has elected to defer Compensation or the Performance Bonus, as if such deferral had been invested in whole and fractional shares of Aon common stock. 1.03 "Aon General Account" shall mean the account established on the books of the Company or a Subsidiary for a Participant who has elected to defer Compensation or to defer a Performance Bonus as if such deferral had been invested in accordance with Section 4.03. 1.04 "Beneficiary" shall mean the beneficiary or beneficiaries designated by the Participant to receive the amount, if any, payable under the Plan upon the death of the Participant. 1.05 "Board" shall mean the board of directors of the Company. 1.06 "Change of Control" shall mean: (a) the purchase or other acquisition by any person (as defined by (S)(S) 13(d) or 14(d)(2) of the Securities Exchange Act of 1934 (the "Act") or any comparable successor provisions) of beneficial ownership (within the meaning of Rule 13d-3 under the Act) of 20% or more of either the outstanding shares of common stock or the combined voting power of the 2 Company's then outstanding voting securities entitled to vote generally; or (b) the consummation of a merger or equivalent combination in which the Company is not the continuing or surviving corporation, or pursuant to which shares of Aon common stock are converted into cash, securities or other property, other than a merger of the Company in which the holders of Aon common stock immediately prior to the merger have substantially the same proportionate ownership of common stock of the surviving corporation immediately after the merger; or (c) the election by stockholders of members of the Board 20% or more whom are persons who were not nominated in the most recent proxy statement of the Company; or (d) a liquidation or dissolution of the Company or the sale of all or substantially all of the Company's assets. 1.07 "Code" shall mean the Internal Revenue Code of 1986, as amended. 1.08 "Committee" shall mean the Organization and Compensation Committee of the Board (or such successor committee of the Board as shall from time to time have responsibility for compensation matters). 1.09 "Company" shall mean Aon Corporation. 1.10 "Compensation" shall mean the following types of earnings paid to an Employee for his service on behalf of the Company or the Subsidiaries: salary and fixed base compensation including compensation for overtime, and net commission, renewal and override compensation. Compensation shall be determined before excluding any pretax deferrals for retirement, health, welfare, death, insurance, or similar plans of the Company. The following shall not be included in Compensation: (i) deferred commission payments; (ii) bonuses; (iii) stock awards; (iv) expense reimbursements; (v) income from exercise of stock options; (vi) distributions from, and Company or Subsidiary contributions to, the Aon Savings Plan, the Aon Employee Stock Ownership Plan, the Aon Pension Plan or any other Company or Subsidiary fund or plan providing retirement, health, welfare, death, insurance or similar benefits; (vii) amounts paid to an Employee in respect to employment during which he is not permanently employed within the United States or its possessions; and (viii) amounts previously deferred under the terms of the Plan. 1.11 "Employee" shall mean any United States staff employee of the Company and its Subsidiaries. 3 1.12 "Participant" shall mean any eligible Employee who elects to participate in the Plan pursuant to Section 2. 1.13 "Performance Bonus" shall mean any amount paid by the Company or a Subsidiary to an Employee pursuant to periodic individual performance appraisals or a formal contractual bonus program. 1.14 "Plan" shall mean the Aon Deferred Compensation Plan. 1.15 "Subsidiary" shall mean any corporation of which 50% or more of the voting stock is owned or controlled, directly or indirectly, by the Company or by one or more of such corporations. SECTION 2 --------- ELIGIBILITY AND PARTICIPATION ----------------------------- 2.01 Eligibility. Any Employee of the Company or a Subsidiary who received wages or compensation as reported on Box 1 of IRS Form W-2 of $125,000 or more in the prior calendar year or whose rate of annual base pay in the current calendar year is $125,000 or more shall be eligible to participate in the Plan in accordance with the requirements of Section 2.02, unless otherwise decided by the Committee. In addition, other select management or highly compensated Employees may be eligible to participate at the option of the Committee. 2.02. Participation. Every eligible Employee shall become a Participant after making an irrevocable election to participate as described in Sections 3.01 or 3.02 and as of the first day of the first period for which amounts are deferred. Where the context so requires, an individual for whose benefit an account is being maintained under this Plan shall also be deemed to be a Participant. The Company will establish an Aon Common Stock Account and Aon General Account, as applicable, for each Participant. Such accounts shall be book entries maintained by the Company or its Subsidiaries, and the existence of such book entries shall not create and shall not be deemed to create a trust of any kind, or a fiduciary relationship between the Company or the Subsidiary and the Employee or Beneficiary. 4 SECTION 3 --------- ELECTION TO DEFER ----------------- 3.01 Irrevocable Election. On or before December 31 of any year, each Employee eligible to participate in the Plan shall be entitled to make an irrevocable election to defer receipt of: (i) any whole percentage of Compensation otherwise payable from the Company or a Subsidiary for the following calendar year; and (ii) any whole percentage of a Performance Bonus to be earned in the following calendar year. 3.02 First Calendar Year Election. Within 30 days after the later of the date the Plan is effective or the date the Employee first becomes eligible to participate in the Plan, each Employee eligible to participate shall be entitled to make an irrevocable election to defer (i) any whole percentage of Compensation not yet payable; and (ii) any whole percentage of a Performance Bonus not yet earned. 3.03 Election as to Period of Deferral. Each Employee shall also make, within the time specified in Section 3.01 or 3.02, an irrevocable election as to the period of deferral and distribution in accordance with Section 5. 3.04 Election as to Aon Common Stock Account or Aon General Account. Each Employee shall also make, within the time specified in Section 3.01 or 3.02, (i) an election as to the allocation of the full amount of deferred Compensation to the Aon Common Stock Account or to the Aon General Account; (ii) an election as to the allocation of the full amount of the deferred Performance Bonus to the Aon Common Stock Account or to the Aon General Account; and, if the Participant desires, (iii) a similar election to reallocate balances in the Aon Common Stock Account and Aon General Account. 3.05 Failure to Make an Election. The elections set forth in any notice described in Sections 3.01 through 3.03 shall pertain only to the period for which they are made, and if no election is made for a period no deferral will be made. In the event an Employee fails to specify an allocation of Compensation or of the Performance Bonus, 100% of the deferred portion of such Employee's Compensation or Performance Bonus shall be credited to the Aon General Account. 5 SECTION 4 --------- DEFERRED COMPENSATION AMOUNTS ----------------------------- 4.01 Deferral Period Subaccounts. Separate subaccounts under the Aon Common Stock Account and under the Aon General Account for each deferral period shall be established and maintained for each Participant. Such subaccounts shall reflect the amount deferred for each deferral period specified in each election form by the Participant. In the event two or more subaccounts reflect deferred amounts which are to be paid at the same time, all such subaccounts shall be aggregated into a single subaccount. 4.02 Amounts Credited to the Aon Common Stock Account. With respect to an Employee's election to defer any portion of Compensation or the Performance Bonus, a Participant's Aon Common Stock Account will be credited with such additions as the Participant has elected to defer to such account. For purposes of crediting Compensation or the Performance Bonus, deferred amounts shall be assumed to have been invested in Aon common stock. The amount of shares so credited will be determined by dividing the deferred amount of the Participant's Compensation or Performance Bonus by the fair market value of Aon common stock on the New York Stock Exchange for the day such Compensation or Performance Bonus would have been payable to the Participant had it not been deferred. Fair market value on any day is the average of the highest and lowest price at which the stock was sold on the New York Stock Exchange that day. In the event of a recapitalization, stock split, stock dividend, combination or exchange of shares, merger, consolidation, rights offering, separation, reorganization or liquidation, or any other change in the corporate structure or shares of the Company, the Committee may make such equitable adjustments to prevent dilution or enlargement of rights, as it may deem appropriate, in the number and class of shares so credited. 4.03 Amounts Credited to the Aon General Account. With respect to an Employee's election to defer any portion of Compensation or of a Performance Bonus, a Participant's Aon General Account will be credited with such additions as the Participant has elected to defer to such account. For purposes of computing such addition, deferred amounts shall be credited as of the day such Compensation or Performance Bonus would have been payable to the Participant had it not been deferred, and such deferrals shall be credited with interest, compounded semiannually, at the annual rate determined as of January 1 and July 1 of each year by averaging the one-year Treasury bill yield as published monthly by the Federal Reserve Bank of St. Louis on a bank discount basis through the secondary market for the last six months immediately prior thereto. The rate of interest shall be so determined by the Committee but may be modified by the Board at any time in its exclusive 6 discretion, with prospective effect but with respect to all prior and all future deferrals; provided, however, that no such modification may be implemented without advance notice to Participants affected by the modification. Such deferred amounts shall be deemed to earn interest from the date of crediting until the last day of the month preceding (i) the Elected Distribution Date (as defined in Section 5.02) and every 12-month anniversary of the Elected Distribution Date in the case of installment payments; (ii) the Termination Distribution Date (as defined in Section 5.04) and every 12-month anniversary of the Termination Distribution Date in the case of installment payments; or (iii) the hardship distribution date, whichever is applicable. 4.04 Dividends Credited to Aon Common Stock Account. As of each dividend payment date, each Participant's Aon Common Stock Account shall be credited with the dividends that would be paid with respect to Aon common stock on the dividend payment date as if the Participant owned the stock credited to the Aon Common Stock Account. Dividends will be credited as if reinvested in whole or fractional shares on the dividend date. SECTION 5 --------- METHOD OF DISTRIBUTION OF DEFERRED COMPENSATION ----------------------------------------------- 5.01 Election of Distribution. Any amount deferred for any period plus any earnings or dividends attributable thereto shall be payable under the method selected by the Participant under Section 5.02, unless the Participant terminates employment before the Elected Distribution Date (as defined below) or receives a hardship withdrawal in accordance with Section 5.05 before the period of deferral has expired. 5.02 Method of Distribution. At the time the Participant elects to defer Compensation or the Performance Bonus pursuant to Section 3, the Participant shall also make an irrevocable election as to (i) the beginning date of distribution with respect to amounts so credited to the Accounts of the Participant; and (ii) the number of annual installments, not in excess of ten, over which such distribution will be made. Payments, subject to the provisions of Sections 5.04 and 5.05, shall commence within 30 days following the date of distribution specified by the Participant in his or her deferral election (the "Elected Distribution Date"); provided, however, that the Committee may in its sole discretion determine that payment shall be made over a shorter or longer period or in more frequent installments, or commence on an earlier or later 7 date, or any or all of the above. Each installment shall be withdrawn proportionately from the Aon Common Stock Account and the Aon General Account. 5.03 Installment Payments. The first annual installment shall be paid within the 30-day period following the Elected Distribution Date or following the Termination Distribution Date, whichever is applicable. Subsequent annual installments shall be paid within the 30-day period following the end of each 12-month anniversary of the Elected Distribution Date or Termination Distribution Date, whichever is applicable. The amount of the first payment shall be a fraction of the total balances of the Participant's Accounts for such period (with interest credited in accordance with Section 4.03; with dividends credited in accordance with Section 4.04, and with Aon common stock as valued under Section 5.08), the numerator of which is one and the denominator of which is the total number of installments elected. The amount of each subsequent payment shall be a fraction of the total balances of the Participant's Accounts similarly computed for each subsequent payment, the numerator of which is one and the denominator of which is the total number of installments remaining. 5.04 Termination of Employment Prior to Distribution Date. If the Participant terminates employment for any reason prior to the Elected Distribution Date, payments shall commence within the 30- day period following the first business day of the first calendar year following the year in which employment terminated (the "Termination Distribution Date"), and distributions shall be made in the same number of annual installments as had been elected by the Participant at the time of the deferral election; provided, however, that the Committee may, in its sole discretion, determine that distribution to a terminated employee shall commence on any earlier or later date. 5.05 Hardship Withdrawals. If a Participant or Beneficiary would otherwise suffer severe financial hardship and distribution of amounts credited to the Accounts has not yet commenced, deferral of amounts may be suspended and payment of amounts credited to the Accounts shall commence within 30 days following the determination of the Committee that such hardship resulted from an unforeseeable emergency that is caused by an event beyond the control of the Participant or Beneficiary. Such suspension or withdrawal may not exceed the amount necessary to meet the emergency. 8 For purposes of this section, "unforeseeable emergency" is defined as a severe financial hardship to the Participant resulting from a sudden and unexpected illness or accident of the Participant or of a dependent (as defined in Internal Revenue Code Section 152(a)) of the Participant, loss of the Participant's property due to casualty or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of a Participant. Payment may not be made to a Participant to the extent that such hardship is or may be relieved: (a) through reimbursement or compensation by insurance or otherwise; (b) by liquidation of the Participant's assets, to the extent the liquidation of such assets would not itself cause severe financial hardship. 5.06 Distribution Upon Death after Payments Have Commenced. If any Participant dies before receiving all amounts credited to such Participant's Accounts, the unpaid amounts in the Participant's Accounts shall be paid to the Participant's Beneficiary or Beneficiaries in accordance with the last effective beneficiary designation form filed by the Participant with the Company. Such unpaid amounts shall be paid in the same manner and at the same time as had been elected by the Participant prior to such Participant's death. 5.07 Distribution to Beneficiaries. Each Participant shall file with the Company a form indicating the person, persons, or entity which are to receive the Participant's benefits under the Plan if the Participant dies before receiving all the balances in his Accounts. A Participant's beneficiary designation may be changed at any time prior to death by execution and delivery of a new beneficiary designation form. If a Participant has failed to designate a Beneficiary, the amounts payable hereunder shall be made to such person or persons who, as of the date payment is to be made under this Plan, would receive distribution of the Participant's account balances, if any, under the terms of the Aon Savings Plan, or, if the Participant is not a participant in the Aon Savings Plan at the time of his death or if the Beneficiary fails to survive the Participant, payment shall be made in a lump sum to the estate of the Participant. A Beneficiary who fails to survive a Participant by at least 10 days shall be deemed to have predeceased the Participant. 5.08 Distributions from Aon Common Stock Account. The form of distribution from the Aon Common Stock Account may be elected by the Participant no fewer than 30 days prior to distribution, or, in the case of hardship pursuant to Section 5.05, at the time the Committee determines hardship. Distributions from the Aon Common Stock Account may be made in cash, in Aon common stock, or in a combination of cash and Aon common stock; provided, however, that the Committee, in its sole discretion, may modify such election and determine the form of distribution. To the extent each installment payment will 9 be paid in cash, the cash value of the Aon common stock credited to the Aon Common Stock Account shall be obtained by multiplying the number of full and fractional shares to be converted to cash by the average market price of Aon common stock on the New York Stock Exchange for the last business day of the month immediately preceding: (a) in the case of the first annual installment, the Elected Distribution Date or the Termination Distribution Date, whichever is applicable; (b) in the case of subsequent installments, the 12-month anniversary of the Elected Distribution Date or the 12-month anniversary of the Termination Distribution Date, whichever is applicable; or (c) the hardship determination date. SECTION 6 --------- MISCELLANEOUS ------------- 6.01 Other Benefit Plans. The amount of each Participant's Compensation or Performance Bonus which the Participant elects to defer under the Plan shall be deemed compensation for the purpose of calculating the amount of a Participant's benefits or contributions under all retirement and welfare benefit plans sponsored by the Company and the Subsidiaries, except to the extent not permitted under such retirement or welfare benefit plan and except to the extent not permitted under the Code. No amount distributed to a Participant from a Participant's Accounts under this Plan shall be deemed to be compensation with respect to a Participant's entitlement to benefits under any employee benefit plan established by the Company or the Subsidiaries for its employees unless otherwise specifically provided in such plan. 6.02 Participant's Rights. Establishment of the Plan shall not be construed to give any Participant the right to be retained in the Company's or a Subsidiary's service or to any benefits not specifically provided by the Plan. Neither a Participant nor a Beneficiary shall have any interest in the deferred compensation or earnings credited to his accounts. All amounts deferred or otherwise held for the account of a Participant or a Beneficiary under the Plan shall remain the sole property of the Company or Subsidiary. With respect to such amounts, the Participant or Beneficiary is merely a general creditor, and any obligation of the Company or Subsidiary hereunder is purely contractual and shall not be funded or secured in any way, except as described in Section 6.03. 10 In case the claim of any Participant or Beneficiary for benefits under the Plan is denied, the Company shall provide adequate notice in writing to such claimant, setting forth the specific reasons for such denial. The notice shall be written in a manner calculated to be understood by the claimant. The Company shall afford a Participant or Beneficiary whose claim for benefits has been denied 60 days from the date notice of such denial is delivered or mailed in which to appeal the decision in writing to the Committee. If the Participant or Beneficiary appeals the decision in writing within 60 days, the Committee shall review the written comments and any submissions of the Participant or Beneficiary and render its decision regarding the appeal all within 60 days of such appeal. 6.03 Change of Control. Upon a Change of Control, the Company shall, as soon as possible, but in no event longer than 45 days following the Change of Control, establish an irrevocable grantor trust: (a) subject to the claims of the Company's creditors; (b) with respect to which the Participants and Beneficiaries have only the rights of unsecured general creditors and receive no title or beneficial ownership; (c) under which benefits payable may not be assigned, alienated, pledged, attached or encumbered by the Participant or Beneficiary; and (d) in substantial compliance with the required provisions of Revenue Procedure 92- 64, 1992-33 I.R.B. 11, of the Internal Revenue Service (or any comparable successor procedure). At the same time, the Company shall make a contribution to such trust in an amount that is sufficient to pay each Participant or Beneficiary the benefits to which such Participants and Beneficiaries would be entitled pursuant to the terms of the Plan as of the date on which the Change of Control occurred. Any payments made to a Participant under the trust for his benefit shall reduce dollar for dollar the amount payable to the Participant or Beneficiary from the general assets of the Company. Upon the occurrence of a Change of Control, this Plan may not be amended until all accounts have been paid in full and may be terminated only if all accounts have been paid in full. 6.04 Nonalienability and Nontransferability. The rights of a Participant to the payment of deferred compensation as provided in the Plan shall not be assigned, transferred, pledged or encumbered, or be subject in any manner to alienation or anticipation. No Participant may borrow against his Accounts. No Accounts shall be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, charge, garnishment, execution, or levy of any kind, whether voluntary or involuntary, including any liability which is for alimony or other payments for the support of a spouse or former spouse, or for any other relative of any Participant. 11 6.05 Plan Administrator. The administrator of the Plan shall be the Committee, which shall have authority to adopt rules and regulations for carrying out the Plan, to delegate its administrative responsibilities as it shall, from time to time, deem advisable, and to interpret, construe, and implement the provisions thereof. Any decision or interpretation of any provision of the Plan adopted by the Committee shall be final and conclusive. 6.06 Amendment and Termination. The Plan may, at any time (except as provided in Section 6.03 upon a Change of Control), be amended, modified, or terminated by action of the Board. No amendment, modification, or termination shall, without the consent of a Participant, adversely affect such Participant's rights with respect to amounts accrued in his or her Accounts. SECTION 7 --------- GENERAL PROVISIONS ------------------ 7.01 Notices. All notices to the Company hereunder shall be delivered to the attention of the Secretary of the Company. Any notice or filing required or permitted to be given to the Company under this Plan shall be sufficient if in writing and hand delivered, or sent by registered or certified mail, to the Company at the principal office of the Company. Such notice shall be deemed given as of the date of delivery or, if delivery is made by mail, as of the date shown on the postmark or the receipt for registration or certification. 7.02 Controlling Law. Except to the extent superseded by federal law, the laws of Illinois shall be controlling in all matters relating to the Plan. 7.03 Gender and Number. Where the context admits, words in the masculine gender shall include the feminine and neuter genders, the plural shall include the singular and the singular shall include the plural. 7.04 Captions. The captions of Sections and paragraphs of this Plan are for convenience only and shall not control or affect the meaning of construction of any of its provisions. 7.05 Action by the Company. Any action required or permitted by the Company under the Plan shall be by resolution of its Board or any person or persons authorized by resolution of its Board. 7.06 Facility of Payment. Any amounts payable hereunder to any person under legal disability or who, in the judgment of the Company, is unable to properly manage his financial affairs may be paid to the legal representative of such 12 person or may be applied for the benefit of such person in any manner which the Company may select. 7.07 Withholding Payroll Taxes. To the extent required by the laws in effect at the time distributions or contributions are made to this Plan, the Company shall withhold from such payments any taxes required to be withheld for federal, state, or local government purposes. A participant shall have the duty to pay to the Company or the Subsidiary an amount equal to the taxes required by any government to be withheld or otherwise deducted and paid by the Company or a Subsidiary as a result of the distribution to the Participant of shares of stock. Such shares shall not be delivered to the Participant until such time as such payment has been made. 7.08 Severability. Whenever possible, each provision of the Plan shall be interpreted in such manner as to be effective and valid under applicable law (including the Internal Revenue Code), but if any provision of the Plan shall be held to be prohibited by or invalid under applicable law, then (a) such provision shall be deemed amended to, and to have contained from the outset such language as shall be necessary to, accomplish the objectives of the provision as originally written to the fullest extent permitted by law and (b) all other provisions of the Plan shall remain in full force and effect. 7.09 Liability. No member of the Board, no employee of the Company or a Subsidiary, and no member of the Committee (nor the Committee itself) shall be liable for any act or action hereunder whether of omission or commission, by any other member or employee or by any agent to whom duties in connection with the administration of the Plan have been delegated or, except in circumstances involving his bad faith, gross negligence or fraud, for anything done or omitted to be done by himself. The Company will fully indemnify and hold the members of the Committee harmless from any liability hereunder, except in circumstances involving a Committee member's bad faith, gross negligence, or fraud. The Company or the Committee may consult with legal counsel, who may be counsel for the Company or other counsel, with respect to its obligation or duties hereunder, or with respect to any action or proceeding or any question of law, and shall not be liable with respect to any action taken or omitted by it in good faith pursuant to the advice of counsel. 7.10 Successors. The provisions of the Plan shall bind and inure to the benefit of the Company and its successors and assigns. The term "successors" as used herein shall include any corporation or other business entity which shall by merger, consolidation, purchase, or otherwise, acquire all or substantially all of the business and assets of the Company and successors of any such corporation or other business entity. 7.11 Unfunded Status of the Plan. Except as provided in Section 6.03, any and all payments made to the Participant pursuant to the Plan shall be made only from the general assets of the Company or a Subsidiary. All accounts under the Plan 13 shall be for bookkeeping purposes only and shall not represent a claim against specific assets of the Company or the Subsidiaries. Nothing contained in this Plan shall be deemed to create a trust of any kind or create any fiduciary relationship. 14 IN WITNESS WHEREOF, Aon Corporation hereby adopts the Aon Deferred Compensation Plan, effective as set forth above, as of this 11th day of October, 1994. Aon CORPORATION By: /s/ Abdul L. Regala ----------------------------- Abdul L. Regala First Amendment to the Aon Deferred Compensation Plan ------------------------------ Whereas, the Board of Directors of Aon Corporation desires to amend the Aon Deferred Compensation Plan (the "Plan") pursuant to the Board's authority to do so under Section 6.05 of the Plan; Now, therefore, the Plan is amended as follows effective as of December 1, 1994: Section 4.05. A new Section 4.05 shall be added to read as follows: 4.05 Company Match. The Company, at its discretion, may credit to the Accounts of selected Participants an additional amount equal to a specified percentage of the amount of Compensation deferred by the Employee or a specified dollar amount (the "Company Match") during the calendar year in which the Company Match is credited. The following rules shall apply: (a) the Company Match for any year shall be subject to the same elections regarding the periods of deferral and distribution and regarding allocation to the Accounts as the amount of Compensation irrevocably deferred by the Employee under Sections 3.01 or 3.02 during the year in which the Company Match is credited; (b) the Company Match shall be subject to the rules regarding crediting under Section 4 and distributions under Section 5; provided, however, that no hardship withdrawals under Section 5.06 shall be available either as to the Company Match or as to earnings or dividends attributable thereto; and (c) the amount of the Company Match credited in each separate year shall vest separately and in accordance with the schedule set forth below, together with earnings or dividends attributable to that year's Company Match; provided, however, that such other restrictions as the Company may place upon crediting, vesting or distribution shall be satisfied:
============================================ Completed Years of Percent Vested Continuous -------------- Employment ---------- ============================================ Less than 3 years 0% -------------------------------------------- 3 20% -------------------------------------------- 4 30% -------------------------------------------- 5 40% -------------------------------------------- 6 50% -------------------------------------------- 7 60% -------------------------------------------- 8 70% -------------------------------------------- 9 80% -------------------------------------------- 10 100% ============================================
For these purposes, "Continuous Employment" shall be computed separately, with respect to each year's credited Company Match, to determine the vested percentage. For each year's separate Company Match, "Continuous Employment" shall mean the total period of time that an individual has served as an Employee of the Company or of a Subsidiary beginning on the date an Employee's account is first credited with the particular Company Match for which vesting is being computed and ending on the date an employee quits, retires, is discharged or dies. A "Completed Year of Continuous Employment" shall refer to a 12-month period during which a Participant has been continuously employed. If a prior Participant is reemployed and again becomes a Participant, Continuous Employment after the date of reemployment shall not be taken into account for purposes of determining such Participant's nonforfeitable interest in the Company Match or in earnings or dividends attributable thereto and accrued prior to the date of reemployment. IN WITNESS WHEREOF, Aon Corporation hereby adopts this First Amendment to the Aon Deferred Compensation Plan, effective as set forth above, as of this 16th day of Dec., 1994. Aon CORPORATION /s/ Abdul L. Ragala By:_________________________________ Executive Vice President EX-10.S 4 STOCK PURCHASE AGREEMENT EXHIBIT 10.S EXECUTED COPY ________________________________________________________________________________ STOCK PURCHASE AGREEMENT by and among Aon CORPORATION, COMBINED INSURANCE COMPANY OF AMERICA, UNION FIDELITY LIFE INSURANCE COMPANY and GENERAL ELECTRIC CAPITAL CORPORATION Dated as of November 11, 1995 ________________________________________________________________________________ Sale of All of the Outstanding Common Shares of Union Fidelity Life Insurance Company to General Electric Capital Corporation TABLE OF CONTENTS
Page 1. Definitions 1 2. Sale and Purchase of Shares.................................. 10 2.1 Sale of Shares......................................... 10 2.2 Purchase Price and Payment for Shares.................. 10 2.3 Delivery of Shares..................................... 10 2.4 Post-Closing Purchase Price Adjustment; Closing Balance Sheets................................................. 10 3. Closing; Closing Date........................................ 14 4. Representations and Warranties of Parent and Seller.......... 14 4.1 Existence and Power.................................... 15 4.2 Authority; Execution and Delivery...................... 15 4.3 Consents and Approvals................................. 15 4.4 No Conflict............................................ 16 4.5 Capital Stock; Title................................... 16 4.6 Options or Other Rights................................ 17 4.7 Charter Documents and By-laws.......................... 17 4.8 Minute Books........................................... 17 4.9 GAAP and SAP Statements................................ 17 4.10 Taxes................................................. 19 4.11 Litigation............................................ 22 4.12 [Intentionally Omitted]................................ 23 4.13 Insurance............................................. 23 4.14 Employee Benefits..................................... 23 4.15 Brokers............................................... 24 5. Representations and Warranties of the Company................ 25 5.1 Corporate Authority.................................... 25 5.2 Consents and Approvals................................. 25 5.3 No Conflict............................................ 25 5.4 Minute Books........................................... 26 5.5 Compliance With Laws................................... 26 5.6 Insurance Licenses..................................... 26 5.7 Litigation............................................. 27 5.8 Contracts and Other Agreements......................... 27 5.9 Real Estate............................................ 29 5.10 Personal Property; Intellectual Property.............. 30 5.11 Operations of the Company............................. 30 5.12 [Intentionally Omitted]............................... 35 5.13 Labor Matters......................................... 35 5.14 No Undisclosed Liabilities............................ 35 6. Representations and Warranties of Buyer...................... 36 6.1 Existence and Power.................................... 36 6.2 Execution and Delivery................................. 36 6.3 Consents and Approvals................................. 36
6.4 No Conflict............................................. 37 6.5 Purchase Not for Distribution........................... 37 6.6 Financing............................................... 37 6.7 Litigation.............................................. 37 6.8 Brokers................................................. 38 7. Covenants and Agreements...................................... 38 7.1 Conduct of Business..................................... 38 7.2 Pre-Closing Maintenance of Insurance.................... 40 7.3 Litigation; Notice of Assessments; Requests for Information............................................. 40 7.4 Access to Information; Confidentiality.................. 40 7.5 Approvals............................................... 42 7.6 Additional Financial Statements......................... 43 7.7 Further Assurances...................................... 43 7.8 Certain Employee Matters................................ 44 7.9 Settlement of Intercompany Accounts; Cancellation of Intercompany and Other Agreements....................... 49 7.10 Actions to Address Certain Interrelationships.......... 50 7.11 Investments............................................ 50 7.12 Resignations of Directors.............................. 51 7.13 No Negotiations, Etc................................... 51 8. Conditions Precedent to the Obligation of Buyer............... 52 8.1 Representations and Warranties; Covenants and Agreements.............................................. 52 8.2 Governmental Approvals; Illegality...................... 52 8.3 Third Party Consents.................................... 53 8.4 Hart-Scott-Rodino....................................... 53 8.5 Opinions of Counsel to Parent, Seller and the Company... 53 8.6 No Material Adverse Change.............................. 53 8.7 Consummation of Certain Transactions.................... 53 9. Conditions Precedent to the Obligations of Parent, Seller and the Company................................................... 53 9.1 Representations and Warranties; Covenants and Agreements.............................................. 54 9.2 Governmental Approvals; Illegality...................... 54 9.3 Third Party Consents.................................... 54 9.4 Hart-Scott-Rodino....................................... 55 9.5 Opinion of Counsel to Buyer............................. 55 9.6 Consummation of Certain Transactions.................... 55 10. Survival and Indemnification................................. 55 10.1 Survival of Representations and Warranties............. 55 10.2 Indemnification by Parent and Seller................... 55 10.3 Indemnification by Buyer............................... 56 10.4 Procedure.............................................. 56 10.5 Indemnification; Directors and Officers Insurance...... 58 11. Tax Matters.................................................. 58
11.1 Section 338 Election................................... 58 11.2 Tax Indemnification.................................... 60 11.3 Tax Related Adjustments................................ 67 11.4 Transfer Taxes......................................... 68 12. Termination................................................... 69 12.1 Termination and Abandonment............................ 69 12.2 Survival; Expenses..................................... 69 13. Miscellaneous................................................. 69 13.1 Public Announcements................................... 69 13.2 Notices................................................ 70 13.3 Entire Agreement....................................... 71 13.4 Waivers and Amendments; Noncontractual Remedies; Preservation of Remedies............................... 71 13.5 Governing Law.......................................... 71 13.6 Binding Effect; Assignment Limited..................... 71 13.7 No Third-Party Beneficiaries........................... 72 13.8 Counterparts........................................... 72 13.9 Schedules.............................................. 72 13.10 Headings.............................................. 72 13.11 Remedies.............................................. 72 13.12 Invalidity of Provisions.............................. 72
STOCK PURCHASE AGREEMENT STOCK PURCHASE AGREEMENT (the "Agreement"), dated as of November 11, 1995 by and among Aon Corporation, a Delaware corporation ("Parent"), Combined Insurance Company of America, an Illinois corporation ("Seller"), Union Fidelity Life Insurance Company, an Illinois corporation (the "Company"), and General Electric Capital Corporation, a New York corporation ("Buyer"). RECITALS: WHEREAS, Parent is the beneficial owner of all of the issued and outstanding capital stock of Seller; WHEREAS, Seller is the beneficial and record owner of 461,035 shares (the "Shares") of the issued and outstanding common stock, $5.50 par value, of the Company; WHEREAS, the Shares constitute all of the issued and outstanding capital stock of the Company; WHEREAS, Seller desires to sell, and Buyer desires to purchase, the Shares, upon the terms, subject to the conditions and for the consideration set forth in this Agreement; NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth herein and in reliance upon the representations and warranties contained herein, Parent, Seller, the Company and Buyer agree as follows: 1. Definitions. (a) Except as the context shall otherwise require, the following terms when used in this Agreement shall have the following meanings: "Adjusted Closing Balance Sheets" means the Adjusted Closing GAAP Balance Sheet and the Adjusted Closing SAP Balance Sheet. "Adjusted Closing GAAP Balance Sheet" means the Closing GAAP Balance Sheet adjusted if and to the extent appropriate (i) to take into account all of the transactions and other actions described in Exhibit A hereto and Section 7.10(b) hereof which have been effected on or prior to the Closing Date, (ii) to take into account the valuation principles described in Section 2.4(i), and (iii) to remove any accrual for Taxes (other than deferred Taxes). "Adjusted Closing GAAP Capital" means the stockholders' equity as reflected in the Adjusted Closing GAAP Balance Sheet. "Adjusted Closing SAP Balance Sheet" means the Closing SAP Balance Sheet, adjusted if and to the extent appropriate (i) to take into account all of the transactions and other actions described in Exhibit A hereto and Section 7.10(b) hereof which have been effected on or prior to the Closing Date, (ii) to take into account the valuation principles described in Section 2.4(i), and (iii) to remove any accrual for Taxes. "Adjusted Closing SAP Capital" means the sum of (i) the Company's capital and surplus as reflected in the Adjusted Closing SAP Balance Sheet, plus (ii) the amount of AVR as of the Closing Date for the Company, all determined in accordance with SAP as in effect on September 30, 1995. "Affected Employees" means all current or former employees of the Company, Erco Services, Inc. and Ryan Financial Services, Inc. as of the Closing Date, including any such person who is on disability, layoff or leave of absence, but excluding any former employee of the Company or any of its Subsidiaries who subsequently became employed by Parent or any Subsidiary of Parent other than the Company, Erco Services, Inc. and Ryan Financial Services, Inc. "Affiliate" means, with respect to any Person, at the time in question, any other Person controlling, controlled by or under common control with such Person. For purposes of this definition, "control" (including the terms "controlling", "controlled by" and "under common control with") 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 securities or otherwise. "Agreement" means this Stock Purchase Agreement, including the Exhibits attached hereto, the Seller Disclosure Schedule and the Company Disclosure Schedule. "Annual SAP Statements" means, with respect to any Person, the annual financial statements of such Person prepared in accordance with SAP, as filed with or submitted to the Insurance Department on forms prescribed or permitted by the Insurance Department. "Auto Credit Business" means the business conducted by the Company and its Subsidiaries of underwriting and distributing group credit life insurance and group credit accident and health insurance to auto dealer-creditors, which business shall be transferred to one or more Subsidiaries of Parent (other than the Company and its Subsidiaries) as contemplated by Exhibit A hereto. "AVR" means, with respect to any Person, the Asset Valuation Reserve set forth in the balance sheet of such Person in accordance with SAP. 2 "Benefit Arrangements" has the meaning set forth in Section 4.14(a). "Business Day" means any day which is neither a Saturday nor a Sunday, nor a day on which banking institutions in the City of New York shall be permitted or required by law or executive order to be closed. "Buyer" has the meaning set forth in the first paragraph hereof. "Buyer Group Member" has the meaning set forth in Section 11.3(d). "Closing" means the closing of the sale and purchase of the Shares contemplated by this Agreement. "Closing Adjustment Calculations" has the meaning set forth in Section 2.4(c). "Closing GAAP Balance Sheet" means the audited balance sheet of the Company and its consolidated subsidiaries, as of the Closing Date (following consummation of the Closing), prepared in accordance with GAAP using the Company's customary standards of practice used in preparing year-end financial statements. "Closing Purchase Price" has the meaning set forth in Section 2.2(a). "Closing SAP Balance Sheet" means the audited balance sheet of the Company and its consolidated subsidiaries, as of the Closing Date (following consummation of the Closing) prepared in accordance with SAP using the Company's customary standards of practice used in preparing year-end financial statements. "Closing SAP RBC Amount" means an amount as of the Closing Date (following consummation of the Closing) equal to 200% of the Company's company action level risk based capital as defined by the risk based capital guidelines issued by the NAIC based on the Adjusted Closing SAP Balance Sheet; provided, however, that the Exhibit C Assets, the Exhibit D Assets, the Exhibit E Assets and the GIC will be treated, for risk based capital purposes, as having the same quality as the Exhibit C Assets as of the date hereof. "COBRA" refers to the provisions of the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended, relating to continuation of health benefits in certain circumstances. "Code" means the Internal Revenue Code of 1986, as amended (including any successor code), and the rules and regulations promulgated thereunder. 3 "Company" has the meaning set forth in the first paragraph hereof. "Company Disclosure Schedule" refers to the disclosure schedule delivered by the Company to Buyer in connection with the execution and delivery of this Agreement. "Company Plans" has the meaning set forth in Section 4.14(a). "Contracts and Other Agreements" means all contracts, agreements, undertakings, indentures, notes, bonds, loans, instruments, leases, mortgages, commitments or other binding agreements, whether written or oral, other than Employee Benefit Programs. "Defined Contribution Plans" means Parent's Savings Plan and Parent's ESOP. "Employee Benefit Programs" has the meaning set forth in Section 4.14(a). "Employment and Withholding Taxes" means all employment, payroll and withholding Taxes payable with respect to salaries, wages, commissions, other compensation or other payments actually or constructively made by the Company or any Subsidiary on or before the Closing Date, except to the extent such Taxes have been withheld on or prior to the Closing Date and are required to be paid to the appropriate taxing authority after the Closing Date. "Environmental Law" means, without limitation, any of the Hazardous Materials Transportation Act, the Comprehensive Environmental Response, Compensation and Liability Act, the Water Pollution Control Act, the Clean Air Act, the Resource Conservation and Recovery Act, the Solid Waste Disposal Act, the Toxic Substances Control Act, the Insecticide, Fungicide and Rodenticide Act, the Safe Drinking Water Act, the Occupational Health and Safety Act, each as amended, and all other environmental statutes enacted by the United States and by state and local Governmental or Regulatory Bodies (including municipal sewerage authorities), any executive orders, ordinances, rules or regulations promulgated under any of the foregoing, and common law respecting environmental matters. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended, and the rules and regulations promulgated thereunder. "Executive Officers" means, with respect to any corporation, the chairman of the board of directors, the president, any executive or senior vice president (and any vice 4 president, in the case of the Company only), the general counsel, and the treasurer of such corporation (and other individuals, if any, performing comparable functions), and with respect to any partnership, the individuals performing comparable functions on behalf of such partnership. "Exhibit C Assets" are the assets set forth on Exhibit C attached hereto and any other investment assets acquired following the date hereof using funds derived from any disposition of such assets; it being agreed that Exhibit C Assets shall not include any interest income or dividends received in respect thereof. "Exhibit D Assets" are the assets set forth on Exhibit D attached hereto and any other investment assets acquired following the date hereof using funds derived from any disposition of such assets; it being agreed that Exhibit D Assets shall not include any interest income or dividends received in respect thereof. "Exhibit E Assets" are the assets set forth on Exhibit E attached hereto and other investment assets acquired following the date hereof using funds derived from any disposition of such assets. "Federal" means of or pertaining to the government of the United States of America. "Final Purchase Price" has the meaning set forth in Section 2.2(a). "FTC" means the Federal Trade Commission of the United States of America. "GAAP" means United States generally accepted accounting principles consistently applied throughout the specified period and in the immediately prior comparable period, except for normal recurring year-end adjustments. "GIC" has the meaning set forth in Section 7.11. "Governmental or Regulatory Body" means any government or political subdivision thereof, whether Federal, state, local or foreign, or any agency or instrumentality of any such government or political subdivision. "Group Health Business" means the business conducted by the Seller of underwriting and distributing group life and group accident and health insurance, which business shall be transferred to the Company as contemplated by Exhibit A hereto. "HSR" means the Hart-Scott-Rodino Antitrust 5 Improvements Act of 1976, as amended, and the rules and regulations promulgated thereunder. "IMR" means, with respect to any Person, the Interest Maintenance Reserve set forth in the balance sheet of such Person in accordance with SAP. "Income Taxes" means (i) all Taxes however denominated (including franchise taxes and premium taxes) that are based upon or measured by gross income, net income, or gross receipts, (ii) minimum and tax preference based Taxes, (iii) any guarantee fund assessments, (iv) state insurance department licenses and fees and (v) any interest, fines, penalties, assessments or additions to tax resulting from, attributable to or incurred in connection with any Tax described in clauses (i) through (iv) or any contest, dispute or refund thereof. "Income Tax Returns" means Tax Returns in respect of Income Taxes. "Increase Amount" has the meaning set forth in Section 2.4. "Indemnitee" has the meaning set forth in Section 10.4. "Indemnitor" has the meaning set forth in Section 10.4. "Insurance Contracts" means all insurance policies, annuity contracts, guaranteed investment contracts and other insurance products underwritten by the Company or the Insurance Subsidiary. "Insurance Department" means the appropriate insurance regulatory governmental authority for the Company's and the Insurance Subsidiary's respective state of domicile and deemed commercial domicile, if any. "Insurance Licenses" has the meaning set forth in Section 5.6(a). "Insurance Subsidiary" means Sterling Life Insurance Company, an Arizona corporation. "Interim SAP Statements" has the meaning set forth in Section 7.6. "Investment Contracts" means all contracts, agreements, undertakings, indentures, notes, bonds, loans, instruments, leases, mortgages, commitments or other binding agreements included in the investment portfolio of the Company or any of its Subsidiaries. 6 "IRS" means the Internal Revenue Service of the United States of America. "Justice" means the Antitrust Division of the Department of Justice of the United States of America. "Knowledge" means, with respect to any entity, the actual knowledge of any of the Executive Officers of such entity. "Lien or Other Encumbrance" means any lien, pledge, mortgage, security interest, claim, lease, charge, option, right of first refusal, easement, servitude, transfer restriction under any shareholder or similar agreement or encumbrance. "Litigation" means, with respect to any Person, any claim, action, suit, proceeding, arbitration or investigation. "Losses" means all losses, liabilities (including for environmental clean up), damages (excluding consequential damages suffered by any Indemnitee), deficiencies, costs, fines and assessments, penalties, claims, actions, injuries, suits, judgments and expenses (including interest actually paid by an Indemnitee to a third party and reasonable attorneys' fees and disbursements), however arising, net of any insurance proceeds the Person incurring such losses recovered in respect thereof. "Material Adverse Effect" means an effect or series of related effects which, individually or in the aggregate, is materially adverse to either (a) the business, financial condition or results of operations of the Company and its Subsidiaries, taken as a whole, (b) the legal ability of Parent or Seller to consummate the transactions contemplated by this Agreement other than by reason of the inability of Buyer to consummate such transactions, or (c) the validity or enforceability of this Agreement. "NAIC" means the National Association of Insurance Commissioners and any successor thereto. "Notice" has the meaning set forth in Section 10.4. "Parent" has the meaning set forth in the first paragraph hereof. "Parent's ESOP" means the Aon Employee Stock Ownership Plan. "Parent's Retirement Plan" means the Aon Pension Plan. "Parent's Savings Plan" means the Aon Savings Plan. "Permits" means all licenses, permits, orders, 7 approvals, registrations, authorizations and qualifications with and under all Federal, state, local or foreign laws and Governmental or Regulatory Bodies and all industry or other nongovernmental self-regulatory organizations that are necessary for the conduct of the applicable Person's business and the ownership of its properties. "Permitted Liens" means (i) Liens or Other Encumbrances for Taxes not yet due and payable, and (ii) statutory or other Liens or Other Encumbrances that do not interfere with the use by a Person of the property involved. "Person" means and includes any natural person, corporation, limited liability company, partnership, limited partnership, firm, joint venture, association, joint-stock company, trust, business trust, unincorporated organization, Governmental or Regulatory Body, or other entity. "Quarterly SAP Statements" means, with respect to a specified Person, the quarterly financial statements of such Person prepared in accordance with SAP, as filed with or submitted to the Insurance Department on forms prescribed or permitted by the Insurance Department. "Reduction Amount" has the meaning set forth in Section 2.4. "SAP" means, with respect to a specified Person, the statutory accounting practices prescribed or permitted by the Insurance Department, consistently applied throughout the specified period and in the immediately prior comparable period. "Section 338 Forms" has the meaning set forth in Section 11.1(b). "Seller" has the meaning set forth in the first paragraph hereof. "Seller Consolidated and Combined Returns" means any consolidated, affiliated, combined or unitary Tax Returns of Parent which include the Company and any Subsidiary of the Company. "Seller Disclosure Schedule" refers to the disclosure schedule delivered by Parent and Seller to Buyer in connection with the execution and delivery of this Agreement. "Seller Group" has the meaning set forth in Section 11.3(d). "Shares" has the meaning set forth in the recitals hereof. 8 "Settlement Auditor" has the meaning set forth in Section 2.4(f). "Special Bonus Program" means the special incentive plan described in the memorandum attached to Section 5.8(a) of the Company Disclosure Schedule. "Subsidiary" of a specified Person means a Person 50% or more of the outstanding voting stock or other ownership interests of which are owned, directly or indirectly, by such specified Person or one or more other Subsidiaries of such specified Person. For the purposes of this definition, "voting stock" means stock that ordinarily has voting power for the election of directors, whether at all times or only so far as no senior class of stock has such voting power by reason of any contingency. Ryan Financial Services, Inc., an Illinois corporation, shall be deemed to be a Subsidiary of the Company. "Tax Claim" has the meaning set forth in Section 11.2(d). "Taxes" means all taxes, charges, fees, levies, or other similar assessments, including, without limitation, (i) income, gross receipts, ad valorem, premium, guarantee fund assessments, excise, real property, personal property, windfall profit, sales, use, transfer, licensing, withholding, employment, payroll, estimated and franchise taxes imposed by the United States of America, any state, local, or foreign government, or any subdivision, agency, or other similar Person of the United States or any such government; and (ii) any interest, fines, penalties, assessments, or additions to tax resulting from, attributable to or incurred in connection with any Tax or any contest, dispute or refund thereof. "Tax Return" means any report, return, statement or other information required to be supplied to a taxing authority in connection with Taxes. "Tax Settlement Auditor" has the meaning set forth in Section 11.1(b)(z). "Tax Statement" has the meaning set forth in Section 11.2(e). "Transferred Employee" means any Affected Employee who is offered employment or remains employed by the Company, Erco Services, Inc. or Ryan Financial Services, Inc. as of the Closing Date or such later date, in either case as otherwise provided in Section 7.8(a) hereof. "WARN" means the Worker Adjustment and Retraining Notification Act of 1988. 9 (b) "Including" and other forms of such term, with respect to any matter or thing, shall be construed to mean "including but not limited to" such matter or thing. 2. Sale and Purchase of Shares. 2.1 Sale of Shares. At the Closing, Seller agrees to sell to Buyer, and Buyer agrees to purchase from Seller, the Shares, upon the terms and subject to the conditions set forth herein. 2.2 Purchase Price and Payment for Shares. (a) The purchase price for the Shares shall be an amount equal to $425,000,000 (the "Closing Purchase Price") and subject to adjustment following the Closing in accordance with Section 2.4 (as so adjusted, the "Final Purchase Price"). (b) At the Closing, Buyer shall pay to Seller the Closing Purchase Price, in immediately available funds by wire transfer to such account or accounts of Seller as Seller shall have designated to Buyer, in the manner specified herein for the delivery of notices, not less than two Business Days prior to the Closing Date. 2.3 Delivery of Shares. At the Closing, Seller shall deliver to Buyer certificates representing all of the Shares, duly endorsed in blank for transfer or accompanied by duly executed blank stock powers together with all necessary stock transfer stamps affixed thereto. 2.4 Post-Closing Purchase Price Adjustment; Closing Balance Sheets. (a) Upon the earlier to occur of (i) the parties' agreement (or deemed agreement pursuant to Section 2.4(e)) with respect to the calculation of the Final Purchase Price and (ii) the delivery of any report of the Settlement Auditor as provided in Section 2.4(g), the Closing Purchase Price shall be decreased by the Reduction Amount, if any, and shall be increased by the Increase Amount, if any, and shall be decreased by the product of (y) $4,000 and (z) the number of full months which have elapsed prior to the Closing Date in the calendar year in which the Closing Date occurs. Seller shall pay, within five Business Days after the earlier to occur of the events described in clauses (i) and (ii) above, the amount of such Reduction Amount to Buyer, plus simple interest thereon from the Closing Date to the date of payment at an annual interest rate equal to 6% by wire transfer of immediately available funds to such account or accounts of Buyer as Buyer specifies in writing to Seller in the manner specified herein for the delivery of notices. Buyer shall pay, within five Business Days after the earlier to occur of the events described in clauses (i) and (ii) above, the amount of such Increase Amount to Seller, plus simple interest thereon from the Closing Date to the date of payment at 10 an annual interest rate equal to 6%, by wire transfer of immediately available funds to such account or accounts of Seller as Seller specifies in writing to Buyer in the manner specified herein for the delivery of notices. (b) The Reduction Amount or Increase Amount, as the case may be, is calculated as follows: (i) If the Adjusted Closing GAAP Capital exceeds $384,500,000 and the Adjusted Closing SAP Capital exceeds the Closing SAP RBC Amount, then the maximum amount that, on a pro forma basis, could have been paid immediately preceding the Closing as a cash dividend by the Company without causing, after giving effect to such dividend, (y) the Adjusted Closing GAAP Capital to be less than $384,500,000 or (z) the Adjusted Closing SAP Capital to be less than the Closing SAP RBC Amount, shall be deemed to be the "Increase Amount". (ii) If $384,500,000 exceeds the Adjusted Closing GAAP Capital and the Closing SAP RBC Amount exceeds the Adjusted Closing SAP Capital, then the minimum amount of cash that, on a pro forma basis, would have been required to be contributed to the Company by its stockholder in order to cause, after giving effect to such contribution, both (y) the Adjusted Closing GAAP Capital to equal or exceed $384,500,000 and (z) the Adjusted Closing SAP Capital (as adjusted to reflect the contribution that causes clause (y) above to be satisfied) to equal or exceed the Closing SAP RBC Amount, shall be deemed to be the "Reduction Amount". (iii) If the Adjusted Closing GAAP Capital exceeds $384,500,000 and the Closing SAP RBC Amount exceeds the Adjusted Closing SAP Capital, then the amount of the excess of the Adjusted Closing GAAP Capital over $384,500,000, reduced by the minimum amount that, on a pro forma basis (that assumes the amount of such excess was paid as a cash dividend immediately prior to the Closing) would have been required to have been contributed by the stockholder to the Company immediately after such assumed dividend to cause the Adjusted Closing SAP Capital to equal or exceed the Closing SAP RBC Amount, shall be deemed to be the "Increase Amount", unless it is a negative number, in which case the absolute value of such negative number shall be deemed to be the "Reduction Amount". (iv) If the Adjusted Closing GAAP Capital is less than $384,500,000 and the Adjusted Closing SAP Capital exceeds the Closing SAP RBC Amount, then the amount by which $384,500,000 exceeds the Adjusted Closing GAAP 11 Capital shall be deemed to be the "Reduction Amount". (c) Within 30 Business Days after the Closing Date, Seller shall prepare and deliver to Ernst & Young LLP for audit the Adjusted Closing Balance Sheets. Buyer shall, and shall cause the Company and its Subsidiaries and Buyer's and their officers and employees to, afford to Seller and its officers, employees and agents reasonable access at reasonable times to the officers, employees, properties, books and records of the Company and its Subsidiaries and shall furnish to Seller all financial and other data and information relating to the Company and the Subsidiaries as Seller may reasonably request in connection with Seller's preparation of the Adjusted Closing Balance Sheets. As promptly as practicable following such delivery (and, in any event, within 40 Business Days), Seller shall cause (at its expense) Ernst & Young LLP to complete an audit of each of the Adjusted Closing Balance Sheets. Buyer shall, and shall cause the Company and its Subsidiaries and Buyer's and their officers and employees to, cooperate with Ernst & Young LLP in connection with such audits. As promptly as practicable after such audits are completed, Seller shall deliver to Buyer (i) the audited Adjusted Closing SAP Balance Sheet together with the report thereon of Ernst & Young LLP to the effect that such audit was conducted in accordance with generally accepted auditing standards and that such firm believes that such audit provides a reasonable basis for such firm's opinion thereon and that the Adjusted Closing SAP Balance Sheet presents fairly in all material respects the financial condition of the Company and its consolidated subsidiaries as of the Closing Date in conformity with this Agreement, (ii) the audited Adjusted Closing GAAP Balance Sheet together with the report thereon of Ernst & Young LLP to the effect that such audit was conducted in accordance with generally accepted auditing standards and that such firm believes that such audit provides a reasonable basis for such firm's opinion thereon and that the Adjusted Closing GAAP Balance Sheet presents fairly in all material respects the financial condition of the Company and its consolidated subsidiaries as of the Closing Date in conformity with this Agreement and (iii) a statement signed by the Seller setting forth the calculation of (A) Adjusted Closing SAP Capital, (B) the Adjusted Closing GAAP Capital, (C) the Reduction Amount or the Increase Amount, as the case may be (collectively, the "Closing Adjustment Calculations"), in each case in sufficient detail to permit Buyer to verify such calculation. (d) As promptly as practicable after the conduct of the audits required pursuant to Section 2.4(c), Seller shall cause Ernst & Young LLP (subject to the execution by Buyer and delivery to Ernst & Young LLP of an appropriate agreement for the review and release of such documents) to (i) provide to Buyer's independent auditors such work papers and other documents of Ernst & Young LLP relating to such audits as Buyer's independent 12 auditors may reasonably request and (ii) cooperate with, and be reasonably available to, Buyer's independent auditors to provide such other information reasonably requested by Buyer's independent auditors concerning such audits and the accounting and auditing issues that arise from or relate to such audits. Buyer shall pay the fees and expenses of its independent auditors. (e) Within 30 Business Days after Buyer's receipt of the audited Adjusted Closing Balance Sheets (together with Seller's Closing Adjustment Calculations), Buyer shall provide Seller with written notice indicating whether Buyer agrees or disagrees with such calculations, and, if Buyer disagrees with such calculations, setting forth Buyer's calculation of the Closing Adjustment Calculations. If Buyer agrees with such calculations, or if Buyer fails to deliver to Seller such written notice within such 30 Business Day period, such Balance Sheets and such calculations shall be deemed final. To the extent Buyer and Seller are in agreement as to calculation of the Closing Adjustment Calculations, the parties agree to make the corresponding payment contemplated in Section 2.4(a). (f) Within ten Business Days after Seller's timely receipt of any notice of disagreement with the calculation of the Closing Adjustment Calculations, Buyer and Seller shall begin, and shall cause their independent auditors to participate in, good faith negotiations to resolve such disagreement. If such parties and their independent auditors are unable to resolve such disagreement within ten Business Days after such negotiations begin, such disagreement shall be submitted to the national office of Coopers & Lybrand (which may not assign the matter to its Chicago, Illinois or Stamford, Connecticut office), or, if such firm is unavailable, another independent nationally recognized auditing firm selected by the parties (the "Settlement Auditor") for resolution in a manner consistent with the provisions of this Agreement. The parties shall, and shall cause their independent auditors to, cooperate with the Settlement Auditor and shall proceed in good faith to cause the Settlement Auditor to resolve such disagreement within 40 Business Days after such disagreement is submitted to the Settlement Auditor. The fees and expenses of the Settlement Auditor (i) shall be paid by Seller if the Buyer's calculation of the Closing Adjustment Calculations is closer to the Settlement Auditor's calculation of the Closing Adjustment Calculations than the Seller's calculation of the Closing Adjustment Calculations, (ii) shall be paid by Buyer if the Seller's calculation of the Closing Adjustment Calculations is closer to the Settlement Auditor's calculation of the Closing Adjustment Calculations than the Buyer's calculation of the Closing Adjustment Calculations and (iii) shall be paid one-half by Seller and one-half by Buyer if neither the Seller's calculation of the Closing Adjustment Calculations nor the Buyer's calculation of the Closing Adjustment Calculations is 13 closer to the Settlement Auditor's calculation of the Closing Adjustment Calculations than the other. (g) The Settlement Auditor, in its sole discretion, shall determine (i) the nature and extent of the participation by Buyer and Seller and their respective independent auditors in connection with the resolution of any disagreement submitted to the Settlement Auditor, (ii) the nature and extent of information that Buyer and Seller may submit to the Settlement Auditor for consideration in connection with such resolution and (iii) the personnel of the Settlement Auditor who shall review such information and resolve such disagreement; provided, however, that the Settlement Auditor shall permit Buyer to submit any information relating to any audit by Buyer or its auditors of the Adjusted Closing Balance Sheets or the calculation of the Closing Adjustment Calculations prepared by Buyer in connection with the Settlement Auditor's resolution of any such disagreement. The Settlement Auditor's resolution of any such disagreement shall be reflected in a written report which shall be delivered promptly to, and shall be final and binding upon, the parties and the Closing Purchase Price shall be adjusted accordingly to reflect any such resolution and, as adjusted, shall be deemed to be the Final Purchase Price and any adjustment thereto will be paid in accordance with Section 2.4(a). (h) [Intentionally Omitted] (i) For purposes of the Adjusted Closing Balance Sheets, (i) the Exhibit C Assets shall be assigned a value of $367,085,561; (ii) the Exhibit D Assets shall be assigned a value of $62,667,311; (iii) the Exhibit E Assets shall be assigned a value of $32,229,000 plus deemed interest income at an annual rate of 6.70% plus any capital contribution or like payments made by the Company in respect of the Exhibit E Assets between the date hereof and the Closing Date, and minus any cash distribution received by the Company in respect of the Exhibit E Assets between the date hereof and the Closing Date; and (iv) the GIC shall be assigned a value of $50,000,000. 3. Closing; Closing Date. The Closing shall take place at the offices of Sidley & Austin, 875 Third Avenue, New York, New York 10022, at 10:00 a.m., on the fifth Business Day following the day on which the last of the conditions to Closing set forth in Sections 8 and 9 shall have been satisfied, or at such other place and date as the parties may mutually agree. The date and time of such Closing are herein referred to as the "Closing Date." 4. Representations and Warranties of Parent and Seller. Parent and Seller each represents and warrants to Buyer as follows: 14 4.1 Existence and Power. (a) Each of Parent, Seller, the Company and its Subsidiaries is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation. Each of Parent, Seller and the Company has all requisite corporate power and authority to execute and deliver this Agreement, to perform its obligations hereunder and to consummate the transactions contemplated hereby. (b) The Company has all requisite corporate power and authority to own, lease and operate its assets, properties and business and to carry on its business as now being conducted by it. The Company is duly qualified or otherwise authorized or admitted as a foreign corporation to transact business and is in good standing as a foreign corporation in each jurisdiction set forth in Section 4.1(b) of the Seller Disclosure Schedule, which are the only jurisdictions in which such qualification, authorization or admission is required by law, except for any jurisdictions in which the failure to be so qualified, authorized or admitted could not reasonably be expected to have a Material Adverse Effect. 4.2 Authority; Execution and Delivery. The execution and delivery by each of Parent, Seller and the Company of this Agreement, the performance by each of Parent, Seller and the Company of its obligations hereunder and the consummation by each of Parent, Seller and the Company of the transactions contemplated hereby have been duly and validly authorized by all necessary corporate action on the part of each of Parent, Seller and the Company, respectively. This Agreement has been duly executed and delivered by each of Parent, Seller and the Company and constitutes the legal, valid and binding obligation of Parent, Seller and the Company, enforceable against Parent, Seller and the Company in accordance with its terms, except as such enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium and other similar laws relating to or affecting creditors' rights generally, or by general equitable principles (regardless of whether such enforceability is considered in a proceeding in equity or at law). 4.3 Consents and Approvals. The execution and delivery by each of Parent, Seller and the Company of this Agreement, the performance by each of Parent, Seller and the Company of its obligations hereunder and the consummation by each of Parent, Seller and the Company of the transactions contemplated hereby do not and will not require Parent, Seller or the Company or any other Subsidiary of Parent (other than the Subsidiaries of the Company) to obtain any consent, approval or action of, or make any filing with or give any notice to, any Person except (i) as set forth in Section 4.3 of the Seller Disclosure Schedule, (ii) such as have been duly obtained and are in full force and effect on the date hereof and will continue to be in full force and effect on the Closing Date and (iii) those 15 which, if not obtained, made or given, could not reasonably be expected to have a Material Adverse Effect or have a material adverse effect on Buyer's ability to own, possess or exercise the rights of an owner with respect to the Shares or the Company and its Subsidiaries. 4.4 No Conflict. (a) The execution and delivery by each of Parent and Seller of this Agreement, the performance by each of Parent and Seller of its obligations hereunder and the consummation by each of Parent and Seller of the transactions contemplated hereby in accordance with the terms and conditions hereof will not violate any provision of the articles or certificate of incorporation or by-laws or other charter or organizational documents of Parent or Seller. (b) Except as set forth in Section 4.4(b) of the Seller Disclosure Schedule, the execution and delivery by each of Parent and Seller of this Agreement, the performance by Parent and Seller of their obligations hereunder and the consummation by Parent and Seller of the transactions contemplated hereby in accordance with the terms and conditions hereof will not (i) violate, conflict with or result in the breach of any of the terms of, result in a material modification of the effect of, otherwise give any other contracting party the right to terminate, or constitute (with or without notice or lapse of time or both) a default under, any Contract or Other Agreement to which Parent or Seller or any other Subsidiary of Parent (other than the Company and the Subsidiaries of the Company) is a party or by or to which Parent or Seller or any other Subsidiary of Parent (other than the Company and the Subsidiaries of the Company) or any of their respective assets or properties may be bound or subject, or (ii) violate any existing term or provision of any law, regulation, order, writ, judgment, injunction or decree applicable to Parent or Seller or any other Subsidiary of Parent (other than the Company and the Subsidiaries of the Company) or any of their respective assets or properties, except, in the case of clause (i) for such violations, conflicts, breaches, modifications, rights, defaults and impairments that could not reasonably be expected to have a Material Adverse Effect or have a material adverse effect on Buyer's ability to own, possess or exercise the rights of an owner with respect to the Shares or the Company and its Subsidiaries. 4.5 Capital Stock; Title. Section 4.5 of the Seller Disclosure Schedule accurately sets forth the name and jurisdiction of incorporation of each Subsidiary of the Company and the authorized capital stock of each of the Company and its Subsidiaries and the number of shares of each class of capital stock of the Company and each of such Subsidiaries that are issued and outstanding. The Shares and all of the issued and outstanding shares of capital stock of the Subsidiaries of the Company are duly authorized, validly issued, fully paid and 16 non-assessable and are owned beneficially and of record as set forth in Section 4.5 of the Seller Disclosure Schedule, free and clear of any Lien or Other Encumbrance, except as provided in the next sentence. Upon delivery of the payment for the Shares as herein provided, Buyer will acquire good title thereto, free and clear of any Lien or Other Encumbrance (other than (i) Liens or Other Encumbrances created by Buyer and (ii) the requirements of the Federal and state securities laws and state insurance laws respecting limitations on the subsequent transfer thereof), and will own all of the issued and outstanding shares of capital stock of the Company. 4.6 Options or Other Rights. Except for and as provided in this Agreement, (i) there is no outstanding right, subscription, warrant, call, unsatisfied preemptive right, option or other agreement of any kind to purchase or otherwise to receive from Parent, Seller, the Company or any other Affiliate of Parent, any of the outstanding, authorized but unissued, unauthorized or treasury shares of the capital stock or any other equity security of the Company or any of its Subsidiaries (or any interest therein), (ii) there is no outstanding security of any kind that has been issued by Parent, Seller, the Company or any other Affiliate of Parent and that is convertible into or exchangeable for the capital stock of the Company or any of its Subsidiaries (or any interest therein) and (iii) there is no outstanding Contract or Other Agreement of or binding upon Parent, Seller, the Company or any other Affiliate of Parent (y) to purchase, redeem or otherwise acquire any outstanding shares of the capital stock of the Company or to participate in the equity, income, or election of directors or officers of the Company or any of its Subsidiaries or (z) that permits any Person to participate in the equity, income or election of directors of the Company or any of its Subsidiaries. 4.7 Charter Documents and By-laws. Seller has heretofore made available to Buyer true and complete copies of the articles or certificate of incorporation and by-laws of the Company and each of its Subsidiaries, in each case as in effect on the date hereof. 4.8 Minute Books. The minute books of the Company accurately reflect in all material respects all formal actions taken at all meetings and all consents in lieu of meetings of the stockholders of the Company since December 31, 1990 and all formal actions taken at all meetings and all consents in lieu of meetings of the Board of Directors of the Company and all committees thereof since December 31, 1990. All of such minute books have previously been made available for inspection by Buyer. 4.9 GAAP and SAP Statements. (a) Seller has made available to Buyer true and complete copies of the consolidated 17 balance sheets of the Company and its consolidated subsidiaries as of December 31, 1994 and 1993 and September 30, 1995 and the related statements of income, changes in stockholder's equity for the periods then ended, prepared in each case on a pro-forma basis after giving effect to the transactions and other actions contemplated by Exhibit A hereto as of such date or the beginning of such period, as the case may be. Such financial statements present fairly in all material respects the financial position and the results of operations and shareholders' equity of the Company and its consolidated subsidiaries as of each such date and for each such period in conformity with GAAP, except that statements of cash flows and footnotes are not included in such financial statements. (b) Seller has made available to Buyer true and complete copies of Annual SAP Statements of the Company and its consolidated subsidiaries for the years ended December 31, 1994 and 1993, prepared in each case on a pro-forma basis after giving effect to the transactions and other actions contemplated by Exhibit A hereto as of such date or the beginning of such period, as the case may be. Such financial statements present fairly in all material respects the financial position and the results of operations of the Company and its consolidated subsidiaries as of each such date and for each such period in conformity with SAP, except that statements of cash flows and footnotes are not included in such financial statements. (c) Seller has made available to Buyer true and complete copies of Annual SAP Statements of the Company and its consolidated subsidiaries for the years ended December 31, 1994, 1993 and 1992, together with the exhibits, schedules and notes thereto and any affirmations and certifications filed therewith, as filed with the appropriate Insurance Department. Except as set forth in Section 4.9(c) of the Seller Disclosure Schedule, each of such Annual SAP Statements presents fairly in all material respects the statutory financial condition of the Company or the Insurance Subsidiary to which such statement relates as of the end of each such year and the statutory results of its operations and changes in capital and surplus for each of the periods then ended and were prepared in conformity with SAP. Except as set forth in Section 4.9(c) of the Seller Disclosure Schedule, each of such Annual SAP Statements was properly prepared in every material respect when filed and there were no material omissions therefrom. In addition, except as set forth in Section 4.9(c) of the Seller Disclosure Schedule, the schedules included in such Annual SAP Statements, when considered in relation to the basic statutory financial statements, present fairly in all material respects the information shown therein. (d) Seller has made available to Buyer true and complete copies of Quarterly SAP Statements of the Company and the Insurance Subsidiary for the nine months ended September 30, 18 1995, together with the exhibits, schedules and notes thereto and any affirmations and certifications filed therewith, as filed with the appropriate Insurance Department. Except as set forth in Section 4.9(d) of the Seller Disclosure Schedule, each of such Quarterly SAP Statements presents fairly in all material respects the statutory financial condition of the Company or the Insurance Subsidiary to which such statement relates as of the end of such nine month period and the statutory results of its operations and changes in capital and surplus for the period then ended and were prepared in conformity with SAP. Except as set forth in Section 4.9(d) of the Seller Disclosure Schedule, each of such Quarterly SAP Statements was properly prepared in every material respect when filed and there were no material omissions therefrom, subject, in each case, to normal, recurring year-end adjustments. In addition, except as set forth in Section 4.9(d) of the Seller Disclosure Schedule, the schedules included in such Quarterly SAP Statements, when considered in relation to the basic statutory financial statements, present fairly in all material respects the information shown therein. 4.10 Taxes. For purposes of this Section 4.10, any reference to the Company or a Subsidiary of the Company shall include any corporation which merged or was liquidated with and into the Company or a Subsidiary of the Company. Except as disclosed in Section 4.10 of the Seller Disclosure Schedule: (a) All Income Tax Returns and all material other Tax Returns required to be filed by or with respect to each of the Company and its Subsidiaries on or before the date hereof have been timely filed (and in the case of such Tax Returns required to be filed after the date hereof and on or prior to the Closing Date, will be so filed) and all such Tax Returns are (and will be) true and complete in all material respects. Each of the Company and its Subsidiaries has timely paid (or there has been paid on their behalf) all material Taxes that are due, or claimed or asserted by any taxing authority to be due, from or with respect to it for taxable years or periods ending prior to the date hereof (and in the case of payments required to be made after the date hereof and on or prior to the Closing Date, will so pay), other than non-Income Taxes which are being contested in good faith. With respect to any period for which federal and state income tax returns have not been filed, or for which such taxes are not yet due and owing, the Company or its Subsidiaries, as the case may be, have made sufficient accruals for such taxes in the financial statements referred to in Sections 4.9(b) and (c). Neither the Company nor any of its Subsidiaries files any material Tax Returns in any jurisdiction other than those set forth in Section 4.10 of the Seller Disclosure Schedule. Each of the Company and its Subsidiaries have made (or there has been made on their behalf) all required estimated Tax payments sufficient to avoid material underpayment penalties. 19 (b) No audit or other proceeding by any court, Governmental or Regulatory Authority, or similar Person is pending, or, to the Knowledge of Parent, Seller or the Company, threatened, with respect to any Income Tax or material other Tax due from or with respect to the Company or any of its Subsidiaries or any such Tax Return filed by or with respect to the Company or any of its Subsidiaries. No assessment of Income Taxes or material other Taxes has been proposed in writing against the Company or any of its Subsidiaries or any of their respective assets or properties. (c) The statute of limitations with respect to the assessment of a deficiency relating to Income Taxes of each of the Company and its Subsidiaries and of each affiliated group (within the meaning of the Code) of which the Company or any of its Subsidiaries is or has been a member for all periods ending on or before December 31, 1985 has expired. No issue relating to the Company or any of its Subsidiaries has been raised in writing by any taxing authority in any audit or examination which, by application of the same or similar principles, could reasonably be expected to result in a material deficiency for any subsequent period, including periods subsequent to the Closing Date. There are no outstanding agreements, waivers or arrangements extending the statutory period of limitation applicable to any claim for, or the period for the collection or assessment of, Income Taxes or material other Taxes due from or with respect to the Company or any of its Subsidiaries for any taxable period, and no power of attorney granted by or with respect to the Company or any of its Subsidiaries relating to Taxes is currently in force. With respect to Taxes for taxable years or periods ending after December 31, 1985, no closing agreement pursuant to Section 7121 of the Code (or any predecessor provision) or any similar provision of any state, local, or foreign law has been entered into by or with respect to the Company or any of its Subsidiaries. (d) Seller has previously delivered to Buyer true and complete copies of each of (i) any audit reports issued within the last three years relating to the United States federal, state, local or foreign Taxes due from or with respect to each of the Company and its Subsidiaries and (ii) the United States federal Income Tax Return, and those state, local and foreign Income Tax Returns showing Taxes due in excess of $10,000 for each of the last three taxable years, filed by each of the Company and its Subsidiaries or (insofar as such returns relate to the Company or any such Subsidiary) filed by any affiliated, consolidated, combined or unitary group of which the Company or any of its Subsidiaries was then a member. (e) There are no Liens or Other Encumbrances with respect to Taxes upon any of the assets or properties of the Company or any of its Subsidiaries, other than with respect to 20 Taxes not yet due and payable. (f) No consent to the application of Section 341(f)(2) of the Code (or any predecessor provision) has been made or filed by or with respect to the Company or any of its Subsidiaries or any of their respective assets or properties. None of the assets or properties of the Company or any of its Subsidiaries is an asset or property that is or will be required to be treated as being (i) owned by any Person (other than the Company or its Subsidiaries) pursuant to the provisions of Section 168(f)(8) of the Internal Revenue Code of 1954, as amended and in effect immediately before the enactment of the Tax Reform Act of 1986, or (ii) tax-exempt use property within the meaning of Section 168(h)(1) of the Code. (g) The Company and its Subsidiaries are in substantial compliance with all applicable laws or regulations relating to the payment or withholding of Taxes. Each of the Company and its Subsidiaries is in substantial compliance with its obligation to withhold from employee salaries, wages and other compensation and pay over to the appropriate taxing authorities all amounts required to be so withheld and paid over for all periods under all applicable laws and regulations. (h) Effective as of the Closing, neither the Company nor any of its Subsidiaries shall be a party to, be bound by or have any obligation under, any Tax sharing agreement or similar contract or arrangement among the Company or any of its Subsidiaries and Parent and its Affiliates (other than the Company or any of its Subsidiaries). (i) There is no contract or agreement, plan or arrangement by the Company or any of its Subsidiaries covering any Person that, individually or collectively, could give rise to a payment after the Closing of any amount that would not be deductible by the Company or any of its Subsidiaries by reason of Section 280G of the Code. (j) Seller is not a "foreign person" within the meaning of Section 1445(b)(2) of the Code. (k) All life insurance contracts issued by the Company and the Insurance Subsidiary that are subject to Section 7702 of the Code qualify as "life insurance contracts" within the meaning of Section 7702(a) of the Code. No life insurance contract issued by the Company or the Insurance Subsidiary is a "modified endowment contract" within the meaning of Section 7702A of the Code. All contracts issued by the Company and the Insurance Subsidiary that are subject to Section 817 of the Code have met the diversification requirements applicable thereto since the issuance of the contract. 21 (l) Neither the Company nor any of its Subsidiaries has agreed to or is required to make any adjustment pursuant to Section 481(a) of the Code (or any predecessor provision) by reason of any change in any accounting method of the Company or such Subsidiary, and there is no application pending with any taxing authority requesting permission for, nor has the Internal Revenue Service proposed any changes, in any accounting method of the Company or any of its Subsidiaries. (m) The unearned premiums with respect to the Company set forth in all federal Income Tax Returns of the Company were determined in all material respects in accordance with Section 807 of the Code. (n) The unpaid losses with respect to the Company set forth in all federal Income Tax Returns of the Company were based upon reasonable estimates and were discounted in all material respects in accordance with Section 846 of the Code. (o) Since January 1, 1991 the Company has, for federal Income Tax purposes, been taxable as a life insurance company (as defined in Section 816 of the Code) or an "insurance company other than a life insurance company" within the meaning of Section 831 of the Code. The Company was treated as an insurance company other than a life insurance company in calendar year 1994 and will be so treated in 1995. (p) Except to the extent that the tax treatment of any annuity policy or contract issued or sold by the Company or any of its Subsidiaries is not materially less favorable than the tax treatment of substantially similar products offered by other companies, the tax treatment under the Code of annuity policies or contracts issued or sold by the Company or any of its Subsidiaries is and at all times has been not materially less favorable to the purchaser thereof than the tax treatment under the Code which the Company represented could be obtained at the time of its purchase. Any indemnification with respect to breaches of the representations, warranties and covenants of this Section 4.10 which also give rise to indemnification pursuant to Section 11.2 shall not provide a duplicative benefit to Buyer. 4.11 Litigation. There is no Litigation pending to which Parent or Seller or any other Subsidiary of Parent (other than the Company and its Subsidiaries) is a party or by which any of such Persons or their respective assets or properties are or may be bound by or before any Federal, state, municipal, foreign or other court or Governmental or Regulatory Body, or any private tribunal, or, to the Knowledge of Parent, Seller or the Company, threatened against Parent or Seller or any other Subsidiary of Parent (other than the Company and its Subsidiaries) that, in 22 each case, (i) seeks to restrain or enjoin the consummation of the transactions contemplated by this Agreement or (ii) could reasonably be expected to have a Material Adverse Effect. Neither Seller nor any of its Affiliates (other than the Company and its Subsidiaries) is bound by or subject to any existing order, judgement, injunction award or decree, that, in each case, (i) seeks to restrain or enjoin the consummation of the transactions contemplated by this Agreement or (ii) could reasonably be expected to have a Material Adverse Effect. 4.12 [Intentionally Omitted] 4.13 Insurance. Section 4.13 of the Seller Disclosure Schedule contains a true, complete and correct list as of the date of this Agreement of all policies of insurance and fidelity bonds, other than those constituting an Employee Benefit Program, issued to the Company or any of its Subsidiaries showing the insurers, limits, type of coverage, annual premium, deductibles and expiration dates. All such policies and bonds are in full force and effect as of the date of this Agreement. Neither the Company nor any such Subsidiary is in default with respect to any such policy or bond. All such policies and bonds will be in effect through the Closing Date or will be replaced by the Parent or any of its Affiliates on or prior to the Closing Date by policies or bonds, as the case may be, with substantially similar coverage to the extent available on commercially reasonable terms except for failures to replace or differences in coverage which could not reasonably be expected to have a Material Adverse Effect. 4.14 Employee Benefits. (a) Section 4.14(a) of the Seller Disclosure Schedule lists each "employee benefit plan" (within the meaning of Section 3(3) of ERISA) that is maintained or otherwise contributed to by the Parent, Seller, the Company or any of its Subsidiaries for the benefit of the Affected Employees (including, without limitation, pension, profit sharing, stock bonus, medical reimbursement, life insurance, disability and severance pay plans) (collectively, "Company Plans") and all other material employee benefit plans and arrangements, payroll practices, agreements, programs, policies or other arrangements, not subject to ERISA, that are maintained or otherwise contributed to by the Parent, Seller, Company or any of the Subsidiaries of the Company for the benefit of the Affected Employees and providing for deferred compensation, bonuses, stock options, employee insurance coverage or any similar compensation or welfare benefit plan (collectively, "Benefit Arrangements" and, together with the Company Plans, collectively referred to as "Employee Benefit Programs"). All Employee Benefit Programs so listed are sponsored by Parent except for the child care center. (b) With respect to each Company Plan, Seller has made available to Buyer a current, accurate and complete copy (or, to 23 the extent no such copy exists, an accurate description) thereof (including all existing amendments thereto that shall become effective at a later date) and, to the extent applicable, (i) any related trust agreement, annuity contract or other funding instrument; and (ii) any summary plan description. (c) Except as set forth in Section 4.14(c) of the Seller Disclosure Schedule, (i) each Employee Benefit Program has been established and administered in substantial compliance with the applicable provisions of ERISA, the Code and the terms of all documents relating to such programs; (ii) each Company Plan that is intended to be qualified under Section 401(a) of the Code has received a favorable determination letter as to its qualification; (iii) as of the date of this Agreement no "reportable event" (as such term is used in Section 4043 of ERISA, but other than any event for which notice to the Pension Benefit Guaranty Corporation has been waived), "prohibited transaction" (as such term is used in Section 4975 of the Code or Section 406 of ERISA) or "accumulated funding deficiency" (as such term is used in Section 412 or 4971 of the Code) has heretofore occurred with respect to any Company Plan where such occurrence has a reasonable probability of resulting in a termination of a Company Plan subject to Title IV of ERISA; and (iv) there are no pending or, to the Knowledge of Parent, Seller, the Company or any of their Subsidiaries material threatened actions, claims or lawsuits which have been asserted or instituted against the Employee Benefit Programs, the assets of any of the trusts under such plans or the plan sponsor or the plan administrator, or against any fiduciary of the Employee Benefit Programs with respect to the operation of such plans (other than routine benefit claims). (d) Neither Parent, Seller, Company nor any of their Subsidiaries maintains or contributes to any "multiemployer plan" (as such term is defined in Section 3(37) of ERISA) and neither Parent, Seller, Company nor any of their Subsidiaries has incurred any material liability that remains unsatisfied with respect to any such plans or has incurred any material liability which remains unsatisfied under Sections 4062, 4063, 4064, 4069 or 4201 of ERISA. (e) Any individual who performs services for the Company or its Subsidiaries (other than through a contract with an organization other than such individual) and who is not treated as an employee for federal income tax purposes by Parent, Seller, the Company or any of their Subsidiaries is not an employee for such purposes. 4.15 Brokers. Other than Lazard Freres & Co. LLC and Morgan Stanley & Co. Incorporated, no broker or finder has acted directly or indirectly for Parent or Seller nor has Parent, Seller or the Company or any Subsidiary of the Company incurred 24 any obligation to pay any brokerage, finder's fee or other commission in connection with the transactions contemplated by this Agreement. The fees and expenses of Lazard Freres & Co. LLC and Morgan Stanley & Co. Incorporated in connection with the transactions contemplated by this Agreement shall be borne by Parent. 5. Representations and Warranties of the Company. The Company represents and warrants to Buyer as follows: 5.1 Corporate Authority. Each of the Subsidiaries of the Company has all requisite corporate power and authority to own, lease and operate its assets, properties and business and to carry on its business as now being conducted by it. Each of the Subsidiaries of the Company is duly qualified or otherwise authorized or admitted as a foreign corporation to transact business and is in good standing as a foreign corporation in each jurisdiction set forth in Section 5.1 of the Company Disclosure Schedule, which are the only jurisdictions in which such qualification, authorization or admission is required by law, except for any jurisdictions in which the failure to be so qualified, authorized or admitted could not reasonably be expected to have a Material Adverse Effect. 5.2 Consents and Approvals. The performance by the Company of its obligations under this Agreement and the consummation by the Company of the transactions contemplated hereby do not and will not require any of the Subsidiaries of the Company to obtain any consent, approval or action of, or make any filing with or give any notice to, any Person except (i) as set forth in Section 5.2 of the Company Disclosure Schedule, (ii) such as have been duly obtained and are in full force and effect on the date hereof and will continue to be in full force and effect on the Closing Date and (iii) those which, if not obtained, made or given, could not reasonably be expected to have a Material Adverse Effect or have a material adverse effect on Buyer's ability to own, possess or exercise the rights of an owner with respect to the Shares or the Company and its Subsidiaries. 5.3 No Conflict. The execution and delivery by each of Parent, Seller and the Company of, and the performance by each of Parent, Seller and the Company of its obligations under, this Agreement and the consummation by it of the transactions contemplated hereby in accordance with the terms and conditions hereof will not, except as set forth in Section 5.3 of the Company Disclosure Schedule, (i) violate any provision of the articles or certificate of incorporation or by-laws of the Company or any of its Subsidiaries, (ii) violate, conflict with or result in the breach of any of the terms of, result in a material modification of the effect of, otherwise give any other contracting party the right to terminate, or constitute (with or 25 without notice or lapse of time or both) a default under, any Contract or Other Agreement to which the Company or any of the Subsidiaries of the Company is a party or by or to which the Company or any of such Subsidiaries or any of their respective assets or properties may be bound or subject, (iii) violate any existing term or provision of any law, regulation, order, writ, judgment, injunction or decree applicable to the Company or any of the Subsidiaries of the Company or any of their respective assets or properties or (iv) result in the breach of any of the terms or conditions of, constitute (with or without notice or lapse of time or both) a default under, or otherwise cause an impairment of, any Permit (other than Insurance Licenses), or (v) result in the breach of any of the terms or conditions of, constitute (with or without notice or lapse of time or both) a default under, or otherwise cause an impairment of any Insurance License, except, in the case of each of clauses (ii) and (iv), for such violations, conflicts, breaches, modifications, rights, defaults and impairments that could not reasonably be expected to have a Material Adverse Effect or have a material adverse effect on Buyer's ability to own, possess or exercise the rights of an owner with respect to the Shares or the Company and its Subsidiaries. 5.4 Minute Books. The minute books of each of the Subsidiaries of the Company accurately reflect in all material respects all formal actions taken at all meetings and all consents in lieu of meetings of stockholders of such Subsidiaries since December 31, 1990 and all formal actions taken at all meetings and all consents in lieu of meetings of the Board of Directors of each of such Subsidiaries and all committees thereof since December 31, 1990. All of such minute books have previously been made available for inspection by Buyer. 5.5 Compliance With Laws. Each of the Company and its Subsidiaries is in compliance with all Federal, state, local or foreign laws, ordinances or regulations and other requirements (including any writ, judgment, decree, injunction, or similar order applicable to any of such Persons or the business or assets of such Persons) of any Governmental or Regulatory Body, court or arbitrator applicable to its business, the violation of which could reasonably be expected to have a Material Adverse Effect. 5.6 Insurance Licenses. (a) Section 5.6(a) of the Company Disclosure Schedule lists all of the jurisdictions in which the Company and its Subsidiaries hold licenses (including, without limitation, licenses or certificates of authority from applicable insurance departments), permits, or authorizations to transact insurance or reinsurance business (collectively, the "Insurance Licenses"). All such Insurance Licenses are valid, binding, and in full force and effect. Each of the Company and the Insurance Subsidiary is duly licensed in all jurisdictions in which the Company or the Insurance Subsidiary writes the lines of 26 insurance offered by it. No Insurance License is the subject of a proceeding for suspension or revocation or any similar proceedings and, to the Knowledge of the Parent, Seller or the Company, there is no pending threat of such suspension or revocation by any licensing authority. (b) The Company has heretofore made available to Buyer true and complete copies of the reports reflecting the results of the most recent financial examination of the Company or the Insurance Subsidiary issued by any Insurance Department. Except as disclosed in Section 5.6(b) of the Company Disclosure Schedule, all material deficiencies or violations in such reports have been resolved. 5.7 Litigation. Except as set forth in Section 5.7 of the Company Disclosure Schedule, (x) there is no Litigation (other than policyholder claims submitted to the Company or any of its Subsidiaries for payment in the ordinary course of business of the Company and its Subsidiaries) pending to which the Company or any of its Subsidiaries is a party or by which any of such Subsidiaries or their respective assets or properties are or may be bound by or before any Federal, state, municipal, foreign or other court or Governmental or Regulatory Body, or any private tribunal, or, to the Knowledge of Parent, Seller or the Company, threatened against the Company or such Subsidiaries, in each case that (i) seeks to restrain or enjoin the consummation of the transactions contemplated by this Agreement or (ii) could reasonably be expected to have a Material Adverse Effect and (y) neither the Company nor any of its Subsidiaries is bound by or subject to any existing order, judgment, injunction, award or decree, in each case that (i) seeks to restrain or enjoin the consummation of the transactions contemplated by this Agreement or (ii) could reasonably be expected to have a Material Adverse Effect. Neither the Company nor any of its Subsidiaries nor, to the Knowledge of Parent, Seller or the Company, any officer, director or employee of the Company or any of its Subsidiaries has been permanently or temporarily enjoined or barred by any order, judgment or decree of any court or other tribunal or any Governmental or Regulatory Body from engaging in or continuing any conduct or practice in connection with the business conducted by the Company or any of its Subsidiaries. 5.8 Contracts and Other Agreements. (a) Section 5.8(a) of the Company Disclosure Schedule lists all Contracts and Other Agreements to which the Company or any of its Subsidiaries is a party or by which any of their assets or properties are bound as of the date of this Agreement that involve or reasonably could be expected to involve, in any instance, an obligation or commitment on the part of any of the Company or any of its Subsidiaries in an amount greater than $250,000 (other than Company Plans set forth in Section 4.14(a) of the Seller Disclosure Schedule, leases set forth in Section 5.9(b) of the 27 Company Disclosure Schedule, agreements described in Section 5.13, Insurance Contracts and Investment Contracts), as well as the following: (i) all written or, to the Knowledge of Parent, Seller or the Company, oral employment, agency, consultation, or representation contracts or other contracts of any type (including, without limitation, loans or advances) with any present officer, director, employee, agent, consultant, or other similar representative of the Company or any Subsidiary of the Company (or former officer, director, employee, agent, consultant or similar representative of the Company or any Subsidiary of the Company if there exists any present or future liability with respect to such contract), other than contracts (i) with such Persons who do not receive compensation of $75,000 or more per year, or (ii) with insurance agents of the Company or any Insurance Subsidiary that are terminable by the Company or such Insurance Subsidiary without premium or penalty upon notice of 180 days or less or, by their terms, do not provide for exclusivity (including, without limitation, by territory, product, or distribution); (ii) all written or, to the Knowledge of Parent, Seller or the Company, oral contracts with insurance agents or brokers that both (A) relate to the sale or distribution of insurance policies or annuity contracts issued, reinsured, or underwritten by the Company or the Insurance Subsidiary, and (B) by their terms, provide for exclusivity (including, without limitation, by territory, product, or distribution); provided, however, excluded from this clause (ii) shall be any contract terminable by the Company or the Insurance Subsidiary without premium or penalty upon notice of 180 days or less; (iii) all contracts with any Person containing any stipulation, provision, or covenant limiting, in any material respect, the ability of the Company or any Subsidiary of the Company to (i) sell any products or services of any other Person, (ii) transact business or engage in any line of business, or (iii) compete with or obtain products or services from any Person; (iv) all contracts relating to the borrowing of money by the Company or any Subsidiary of the Company, relating to the deferred purchase price for property or services, or relating to the direct or indirect guarantee by the Company or any Subsidiary of the Company of any liability; (v) all contracts pursuant to which the Company or any Subsidiary of the Company has agreed to indemnify or hold harmless any Person (other than indemnifications in the 28 ordinary course of business and consistent with past practice); (vi) all contracts or arrangements (including, without limitation, those relating to allocations of expenses, taxes, personnel, services, or facilities) between or among the Company or any Subsidiary of the Company and Seller, Parent or any Affiliate of Seller or Parent (other than the Company and its Subsidiaries); and (vii) all reinsurance, coinsurance, or other similar contracts pursuant to which the Company or the Insurance Subsidiary receives or has received surplus relief. Except as set forth in Section 5.8(a) of the Company Disclosure Schedule, none of Parent, Seller, the Company or any of its Subsidiaries or, to the Knowledge of Parent, Seller or the Company, any other party to any such Contract or Other Agreement is in violation or breach of or default under any such Contract or Other Agreement (or, with or without notice or lapse of time or both, would be in violation or breach of or default under any such Contract or Other Agreement), which violation, breach or default has had or could reasonably be expected to have a Material Adverse Effect. Each of the agreements listed on Section 5.8(a) of the Company Disclosure Schedule (i) under "Client Agreements" and designated File CC-26 through CC-39, (ii) under "Brokerage Agreements" and (iii) under "Reinsurance Agreements" and designated File R1-12, R1-13, R1-14 and R1-19 was entered into in the ordinary course of business and contain terms not materially dissimilar to the terms of the other agreements listed under "Client Agreements", "Brokerage Agreements" and "Reinsurance Agreements", respectively. (b) Except as set forth in Section 5.8(b) of the Company Disclosure Schedule, there have been made available to Buyer true and complete copies of all of the Contracts and Other Agreements set forth in Section 5.8(a) of the Company Disclosure Schedule or in any other Section of the Company Disclosure Schedule. 5.9 Real Estate. (a) Except as set forth in Section 5.9(a) of the Company Disclosure Schedule, neither the Company nor any of its Subsidiaries owns any real property. (b) Section 5.9(b) of the Company Disclosure Schedule lists all real property leased or subleased to the Company or any of its Subsidiaries. Seller has made available to Buyer correct and complete copies of each such lease or sublease as amended to the date of this Agreement. Each such lease or sublease is in full force and effect and neither the Company nor any of its Subsidiaries is in default thereunder or has received any notice of any default thereunder of any other party thereto, except in 29 each case where any such unenforceability, ineffectiveness or default would not have a Material Adverse Effect. 5.10 Personal Property; Intellectual Property. (a) Except as set forth in Section 5.10(a) of the Company Disclosure Schedule, the Company and its Subsidiaries have good and valid title to (free and clear of all Liens or Other Encumbrances, other than Permitted Liens), or a valid leasehold interest in, the tangible personal property they use in the conduct of their businesses, except where the failure thereof would not have a Material Adverse Effect. (b) Section 5.10(b) of the Company Disclosure Schedule contains a true and complete list and description of all marks, names, trademarks, service marks, patents, patent rights, assumed names, logos, trade secrets, copyrights, trade names, and service marks that are material to the conduct of the business, operations, or affairs of the Company or its Subsidiaries. Except as set forth in Section 5.10(b) of the Company Disclosure Schedule, the Company or its Subsidiaries have, and after the Closing will have, the right to use, free and clear of any Liens or Other Encumbrances, such intellectual property and all computer software, programs, and similar systems owned by or licensed to the Company or its Subsidiaries and material to the conduct of the business, operations, or affairs of the Company or its Subsidiaries. To the Knowledge of Parent, Seller or the Company, neither the Company nor any Subsidiary of the Company is in conflict with or in violation or infringement of, nor has Seller, Parent, the Company, or any Subsidiary received any notice of any conflict with or violation or infringement of or any claimed conflict with, any asserted rights of any other Person with respect to any such intellectual property or computer software, programs, or similar systems. 5.11 Operations of the Company. (a) Except as set forth in Section 5.11 of the Company Disclosure Schedule, since December 31, 1994, there has not been, occurred or arisen any change in the business, financial condition or results of operations of the Company or its Subsidiaries that has had or could reasonably be expected to have a Material Adverse Effect, other than changes after the date hereof resulting from a change in general economic conditions or matters affecting the life or health insurance industry generally, and neither the Company nor any of its Subsidiaries has: (i) sold, assigned, transferred, mortgaged, pledged, leased, granted or permitted to exist any Lien or Other Encumbrance, or otherwise disposed of any assets which are material to the business of the Company and its Subsidiaries, taken as a whole, as presently conducted, other than in the ordinary course of business; 30 (ii) increased the rates of compensation (including bonuses) payable or to become payable to any officer, employee, agent, broker, independent contractor or consultant of the Company or any of its Subsidiaries, other than increases made in the ordinary course of business and other than the Special Bonus Program; (iii) entered into any new, or amended any existing, employment contracts, severance agreements or consulting contracts or instituted, or agreed to institute, any increase in benefits with respect to any Company Plans where such increase would have a Material Adverse Effect, or altered its employment practices or the terms and conditions of employment other than, in each case, in the ordinary course of business or as required by applicable law; (iv) incurred any material obligation, liability or indebtedness except in the ordinary course of business, incurred any extraordinary losses, or disposed of, canceled, waived or permitted to lapse any rights of material value; (v) changed in any material respect its Tax or accounting methods, principles or practices (including, without limitation, any changes in depreciation or amortization policies or rates or any changes in any assumptions underlying any method of calculating reserves) other than as required by a change in GAAP, SAP or other applicable law; (vi) conducted its business otherwise than in the ordinary course; (vii) entered into or amended or terminated any transaction or contract that could reasonably be expected to have a Material Adverse Effect; (viii) split, combined, redeemed, repurchased or reclassified the capital stock of the Company or declared, set aside, made or paid any dividend or other distribution in respect of the capital stock of the Company; (ix) issued or sold (or agreed to issue or sell) any note, debenture, stock, or other security or any options, warrants, conversion or other rights to purchase any such securities or any securities convertible into or exchangeable for such securities, or granted, or agreed to grant, any such options; (x) amended the articles or certificate of incorporation or by-laws or other charter or organizational documents of the Company or any of its Subsidiaries; 31 (xi) incurred any damage, destruction, or loss (whether or not covered by insurance) affecting any of the assets of the Company or any Subsidiary of the Company (other than claims under any Insurance Contracts) which damage, destruction, or loss, individually or in the aggregate, has or could reasonably be expected to have a Material Adverse Effect; (xii) suffered any work stoppage, strike, or union organizational campaign (in process or threatened) at or affecting the Company or any Subsidiary of the Company that has or could reasonably be expected to have a Material Adverse Effect; (xiii) terminated, amended, or executed any material reinsurance, coinsurance, or other similar contract, as ceding or assuming insurer; (xiv) incurred any expenditure or commitment for additions to property, plant, or equipment of the Company or any Subsidiary of the Company, which expenditure or commitment exceeds $150,000 individually or $1,000,000 in the aggregate; or (xv) entered into any Contract or Other Agreement to do any of the foregoing. (b) The investments of the Company and the Insurance Subsidiary reflected in the Annual SAP Statements of the Company and the Insurance Subsidiary described in Section 4.9(b) comply with all applicable requirements of law of their respective states of domicile, except where the failure to do so would not have a Material Adverse Effect. (c) Invested assets, including marketable securities, private placements, mortgages, real estate and short-term investments, reflected on the Annual SAP Statements of the Company and the Insurance Subsidiary described in Section 4.9(b) are valued on such Statements at cost, amortized cost or market value, as required by applicable law. (d) Each of the Company and its Subsidiaries has, and on the Closing Date will have, good and valid title to the bonds, stocks, mortgage loans and other investments purported to be owned by it and reflected in the financial statements of the Company or any of its Subsidiaries, in each case free and clear of any Lien or Other Encumbrance. The Company and its Subsidiaries have good and valid title to the investments set forth on Exhibits C, D and E hereto, in each case free and clear of any Lien or Other Encumbrance. (e) Except as to the Auto Credit Business, no 32 outstanding insurance contract issued by the Company or any Insurance Subsidiary entitles any policyholder thereunder to receive dividends, distributions or other benefits based on the revenues or earnings of the Company or such Insurance Subsidiary. (f) All reserves with respect to insurance and annuities as established or reflected, and all other provisions made for policy and contract claims and, with respect to the Annual SAP Statements for the years ended December 31, 1994, 1993 and 1992, IMR and AVR in the respective Annual SAP Statements and Quarterly SAP Statements of the Company and the Insurance Subsidiary described in Section 4.9(b) were determined in accordance with SAP and generally recognized actuarial methods and generally accepted actuarial standards, using prescribed or permitted morbidity and mortality tables and interest rates that are in accordance with the nature of the benefits specified in the related Insurance Contracts and in the related reinsurance, coinsurance and other similar contracts of the Insurance Subsidiary, and such reserves and other provisions met the applicable requirements of the insurance laws of each Insurance Subsidiary's respective state of domicile, except where the failure to do so would not have a Material Adverse Effect. All such reserves were adequate (under accepted actuarial standards) as of the respective dates of such Annual SAP Statements and Quarterly SAP Statements to cover the total amount of all reasonably anticipated matured and unmatured benefits, claims and other actuarially determined liabilities of the Company and the Insurance Subsidiary under all Insurance Contracts under which the Company or the Insurance Subsidiary had or would have had any liability (including any liability arising under or as a result of any reinsurance, coinsurance, or other similar contract), except where the failure of such reserves to be adequate to cover the total amount of such benefits, dividends, claims and other liabilities would not have a Material Adverse Effect. The Company and the Insurance Subsidiary own assets that qualify as legal reserve assets under applicable insurance laws of their respective state of domicile in an amount, determined in accordance with SAP, at least equal to all required reserves, except where the failure to own a sufficient amount of such assets or the failure of such assets to so qualify would not have a Material Adverse Effect. (g) Except as set forth in Section 5.11(g) of the Company Disclosure Schedule, since September 30, 1995 through the date hereof: (i) No Person writing, selling or producing insurance business that accounted for 5% or more of the premium or annuity considerations of the Company and the Insurance Subsidiary, taken as a whole, for the year ended December 31, 1994 has terminated or, to the Knowledge of Parent, Seller or the Company, threatened to terminate its 33 relationship with the Company or the Insurance Subsidiary; and (ii) No policyholder (or group of policyholders known to the Company to be affiliated with each other) that accounted for 5% or more of the premium or annuity considerations of the Company and the Insurance Subsidiary, taken as a whole, for the year ended December 31, 1994 has terminated or, to the Knowledge of Parent, Seller or the Company, threatened to terminate its policies with the Company or the Insurance Subsidiary. (h) From December 31, 1994 through the date hereof, no rating agency has (i) imposed conditions (financial or otherwise) on retaining any rating assigned to the Company or any Insurance Subsidiary or (ii) threatened to downgrade any rating assigned to the Company or any Insurance Subsidiary. Parent, Seller and the Company have no Knowledge of any facts existing as of the date of this Agreement (except for the transactions contemplated by this Agreement) which can reasonably be expected to result in a downgrade in any rating assigned to the Company or any Insurance Subsidiary by any rating agency. (i) The underwriting standards utilized and ratings applied by the Company and the Insurance Subsidiary and by any other Person that is a party to or bound by any reinsurance, coinsurance, or other similar contract with the Company or the Insurance Subsidiary conform in all material respects to industry accepted practices and to the standards and ratings required pursuant to the terms of the respective reinsurance, coinsurance, or other similar contracts. (j) Each Person who wrote, sold, or produced business for the Company or the Insurance Subsidiary was duly licensed as an insurance agent at the time such Person wrote, sold or produced such business (for the type of business written, sold, or produced by such insurance agent) in the particular jurisdiction in which such agent wrote, sold, or produced such business, except where the failure to be so licensed does not or cannot reasonably be expected to have a Material Adverse Effect. (k) All outstanding insurance policies and annuity contracts issued, reinsured, or underwritten by the Company and Insurance Subsidiaries are, to the extent required under applicable laws, on forms and at rates and commissions approved by the insurance regulatory authority of the jurisdiction where issued or have been filed with and not objected to by such authority within the period provided for objection, except where the failure to obtain such approval or make such filing does not have or cannot reasonably be expected to have a Material Adverse Effect. 34 5.12 [Intentionally Omitted]. 5.13 Labor Matters. (a) Section 5.13(a) of the Company Disclosure Schedule sets forth a list containing the name, current base salary or wage rate, and position of each Affected Employee who is actively employed (including those on vacation). Parent or Seller shall, or shall cause the Company or one of its Subsidiaries to, provide Buyer with an updated Section 5.13(a) of the Company Disclosure Schedule listing those Affected Employees (i) who are on disability, layoff or leave of absence as of the Closing Date or (ii) who were Inactive Employees (as defined in Section 7.8(a)) as of the date hereof who, in each case, have returned to active employment with the Company or one of its Subsidiaries on or prior to the Closing Date. (b) Neither the Company nor any of its Subsidiaries is a party to any labor or collective bargaining agreement and there are no labor or collective bargaining agreements which pertain to employees of the Company or any of its Subsidiaries. There are no organizing activities, strikes, work stoppages, slowdowns, lockouts, material arbitrations or material grievances or other material labor disputes pending or (to the Knowledge of Parent, Seller or the Company) threatened against or involving the Company or any of its Subsidiaries. (c) Except as set forth on Section 5.13(c) of the Company Disclosure Schedule, there are no complaints, charges or claims against the Company or any of its Subsidiaries pending or, to the Knowledge of Parent, Seller or the Company, threatened to be brought or filed, with any public or governmental authority, arbitrator or court based on, arising out of, in connection with, or otherwise relating to the employment or termination of employment by the Company or any of its Subsidiaries, of any individual, in each case which have or could reasonably be expected to have a Material Adverse Effect. (d) The Company and each of its Subsidiaries is in material compliance with all laws, regulations and orders relating to the employment of labor, including all such laws, regulations and orders relating to wages, hours, WARN, collective bargaining, discrimination, civil rights, safety and health, workers' compensation and the collection and payment of withholding and/or social security taxes and any similar tax. (e) There has been no "mass layoff" or "plant closing" as defined by WARN (or any similar state or local "plant closing" laws), with respect to the Company or any of its Subsidiaries within the six months prior to the date hereof. 5.14 No Undisclosed Liabilities. There were no liabilities of the Company or any of its Subsidiaries as of September 30, 1995 that are of a type required to be disclosed on 35 a balance sheet (or in the notes related thereto) prepared in accordance with GAAP or SAP, except (a) policyholder benefits payable in the ordinary course of business and consistent with past practice, (b) as disclosed in Section 5.14 of the Company Disclosure Schedule, or (c) specifically reflected on the financial statements of the Company and its consolidated subsidiaries as of September 30, 1995, in the Quarterly SAP statements for the Company or the Insurance Subsidiary for the period ended September 30, 1995, or in the notes or work papers related to the foregoing financial statements. Since September 30, 1995 through the date hereof, neither the Company nor any of its Subsidiaries has incurred any liabilities that are of a type which could reasonably be expected to have a Material Adverse Effect, except (i) as disclosed in Section 5.14 of the Company Disclosure Schedule and (ii) policyholder benefits payable, or other liabilities incurred, in the ordinary course of business. 6. Representations and Warranties of Buyer. Buyer represents and warrants to each of Parent, Seller and the Company as follows: 6.1 Existence and Power. Buyer is a corporation duly organized, validly existing and in good standing under the laws of the State of New York. Buyer has all requisite corporate power and authority to execute and deliver this Agreement, to perform its obligations hereunder and to consummate the transactions contemplated hereby. 6.2 Execution and Delivery. The execution and delivery by Buyer of this Agreement, the performance by Buyer of its obligations hereunder and the consummation by Buyer of the transactions contemplated hereby have been duly and validly authorized by all necessary corporate action on the part of Buyer. This Agreement has been duly executed and delivered by Buyer and constitutes the valid and binding obligation of Buyer, enforceable against Buyer in accordance with its terms, except as such enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium and other similar laws relating to or affecting creditors' rights generally, or by general equitable principles (regardless of whether such enforceability is considered in a proceeding in equity or at law). 6.3 Consents and Approvals. The execution and delivery by Buyer of this Agreement, the performance by Buyer of its obligations hereunder and the consummation by Buyer of the transactions contemplated hereby do not and will not require Buyer to obtain any consent, approval or action of, or make any filing with or give any notice to, any Governmental or Regulatory Body or Person except (i) as set forth in Section 5.2 of the Company Disclosure Schedule, (ii) such as have been duly obtained and are in full force and effect on the date hereof and will continue to be in full force and effect on the Closing Date and 36 (iii) those which, if not obtained, made or given, could not reasonably be expected to have a material adverse effect on the ability of Buyer to consummate the transactions contemplated by this Agreement. 6.4 No Conflict. The execution and delivery by Buyer of this Agreement, the performance by Buyer of its obligations hereunder and the consummation by Buyer of the transactions contemplated hereby in accordance with the respective terms and conditions hereof will not: (i) violate any provision of the articles or certificate of incorporation or by-laws or other charter or organizational documents of Buyer, (ii) violate, conflict with or result in the breach of any of the terms of, result in a material modification of the effect of, otherwise give any other contracting party the right to terminate, or constitute (with or without notice or lapse of time or both) a default under, any Contract or Other Agreement to which Buyer is a party or by or to which Buyer or any of its assets or properties may be bound or subject or (iii) violate any existing term or provision of any law, regulation, order, writ, judgment, injunction or decree applicable to Buyer or any of its assets or properties, except, in the case of clause (ii), for such violations, conflicts, breaches, modifications, rights and defaults that could not reasonably be expected to have a material adverse effect on the ability of Buyer to consummate the transactions contemplated by this Agreement. 6.5 Purchase Not for Distribution. The Shares to be acquired under the terms of this Agreement will be acquired by Buyer for its own account and not with a view to distribution. Buyer will not resell, transfer, assign or distribute the Shares, except in compliance with the registration requirements of the Securities Act of 1933, as amended, or pursuant to an available exemption therefrom. 6.6 Financing. Buyer has, or will have at the Closing, sufficient funds (including as a result of the sale of commercial paper in the ordinary course of business), in an aggregate amount of not less than the anticipated Final Purchase Price and all contemplated fees and expenses of Buyer related to the transactions contemplated by this Agreement, which funds will be available at the Closing to pay such anticipated Final Purchase Price and all such fees and expenses. 6.7 Litigation. There is no Litigation pending to which Buyer is a party or its assets or properties are or may be bound by or before any Federal, state, municipal, foreign or other court or Governmental or Regulatory Body, or any private tribunal, or, to the Knowledge of Buyer, threatened against Buyer or any of its Affiliates that, in each case, (i) seeks to restrain or enjoin the consummation of the transactions contemplated by this Agreement or (ii) could reasonably be 37 expected to have a material adverse effect on the ability of Buyer to consummate the transactions contemplated by this Agreement. Neither Buyer nor any of its Affiliates is bound by or subject to any existing order, judgement, injunction award or decree that, in each case, (i) seeks to restrain or enjoin the consummation of the transactions contemplated by this Agreement or (ii) could reasonably be expected to have a material adverse effect on the ability of Buyer to consummate the transactions contemplated by this Agreement. Neither Buyer nor any of its Affiliates nor, to the Knowledge of Buyer, any officer, director or employee of Buyer or any of its Affiliates has been permanently or temporarily enjoined or barred by any order, judgment or decree of any court or other tribunal or any Governmental or Regulatory Body from engaging in or continuing any conduct or practice that could reasonably be expected to have a material adverse effect on the ability of Buyer to consummate the transactions contemplated by this Agreement. 6.8 Brokers. No broker or finder has acted directly or indirectly for Buyer, nor has Buyer incurred any obligation to pay any brokerage, finder's fee or other commission, in connection with the transactions contemplated by this Agreement. 7. Covenants and Agreements. The parties covenant and agree as follows: 7.1 Conduct of Business. From the date hereof through the Closing Date, except as set forth in Section 7.1 of the Seller Disclosure Schedule or as may otherwise be expressly required or permitted by this Agreement (including, without limitation, the matters contemplated by Section 7.10), Parent and Seller covenant and agree that, except with the consent of Buyer: (a) Parent and Seller shall cause the Company and each of its Subsidiaries to conduct the business of the Company and its Subsidiaries only in the ordinary course of business and consistent with past practice. (b) Parent and Seller shall cause the Company and each of its Subsidiaries to use commercially reasonable efforts to maintain all Insurance Licenses and all other Permits, other than such other Permits the failure of which so to maintain shall not have had and could not reasonably be expected to have a Material Adverse Effect, of each of the Company and its Subsidiaries to do business in each jurisdiction in which it is licensed, qualified, or authorized. (c) Parent and Seller shall cause the Company and each of its Subsidiaries to use commercially reasonable efforts to (i) maintain until their scheduled expiration, in full force and effect, all material contracts, documents, and arrangements referred to in Section 5.8, and (ii) maintain each rating 38 classification assigned as of the date hereof to the Company and each Insurance Subsidiary by insurance rating agencies. (d) Parent and Seller will cause the Company and each of its Subsidiaries to (i) maintain all material assets of each of the Company and its Subsidiaries in good working order and condition, ordinary wear and tear excepted, and (ii) continue (in all material respects) all current marketing and selling activities relating to the business, operations, and affairs of each of the Company and its Subsidiaries. (e) Parent and Seller will cause the Company and the Insurance Subsidiary to refrain from entering into any surplus relief or financial reinsurance contract. Parent and Seller will cause the Company and the Insurance Subsidiary to refrain from entering into any other reinsurance, coinsurance, or similar contract, whether as reinsurer or reinsured, other than in the ordinary course of business and consistent with past practice. (f) Parent and Seller will cause each of the Company and its Subsidiaries to refrain from entering into any (i) contract (other than contracts with insurance agents or Insurance Contracts) that involves the payment or potential payment pursuant to the terms of such contract, by or to the Company or any Subsidiary of the Company of more than $150,000 individually or $1,000,000 in the aggregate or (ii) transaction of the type, or engaging in any of the activities, described in Section 5.11. (g) Parent and Seller will cause each of the Company and its Subsidiaries to refrain from entering into any contract with any insurance agent or broker that provides, by its terms, for exclusivity (including, without limitation, by territory, product, or distribution) or that is not terminable by its terms within 180 days by the Company or a Subsidiary of the Company, as the case may be, without premium or penalty. (h) Parent and Seller will cause each of the Company and its Subsidiaries to comply with all laws applicable to the business, operations, or affairs of such entity, except to the extent that any such non-compliance does not have or is not reasonably likely to have a Material Adverse Effect. (i) Neither Parent, Seller, the Company nor any of their Subsidiaries shall make any change to, or amend in any way, the contracts, salaries, wages, or other compensation of any officer, director, employee, agent, or other similar representative of the Company or any of its Subsidiaries other than changes or amendments that (i) are made in the ordinary course of business and consistent with past practice or (ii) are required pursuant to the terms of any Employee Benefit Program or written agreement to which such Person is a party, in either case, existing as of the date hereof. 39 (j) Neither Parent, Seller, the Company nor any of their Subsidiaries shall adopt, enter into, amend, alter, or terminate, any Employee Benefit Program relating to or affecting any employee of the Company or any of its Subsidiaries (unless required to do so by applicable law or pursuant to a preexisting binding obligation or commitment), where the effect of any of the foregoing would be material upon the Company or any of its Subsidiaries. (k) Neither the Company nor any of its Subsidiaries shall enter into any contract with an officer, director, employee, agent, or other similar representative of the Company or any of its Subsidiaries that is not terminable, without penalty or other liability, upon not more than 60 calendar days' notice where the liability for such contract exceeds $75,000 in any year in respect of such Person. (l) Neither the Company nor any of its Subsidiaries shall assume, enter into, amend, alter, or terminate any labor or collective bargaining agreement to which it is a party or is affected thereby. 7.2 Pre-Closing Maintenance of Insurance. From the date hereof through the Closing Date, Parent shall use commercially reasonable efforts to maintain or cause to be maintained in force insurance with respect to the Company and its Subsidiaries as described in Section 4.13. 7.3 Litigation; Notice of Assessments; Requests for Information. (a) From the date hereof through the Closing Date, Seller agrees to notify Buyer promptly of any Litigation that, if pending or threatened as of the date hereof, would be required to be described in Section 5.7 of the Company Disclosure Schedule and of any material requests for additional information or documentary materials by any Governmental or Regulatory Body in connection with the transactions contemplated by this Agreement. (b) From the date hereof through the Closing Date, Seller agrees to notify Buyer promptly of any inquiry from the IRS or the U.S. Department of Labor that, if made on or prior to the date of this Agreement, would be required to be described in Section 4.14(a) or Section 4.14(c) of the Seller Disclosure Schedule. (c) From the date hereof through the Closing Date, Buyer shall notify Seller promptly of any Litigation that, if pending or threatened as of the date hereof, would be required to be described in Section 6.7. 7.4 Access to Information; Confidentiality. (a) Prior to the Closing Date, each of Parent, Seller and the Company shall, and shall cause the Subsidiaries of the Company and its 40 and their respective directors, officers, employees and agents to, permit representatives of Buyer to discuss the affairs, operations, finances and accounts of the Company with the officers and employees of the Company and its Subsidiaries, all at such reasonable times and as may reasonably be requested, subject to the terms of any confidentiality agreements with third parties to which Parent, Seller, the Company or any Subsidiary of the Company is subject. Prior to the Closing Date, each of Parent, Seller and the Company shall, and shall cause the Subsidiaries of the Company and its and their respective directors, officers, employees and agents to, upon reasonable request, make available to Buyer and its representatives all of the books, records and other documents of the Company and its Subsidiaries, and permit Buyer and its representatives to examine, make extracts from and, at Buyer's expense, copy such books, records or documents at any time during normal business hours in order that the Buyer may have the opportunity to make such reasonable investigations as it shall desire to make of the affairs of the Company. All requests by Buyer for such access shall be directed to the person or persons who are or have been from time to time designated by Parent and Seller to be the recipient of such requests. After the Closing Date, each of Buyer and the Company shall, and shall cause the Subsidiaries of the Company and its and their respective directors, officers, employees and agents to, upon reasonable request, make available to Seller and its representatives the books, records and other documents of the Company and its Subsidiaries pertaining to the operation of the Company and its Subsidiaries prior to the Closing Date, and permit Seller and its representatives to examine, make extracts from and, at Seller's expense, copy such books, records or documents at any time during normal business hours in connection with any claim or legal proceeding for which Parent or Seller may be responsible and in order for Parent or Seller to comply with any applicable regulatory requirements or applicable requirements of law. (b) Prior to the Closing, Buyer shall, and shall cause each of its Subsidiaries and its and their respective directors, officers, employees, agents and representatives to, keep confidential and, if this Agreement terminates, shall not use in any manner any information or material obtained from or on behalf of Parent, Seller, the Company or any of the Subsidiaries of the Company or any of its or their respective directors, officers, employees, agents or representatives, whether prior to, on or after the date of this Agreement, other than information and material readily ascertainable from public or published information, or trade sources, or already known by Buyer or any of its Affiliates independently of any investigation of Parent, Seller, the Company and the Subsidiaries of the Company or received from a third party who Buyer knows (or reasonably believes) is not under an obligation to any of Parent, Seller, the Company or any of the Subsidiaries of the Company to keep 41 such information confidential. In addition, at all times, except as required by law or judicial order, Buyer shall, and shall cause each of its Subsidiaries and its and their respective directors, officers, employees, agents and representatives to, keep confidential any information or material relating to Parent or Seller or their respective Subsidiaries (other than the Company and its Subsidiaries) obtained from or on behalf of Parent, Seller, the Company or any of the Subsidiaries of the Company or any of its or their respective directors, officers, employees, agents or representatives, whether prior to, on or after the date of this Agreement, other than information and material readily ascertainable from public or published information, or trade sources, or already known by Buyer or any of its Affiliates independently of any investigation of Parent, Seller, the Company and the Subsidiaries of the Company or received from a third party who Buyer knows (or reasonably believes) is not under an obligation to any of Parent, Seller, the Company or any of the Subsidiaries of the Company to keep such information confidential. After the Closing, except as required by law or judicial order, Parent and Seller shall, and shall cause each of their Subsidiaries and their respective directors, officers, employees, agents and representatives to, keep confidential and shall not use in any manner any information or material obtained from or on behalf of the Company or any of its Subsidiaries or any of its or their respective directors, officers, employees, agents or representatives, other than information and material readily ascertainable from public or published information, or trade sources, or known by Parent, Seller or any of their Affiliates independently of the Company and its Subsidiaries or received from a third party who Parent or Seller knows (or reasonably believes) is not under an obligation to Buyer, the Company or any of the Subsidiaries of the Company to keep such information confidential. If this Agreement terminates, any documents or material obtained by Buyer from or on behalf of Parent, Seller, the Company or any of the Subsidiaries of the Company or any of the respective directors, officers, employees, agents or representatives of such Persons and any analyses, compilations, studies or other material prepared by Buyer or its representatives containing, or based in whole or in part on, any information or material so obtained from or on behalf of Parent, Seller, the Company or any of its Subsidiaries shall promptly be destroyed and certification thereof shall promptly be furnished to Parent. 7.5 Approvals. (a) Each party shall use commercially reasonable efforts to obtain as promptly as practicable all necessary approvals, authorizations and consents of all Persons (including, without limitation, Governmental and Regulatory Bodies) required of it to be obtained to consummate the transactions contemplated by this Agreement and cooperate with the other parties in seeking to obtain all their respective approvals, authorizations and consents. Each party shall use 42 commercially reasonable efforts to provide such information to Governmental and Regulatory Bodies (including applicable insurance regulators) as such bodies may request. (b) Each of the parties shall provide to the other parties copies of all insurance change of control applications filed in connection with this Agreement. (c) Following the date hereof, the Company shall use commercially reasonable efforts to cure such deficiencies, if any, that Buyer and Parent agree exist in the licensing of agents of the Company and the Insurance Subsidiary. 7.6 Additional Financial Statements. As soon as reasonably practicable after they become available, Seller shall make available to Buyer (i) as and to the extent prepared, the GAAP financial statements of the Company and its Subsidiaries (without footnotes) for all interim quarterly fiscal periods and all monthly periods subsequent to September 30, 1995 and prior to the Closing Date, (ii) Quarterly SAP Statements of the Company and the Insurance Subsidiary for all interim periods subsequent to September 30, 1995 and prior to the Closing Date ("Interim SAP Statements"), and (iii) pro-forma GAAP and SAP financial statements of the Company for such interim quarterly fiscal periods after giving effect to the transactions and other actions described in Exhibit A and Section 7.10(b) hereof and the valuation principles described in Section 2.4(i). Such GAAP financial statements will present fairly in all material respects the financial position and results of operations of the Company and its consolidated subsidiaries as of each such date and for each such period in conformity with GAAP, subject to year-end adjustments and except that such financial statements shall not contain footnotes. Such SAP financial statements will present fairly the statutory financial condition of the Company or the Insurance Subsidiary to which such statement relates as of the end of the calendar quarter to which such statement relates and the statutory results of its operations for the period then ended and will be prepared in conformity in all material respects with SAP. 7.7 Further Assurances. Each of the parties shall execute such documents and other papers and take such further actions as may be reasonably required or desirable to carry out the provisions of this Agreement and the transactions contemplated hereby. Each such party shall use commercially reasonable efforts to fulfill or obtain the fulfillment of the conditions to the Closing as promptly as practicable. Without limiting the generality of the foregoing, the parties shall use commercially reasonable efforts to file promptly with the FTC and Justice complete and accurate notification and report forms with respect to the transactions contemplated hereby pursuant to HSR, to file as promptly as practicable such additional information 43 and documentary materials as may be requested pursuant to HSR, and request early termination of all applicable waiting periods. 7.8 Certain Employee Matters. (a) Employment of Affected Employees. Any Affected Employee who is actively employed by the Company or any of its Subsidiaries (including such employees who are on vacation) immediately prior to the date hereof in the administration or management of such business of the Company as shall be the business of the Company after giving effect to the transactions outlined in Exhibit A, in addition to employees newly hired between the date hereof and Closing to be so employed, shall remain an employee of the Company or such Subsidiary, as the case may be, immediately following the Closing at the same base compensation and wage levels as in effect immediately preceding the Closing. Notwithstanding anything herein to the contrary, nothing in this Agreement shall create any obligation on the part of the Company or any of its Subsidiaries to continue the employment of any employee for any definite period following the Closing. Buyer shall cause the Company or its Subsidiaries to offer to employ (or offer severance benefits if such individual's position is no longer available as allowed by applicable law) each Affected Employee who is receiving sick-leave or short-term disability benefits under Seller's sick-leave or short-term disability program or who is on an approved leave of absence as of the Closing ("Inactive Employees"); provided, however, no individual shall be offered employment under this provision after six months following the Closing or under the terms of his leave of absence or any applicable period as required by law, if longer. Each Inactive Employee shall become an employee of Parent, Seller or one of their Subsidiaries as of the Closing Date until (i) such Inactive Employee is offered employment (or paid severance) by Buyer, the Company or their Subsidiaries pursuant to this Section 7.8(a), (ii) the expiration of the period for which such Inactive Employee is entitled to such an offer of employment (or payment of severance) or (iii) such Inactive Employment is otherwise terminated by Parent, Seller or their Subsidiaries. Nothing in this Section 7.8(a) shall be interpreted as obligating Parent, Seller or their Subsidiaries to accept any Inactive Employee for active employment for any period of time. The active participation of all Affected Employees in each Employee Benefit Program that is not maintained primarily for the benefit of Affected Employees shall cease as of the Closing Date. (b) Substantially Equivalent Benefits. (i) Effective as of the Closing Date, Buyer shall cause the Company or one of its Subsidiaries to provide such plans, programs, agreements or arrangements on behalf of the Transferred Employees so as to provide, in the aggregate, employee benefits which are substantially equivalent to the benefits provided to similarly situated employees at the 44 life insurance subsidiary of Buyer. (ii) Notwithstanding the foregoing, with respect to any terminations of employment with the Company or one of its Affiliates occurring within one year after the Closing Date, Buyer shall cause to be maintained following the Closing Date severance benefits for the Transferred Employees which are no less favorable to the Transferred Employees than the following: 1. Full-time exempt employees shall receive one week of severance for each year of service plus four weeks. The minimum amount of severance shall be four (4) weeks. 2. Full-time non-exempt employees shall receive one week of severance for each year of service plus two weeks. The minimum amount of severance shall be two (2) weeks. 3. Part-time exempt and non-exempt employees shall receive severance pay based upon the schedule described in item 2 immediately above, pro-rated based upon average hours worked. 4. Partial years of service shall be rounded to the closest year of service for calculation of benefit purposes. (c) Retirement Plan. On the Closing Date, Parent shall cause each Affected Employee who is a participant (other than any terminated non-vested participant) in the Parent's Retirement Plan to become fully vested, to the extent not already vested, as of the Closing Date in the benefits accrued under the Parent's Retirement Plan as of the Closing Date. Transferred Employees shall cease to accrue any benefits under the Parent's Retirement Plan, and the Company and its Subsidiaries shall cease to be participating employers in such plan, as of the Closing Date. After the Closing Date, any new benefits accrued by Affected Employees shall be accrued under the terms of the Buyer's Retirement Plan, if any, and Parent's Retirement Plan shall have no liability or obligation in respect of such accruals. (d) Defined Contribution Plans. On the Closing Date, Parent shall cause each Affected Employee who is a participant (other than any Affected Employee who is terminated prior to the Closing) in the Defined Contribution Plans to become fully vested, to the extent not already vested, as of the Closing Date in his account balance under each such plan. The Company and its Subsidiaries shall cease to be participating employers in the Defined Contribution Plans as of the Closing Date. Transferred 45 Employees shall be entitled to receive distributions pursuant to the terms of such plans and the provisions of applicable law. (e) Post-Retirement Medical and Life Benefits. Parent shall retain all obligations and liabilities for post-retirement medical benefits and life insurance under the Company Plans in respect of any Affected Employee who retired on or before the Closing and any Affected Employee who is not a Transferred Employee, whether such claims are incurred prior to, on or after the Closing Date. Following the Closing, Buyer or the Company or its Subsidiaries shall provide to the Transferred Employees coverage under a retiree welfare benefit plan which provides benefits which are substantially equivalent to the benefits provided under the retiree welfare benefit plans maintained by Parent immediately prior to the Closing. (f) Bonuses. Buyer shall cause the Company and its Subsidiaries to assume all obligations and liabilities for bonuses and incentive payments in connection with the relevant Employee Benefit Programs in effect immediately prior to the Closing Date and shall cause the payment of such bonuses or incentive payments, if any, to be made in accordance with the terms of such Employee Benefit Programs consistent with past practice to the extent such obligations and liabilities have been accrued on the Closing SAP Balance Sheet in accordance with SAP, such accruals to be made in a manner consistent with past practices. (g) Special Bonus Program. Parent or a Subsidiary of Parent (other than the Company and its Subsidiaries) shall assume all obligations and liabilities for bonuses in connection with the Special Bonus Program in effect on the date hereof and shall cause the payment of such bonuses to be made in accordance with the terms of the Special Bonus Program. (h) Vacation. Buyer shall cause the Company and its Subsidiaries to credit each Transferred Employee with the number of unused vacation days credited to such individual through the Closing Date under the applicable vacation policies of his or her employer and shall permit or cause Transferred Employees to be permitted to use such vacation days. (i) Welfare Benefits. Effective as of the Closing, Buyer shall cause the Company or one or more of its Subsidiaries to provide coverage to all Transferred Employees and their dependents or COBRA beneficiaries under a group health plan which is substantially similar to the group health plan covering the Transferred Employees (and their dependents and COBRA beneficiaries) immediately prior to the Closing, and such coverage shall be provided under substantially the same terms and conditions applicable to such Transferred Employees under Parent's group health plan immediately prior to the Closing. 46 With respect to each Transferred Employee, the Company shall retain the obligation and liability for claims by any such individual (or his or her covered dependent) or any COBRA beneficiary under the Company's employee welfare benefit plans (within the meaning of Section 3(1) of ERISA), incurred after the Closing Date. Buyer shall cause the Company and its Subsidiaries to provide for the waiver under the Company's or one of its Subsidiaries' welfare benefit plans covering Transferred Employees on and after the Closing Date of any conditions to coverage with respect to pre-existing medical conditions (but only with respect to conditions which are covered under Seller's welfare benefit plans prior to the Closing Date) and shall credit Transferred Employees with any amounts paid prior to the Closing Date in order to satisfy applicable deductible amounts and copayment minimums under the corresponding welfare plans of the Company or one of its Subsidiaries to the extent such payments would be taken into account under the welfare plans maintained by Buyer with respect to similarly situated employees. Parent agrees that the Affected Employees shall not be eligible to participate in Parent's cafeteria plan for any period after December 31, 1995, assuming that the Closing Date is on or before March 31, 1996, and Buyer agrees to provide for immediate participation and enrollment of such employees in an equivalent cafeteria plan as of the Closing Date and to use its best efforts to make available to such employees the benefits that would have been available thereunder had the Closing Date occurred on December 31, 1995. If the Closing Date does not occur by March 31, 1996, the parties shall cooperate in good faith to make available to the Affected Employees cafeteria plan benefits to replace those that would have been available to such employees under Parent's cafeteria plan for such period of time but for this Agreement. With respect to each Affected Employee who is not on the Closing Date a Transferred Employee and his or her dependents or COBRA beneficiaries, Parent, Seller or one of their Subsidiaries shall assume the obligation and liability for claims under any Employee Benefit Program that is an employee welfare benefit plan under Section 3(1) of ERISA incurred pursuant to the terms of such plan (as if such employee had been an employee of Parent, Seller or such Subsidiary) prior to the date on which such employee becomes a Transferred Employee. Promptly after the end of each calendar quarter after the Closing Date, Parent shall provide to Buyer a report of the payments of short-term disability salary continuation payments (to the extent not accounted for under Section 7.8(m)) made pursuant to the preceding sentence, and Buyer shall within 5 business days thereafter reimburse Parent for such amount. (j) Workers' Compensation. With respect to each Affected Employee, Parent shall retain the obligation and liability for any workers' compensation or similar workers' protection claims with respect to any such individual incurred on or prior to the Closing Date. 47 (k) Credit. Buyer, Company and any of its Subsidiaries shall recognize the service credited to Transferred Employees on or prior to the Closing Date to the extent recognized under the Employee Benefit Programs as if such service had been rendered to Buyer or one of its Affiliates in connection with (i) any welfare benefit plan (within the meaning of Section 3(1) of ERISA) for purposes of any waiting period and eligibility purposes only (including eligibility for benefits that might otherwise be limited due to pre-existing medical conditions or participant co-payments and deductibles) and (ii) any employee pension plan (within the meaning of Section 3(2) of ERISA) for purposes of eligibility and vesting (but not for benefit accrual) but only with respect to a plan in which such employees participate and which is made available by Buyer or any of its Affiliates following the Closing. (l) Third-Party Rights. No provision of this Section 7.8 shall create any third-party beneficiary rights in any employee or former employee (including any beneficiary or dependent thereof) of Parent, Seller, any of their Affiliates, the Company or any Subsidiaries of the Company in respect of continued employment (or resumed employment) for any specified period of any nature or kind whatsoever, and no provision of this Section 7.8 shall create such third-party beneficiary rights in any such persons in respect of any benefits that may be provided, directly or indirectly, under any employee benefit plan or arrangement, including the currently existing Employee Benefit Programs. (m) Reimbursement of Liabilities. Within five Business Days after the Final Purchase Price has been agreed to or determined by the Settlement Auditor, Buyer shall pay to Parent the amount of liabilities accrued on the Adjusted Closing GAAP Balance Sheet that relate to pension, post-retirement medical, workers compensation and welfare liabilities which are retained by Parent and Seller in this Section 7.8. For purposes of this Section 7.8(m), the amount of welfare (including post-retirement) and pension liabilities retained by Parent in respect of Affected Employees shall be determined pursuant to FAS 87, FAS 88, FAS 106 and FAS 112, as the case may be, as applied for purposes of GAAP. Any payments pursuant to this Section 7.8(m) shall constitute an adjustment to the Final Purchase Price. (n) Indemnity. Buyer agrees to indemnify Parent, Seller and their Affiliates and to defend and hold Parent, Seller and their Affiliates harmless from and against any and all claims, losses, damages, expenses, obligations and liabilities (including costs of collection, attorney's fees and other costs of defense) arising out of any claims by or in respect of any Transferred Employee (or such Transferred Employee's successors or assigns) with respect to any of the obligations or liabilities which Parent or Seller has not assumed or retained hereunder or 48 any other events arising after the Closing Date, including, but not limited to, claims with respect to (i) assumed severance, (ii) vacation, (iii) bonus or incentive payments, or (iv) WARN or any similar state notification law. Seller and Parent hereby agree to indemnify Buyer and its Affiliates and to defend and hold Buyer and its Affiliates harmless from and against any and all Losses arising out of (x) any claims under any of the Employee Benefit Programs with respect to any of the obligations or liabilities that Buyer has not agreed to cause the Company or its Subsidiaries to assume, (y) any "employee pension plan" (within the meaning of Section 3(2) of ERISA) or any "group health plan" (within the meaning of Section 607 of ERISA) in respect of which the Company or any of its Subsidiaries have any liability solely as a result of being a member of a "controlled group" (within the meaning of Section 4001(a)(14) of ERISA) prior to the Closing Date which includes Parent or Seller (but exclusive of liabilities in connection with Affected Employees under any such plan maintained or contributed to by the Company or any of its Subsidiaries) or (z) any claims by or in respect of any Affected Employee, including a Transferred Employee (or such Transferred Employee's successors or assigns), arising out of, or in connection with, or otherwise relating to, any allegations of unlawful discrimination or sexual harassment which occurred on or prior to the Closing Date. Notwithstanding any other provision of this Agreement to the contrary, the indemnities provided for herein shall not be subject to the deductible and maximum liability contained in Section 10.2, and all such indemnities shall survive until 60 days after the expiration of the applicable statute of limitations with respect thereto, other than the indemnity set forth in clause (z) herein, which shall be subject to, and be taken into account for purposes of, calculating the availability or applicability of the deductible and maximum liability contained in Section 10.2, and shall survive for one (1) year after the Closing Date (except to the extent that a detailed notice of a specific claim giving rise to a right of indemnification shall have been given by Buyer in accordance with the procedures set forth in Section 10.4). Any claim for indemnification by Buyer, Seller or Parent pursuant to this Section 7.8(n) shall be subject to the procedures set forth in Section 10.4. 7.9 Settlement of Intercompany Accounts; Cancellation of Intercompany and Other Agreements. The parties agree that all intercompany accounts, including all accounts receivable (whether or not currently due and payable), between the Company or any of its Subsidiaries, on the one hand, and Parent, Seller and their Affiliates (other than the Company and its Subsidiaries), on the other hand, shall be settled in full on or prior to the Closing Date (subject to the next sentence). Within five days prior to the Closing Date, Seller will deliver to Buyer a schedule of all amounts to be so settled on the Closing Date. If Buyer agrees with such settlement amounts, Seller will, at Closing, cause such 49 amounts to be settled. If Buyer disagrees with any such settlements, Buyer and Seller will resolve such disagreement in accordance with the procedures set forth in Section 2.4(g), and such settlement payments will be made after such resolution. Except for the agreements entered into pursuant to Section 7.10 and as otherwise provided in this Agreement, the Company shall cause any Contracts or Other Agreements between the Company or its Subsidiaries, on the one hand, and Seller and its Affiliates (other than the Company and its Subsidiaries), on the other hand, to be canceled. Except in the ordinary course consistent with past practice or as otherwise provided in this Agreement, the Company and its Subsidiaries, on the one hand, and Parent, Seller and their Affiliates (other than the Company and its Subsidiaries), on the other hand, shall not enter into any material Contracts or Other Arrangements with each other or engage in any material transactions with each other without the consent of Buyer, which shall not be unreasonably withheld. 7.10 Actions to Address Certain Interrelationships; Dividends. (a) On or prior to the Closing Date, Buyer, Seller, Parent and the Company shall enter into such arrangements and other relationships as are contemplated by Exhibit B hereto. (b) On or prior to the Closing Date, Parent and Seller shall be entitled to cause the Company and its Subsidiaries to declare and pay such dividend or dividends and to make such distributions as Parent shall deem appropriate. (c) After the Closing Date and except as specifically provided in Exhibit B, Parent shall cause its broker/consulting Subsidiaries, consistent with their fiduciary obligations as broker/consultants, to use commercially reasonable efforts to continue and maintain the relationships described in paragraph A of Exhibit B. 7.11 Investments. (a) From the date hereof until the close of business on November 17, 1995, the Company will refrain from selling, transferring, or otherwise trading in any of the securities set forth in Exhibits C, D or E hereto. (b) On or before the Closing Date, Seller will sell to the Company a guaranteed investment contract (the "GIC") having (i) a face value of $50 million, (ii) a book yield of 10.9% (payable semi-annually in arrears), and (iii) a six-year term. After such issuance and before the Closing, the Company will refrain from selling or transferring the GIC. It is agreed that "GIC" shall not include any interest income received thereon. (c) From the close of business on November 17, 1995 until the Closing, the Company will refrain from selling, 50 transferring or otherwise trading in or investing any of the Exhibit C Assets, Exhibit D Assets or Exhibit E Assets, except in accordance with written instructions of Charles Kaminski or his designee on behalf of Buyer; provided, that such instructions comply with (x) the insurance laws of the State of Illinois, and (y) the investment guidelines adopted by the insurance Subsidiaries of the Buyer currently in effect. (d) Nothing in this Agreement shall restrict the Company's ability to sell, transfer or otherwise trade in investment securities other than Exhibit C Assets, Exhibit D Assets or Exhibit E Assets. 7.12 Resignations of Directors. Parent and Seller will cause such members of the boards of directors and such officers of the Company and its Subsidiaries as are designated by Buyer to tender, effective at the Closing, their resignations from such boards of directors or from such offices. 7.13 No Negotiations, Etc. Parent, Seller and the Company will refrain and will cause each other Person acting for or on behalf of them to refrain from taking, directly or indirectly , any action (i) to seek or encourage any offer (including in connection with any proposed public offering of securities) or proposal from any Person to acquire any assets or shares of capital stock or other securities of the Company or any to its Subsidiaries or any interests therein, (ii) to merge, consolidate, or combine, or to permit any other Person to merge, consolidate or combine, with the Company or any of its Subsidiaries, (iii) to liquidate, dissolve, or reorganize the Company or any of its Subsidiaries, (iv) to acquire or transfer any assets of the Company or any of its Subsidiaries or any interests therein, except in the ordinary course of business and consistent with past practice or except as expressly permitted by the terms of this Agreement, (v) to reach any agreement or understanding (whether or not such agreement or understanding is absolute, revocable, contingent, or conditional) for, or otherwise to attempt to consummate, any such acquisition, transfer, merger, consolidation, combination, or reorganization, or (vi) to furnish or cause to be furnished any information with respect to the Company or any of its Subsidiaries to any Person (other than Buyer) that Parent, Seller or the Company (or any Person acting for or on behalf of them) knows or has reason to believe is in the process of attempting or considering any such acquisition, transfer, merger, consolidation, combination, liquidation, dissolution or reorganization. If Parent, Seller or the Company receives from any Person (other than Buyer) any offer, proposal, or information request that is subject to this Section 7.13, Parent, Seller or the Company will promptly advise such Person, by written notice, of the terms of this Section 7.13 and will promptly deliver a copy of such notice of Buyer. 51 8. Conditions Precedent to the Obligation of Buyer. The obligation of Buyer to consummate the transactions contemplated by this Agreement shall be subject to the satisfaction or, where permissible, waiver by Buyer of the following conditions: 8.1 Representations and Warranties; Covenants and Agreements. (a) Except as otherwise permitted or contemplated by this Agreement or as consented to by Buyer, the representations and warranties of Parent, Seller and the Company contained in this Agreement shall be true, accurate and complete in all material respects as of the date hereof and on and as of the Closing Date with the same force and effect as though made on and as of the Closing Date (except that any such representations and warranties that are given as of a specified date and relate solely to a specified date or period shall be true, accurate and complete in all material respects as of such date or period). Each of Parent and Seller shall have delivered to Buyer a certificate, dated the Closing Date and signed on its behalf by one of its Executive Officers, to the foregoing effect with respect to the representations and warranties of Parent and Seller and the Company shall have delivered to Buyer a certificate, dated the Closing Date and signed on its behalf by one of its Executive Officers, to the foregoing effect with respect to the representations and warranties of the Company. (b) Except as otherwise consented to by Buyer, Parent, Seller and the Company shall each have performed and complied in all material respects with all covenants and agreements required by this Agreement to be performed or complied with by it on or prior to the Closing Date. Each of Parent and Seller shall have delivered to Buyer a certificate, dated the Closing Date and signed on its behalf by one of its Executive Officers, to the foregoing effect with respect to the covenants and agreements required by this Agreement to be performed or complied with by Parent or Seller and the Company shall have delivered to Buyer a certificate, dated the Closing Date and signed on its behalf by one of its Executive Officers, to the foregoing effect with respect to the covenants and agreements required by this Agreement to be performed or complied with by the Company. 8.2 Governmental Approvals; Illegality. (a) All authorizations, approvals and consents from Governmental and Regulatory Bodies set forth in Section 4.3 of the Seller Disclosure Schedule and Section 5.2 of the Company Disclosure Schedule required for the transactions contemplated by this Agreement shall have been obtained and shall be in full force and effect and shall no longer be subject to any conditions or limitations other than the occurrence of the Closing (and other than customary conditions uniformly imposed by regulatory authorities in connection with similar acquisitions), and Buyer shall have been furnished with appropriate evidence, reasonably 52 satisfactory to it and its counsel, of the granting of such authorizations, approvals and consents. (b) There shall not be in effect any statute, rule, regulation or order of any court, Governmental or Regulatory Body which prohibits, enjoins, or makes illegal the transactions contemplated by this Agreement. (c) There shall not be instituted or pending any action, suit, investigation, or other proceeding in, before, or by any court, governmental or regulatory authority to recover any damages or obtain other relief (which is reasonably likely to have a Material Adverse Effect or a material adverse effect on the business or condition of the Buyer) as a result of this Agreement or any of the transactions contemplated hereby. 8.3 Third Party Consents. There shall have been obtained all consents and approvals from parties to Contracts or Other Agreements with Parent, Seller, the Company or any Subsidiaries of Parent or the Company that are required in connection with the performance by Parent, Seller and the Company of their respective obligations under this Agreement, except for such consents and approvals the failure of which so to have obtained could not reasonably be expected to have a Material Adverse Effect. 8.4 Hart-Scott-Rodino. The waiting period under HSR, including any extension thereof, shall have expired or been terminated. 8.5 Opinions of Counsel to Parent, Seller and the Company. Buyer shall have received the opinion of counsel to Parent (which may be internal or external counsel), dated the Closing Date and addressed to Buyer, in form and substance reasonably acceptable to Buyer prior to the Closing. 8.6 No Material Adverse Change. There shall not have occurred since September 30, 1995 any change in the business or condition (financial or otherwise) of the Company or its Subsidiaries that has had or is reasonably likely to have a Material Adverse Effect, other than changes resulting from a change in general economic conditions or matters affecting the life or health insurance industry generally. 8.7 Consummation of Certain Transactions. Each of the transactions and other actions contemplated by Exhibit A shall have been effected or taken. 9. Conditions Precedent to the Obligations of Parent, Seller and the Company. The obligations of Parent, Seller and the Company to consummate the transactions contemplated by this Agreement shall be subject to the fulfillment or, where 53 permissible, waiver by Parent and Seller of the following conditions: 9.1 Representations and Warranties; Covenants and Agreements. (a) Except as otherwise permitted or contemplated by this Agreement or as consented to by Parent, the representations and warranties of Buyer contained in this Agreement shall be true, accurate and complete in all material respects as of the date hereof and on and as of the Closing Date with the same force and effect as though made on and as of the Closing Date (except that any such representations and warranties that are given as of a specified date and relate solely to a specified date or period shall be true, accurate and complete in all material respects as of such date or period). Buyer shall have delivered to Parent and Seller a certificate, dated the Closing Date and signed on its behalf by one of its Executive Officers, to the foregoing effect. (b) Buyer shall have performed and complied in all material respects with all covenants and agreements required by this Agreement to be performed or complied with by it on or prior to the Closing Date. Buyer shall have delivered to Parent and Seller a certificate, dated the Closing Date and signed by one of its Executive Officers, to the foregoing effect. 9.2 Governmental Approvals; Illegality. (a) All authorizations, approvals and consents from Governmental and Regulatory Bodies set forth in Section 4.3 of the Seller Disclosure Schedule and Section 5.2 of the Company Disclosure Schedule required for the transactions contemplated by this Agreement shall have been obtained and be in full force and effect and shall no longer be subject to any conditions or limitations other than the occurrence of the Closing (and other than customary conditions uniformly imposed by regulatory authorities in connection with similar acquisitions), and Parent, Seller and the Company shall have been furnished with appropriate evidence, reasonably satisfactory to it and its counsel, of the granting of such authorizations, approvals and consents. (b) There shall not be in effect any statute, rule, regulation or order of any court, Governmental or Regulatory Body which prohibits, enjoins or makes illegal the transactions contemplated by this Agreement. 9.3 Third Party Consents. There shall have been obtained all consents and approvals from parties to Contracts or Other Agreements with Buyer or any of its Affiliates that are required in connection with the performance by Buyer of its obligations under this Agreement, except for such consents and approvals the failure of which to have so obtained could not reasonably be expected to have a material adverse effect on the ability of Buyer to consummate the transactions contemplated by 54 this Agreement. 9.4 Hart-Scott-Rodino. The waiting period under HSR, including any extension thereof, shall have expired or been terminated. 9.5 Opinion of Counsel to Buyer. Parent, Seller and the Company shall have received the opinion of counsel to Buyer (which may be internal or external counsel), dated the Closing Date and addressed to Parent, Seller and the Company, in form and substance reasonably acceptable to Parent prior to the Closing. 9.6 Consummation of Certain Transactions. Each of the transactions and other actions contemplated by Exhibit A shall have been effected or taken. 10. Survival and Indemnification. 10.1 Survival of Representations and Warranties. All representations and warranties contained herein shall survive the execution and delivery hereof and the Closing hereunder, and thereafter (i) in the case of the representations and warranties contained in Sections 4.5, 4.6, 4.10 (other than Sections 4.10(k) and 4.10(p)) and 4.14, such representations and warranties shall survive until 60 days after the expiration of the applicable statute of limitations with respect to the subject matter thereof and (ii) in the case of all other representations and warranties, such representations and warranties shall survive until the date which is 18 months after the Closing Date; provided, however, that any representation or warranty shall survive the time it would otherwise terminate pursuant to this Section 10.1 to the extent that a detailed notice of a specific breach thereof giving rise to a right of indemnification shall have been given by a party hereto in accordance with this Article 10 prior to such time. 10.2 Indemnification by Parent and Seller. From and after the Closing, subject to the provisions of Sections 10.1 and 10.4, Parent and Seller jointly and severally shall indemnify and hold harmless Buyer from and against any and all Losses incurred or suffered by Buyer, the Company and their respective Affiliates and their respective officers, directors, employees, agents and representatives arising out of, resulting from, or relating to (a) any breach of any of the representations or warranties made by Parent, Seller or the Company in this Agreement; (b) any failure by Parent, Seller or the Company to perform any of its respective covenants or agreements contained in this Agreement; (c) (i) any Environmental Law (whether or not such Losses result from a violation of Environmental Law), to the extent such Losses relate to conditions existing as of or prior to the Closing and (ii) any disposal or arrangements for disposal made prior to the Closing of solid waste, toxic or hazardous substances as defined 55 by Environmental Law; or (d) any litigation listed in Section 5.7 of the Company Disclosure Schedule and described therein as being before a court in the State of Alabama; provided, that Parent and Seller shall not be obligated to indemnify and hold harmless Buyer from and against the first $3,000,000 of Losses in accordance with the foregoing; and the aggregate amount of Losses in respect of which Buyer shall be entitled to indemnification in accordance with this Section 10.2 shall not exceed $130,000,000. Notwithstanding the foregoing, (i) the indemnity relating to a breach of the representation and warranty contained in Sections 4.5, 4.6, 4.10 or 4.14 or under clause (b), (c) or (d) immediately above shall not be subject to the aforesaid deductible or maximum amount of liability, (ii) except for the procedural provisions of Section 10.4, this Article 10 shall not apply to the matters governed by Section 7.8(n)(except to the extent provided therein) and (iii) this Article 10 shall not apply to the matters governed by Article 11 and (iv) for purposes of determining whether indemnification is available under clause (a) of this Section 10.2, all qualifications as to materiality and Material Adverse Effect contained in representations or warranties shall be disregarded. 10.3 Indemnification by Buyer. From and after the Closing, subject to the provisions of Sections 10.1 and 10.4, Buyer shall indemnify and hold harmless Seller and Parent from and against any and all Losses incurred or suffered by Parent, Seller and their respective Affiliates and their respective officers, directors, employees, agents and representatives arising out of, resulting from, or relating to (a) subject to Section 10.1, any breach of any of the representations or warranties made by Buyer in this Agreement; or (b) any failure by Buyer to perform any of its covenants or agreements contained in this Agreement. Notwithstanding the foregoing, (i) except for the procedural provisions of Section 10.4, this Article 10 shall not apply to the matters governed by Section 7.8(n) (except to the extent provided therein), and (ii) this Article 10 shall not apply to the matters governed by Article 11. 10.4 Procedure. (a) In the event that any Person shall incur or suffer any Losses in respect of which indemnification may be sought hereunder by Buyer, Seller or Parent, the party seeking to be indemnified hereunder (the "Indemnitee") shall assert a claim for indemnification by written notice (the "Notice") to the party from whom indemnification is being sought (the "Indemnitor") stating the nature and basis of such claim. In the case of Losses arising or which may arise by reason of any third party claim, promptly after receipt by an Indemnitee of written notice of the assertion or the commencement of any Litigation with respect to any matter in respect of which indemnification may be sought by such party hereunder, the Indemnitee shall give Notice to the Indemnitor and shall thereafter keep the Indemnitor reasonably informed with respect 56 thereto, provided that failure of the Indemnitee to give the Indemnitor prompt notice as provided herein shall not relieve the Indemnitor of any of its obligations hereunder, except to the extent that the Indemnitor is materially prejudiced by such failure. In case any such Litigation is brought against any Indemnitee, the Indemnitor shall be entitled to assume the defense thereof, by written notice of its intention to do so to the Indemnitee within 30 days after receipt of the Notice, in which event the Indemnitor shall assume all future responsibility for such Litigation. If the Indemnitor shall assume the defense of such Litigation, it shall not settle such Litigation (other than any Litigation subject to indemnification under clause (d) of Section 10.2 hereof) without the consent of Indemnitees (which consent shall not be unreasonably withheld) and unless such settlement includes as an unconditional term thereof the giving by the claimant or the plaintiff of a release of the Indemnitee from all liability with respect to such Litigation. As long as the Indemnitor is contesting any such Litigation in good faith and on a timely basis, the Indemnitee shall not pay or settle any claims brought under such Litigation. Notwithstanding the assumption by the Indemnitor of the defense of any Litigation as provided in this Section 10.4(a), the Indemnitee shall be permitted to participate in the defense of such Litigation and to employ counsel at its own expense; provided, however, that if the defendants in any action shall include both an Indemnitor and any Indemnitee and such Indemnitee shall have reasonably concluded that counsel selected by Indemnitor has a conflict of interest because of the availability of different or additional defenses to such Indemnitee, such Indemnitee shall have the right to select separate counsel to participate in the defense of such action on its behalf, at the expense of the Indemnitor; provided that the Indemnitor shall not be obligated to pay the expenses of more than one separate counsel for all Indemnitees. Notwithstanding the foregoing, with respect to any Litigation for which indemnification is provided under clause (d) of Section 10.2, no notice shall be required pursuant to the first sentence of this Section 10.4(a) and the Indemnitor shall be deemed to have elected to assume the defense thereof pursuant to this Section 10.4(a). (b) If the Indemnitor shall fail to notify the Indemnitee of its desire to assume the defense of any such Litigation within the prescribed period of time and as required above, or shall notify the Indemnitee that it will not assume the defense of any such Litigation, then the Indemnitee may assume the defense of any such Litigation, in which event it may do so in such manner as it may deem appropriate, and the Indemnitor shall be bound by any determination made in such Litigation or any settlement thereof effected by the Indemnitee, provided that any such determination or settlement shall not affect the right of the Indemnitor to dispute the Indemnitee's claim for indemnification and provided that the Indemnitee shall not effect 57 any such settlement without the prior written consent of the Indemnitor (such consent not to be unreasonably withheld). The failure of the Indemnitor to assume the defense of any such Litigation shall not be deemed a concession that it is required to indemnify the Indemnitee for the subject matter of such Litigation. The Indemnitor shall be permitted to join in the defense of such Litigation and to employ counsel at its own expense. (c) Any payment by any Indemnitor in indemnification hereunder shall be treated as an adjustment to the Final Purchase Price. 10.5 Indemnification; Directors and Officers Insurance. For six years from and after the Closing Date, the Company shall and Buyer agrees to cause the Company and its Subsidiaries to, indemnify, defend and hold harmless all past and present officers and directors of the Company and of its Subsidiaries to the same extent such persons are indemnified as of the date of this Agreement by the Company or its Subsidiaries pursuant to the certificate of incorporation or articles of incorporation, as the case may be, or the by-laws, of the Company or its Subsidiaries, as the case may be, and indemnification agreements in existence on the date hereof for acts or omissions occurring at or prior to the Closing. Parent shall provide, for a period of not less than six years from and after the Closing Date, the current directors and officers of the Company and its Subsidiaries a directors' and officers' liability insurance policy (the "D&O Insurance") that is no less favorable than the policy currently made available for their benefit by Parent or one of its Affiliates, or, if substantially equivalent insurance coverage is unavailable, the best available coverage. The provisions of this Section 10.5 are intended to be for the benefit of, and shall be enforceable by, each past and present officer or director of the Company or of its Subsidiaries and each person who becomes such prior to the Closing Date. 11. Tax Matters. 11.1 Section 338 Election. (a) With respect to Seller's sale of the Shares hereunder, at the request of Buyer, Seller and Buyer shall jointly make timely and irrevocable elections under Section 338(h)(10) of the Code (which elections shall be made with respect to the Company and each of its Subsidiaries requested by Buyer), and, if permissible, similar elections under any applicable state or local income tax laws. To the extent Buyer has requested an election under such Section 338(h)(10), Buyer and Seller agree to report the transfer of the Shares (and the deemed sale of the shares of the Company's Subsidiaries) under this Agreement consistent with 58 such elections under Section 338(h)(10) of the Code or any similar state or local tax provision (the "Elections") and agree not to take any action that could cause such Elections to be invalid, and shall take no position contrary thereto unless required to do so pursuant to a determination (as defined in Section 1313(a) of the Code) or any similar state or local tax provision. (b) To the extent Buyer has requested an Election: (y) To the extent possible, Buyer, Parent, Seller and the Company agree to execute at the Closing any and all forms necessary to effectuate the Elections (including, without limitation, Internal Revenue Service Form 8023-A and any similar forms under applicable state and local income tax laws (the "Section 338 Forms")). In the event, however, any Section 338 Forms are not executed at the Closing, Buyer, Parent, Seller and the Company agree to prepare and complete each such Section 338 Form no later than 10 Business Days prior to the date such Section 338 Form is required to be filed. Buyer, Parent, Seller and the Company shall each cause the Section 338 Forms to be duly executed by an authorized person for Buyer, Parent, Seller or the Company, in each case, and shall duly and timely file the Section 338 Forms in accordance with applicable tax laws and the terms of this Agreement. (z) As soon as practicable after the Closing Date, Buyer shall deliver to Seller a written notice setting forth (with reasonable specificity) Buyer's good faith calculation of the Modified Aggregate Deemed Sales Price (as defined below) and the allocation thereof among the assets of the Company and the assets of the Company's Subsidiaries in accordance with the principles of Treas. Reg. Section 1.338(h)(10)-1(f)(1)(ii) (collectively, "Buyer's Allocation"). For such purposes, the tangible personal property of the Company and its Subsidiaries shall be valued at statutory book value as of the Closing Date, securities of the Company and its Subsidiaries shall be valued at fair market value as of the Closing Date, and insurance in force of the Company shall be valued at fair market value as of the Closing Date. Within 20 Business Days after receipt thereof, Seller shall deliver to Buyer written notice indicating whether Seller agrees or disagrees with Buyer's Allocation. If Seller agrees with Buyer's Allocation or if Seller fails to deliver such written notice within such 20 Business Days, Buyer's Allocation shall constitute the Agreed Allocation. If Seller provides timely written notice to Buyer of any disagreement with Buyer's Allocation, 59 Buyer and Seller shall begin good faith negotiations to resolve such disagreement. If Buyer and Seller are able to resolve such disagreement within ten Business Days after Buyer's receipt of notice of disagreement, Buyer's Allocation shall be adjusted to reflect such resolution, and such resolved Modified Aggregate Deemed Sales Price and allocation thereof shall constitute the Agreed Allocation. If Buyer and Seller are unable to resolve any disagreement within ten Business Days after Buyer's receipt of notice of disagreement, Buyer and Seller shall jointly request the national office of Coopers & Lybrand (which may not assign the matter to its Chicago, Illinois or Stamford, Connecticut office), or, if such firm is unavailable, another independent nationally recognized auditing firm selected by the parties (the "Tax Settlement Auditor") to resolve any issue in dispute as promptly as possible and shall cooperate with the Tax Settlement Auditor to resolve such dispute. The Tax Settlement Auditor shall make a determination with respect to all disputed issues, which determination shall be set forth in a written report delivered to Buyer and Seller, and the Agreed Allocation shall be as determined by the Tax Settlement Auditor. Each of Buyer and Seller shall each pay one-half of the fees and expenses of the Tax Settlement Auditor with respect to such determination. Except as determined to the contrary by the appropriate taxing authority upon an audit of its (or its Affiliates') Tax Returns, each of Buyer, Parent, Seller, the Company and the Company's Subsidiaries shall file all Tax Returns consistent with the Agreed Allocation. For purposes of this Section 11.1, the term "Modified Aggregate Deemed Sales Price" shall mean the amount resulting from the Elections, determined pursuant to Treas. Reg. Section 1.338(h)(10)-1(f) without regard to items described in Treas. Reg. Section 1.338(h)(10)-1(f)(4). 11.2 Tax Indemnification. (a) Parent and Seller jointly and severally shall be responsible for, shall pay or cause to be paid, and shall indemnify and hold harmless Buyer and its Affiliates (including, after the Closing, the Company and its Subsidiaries) from and against any and all Losses for or in respect of each of the following: (i) any and all Income Taxes with respect to any taxable period of the Company or any of its Subsidiaries (or any predecessor) ending on or before the Closing Date (including Income Taxes arising as a result of the Elections), but excluding any transactions occurring on the Closing Date and after the Closing (other than the Elections) which are not related to the transfer of the Shares and the other transactions contemplated by this 60 Agreement ("Excluded Transactions")); (ii) any and all Income Taxes resulting from the Company or any of its Subsidiaries (or any predecessor) having been (or ceasing to be) included in any affiliated, consolidated, combined or unitary Tax Return that included the Company or any of its Subsidiaries (or any predecessor) for any taxable period (or portion thereof) ending on or before the Closing Date (including, without limitation, any liability for Taxes resulting from an acceleration of an "intercompany transaction," within the meaning of Treasury Regulation Section 1.1502-13(d) (or any analogous or similar provision under state, local or foreign law or any predecessor provision or regulation), that occurred on or before the Closing Date (but excluding the Excluded Transactions); (iii) any and all Income Taxes of any member of an affiliated, consolidated, combined or unitary group (other than the Company or any of its Subsidiaries) of which the Company or any of its Subsidiaries (or any predecessor) is or was a member on or prior to the Closing Date, by reason of the liability of the Company or any of its Subsidiaries pursuant to Treasury Regulation Section 1.1502-6(a) or any analogous or similar state, local or foreign law or regulation; (iv) any and all Employment and Withholding Taxes; (v) to the extent not previously paid, any and all real property Taxes allocable to the Seller pursuant to Section 11.2(c) hereof (excluding real property Taxes resulting from the Excluded Transactions and any increase in real property Taxes arising from a revaluation of the property as a result of the sale of the Shares or the Elections); (vi) any and all Income Taxes allocable to the Seller pursuant to Section 11.2(c) hereof and not previously paid thereunder; (vii) any and all Taxes (other than Taxes described in clauses (i) through (vi) of this Section 11.2(a)) with respect to taxable years ending on or before December 31, 1995; (viii) any and all Taxes (other than Taxes described in clauses (i) through (vi) of this Section 11.2(a)) with respect to taxable years ending after December 31, 1995, but only to the extent that such Taxes are attributable to the portion of the period ending on December 31, 1995; and (ix) any breach by the Seller of any representation, 61 warranty or covenant contained in Section 4.10 or Section 11.2. (b) Buyer agrees to indemnify and hold harmless Seller and its Affiliates from and against (and Seller and its Affiliates shall have no liability under Section 11.2(a) on account of) any and all Losses for or in respect of any and all Taxes of the Company or any of its Subsidiaries (or any predecessor) that are not described in Section 11.2(a) (including Taxes resulting from an Excluded Transaction), except for such Taxes arising from a breach of a representation or warranty contained in 4.10, to the extent such representation or warranty has not expired pursuant to Section 10.1. (c) Seller and Buyer shall, to the extent permitted by applicable law, elect with the relevant taxing authority to close the taxable period of the Company and its Subsidiaries on the Closing Date. In any case where applicable law does not permit the Company or any Subsidiary of the Company to close its taxable year on the Closing Date (and in the case of Taxes described in Section 11.2(a)(v)), Taxes (other than Taxes described in Section 11.2(a)(viii)) attributable to the taxable period of the Company or such Subsidiary beginning on or before and ending after the Closing Date shall be allocated (i) to Seller for the period up to and including the Closing Date, excluding any Excluded Transaction and any increase in real property Taxes arising from a revaluation of the property as a result of the sale of the Shares or the Elections, and (ii) to Buyer for the period subsequent to the Closing Date (including any Excluded Transaction and any increase in real property Taxes arising from a revaluation of the property as a result of the sale of the Shares or the Elections). Taxes described in Section 11.2(a)(viii) shall be allocated (i) to Seller for the period ending December 31, 1995 and (ii) to Buyer for the period thereafter. Any allocation required to determine any Income Taxes attributable to any period beginning on or before and ending after the Closing Date (including, without limitation, any Income Taxes resulting from a Tax audit or administrative or court proceeding) shall be made by means of a closing of the books and records of each of the Company and its Subsidiaries as of the close of business on the Closing Date, excluding any Excluded Transaction, and, to the extent not susceptible to such allocation, by apportionment on the basis of elapsed days, except that extraordinary items described in Treasury Regulation Section 1.1502- 76(b)(2)(ii)(C) shall be allocated to the day that they are taken into account. Real property Taxes (excluding those arising from any Excluded Transaction and any increase in such Taxes arising from a revaluation of the property as a result of the sale of the Shares or the Elections) shall be allocated on the basis of elapsed days. Any allocation of Taxes described in Section 11.2(a)(viii) shall be allocated on the basis of elapsed days. 62 (d) (i) Promptly after receipt by Buyer or its Affiliates of written notice of the assertion or commencement of any claim, audit, examination, or other proposed change or adjustment by any taxing authority concerning any Tax covered by Section 11.2(a) (each a "Tax Claim"), Buyer shall notify Seller. Such notice shall contain factual information (to the extent known by Buyer, the Company or any of its Subsidiaries) describing the asserted Tax Claim in reasonable detail and shall include copies of any notice or other document received from any taxing authority in respect of any such asserted Tax Claim. The failure of Buyer to give Seller prompt notice as provided herein shall not relieve Seller of any of its obligations under Section 11.2, except to the extent that the Seller is materially prejudiced by such failure. (ii) Seller shall have the sole right to represent the Company's or any of its Subsidiaries' interests in any Tax audit or administrative or court proceeding relating to any Tax covered by Section 11.2(a) and to employ counsel of its choice, provided that (A) with respect to any taxable period referred to in Sections 11.2(a)(v), (vi) or (viii) hereof or (B) if the results of such Tax audit or proceeding (other than a Tax audit or proceeding with respect to any Seller Consolidated and Combined Return, as to which Seller's sole obligation shall be to keep Buyer duly informed of the progress thereof) could reasonably be expected to be material to Buyer, the Company, any of the Company's Subsidiaries or their Affiliates for any taxable period including or ending after the Closing Date, then Seller and Buyer shall jointly control the defense and settlement of any such Tax audit or proceeding and each party shall cooperate with the other party at its own expense and there shall be no settlement or closing or other agreement with respect thereto without the consent of the other party, which consent shall not be unreasonably withheld. Seller shall promptly notify Buyer if it decides not to control the defense or settlement of any such Tax audit or administrative or court proceeding and Buyer thereupon shall be permitted to defend and settle such Tax audit or proceeding. (iii) Seller shall promptly notify Buyer of the commencement of any claim, audit, examination or other proposed change or adjustment by any taxing authority which could reasonably be expected to affect the liability of the Company or any of its Subsidiaries for Taxes and Seller shall keep Buyer duly informed of the progress thereof. (e) (i) Seller shall properly prepare or cause to be properly prepared, and shall timely file or cause to be timely filed, (x) all Tax Returns which include the Company 63 or any of its Subsidiaries required to be filed on or before the Closing Date, (y) all Tax Returns which include the Company or any of its Subsidiaries or their assets or operations for all taxable periods of the Company and its Subsidiaries ending on or before the Closing Date (which Tax Returns shall include the Company and its Subsidiaries and the reportable items from the assets or operations of the Company and its Subsidiaries through and including the Closing Date), and (z) all Tax Returns with respect to Taxes described in Section 11.2(a)(vii). Such Tax Returns (insofar as they relate to the Company or any of its Subsidiaries) shall be prepared in a manner consistent with past practices and prior audit adjustments and Parent and the Seller shall pay or cause to be paid all Taxes shown as due on such Tax Returns or otherwise levied or assessed upon the Company or any Subsidiary or any of its Assets on or prior to the Closing Date. Insofar as they relate to the Company and its Subsidiaries, such Tax Returns shall be provided to Buyer for Buyer's review and comment 20 Business Days prior to filing, and Buyer shall be entitled to suggest to Seller any reasonable changes to such Tax Returns. Seller and Buyer agree to consult and resolve in good faith any issue arising as a result of the review of such Tax Returns and mutually to consent to the filing as promptly as possible of such Tax Returns. In the event the parties are unable to resolve any dispute within ten Business Days following the delivery of such Tax Returns, the parties shall jointly request a Tax Settlement Auditor (appointed pursuant to the principles set forth in Section 11.1(b)(z)) to resolve any issue at least five Business Days before the due date of any such Tax Return, in order that such Tax Return may be timely filed. Seller and Buyer shall each pay one-half of the Tax Settlement Auditor's fees and expenses. Seller shall, subsequent to the Closing Date, provide written notice to Buyer of its intent to file any amended Tax Return or claim for refund with respect to any taxable period ending on or prior to the Closing Date that could reasonably be expected to be material to Buyer, the Company, any of the Company's Subsidiaries, or their Affiliates for any taxable period including or ending after the Closing Date, and Seller shall not make such filing without the consent of Buyer, which consent shall not be unreasonably withheld. (ii) Except as set forth in clause (i) above, Buyer shall be responsible for the filing and payment (subject to Buyer's right to indemnification to the extent provided in Section 11.2(a)) of all other Tax Returns required to be filed after the Closing Date (including Tax Returns with respect to Taxes described in Section 11.2(a)(viii)) by or on behalf of the Company and its Subsidiaries, or with respect to their assets and operations. 64 (iii) With respect to (x) any Income Tax Return required to be filed by Buyer for a taxable period of the Company or any of its Subsidiaries beginning on or before the Closing Date and ending after the Closing Date, (y) any Taxes described in Section 11.2(a)(v) or (z) any Tax Returns with respect to Taxes described in Section 11.2(a)(viii), Buyer shall deliver, at least 20 Business Days prior to the due date for filing such Tax Return (including extensions), to Seller a statement setting forth the amount of Tax allocated to Seller pursuant to Section 11.2(c) or Section 11.2(a)(viii), as the case may be, (the "Tax Statement") and copies of such Tax Returns, and Buyer shall cause the Company and its Subsidiaries to pay all Taxes shown as due on such Tax Returns. Seller shall have the right to review such Tax Return and the Tax Statement prior to the filing of such Tax Return and to suggest to Buyer any reasonable changes to such Tax Returns. Seller and Buyer agree to consult and resolve in good faith any issue arising as a result of the review of such Tax Return and the Tax Statement and mutually to consent to the filing as promptly as possible of such Tax Return. In the event the parties are unable to resolve any dispute within eight Business Days following the delivery of such Tax Return and the Tax Statement, the parties shall jointly request a Tax Settlement Auditor (appointed pursuant to the principles set forth in Section 11.1(b)(z)) to resolve any issue in dispute as promptly as possible. If the Tax Settlement Auditor is unable to make a determination with respect to any disputed issue within five Business Days prior to the due date (including extensions) for the filing of the Tax Return in question, then Buyer may file such Tax Return on the due date (including extensions) therefor without such determination having been made and without Seller's consent. Notwithstanding the filing of such Tax Return, the Tax Settlement Auditor shall make a determination with respect to any disputed issue, and the amount of Taxes that are allocated to Seller pursuant to Section 11.2(c) or Section 11.2(a)(v) or (viii), as the case may be, shall be as determined by the Tax Settlement Auditor. The fees and expenses of the Tax Settlement Auditor shall be paid one-half by Buyer and one-half by Seller. Nothing in this Section 11.2(e)(iii) shall excuse Seller from its indemnification obligations pursuant to Section 11.2 hereof if the amount of Taxes as ultimately determined (on audit or otherwise), for the periods covered by such Tax Returns and which are allocable to Seller pursuant to Section 11.2(c), or Section 11.2(a)(v) or (viii), as the case may be, exceeds the amount determined under this Section 11.2(e)(iii). (iv) Seller and Buyer shall cooperate fully with each other and make available to each other in a timely fashion such Tax data and other information as may be reasonably 65 required by Seller or Buyer for the preparation and timely filing of any Tax Returns required to be prepared and filed by Seller or Buyer hereunder, or in connection with the preparation or filing of any election, claim for refund, consent or certification. (f) Seller and Buyer shall provide to each other, and Buyer shall cause each of the Company and its Subsidiaries to provide to Seller, full access, at any reasonable time and from time to time, at the business location at which the books and records are maintained, after the Closing Date, to such Tax data of each of the Company and its Subsidiaries as Seller or Buyer, as the case may be, may from time to time reasonably request and shall furnish, and request the independent accountants and legal counsel of Seller, Buyer, the Company, or any Subsidiary of the Company to furnish to Seller or Buyer, as the case may be, such additional Tax and other information and documents in the possession of such persons as Seller or Buyer may from time to time reasonably request. (g) Any claim for indemnity hereunder may be made at any time prior to 60 Business Days after the expiration of the applicable Tax statute of limitations with respect to the relevant taxable period (including all extensions obtained, whether automatic or permissive). (h) The party seeking indemnification or other payment pursuant to this Section 11.2 (Seller or Buyer, as the case may be) shall give the other party written notice of claim for indemnification or payment, which notice shall include a calculation of the amount of the requested indemnity or other payment and shall furnish to the other party copies of all books, records and other information reasonably requested by the other party to the extent necessary to substantiate such claim and verify the amount thereof. If reasonably necessary in order to make or substantiate a claim (or to determine if a claim should be made), each party shall be permitted access to the other party's books, records and other information in connection therewith. The party requested to make any indemnity or other payment pursuant to this Section 11.2 shall deliver to the party requesting payment, within 20 Business Days after receiving both the foregoing notice and all books, records and other information reasonably requested by it, a detailed statement describing its objections (if any) thereto. The parties shall use reasonable efforts to resolve any such objections, but if they do not obtain a final resolution within 20 Business Days (or any longer period mutually agreed to by the parties) after the party requesting indemnification (or other payment) has received the statement of objections, a Tax Settlement Auditor (appointed pursuant to the principles set forth in Section 11.1(b)(z)) shall resolve any remaining objections. Seller and Buyer shall each pay one-half of the Tax Settlement Auditor's fees and expenses. 66 (i) Seller shall be responsible for, shall pay or cause to be paid, and shall indemnify and hold harmless Buyer, as an adjustment to the Final Purchase Price, from and against any Losses arising after the Closing Date arising under any Tax sharing, Tax indemnity, Tax allocation or similar contracts (whether or not written) to which the Company or any of its Subsidiaries, any predecessor of the Company or any of its Subsidiaries, or any transferor to the Company or any of its Subsidiaries, is a party or is obligated thereunder, in each case on or prior to the Closing Date. None of Buyer, the Company or any of its Subsidiaries shall have any liability pursuant to any such agreement after the Closing Date. 11.3 Tax Related Adjustments. (a) Seller and Buyer agree that any indemnity payment made under this Agreement shall be treated by the parties on their Tax Returns as an adjustment to the Final Purchase Price. If, notwithstanding such treatment by the parties, any indemnity payment is determined to be taxable to (i) Parent or Seller (other than as an adjustment to the Final Purchase Price) or (ii) Buyer, the Company or any of its Subsidiaries, for federal Income Tax purposes by the Internal Revenue Service, the indemnifying party shall indemnify the indemnified party for any additional federal Income Taxes payable by the indemnified party by reason of the receipt or accrual of such indemnity payment (including any payments under this Section 11.3)). (b) An indemnity payment otherwise due and payable hereunder shall be decreased (but not below zero) to the extent of any net actual reduction in federal Income Tax liability that is actually realized by the indemnified party upon its payment of an indemnifiable loss. (c) Except as provided in Section 11.3(d), Buyer shall pay to Seller any refund of any Tax for which Seller is responsible under Section 11.2(a) or the amount of actual reduction in such Taxes realized (or portion of either thereof) after the Closing Date by Buyer or any of its Affiliates (including the Company or any of its Subsidiaries) relating to such Taxes imposed on or with respect to Seller or any of its Affiliates (including the Company or any of its Subsidiaries) with respect to any taxable period (or portion thereof) ending on or prior to the Closing Date. Buyer shall pay to Seller such refund (including interest received thereon) (reduced by any actual Tax increase or actual Tax detriment to Buyer, the Company or any of its Subsidiaries, but increased by any actual Tax benefit resulting from such payment) or the amount of any such reduction in Taxes promptly upon receipt thereof by the recipient thereof. Buyer shall, if Seller requests, cause the relevant entity to file for and obtain any refunds or equivalent amounts to which Seller is entitled under this Section 11.3(c), and Buyer shall permit Seller to control the prosecution of any such refund 67 claim, and shall cause the relevant entity to authorize by appropriate powers of attorney such Persons as Seller shall designate to represent such entity with respect to such refund claim; provided, however, that Buyer must consent to any such refund claim, which consent may not be unreasonably withheld, and that any such refund claim shall be at the sole expense of the Seller. (d) Seller agrees that to the extent that the Company or any of its Subsidiaries realizes any Tax attribute after the Closing Date that may be carried back to a taxable period ending on or prior to the Closing Date, Seller shall, at Buyer's sole expense, permit such carryback, shall cooperate in the filing of any required returns or claims for refund and shall pay Buyer any Tax refund received or the amount of any reduction in Taxes so obtained by the Seller Group (as hereinafter defined); provided, however, in the event that any Tax attribute generated after the Closing Date by Buyer, the Company or any Subsidiary or any member of any affiliated group (or other group filing on a combined basis) of which any thereof is a member (any of the foregoing being referred to herein as a "Buyer Group Member") is carried back to a taxable year (or portion thereof) of Parent's affiliated group (or other group filing on a combined basis of which Seller is a member) (the "Seller Group") that ended on or prior to the Closing Date and, as a result of such carryback, any Tax attribute generated by the Seller Group (whether in the same year or in a prior or subsequent year) is not capable of being carried back or forward to the same extent it would have been had no such Buyer Group carryback occurred, Buyer shall pay to Seller an amount sufficient to place the Seller Group in the same position as it would have been in if no such carryback occurred (except that Seller shall pay Buyer (when and as actually realized) any refund of Taxes or actual reduction of Taxes otherwise payable by the Seller Group that is subsequently realized by the Seller Group as a result of the Seller Group's use of any Tax attributes that would otherwise have been utilized by the Seller Group earlier had the Tax attribute of Buyer, the Company or any Subsidiary of the Company (or any other Buyer Group Member) not been so carried back, and provided, further, that if Seller makes a payment pursuant to this Section 11.3(d) on account of a refund of Taxes, or an actual reduction of Taxes of the Seller Group and it is later determined (as a result of an audit adjustment or otherwise) that the Seller Group is liable for the return thereof to the applicable taxing authority, Buyer shall promptly remit to Seller the amount Seller has previously paid to Buyer with respect to the item in issue (plus appropriate interest)). 11.4 Transfer Taxes. Seller shall pay, or cause to be paid, any transfer Tax or fee, recordation or similar Tax or fee, deed, stamp or other Tax, grantor's or grantee's Tax, recording charge, fee, or other similar cost or expense of any kind 68 required or customary in the applicable jurisdiction in connection with the effectuation of the transfer of the Shares and all transactions pursuant to this Agreement (including the Elections), whether such Tax or fee is imposed on Buyer, Seller, the Company or any Subsidiary. Upon demand by Seller, Buyer shall reimburse Seller for one-half of all such payments. 12. Termination. 12.1 Termination and Abandonment. This Agreement may be terminated and the transactions contemplated by this Agreement may be abandoned at any time prior to the Closing: (a) by mutual written consent of Buyer, Parent and Seller; or (b) by Buyer or Parent and Seller if the Closing shall not have occurred on or before May 31, 1996; provided, however, that the right to terminate this Agreement under this Section 12.1(b) shall not be available to any party whose failure to fulfill any obligation under this Agreement shall have been the cause of, or resulted in, the failure of the Closing to occur on or before such date; or (c) by Buyer or Parent and Seller if any court of competent jurisdiction shall have issued an order, decree or ruling or taken any other action enjoining or otherwise prohibiting the transactions contemplated under this Agreement and such order, decree, ruling or other action shall have become final and nonappealable. 12.2 Survival; Expenses. (a) If this Agreement is terminated and the transactions contemplated hereby are not consummated as described above, this Agreement shall become void and of no further force and effect, except for the provisions of this Section 12.2, Section 7.4(b) and Article 13. None of the parties hereto shall have any liability in respect of a termination of this Agreement, except to the extent that such termination results from a breach of the representations, warranties, covenants or agreements of Parent and Seller, on the one hand, or Buyer, on the other hand, under this Agreement. (b) Except as otherwise specifically provided herein, the parties shall bear their respective expenses incurred in connection with the preparation, execution and performance of this Agreement and the transactions contemplated hereby, including all fees and expenses of agents, representatives, counsel, actuaries and accountants. 13. Miscellaneous. 13.1 Public Announcements. No party shall issue any 69 news release or make any public announcement concerning this Agreement or any of the transactions contemplated hereby without the advance approval thereof by Parent and Buyer; provided, however, that any party may make any public disclosure that it reasonably believes, upon the advice of counsel, is required by applicable federal or state securities laws, in which case the disclosing party shall use commercially reasonable efforts to advise the other party or parties prior to making such disclosure. Subject to the prior sentence, Parent and Buyer shall cooperate with each other in the development and distribution of all news releases and other public announcements with respect to this Agreement or any of the transactions contemplated hereby. 13.2 Notices. Any notice or other communication required or permitted hereunder shall be in writing and shall be delivered personally, sent by facsimile transmission, sent by overnight courier or sent by certified, registered or express mail, postage prepaid. Any such notice shall be deemed given when actually received by the relevant party as follows: if to Buyer, to: General Electric Capital Corporation 3001 Summer Street Stamford, Connecticut 06927 Attention: Managing Director of Insurance Services Facsimile: 203-357-6969 with copies to: General Electric Capital Corporation 260 Long Ridge Road Stamford Connecticut 06927-5000 Attention: General Counsel Facsimile: 203-357-3365 and Weil Gotshal & Manges 100 Crescent Ct. Suite 1300 Dallas, Texas 75201 Attention: David Spuria, Esq. Facsimile: 214-746-7777 if to Parent, Seller or, prior to Closing, the Company, to: Aon Corporation 123 North Wacker Drive Chicago, IL 60606 Attention: Raymond I. Skilling, Esq. 70 Facsimile: (312) 701-3080 with a copy to: Sidley & Austin One First National Plaza Chicago, IL 60603 Attention: Thomas A. Cole and Frederick C. Lowinger Facsimile: (312) 853-7036 Any party may by notice given in accordance with this Section 13.2 to the other parties designate another address or Person for receipt of notices hereunder. 13.3 Entire Agreement. This Agreement (including the Schedules and Exhibits hereto) contains the entire agreement among the parties with respect to the transactions contemplated hereby, and supersedes all prior agreements and understandings, written or oral, with respect thereto. 13.4 Waivers and Amendments; Noncontractual Remedies; Preservation of Remedies. This Agreement may be amended, superseded, canceled, renewed or extended, and the terms hereof may be waived, only by a written instrument signed by the parties or, in the case of a waiver, by the party waiving compliance. No delay on the part of any party in exercising any right, power or privilege hereunder shall operate as a waiver thereof. No waiver on the part of any party of any such right, power or privilege, and no single or partial exercise of any such right, power or privilege, shall preclude any further exercise thereof or the exercise of any other such right, power or privilege. The rights and remedies herein provided are cumulative and, except as provided in Section 13.11, are not exclusive of any rights or remedies that any party may otherwise have at law or in equity. 13.5 Governing Law. This Agreement and the rights and obligations of the parties hereto shall be governed by, and construed and enforced in accordance with, the laws of the State of the State of Illinois, without giving effect to the conflicts of laws principles thereof. 13.6 Binding Effect; Assignment Limited. (a) This Agreement shall be binding upon and inure to the benefit of and be enforceable by the parties hereto and their respective successors and permitted assigns and legal representatives. (b) Neither this Agreement, nor any right hereunder, may be assigned by any party without the written consent of the other parties hereto, except that Buyer may assign all or any portion of its interest in this Agreement to any one or more wholly-owned Subsidiaries of Buyer; provided that, 71 notwithstanding any such assignment, Buyer shall remain liable to perform all obligations hereunder. 13.7 No Third-Party Beneficiaries. Except for Section 10.5, nothing in this Agreement is intended or shall be construed to give any Person, other than the parties hereto, any legal or equitable right, remedy or claim under or in respect of this Agreement or any provision contained herein. 13.8 Counterparts. This Agreement may be executed by the parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed to be an original and which together shall constitute one and the same instrument. Each counterpart may consist of a number of copies hereof each signed by less than all, but together signed by all of the parties hereto. 13.9 Schedules. (a) The Schedules hereto are a part of this Agreement as if fully set forth herein. (b) Any item appearing in either the Seller Disclosure Schedule or the Company Disclosure Schedule pursuant to any one Section of this Agreement shall be deemed to have been listed in such disclosure schedules with respect to any other Section of this Agreement where such listing may be deemed to be required, and subject to Section 8.1 all disclosures in the Seller Disclosure Schedule or the Company Disclosure Schedule shall be deemed to refer solely to matters as they exist at the date of this Agreement, unless a different date is specified in such disclosure schedule. 13.10 Headings. The article, section and paragraph headings in this Agreement are for convenience only, and shall not control or affect the meaning or construction of any provision of this Agreement. 13.11 Remedies. The parties hereto agree that money damages or other remedies at law would not be sufficient or adequate remedy for any breach or violation of, or a default under, this Agreement by them and that, in addition to all other remedies available to them, each of them shall be entitled to an injunction restraining such breach, violation or default or threatened breach, violation or default and to any other equitable relief, including specific performance, without bond or other security being required. 13.12 Invalidity of Provisions. The invalidity or unenforceability of any provision of this Agreement in any jurisdiction shall not affect the validity or enforceability of the remainder of this Agreement in that jurisdiction or the validity or enforceability of this Agreement, including that provision, in any other jurisdiction. If any restriction or 72 provision of this Agreement is held unreasonable, unlawful or unenforceable in any respect, such restriction or provision shall be interpreted, revised or applied in a manner that renders it lawful and enforceable to the fullest extent possible under law. 73 IN WITNESS WHEREOF, the parties have executed this Agreement on the date first above written. Aon CORPORATION By: /s/ Harvey N. Medvin ------------------------------------ Name: Harvey N. Medvin Title: COMBINED INSURANCE COMPANY OF AMERICA By: /s/ Harvey N. Medvin ------------------------------------ Name: Harvey N. Medvin Title: UNION FIDELITY LIFE INSURANCE COMPANY By: /s/ Harvey N. Medvin ------------------------------------ Name: Harvey N. Medvin Title: GENERAL ELECTRIC CAPITAL CORPORATION By: /s/ Edward D. Stewart ------------------------------------ Name: Edward D. Stewart Title: 74 EX-10.T 5 STOCK PURCHASE AGREEMENT EXHIBIT 10.T EXECUTED COPY STOCK PURCHASE AGREEMENT by and among Aon CORPORATION, COMBINED INSURANCE COMPANY OF AMERICA, GENERAL ELECTRIC CAPITAL CORPORATION and THE OTHER PARTIES SPECIFIED HEREIN Dated as of December 22, 1995 Sale of All of the Outstanding Common Shares of The Life Insurance Company of Virginia, Forth Financial Resources, Ltd. and Newco Properties, Inc. to General Electric Capital Corporation TABLE OF CONTENTS
Page 1. Definitions........................................................... 1 2. Sale and Purchase of Shares........................................... 11 2.1 Sale of Shares..................................................... 11 2.2 Purchase Price and Payment for Shares.............................. 11 2.3 Delivery of Shares................................................. 11 2.4 Post-Closing Purchase Price Adjustment; Closing Balance Sheet...... 11 3. Closing; Closing Date................................................. 14 4. Representations and Warranties of Parent and Seller................... 14 4.1 Existence and Power................................................ 14 4.2 Authority; Execution and Delivery.................................. 15 4.3 Consents and Approvals............................................. 15 4.4 No Conflict........................................................ 15 4.5 Capital Stock; Title............................................... 16 4.6 Options or Other Rights............................................ 16 4.7 Charter Documents and By-laws...................................... 17 4.8 Minute Books....................................................... 17 4.9 GAAP and SAP Statements........................................... 17 4.10 Taxes............................................................. 18 4.11 Litigation........................................................ 21 4.12 Broker Dealer Financial Statements................................ 22 4.13 Insurance......................................................... 22 4.14 Employee Benefits................................................. 22 4.15 Brokers........................................................... 23 5. Representations and Warranties of the Companies....................... 24 5.1 Corporate Authority................................................ 24 5.2 Consents and Approvals............................................. 24 5.3 No Conflict........................................................ 24 5.4 Minute Books....................................................... 25 5.5 Compliance With Laws............................................... 25 5.6 Insurance Licenses................................................. 25 5.7 Litigation......................................................... 26 5.8 Contracts and Other Agreements..................................... 26 5.9 Real Estate........................................................ 28 5.10 Personal Property; Intellectual Property.......................... 28 5.11 Operations of the Companies....................................... 29 5.12 The Mutual Fund................................................... 33
5.13 Labor Matters....................................... 34 5.14 No Undisclosed Liabilities.......................... 35 6. Representations and Warranties of Buyer..................... 36 6.1 Existence and Power.................................. 36 6.2 Execution and Delivery............................... 36 6.3 Consents and Approvals............................... 36 6.4 No Conflict.......................................... 36 6.5 Purchase Not for Distribution........................ 37 6.6 Financing............................................ 37 6.7 Litigation........................................... 37 6.8 Brokers.............................................. 37 7. Covenants and Agreements.................................... 37 7.1 Conduct of Business.................................. 38 7.2 Pre-Closing Maintenance of Insurance................. 39 7.3 Litigation; Notice of Assessments; Requests for Information........................................ 39 7.4 Access to Information; Environmental Investigation; Confidentiality.................................... 40 7.5 Approvals............................................ 42 7.6 Additional Financial Statements...................... 42 7.7 Further Assurances................................... 42 7.8 Certain Employee Matters............................. 43 7.9 Settlement of Intercompany Accounts; Cancellation of Intercompany and Other Agreements.................. 48 7.10 Actions to Address Certain Interrelationships; Dividends.......................................... 48 7.11 Investments......................................... 48 7.12 Resignations of Directors........................... 49 7.13 No Negotiations, Etc................................ 49 7.14 Newco Assets; Other Real Property................... 49 8. Conditions Precedent to the Obligation of Buyer............. 50 8.1 Representations and Warranties; Covenants and Agreements.......................................... 50 8.2 Governmental Approvals; Illegality................... 51 8.3 Third Party Consents................................. 52 8.4 Hart-Scott-Rodino.................................... 52 8.5 Opinions of Counsel to Parent, Seller and the Companies........................................... 52 8.6 No Material Adverse Change........................... 52 8.7 Consummation of Certain Transactions................. 52 9. Conditions Precedent to the Obligations of Parent, Seller and the Companies................................... 52 9.1 Representations and Warranties; Covenants and Agreements.......................................... 52 9.2 Governmental Approvals; Illegality................... 53 9.3 Third Party Consents................................. 53 9.4 Hart-Scott-Rodino.................................... 53
9.5 Opinion of Counsel to Buyer................................... 53 9.6 Consummation of Certain Transactions.......................... 53 10. Survival and Indemnification...................................... 53 10.1 Survival of Representations and Warranties.................... 53 10.2 Indemnification by Parent and Seller.......................... 54 10.3 Indemnification by Buyer...................................... 54 10.4 Procedure..................................................... 55 10.5 Indemnification; Directors and Officers Insurance............. 56 10.6 Certain Exclusions from Article 10 Coverage................... 56 11. Tax Matters....................................................... 56 11.1 Section 338 Election.......................................... 57 11.2 Tax Indemnification........................................... 60 11.3 Tax Related Adjustments....................................... 66 11.4 Transfer Taxes................................................ 67 12. Termination....................................................... 67 12.1 Termination and Abandonment................................... 67 12.2 Survival; Expenses............................................ 68 13. Miscellaneous..................................................... 68 13.1 Public Announcements.......................................... 68 13.2 Notices....................................................... 68 13.3 Entire Agreement.............................................. 70 13.4 Waivers and Amendments; Noncontractual Remedies; Preservation of Remedies..................................... 70 13.5 Governing Law................................................. 70 13.6 Binding Effect; Assignment Limited............................ 70 13.7 No Third-Party Beneficiaries.................................. 70 13.8 Counterparts.................................................. 70 13.9 Schedules..................................................... 71 13.10 Headings..................................................... 71 13.11 Remedies..................................................... 71 13.12 Invalidity of Provisions..................................... 71
STOCK PURCHASE AGREEMENT STOCK PURCHASE AGREEMENT (the "Agreement"), dated as of December 22, 1995 by and among Aon Corporation, a Delaware corporation ("Parent"), Combined Insurance Company of America, an Illinois corporation ("Seller"), The Life Insurance Company of Virginia, a Virginia corporation (the "LOV"), Forth Financial Resources, Ltd., a Virginia corporation ("Forth"), Newco Properties, Inc., a Virginia corporation ("Newco", and together with Forth and LOV, collectively the "Companies" and each a "Company"), and General Electric Capital Corporation, a New York corporation ("Buyer"). RECITALS: WHEREAS, Parent is the beneficial owner of all of the issued and outstanding capital stock of Seller; WHEREAS, Seller is the beneficial and record owner of 4,000 shares (the "LOV Shares") of the issued and outstanding common stock, $1,000 par value, of LOV; WHEREAS, Parent is the beneficial and record owner of (i) 6,000 shares (the "Forth Shares") of the issued and outstanding common stock, $1 par value, of Forth; and (ii) of 500 shares (the "Newco Shares") of the issued and outstanding common stock, $1.00 par value, of Newco; WHEREAS, the LOV Shares, the Forth Shares and the Newco Shares (collectively, the "Shares") constitute all of the issued and outstanding common shares of capital stock of the Companies; and WHEREAS, each of Parent and Seller desires to sell its Shares, and Buyer desires to purchase the Shares, upon the terms, subject to the conditions and for the consideration set forth in this Agreement. NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth herein and in reliance upon the representations and warranties contained herein, Parent, Seller, the Companies and Buyer agree as follows: 1. Definitions. (a) Except as the context shall otherwise require, the following terms when used in this Agreement shall have the following meanings: "Adjusted Closing SAP Balance Sheet" means the Closing SAP Balance Sheet, adjusted if and to the extent appropriate (i) to take into account all of the transactions and other actions described in Exhibit A hereto which have been effected on or prior to the Closing Date and (ii) to exclude the impact of any realized or unrealized capital gain or loss, arising on or after July 1, 1995 with respect to the investment portfolio of LOV or the Exhibit C Assets. "Adjusted Closing SAP Capital" means the sum of (i) LOV's capital and surplus as reflected in the Adjusted Closing SAP Balance Sheet, plus (ii) the amount of AVR as of the Closing Date for LOV, all determined in accordance with SAP as in effect on June 30, 1995. "Adverse Environmental Condition" means any of the following: (i) the existence, or the continuation of the existence, of a Release (including, without limitation, sudden or non-sudden, accidental or non-accidental Releases) of, exposure to, or presence of, any substance, chemical, material, pollutant, odor or audible noise or other release or emission in, into or onto the environment (including, without limitation, the air, ground, water or any surface) at, in, by, from or related to the Real Property, (ii) any material damage or injury to the environment in connection with the transportation, storage, treatment or disposal of materials in connection with the operation of the Real Property or (iii) any material violation, or alleged violation, of Environmental Law in connection with Real Property. "Affected Employees" means all current or former employees of the Companies and their Subsidiaries, including any such person who is on disability, layoff or leave of absence, but excluding any former employee of any Company or any of its Subsidiaries who subsequently became employed by Parent or any Subsidiary of Parent other than any Company or any of its Subsidiaries. "Affiliate" means, with respect to any Person, at the time in question, any other Person controlling, controlled by or under common control with such Person. For purposes of this definition, "control" (including the terms "controlling", "controlled by" and "under common control with") 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 securities or otherwise. "Agreed Aggregate Asset Bases" has the meaning set forth in Section 11.1(c). "Agreed Allocation" has the meaning set forth in Section 11.1(b)(z). "Agreement" means this Stock Purchase Agreement, including the Exhibits attached hereto, the Seller Disclosure Schedule and the Company Disclosure Schedule. "Annual SAP Statements" means, with respect to any Person, the annual financial statements of such Person prepared in accordance with SAP, as filed with or 2 submitted to the Insurance Department on forms prescribed or permitted by the Insurance Department. "AVR" means, with respect to any Person, the Asset Valuation Reserve set forth in the balance sheet of such Person in accordance with SAP. "Basis Step-Up" has the meaning set forth in Section 11.1(d). "Basis Step-Up Deficit" has the meaning set forth in Section 11.1(d). "Basis Step-Up Excess" has the meaning set forth in Section 11.1(d). "Benefit Arrangements" has the meaning set forth in Section 4.14(a). "Business Day" means any day which is neither a Saturday nor a Sunday, nor a day on which banking institutions in the City of New York shall be permitted or required by law or executive order to be closed. "Buyer" has the meaning set forth in the first paragraph hereof. "Buyer Group Member" has the meaning set forth in Section 11.3(d). "Buyer's Allocation" has the meaning set forth in Section 11.1(b)(z). "Calculating Party" has the meaning set forth in Section 11.1(b)(z) "Closing" means the closing of the sale and purchase of the Shares contemplated by this Agreement. "Closing Date" has the meaning set forth in Section 3. "Closing Adjustment Calculations" has the meaning set forth in Section 2.4(c). "Closing Purchase Price" has the meaning set forth in Section 2.2(a). "Closing SAP Balance Sheet" means the balance sheet of LOV, as of the Closing Date (immediately prior to consummation of the Closing) prepared in accordance with SAP using LOV's customary standards of practice used in preparing year-end financial statements. 3 "COBRA" refers to the provisions of the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended, relating to continuation of health benefits in certain circumstances. "Code" means the Internal Revenue Code of 1986, as amended (including any successor code), and the rules and regulations promulgated thereunder. "Companies" has the meaning set forth in the first paragraph hereof. "Company" has the meaning set forth in the first paragraph hereof. "Company Disclosure Schedule" refers to the disclosure schedule delivered by the Companies to Buyer in connection with the execution and delivery of this Agreement. "Company Plans" has the meaning set forth in Section 4.14(a). "Contracts and Other Agreements" means all contracts, agreements, undertakings, indentures, notes, bonds, loans, instruments, leases, mortgages, commitments or other binding agreements, whether written or oral, other than Employee Benefit Programs. "Deemed Purchase Price" has the meaning set forth in Section 11.1(b)(z). "Defined Contribution Plans" means Parent's Savings Plan and Parent's ESOP. "Disputing Party" has the meaning set forth in Section 11.1(b)(z). "Elections" has the meaning set forth in Section 11.1(a). "Employee Benefit Programs" has the meaning set forth in Section 4.14(a). "Employment and Withholding Taxes" means all employment, payroll and withholding Taxes payable with respect to salaries, wages, commissions, other compensation or other payments actually or constructively made by the Companies or any of their Subsidiaries on or before the Closing Date, except to the extent such Taxes have been withheld on or prior to the Closing Date and are required to be paid to the appropriate taxing authority after the Closing Date. "Environmental Investigation" has the meaning set forth in Section 7.4(c). 4 "Environmental Law" means, without limitation, any of the Hazardous Materials Transportation Act, the Comprehensive Environmental Response, Compensation and Liability Act, the Water Pollution Control Act, the Clean Air Act, the Resource Conservation and Recovery Act, the Solid Waste Disposal Act, the Toxic Substances Control Act, the Insecticide, Fungicide and Rodenticide Act, the Safe Drinking Water Act, the Occupational Health and Safety Act, each as amended, and all other environmental statutes enacted by the United States and by state and local Governmental or Regulatory Bodies (including municipal sewerage authorities), any executive orders, ordinances, rules or regulations promulgated under any of the foregoing, and common law respecting environmental matters. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended, and the rules and regulations promulgated thereunder. "Executive Officers" means, with respect to any corporation, the chairman of the board of directors, the president, any executive or senior vice president (and any vice president, in the case of the Companies only), the general counsel, and the treasurer of such corporation (and other individuals, if any, performing comparable functions), and with respect to any partnership, the individuals performing comparable functions on behalf of such partnership. "Excluded Transactions" has the meaning set forth in Section 11.2. "Exhibit C Assets" means the assets set forth on Exhibit C attached hereto and any other investment assets acquired on or after December 1, 1995 using funds (i) derived from any disposition of such assets, (ii) earned on such assets and (iii) from other cash flows on the insurance businesses described in items 1 through 4 of Exhibit A. "Federal" means of or pertaining to the government of the United States of America. "FFRL Re" means FFRL Re Corp., a Virginia corporation. "Final Purchase Price" has the meaning set forth in Section 2.2(a). "Forth" has the meaning set forth in the first paragraph hereof. "Forth Shares" has the meaning set forth in the recitals hereof. "FTC" means the Federal Trade Commission of the United States of America. 5 "GAAP" means United States generally accepted accounting principles consistently applied throughout the specified period and in the immediately prior comparable period, except for normal recurring year-end adjustments. "Governmental or Regulatory Body" means any government or political subdivision thereof, whether Federal, state, local or foreign, or any agency or instrumentality of any such government or political subdivision. "HSR" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the rules and regulations promulgated thereunder. "IMR" means, with respect to any Person, the Interest Maintenance Reserve set forth in the balance sheet of such Person in accordance with SAP. "Income Taxes" means (i) all Taxes however denominated (including franchise taxes and premium taxes) that are based upon or measured by gross income, net income, or gross receipts, (ii) minimum and tax preference based Taxes, (iii) any guarantee fund assessments, (iv) state insurance department licenses and fees and (v) any interest, fines, penalties, assessments or additions to tax resulting from, attributable to or incurred in connection with any Tax described in clauses (i) through (iv) or any contest, dispute or refund thereof. "Income Tax Returns" means Tax Returns in respect of Income Taxes. "Increase Amount" has the meaning set forth in Section 2.4(b). "Indemnitee" has the meaning set forth in Section 10.4. "Indemnitor" has the meaning set forth in Section 10.4. "Insurance Contracts" means all insurance policies, annuity contracts, guaranteed investment contracts and other insurance products underwritten by LOV or FFRL Re. "Insurance Department" means the appropriate insurance regulatory governmental authority for LOV's and FFRL Re's respective states of domicile and deemed commercial domicile, if any. "Insurance Licenses" has the meaning set forth in Section 5.6(a). "Interim SAP Statements" has the meaning set forth in Section 7.6. "Investment Assets" means (i) the investment assets of LOV and FFRL Re (including, without limitation, "caps," "swaps" and other similar arrangements) as of 6 the date hereof and any other investment assets acquired following the date hereof using funds derived from any disposition of such assets or funds earned on such assets or cash flows from the related insurance business and (ii) the Exhibit C Assets. "Investment Advisor" means Aon Advisors, Inc. "Investment Act" means the Investment Advisers Act of 1940, as amended. "Investment Contracts" means all contracts, agreements, undertakings, indentures, notes, bonds, loans, instruments, leases, mortgages, commitments or other binding agreements included in the investment portfolio of the Companies or any of their Subsidiaries. "IRS" means the Internal Revenue Service of the United States of America. "Justice" means the Antitrust Division of the Department of Justice of the United States of America. "Knowledge" means, with respect to any entity, the actual knowledge of any of the Executive Officers of such entity. "Lawyers Title Building" means the six-story multi-tenant office building owned as of the date hereof by LOV that as of the date hereof is primarily occupied by the Lawyer's Title Insurance Company. "Lien or Other Encumbrance" means any lien, pledge, mortgage, security interest, claim, lease, charge, option, right of first refusal, easement, servitude, transfer restriction under any shareholder or similar agreement or encumbrance. "Litigation" means, with respect to any Person, any claim, action, suit, proceeding, arbitration or governmental investigation. "Losses" means all losses, liabilities (including for environmental clean up) , damages (excluding consequential damages suffered by any Indemnitee), deficiencies, costs, fines and assessments, penalties, claims, actions, injuries, judgments and expenses (including interest actually paid by an Indemnitee to a third party and reasonable attorneys' fees and disbursements), however arising, net of any insurance proceeds the Person incurring such losses recovered in respect thereof. "LOV" has the meaning set forth in the first paragraph hereof. "LOV Shares" has the meaning set forth in the recitals hereof. 7 "Material Adverse Effect" means an effect or series of related effects which, individually or in the aggregate, is materially adverse to either (a) the business, financial condition or results of operations of the Companies and their Subsidiaries, taken as a whole, (b) the legal ability of Parent or Seller to consummate the transactions contemplated by this Agreement other than by reason of the inability of Buyer to consummate such transactions, or (c) the validity or enforceability of this Agreement. "Modified Aggregate Deemed Sales Price" has the meaning set forth in Section 11.1(b)(z). "Mutual Fund" means Life of Virginia Series Fund, Inc. "NAIC" means the National Association of Insurance Commissioners and any successor thereto. "Newco" has the meaning set forth in the first paragraph hereof. "Newco Shares" has the meaning set forth in the recitals hereof. "Notice" has the meaning set forth in Section 10.4. "Parent" has the meaning set forth in the first paragraph hereof. "Parent's ESOP" means the Aon Employee Stock Ownership Plan. "Parent's Retirement Plan" means the Aon Pension Plan. "Parent's Savings Plan" means the Aon Savings Plan. "Permits" means all licenses, permits, orders, approvals, registrations, authorizations and qualifications with and under all Federal, state, local or foreign laws and Governmental or Regulatory Bodies and all industry or other nongovernmental self-regulatory organizations that are necessary for the conduct of the applicable Person's business and the ownership of its properties. "Permitted Liens" means (i) Liens or Other Encumbrances for Taxes not yet due and payable, and (ii) statutory or other Liens or Other Encumbrances that do not interfere with the use by a Person of the property involved. "Person" means and includes any natural person, corporation, limited liability company, partnership, limited partnership, firm, joint venture, association, joint-stock company, trust, business trust, unincorporated organization, Governmental or Regulatory Body, or other entity. 8 "Product" has the meaning set forth in Section 2.4(a). "Quarterly SAP Statements" means, with respect to a specified Person, the quarterly financial statements of such Person prepared in accordance with SAP, as filed with or submitted to the Insurance Department on forms prescribed or permitted by the Insurance Department. "Real Property" means any real estate (including all buildings, structures, improvements and fixtures thereon) in which a Company or a Subsidiary of a Company holds an ownership or leasehold interest (including, without limitation, Lawyers Title Building). "Reduction Amount" has the meaning set forth in Section 2.4(b). "Release" means any material release, spill, emission, leaking, pumping, pouring, dumping, emptying, injection, deposit, disposal, discharge, dispersal, leaching or migration on or into the indoor or outdoor environment or into or out of any property. "SAP" means, with respect to a specified Person, the statutory accounting practices prescribed or permitted by the Insurance Department, consistently applied throughout the specified period and in the immediately prior comparable period. "Section 338 Forms" has the meaning set forth in Section 11.1(b)(y). "Seller" has the meaning set forth in the first paragraph hereof. "Seller Consolidated and Combined Returns" means any consolidated, affiliated, combined or unitary Tax Returns of Parent which include any Company and any Subsidiary of such Company. "Seller Disclosure Schedule" refers to the disclosure schedule delivered by Parent and Seller to Buyer in connection with the execution and delivery of this Agreement. "Seller Group" has the meaning set forth in Section 11.3(d). "Seller's Aggregate Asset Bases" has the meaning set forth in Section 11.1(c). "Shares" has the meaning set forth in the recitals hereof. "Settlement Auditor" has the meaning set forth in Section 2.4(f). 9 "Special Bonus Program" means the special incentive plan described in the memorandum attached to Section 5.8(a) of the Company Disclosure Schedule. "Subsidiary" of a specified Person means a Person 50% or more of the outstanding voting stock or other ownership interests of which are owned, directly or indirectly, by such specified Person or one or more other Subsidiaries of such specified Person. For the purposes of this definition, "voting stock" means stock that ordinarily has voting power for the election of directors, whether at all times or only so far as no senior class of stock has such voting power by reason of any contingency. For purposes of this Agreement, each of Forth Financial Resources of Ohio, Inc., an Ohio corporation, Forth Financial Resources of Oklahoma Agency, Inc., an Oklahoma corporation, and Forth Financial Resources of Texas, Inc., a Texas corporation, shall be deemed to be a Subsidiary of Forth. "Tax Claim" has the meaning set forth in Section 11.2(d). "Taxes" means all taxes, charges, fees, levies, or other similar assessments, including, without limitation, (i) income, gross receipts, ad valorem, premium, guarantee fund assessments, excise, real property, personal property, windfall profit, sales, use, transfer, licensing, withholding, employment, payroll, estimated and franchise taxes imposed by the United States of America, any state, local, or foreign government, or any subdivision, agency, or other similar Person of the United States or any such government; and (ii) any interest, fines, penalties, assessments, or additions to tax resulting from, attributable to or incurred in connection with any Tax or any contest, dispute or refund thereof. "Tax Return" means any report, return, statement or other information required to be supplied to a taxing authority in connection with Taxes. "Tax Settlement Auditor" has the meaning set forth in Section 11.1(b)(z). "Tax Settlement Procedure" has the meaning set forth in Section 11.1(b)(z). "Tax Statement" has the meaning set forth in Section 11.2(e). "Transferred Employee" means any Affected Employee who is offered employment or remains employed by LOV, Forth, Newco or any of their respective Subsidiaries as of the Closing Date or such later date, in either case as otherwise provided in Section 7.8(a) hereof. "Value" has the meaning set forth in Section 7.14(a). 10 "WARN" means the Worker Adjustment and Retraining Notification Act of 1988. (b) "Including" and other forms of such term, with respect to any matter or thing, shall be construed to mean "including but not limited to" such matter or thing. 2. Sale and Purchase of Shares. 2.1 Sale of Shares. (a) At the Closing, Seller agrees to sell to Buyer, and Buyer agrees to purchase from Seller, the LOV Shares, upon the terms and subject to the conditions set forth herein. (b) At the Closing, Parent agrees to sell to Buyer, and Buyer agrees to purchase from Parent, the Newco Shares and the Forth Shares, upon the terms and subject to the conditions set forth herein. 2.2 Purchase Price and Payment for Shares. (a) The purchase price for the Shares shall be an amount equal to $960,000,000 plus, if the Closing occurs after March 31, 1996, simple interest thereon from and including April 1, 1996 to (but not including) the Closing Date at an annual interest rate equal to 6% (the "Closing Purchase Price") and subject to adjustment following the Closing in accordance with Sections 2.4 and 11.1(d) (as so adjusted, the "Final Purchase Price"). The Closing Purchase Price shall be allocated among the Shares as determined by mutual agreement of Parent, Seller and Buyer. (b) At the Closing, Buyer shall pay to Seller and Parent the Closing Purchase Price (as allocated in accordance with the mutual agreement referred to in Section 2.2(a)), in immediately available funds by wire transfer to such account or accounts of Parent and/or Seller as Parent shall have designated to Buyer, in the manner specified herein for the delivery of notices, not less than two Business Days prior to the Closing Date. 2.3 Delivery of Shares. At the Closing, Parent and Seller shall deliver to Buyer certificates representing all of the Shares, duly endorsed in blank for transfer or accompanied by duly executed blank stock powers together with all necessary stock transfer stamps affixed thereto. 2.4 Post-Closing Purchase Price Adjustment; Closing Balance Sheet. (a) Upon the earlier to occur of (i) the parties' agreement (or deemed agreement pursuant to Section 2.4(e)) with respect to the calculation of the Final Purchase Price and (ii) the delivery of any report of the Settlement Auditor as provided in Section 2.4(g), the Closing Purchase Price shall be decreased by the Reduction Amount, if any, and shall be increased by the Increase Amount, if any, and shall be decreased by the product (the "Product") of (y) $80,000 and (z) the number of full months which have 11 elapsed prior to the Closing Date in the calendar year in which the Closing Date occurs. Seller and/or Parent, as the parties shall then agree, shall pay, within five Business Days after the earlier to occur of the events described in clauses (i) and (ii) above, the amount of such Reduction Amount plus the Product to Buyer, plus simple interest thereon (exclusive of the Product) from and including April 1, 1996 to (but not including) the date of payment at an annual interest rate equal to 6%, by wire transfer of immediately available funds to such account or accounts of Buyer as Buyer specifies in writing to Seller in the manner specified herein for the delivery of notices. Buyer shall pay to Seller and/or Parent, as the parties shall then agree, within five Business Days after the earlier to occur of the events described in clauses (i) and (ii) above, the amount of such Increase Amount, by wire transfer of immediately available funds to such account or accounts of Parent and/or Seller as Parent specifies in writing to Buyer in the manner specified herein for the delivery of notices. The allocation of any such payment to particular Shares shall be determined by mutual agreement of Parent, Seller and Buyer. (b) The Reduction Amount shall equal the amount, if any, by which $470,000,000 exceeds the Adjusted Closing SAP Capital. The Increase Amount shall equal the amount of all accruals for Taxes on the Closing SAP Balance Sheet, provided that such accrual for federal income taxes (but not for other Income Taxes or other Taxes) with respect to the period commencing July 1, 1995 and ending on the Closing Date shall be calculated in accordance with the Aon Corporation and Subsidiaries Tax Sharing Agreement effective January 1, 1994. (c) Within 30 Business Days after the Closing Date, Seller and Parent shall prepare and deliver to Ernst & Young LLP for audit the Adjusted Closing SAP Balance Sheet. Buyer shall, and shall cause each Company and its Subsidiaries and Buyer's and their officers and employees to, afford to Seller and Parent and their officers, employees and agents reasonable access at reasonable times to the officers, employees, properties, books and records of each Company and its Subsidiaries and shall furnish to Seller and Parent all financial and other data and information relating to each Company and its Subsidiaries as Seller or Parent may reasonably request in connection with Seller's preparation of the Adjusted Closing SAP Balance Sheet. As promptly as practicable following such delivery (and, in any event, within 40 Business Days), Seller and Parent shall cause (at its expense) Ernst & Young LLP to complete an audit of the Adjusted Closing SAP Balance Sheet. Buyer shall, and shall cause each Company and its Subsidiaries and Buyer's and their officers and employees to, cooperate with Ernst & Young LLP in connection with such audit. As promptly as practicable after such audit is completed, Seller and Parent shall deliver to Buyer (i) the audited Adjusted Closing SAP Balance Sheet together with the report thereon of Ernst & Young LLP to the effect that such audit was conducted in accordance with generally accepted auditing standards and that such firm believes that such audit provides a reasonable basis for such firm's opinion thereon and that the Adjusted Closing SAP Balance Sheet presents fairly in all material respects the statutory financial condition of 12 LOV and its consolidated subsidiaries (assuming Forth and its Subsidiaries to be such consolidated subsidiaries) as of the Closing Date in conformity with this Agreement, and (ii) a statement signed by the Seller and Parent setting forth the calculation of the Reduction Amount and/or the Increase Amount, as the case may be (collectively, the "Closing Adjustment Calculations"), in each case in sufficient detail to permit Buyer to verify such calculation. (d) As promptly as practicable after the conduct of the audits required pursuant to Section 2.4(c), Seller and Parent shall cause Ernst & Young LLP (subject to the execution by Buyer and delivery to Ernst & Young LLP of an appropriate agreement for the review and release of such documents) to (i) provide to Buyer's independent auditors such work papers and other documents of Ernst & Young LLP relating to such audits as Buyer's independent auditors may reasonably request and (ii) cooperate with, and be reasonably available to, Buyer's independent auditors to provide such other information reasonably requested by Buyer's independent auditors concerning such audits and the accounting and auditing issues that arise from or relate to such audits. Buyer shall pay the fees and expenses of its independent auditors. (e) Within 30 Business Days after Buyer's receipt of the audited Adjusted Closing SAP Balance Sheet (together with the Closing Adjustment Calculations of Seller and Parent), Buyer shall provide Seller and Parent with written notice indicating whether Buyer agrees or disagrees with such calculations, and, if Buyer disagrees with such calculations of Seller and Parent, setting forth Buyer's calculation of the Closing Adjustment Calculations. If Buyer agrees with such calculations, or if Buyer fails to deliver to Seller such written notice within such 30 Business Day period, such SAP Balance Sheet and such calculations shall be deemed final. To the extent Buyer, on the one hand, and Seller and Parent, on the other hand, are in agreement as to calculation of the Closing Adjustment Calculations, the parties agree to make the corresponding payment contemplated in Section 2.4(a). (f) Within ten Business Days after Seller's timely receipt by Seller and Parent of any notice of disagreement with the calculation of the Closing Adjustment Calculations, Buyer, Seller and Parent shall begin, and shall cause their independent auditors to participate in, good faith negotiations to resolve such disagreement. If such parties and their independent auditors are unable to resolve such disagreement within ten Business Days after such negotiations begin, such disagreement shall be submitted to the national office of Coopers & Lybrand (which may not assign the matter to its Chicago, Illinois or Stamford, Connecticut office), or, if such firm is unavailable, another independent nationally recognized auditing firm selected by the parties (the "Settlement Auditor") for resolution in a manner consistent with the provisions of this Agreement. The parties shall, and shall cause their independent auditors to, cooperate with the Settlement Auditor and shall proceed in good faith to cause the Settlement Auditor to resolve such disagreement within 40 Business Days after such disagreement is submitted to the Settlement Auditor. The fees and expenses of the Settlement Auditor 13 (i) shall be paid by Seller if the Buyer's calculation of the Closing Adjustment Calculations is closer to the Settlement Auditor's calculation of the Closing Adjustment Calculations than the Seller's calculation of the Closing Adjustment Calculations, (ii) shall be paid by Buyer if the Seller's and Parent's calculation of the Closing Adjustment Calculations is closer to the Settlement Auditor's calculation of the Closing Adjustment Calculations than the Buyer's calculation of the Closing Adjustment Calculations and (iii) shall be paid one- half by Seller and one-half by Buyer if neither the Seller's and Parent's calculation of the Closing Adjustment Calculations nor the Buyer's calculation of the Closing Adjustment Calculations is closer to the Settlement Auditor's calculation of the Closing Adjustment Calculations than the other. (g) The Settlement Auditor, in its sole discretion, shall determine (i) the nature and extent of the participation by Buyer, Seller and their respective independent auditors in connection with the resolution of any disagreement submitted to the Settlement Auditor, (ii) the nature and extent of information that Buyer, Seller and Parent may submit to the Settlement Auditor for consideration in connection with such resolution and (iii) the personnel of the Settlement Auditor who shall review such information and resolve such disagreement; provided, however, that the Settlement Auditor shall permit Buyer to submit any information relating to any audit by Buyer or its auditors of the Adjusted Closing SAP Balance Sheet or the calculation of the Closing Adjustment Calculations prepared by Buyer in connection with the Settlement Auditor's resolution of any such disagreement. The Settlement Auditor's resolution of any such disagreement shall be reflected in a written report which shall be delivered promptly to, and shall be final and binding upon, the parties and the Closing Purchase Price shall be adjusted accordingly to reflect any such resolution and, as adjusted, shall be deemed to be the Final Purchase Price and any adjustment thereto will be paid in accordance with Section 2.4(a). 3. Closing; Closing Date. The Closing shall take place at the offices of Sidley & Austin, 875 Third Avenue, New York, New York 10022, at 10:00 a.m., on the fifth Business Day following the day on which the last of the conditions to Closing set forth in Sections 8 and 9 shall have been satisfied, or at such other place and date as the parties may mutually agree. The date and time of such Closing are herein referred to as the "Closing Date." 4. Representations and Warranties of Parent and Seller. Parent and Seller each represents and warrants to Buyer as follows: 4.1 Existence and Power. (a) Each of Parent, Seller, the Companies and their Subsidiaries is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation. Each of Parent, Seller and the Companies has all requisite corporate power and authority to execute and deliver this Agreement, to perform its obligations hereunder and to consummate the transactions contemplated hereby. 14 (b) Each Company has all requisite corporate power and authority to own, lease and operate its assets, properties and business and to carry on its business as now being conducted by it. Each Company is duly qualified or otherwise authorized or admitted as a foreign corporation to transact business and is in good standing as a foreign corporation in each jurisdiction set forth in Section 4.1(b) of the Seller Disclosure Schedule, which are the only jurisdictions in which such qualification, authorization or admission is required by law, except for any jurisdictions in which the failure to be so qualified, authorized or admitted could not reasonably be expected to have a Material Adverse Effect. 4.2 Authority; Execution and Delivery. The execution and delivery by each of Parent, Seller and the Companies of this Agreement, the performance by each of Parent, Seller and the Companies of its obligations hereunder and the consummation by each of Parent, Seller and the Companies of the transactions contemplated hereby have been duly and validly authorized by all necessary corporate action on the part of each of Parent, Seller and the Companies, respectively. This Agreement has been duly executed and delivered by each of Parent, Seller and the Companies and constitutes the legal, valid and binding obligation of Parent, Seller and the Companies, enforceable against Parent, Seller and the Companies in accordance with its terms, except as such enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium and other similar laws relating to or affecting creditors' rights generally, or by general equitable principles (regardless of whether such enforceability is considered in a proceeding in equity or at law). 4.3 Consents and Approvals. The execution and delivery by each of Parent, Seller and the Companies of this Agreement, the performance by each of Parent, Seller and the Companies of its obligations hereunder and the consummation by each of Parent, Seller and the Companies of the transactions contemplated hereby do not and will not require Parent, Seller or the Companies or any other Subsidiary of Parent (other than the Subsidiaries of the Companies) to obtain any consent, approval or action of, or make any filing with or give any notice to, any Person except (i) as set forth in Section 4.3 of the Seller Disclosure Schedule, (ii) such as have been duly obtained and are in full force and effect on the date hereof and will continue to be in full force and effect on the Closing Date and (iii) those which, if not obtained, made or given, could not reasonably be expected to have a Material Adverse Effect or have a material adverse effect on Buyer's ability to own, possess or exercise the rights of an owner with respect to the Shares or any Company and its Subsidiaries. 4.4 No Conflict. (a) The execution and delivery by each of Parent and Seller of this Agreement, the performance by each of Parent and Seller of its obligations hereunder and the consummation by each of Parent and Seller of the transactions contemplated hereby in accordance with the terms and conditions hereof will not violate any provision of the articles or certificate of incorporation or by-laws or other charter or organizational documents of Parent or Seller. 15 (b) Except as set forth in Section 4.4(b) of the Seller Disclosure Schedule, the execution and delivery by each of Parent and Seller of this Agreement, the performance by Parent and Seller of their obligations hereunder and the consummation by Parent and Seller of the transactions contemplated hereby in accordance with the terms and conditions hereof will not (i) violate, conflict with or result in the breach of any of the terms of, result in a material modification of the effect of, otherwise give any other contracting party the right to terminate, or constitute (with or without notice or lapse of time or both) a default under, any Contract or Other Agreement to which Parent or Seller or any other Subsidiary of Parent (other than the Companies and the Subsidiaries of the Companies) is a party or by or to which Parent or Seller or any other Subsidiary of Parent (other than the Companies and the Subsidiaries of the Companies) or any of their respective assets or properties may be bound or subject, or (ii) violate any existing term or provision of any law, regulation, order, writ, judgment, injunction or decree applicable to Parent or Seller or any other Subsidiary of Parent (other than the Companies and the Subsidiaries of the Companies) or any of their respective assets or properties, except, in the case of clause (i) for such violations, conflicts, breaches, modifications, rights, defaults and impairments that could not reasonably be expected to have a Material Adverse Effect or have a material adverse effect on Buyer's ability to own, possess or exercise the rights of an owner with respect to the Shares or the Companies and their Subsidiaries. 4.5 Capital Stock; Title. Section 4.5 of the Seller Disclosure Schedule accurately sets forth the name and jurisdiction of incorporation of each Subsidiary of each Company and the authorized capital stock of each Company and its Subsidiaries and the number of shares of each class of capital stock of each Company and each of such Subsidiaries that are issued and outstanding. The Shares and all of the issued and outstanding shares of capital stock of the Subsidiaries of each Company are duly authorized, validly issued, fully paid and non-assessable and are owned beneficially and of record as set forth in Section 4.5 of the Seller Disclosure Schedule, free and clear of any Lien or Other Encumbrance, except as provided in such Schedule or in the next sentence. Upon delivery of the payment for the Shares as herein provided, Buyer will acquire good title thereto, free and clear of any Lien or Other Encumbrance (other than (i) Liens or Other Encumbrances created by Buyer and (ii) the requirements of the Federal and state securities laws and state insurance laws respecting limitations on the subsequent transfer thereof), and will own all of the issued and outstanding shares of capital stock of each Company. 4.6 Options or Other Rights. Except for and as provided in this Agreement and except as set forth in Section 4.6 of the Seller Disclosure Schedule, (i) there is no outstanding right, subscription, warrant, call, unsatisfied preemptive right, option or other agreement of any kind to purchase or otherwise to receive from Parent, Seller, any Company or any other Affiliate of Parent, any of the outstanding, authorized but unissued, unauthorized or treasury shares of the capital stock or any other equity security of any Company or any of its Subsidiaries (or any interest therein), (ii) there is 16 no outstanding security of any kind that has been issued by Parent, Seller, any Company or any other Affiliate of Parent and that is convertible into or exchangeable for the capital stock of any Company or any of its Subsidiaries (or any interest therein) and (iii) there is no outstanding Contract or Other Agreement of or binding upon Parent, Seller, any Company or any other Affiliate of Parent (y) to purchase, redeem or otherwise acquire any outstanding shares of the capital stock of any Company or to participate in the equity, income, or election of directors or officers of any Company or any Subsidiary of a Company or (z) that permits any Person to participate in the equity, income or election of directors of any Company or any Subsidiary of a Company. 4.7 Charter Documents and By-laws. Seller has heretofore made available to Buyer true and complete copies of the articles or certificate of incorporation and by-laws of each Company and each of its Subsidiaries, in each case as in effect on the date hereof. 4.8 Minute Books. The minute books of each Company accurately reflect in all material respects all formal actions taken at all meetings and all consents in lieu of meetings of the stockholders of such Company since December 31, 1990 and all formal actions taken at all meetings and all consents in lieu of meetings of the Board of Directors of such Company and all committees thereof since December 31, 1990. All of such minute books have previously been made available for inspection by Buyer. 4.9 GAAP and SAP Statements. (a) Seller has made available to Buyer true and complete copies of the consolidating balance sheets, with appropriate eliminations, of LOV and its consolidated subsidiaries (assuming that Forth and its Subsidiaries are consolidated subsidiaries of LOV) as of December 31, 1994 and 1993, June 30, 1995 and September 30, 1995, and the related statements of income for the periods then ended, prepared in each case on a pro-forma basis after giving effect to the transactions and other actions contemplated by Exhibit A hereto as of such date or the beginning of such period, as the case may be. Such balance sheets and income statements present fairly in all material respects the financial position and the results of operations and shareholders' equity of LOV and its consolidated subsidiaries as of each such date and for each such period in conformity with GAAP, except that footnotes are not included in such financial statements. (b) Seller has made available to Buyer true and complete copies of the statutory balance sheets of LOV as of December 31, 1994 and 1993 and June 30, 1995 and the related statements of statutory income for the periods then ended prepared in each case on a pro-forma basis after giving effect to the transactions and other actions contemplated by Exhibit A hereto as of such date or the beginning of such period, as the case may be. Such balance sheets and income statements present fairly in all material respects the statutory financial position and statutory results of operations of LOV as of each such date and for each such period in conformity with SAP, except that footnotes are not included in such financial statements. 17 (c) Seller has made available to Buyer true and complete copies of Annual SAP Statements of LOV and FFRL Re for the years ended December 31, 1994, 1993 and 1992 and Quarterly SAP Statements of LOV and FFRL Re for the three months ended June 30, 1995 and September 30, 1995, together with the exhibits, schedules and notes thereto and any affirmations and certifications filed therewith, as filed with the appropriate Insurance Department. Except as set forth in Section 4.9(c) of the Seller Disclosure Schedule, each of such Annual and Quarterly SAP Statements presents fairly in all material respects the statutory financial condition of LOV or FFRL Re as of the end of each such period and the statutory results of its operations and changes in capital and surplus for each of the periods then ended and were prepared in conformity with SAP. Except as set forth in Section 4.9(c) of the Seller Disclosure Schedule, each of such Annual and Quarterly SAP Statements was properly prepared in every material respect when filed and there were no material omissions therefrom. In addition, except as set forth in Section 4.9(c) of the Seller Disclosure Schedule, the schedules included in such Annual and Quarterly SAP Statements, when considered in relation to the basic statutory financial statements, present fairly in all material respects the information shown therein. 4.10 Taxes. For purposes of this Section 4.10, any reference to a Company or a Subsidiary of a Company shall include any corporation which merged or was liquidated with and into such Company or a Subsidiary of such Company. Except as disclosed in Section 4.10 of the Seller Disclosure Schedule: (a) All Income Tax Returns and all material other Tax Returns required to be filed by or with respect to each of the Companies and their Subsidiaries on or before the date hereof have been timely filed (and in the case of such Tax Returns required to be filed after the date hereof and on or prior to the Closing Date, will be so filed) and all such Tax Returns are (and will be) true and complete in all material respects. Each Company and its Subsidiaries has timely paid (or there has been paid on their behalf) all material Taxes that are due, or claimed or asserted by any taxing authority to be due, from or with respect to it for taxable years or periods ending prior to the date hereof (and in the case of payments required to be made after the date hereof and on or prior to the Closing Date, will so pay), other than non-Income Taxes which are being contested in good faith. With respect to any period for which federal and state Income Tax Returns have not been filed, or for which such Taxes are not yet due and owing, each Company or its Subsidiaries, as the case may be, has made sufficient accruals for such Taxes in the financial statements referred to in Sections 4.9(b) and (c). Neither any Company nor any Subsidiary of a Company files any material Tax Returns in any jurisdiction other than those set forth in Section 4.10 of the Seller Disclosure Schedule. Each Company and its Subsidiaries has made (or there has been made on their behalf) all required estimated Tax payments sufficient to avoid material underpayment penalties. 18 (b) No audit or other proceeding by any court, Governmental or Regulatory Authority, or similar Person is pending, or, to the Knowledge of Parent, Seller or any Company, threatened, with respect to any Income Tax or material other Tax due from or with respect to any Company or any Subsidiary of a Company or any such Tax Return filed by or with respect to any Company or any of its Subsidiaries. No assessment of Income Taxes or material other Taxes has been proposed in writing against any Company or any Subsidiary of a Company or any of their respective assets or properties. (c) The statute of limitations with respect to the assessment of a deficiency relating to Income Taxes of each Company and its Subsidiaries and of each affiliated group (within the meaning of the Code) of which such Company or any Subsidiary of a Company is or has been a member for all periods ending on or before December 31, 1985 has expired. No issue relating to any Company or any of its Subsidiaries has been raised in writing by any taxing authority in any audit or examination which, by application of the same or similar principles, could reasonably be expected to result in a material deficiency for any subsequent period, including periods subsequent to the Closing Date. There are no outstanding agreements, waivers or arrangements extending the statutory period of limitation applicable to any claim for, or the period for the collection or assessment of, Income Taxes or material other Taxes due from or with respect to any Company or any Subsidiary of a Company for any taxable period, and no power of attorney granted by or with respect to any Company or any of its Subsidiaries relating to Taxes is currently in force. With respect to Taxes for taxable years or periods ending after December 31, 1985, no closing agreement pursuant to Section 7121 of the Code (or any predecessor provision) or any similar provision of any state, local, or foreign law has been entered into by or with respect to any Company or any Subsidiary of a Company. (d) Seller has previously delivered to Buyer true and complete copies of each of (i) any audit reports issued within the last three years relating to the United States federal, state, local or foreign Taxes due from or with respect to each Company and its Subsidiaries and (ii) the United States federal Income Tax Return, and those state, local and foreign Income Tax Returns showing Taxes due in excess of $10,000 for each of the last three taxable years, filed by each Company and its Subsidiaries or (insofar as such returns relate to such Company or any such Subsidiary) filed by any affiliated, consolidated, combined or unitary group of which such Company or any of its Subsidiaries was then a member. (e) There are no Liens or Other Encumbrances with respect to Taxes upon any of the assets or properties of any Company or any Subsidiary of a Company, other than with respect to Taxes not yet due and payable. (f) No consent to the application of Section 341(f)(2) of the Code (or any predecessor provision) has been made or filed by or with respect to any Company or 19 any Subsidiary of a Company or any of their respective assets or properties. None of the assets or properties of any Company or any of its Subsidiaries is an asset or property that is or will be required to be treated as being (i) owned by any Person (other than a Company or its Subsidiaries) pursuant to the provisions of Section 168(f)(8) of the Internal Revenue Code of 1954, as amended, and in effect immediately before the enactment of the Tax Reform Act of 1986, or (ii) tax-exempt use property within the meaning of Section 168(h)(1) of the Code. (g) Each Company and its Subsidiaries are in substantial compliance with all applicable laws or regulations relating to the payment or withholding of Taxes. Each Company and its Subsidiaries is in substantial compliance with its obligation to withhold from employee salaries, wages and other compensation and pay over to the appropriate taxing authorities all amounts required to be so withheld and paid over for all periods under all applicable laws and regulations. (h) Effective as of the Closing, neither any Company nor any of its Subsidiaries shall be a party to, be bound by or have any obligation under, any Tax sharing agreement or similar contract or arrangement among such Company or any Subsidiary of a Company and Parent and its Affiliates (other than any Company or any Subsidiary of a Company). (i) There is no contract or agreement, plan or arrangement by the Company or any Subsidiary of a Company covering any Person that, individually or collectively, could give rise to a payment after the Closing of any amount that would not be deductible by any Company or any of its Subsidiaries by reason of Section 280G of the Code. (j) Neither Parent nor Seller is a "foreign person" within the meaning of Section 1445(b)(2) of the Code. (k) All life insurance contracts issued by LOV and FFRL Re that are subject to Section 7702 of the Code qualify as "life insurance contracts" within the meaning of Section 7702(a) of the Code. All contracts issued by LOV and FFRL Re that are subject to Section 817 of the Code have met the diversification requirements applicable thereto since the issuance of the contract. All annuity contracts issued by LOV or FFRL Re that are subject to Section 72(s) of the Code contain all of the necessary provisions of Section 72(s) of the Code. (l) Neither any Company nor any Subsidiary of a Company has agreed to or is required to make any adjustment pursuant to Section 481(a) of the Code (or any predecessor provision) by reason of any change in any accounting method of such Company or such Subsidiary, and there is no application pending with any taxing 20 authority requesting permission for, nor has the Internal Revenue Service proposed any changes, in any accounting method of any Company or any Subsidiary of a Company. Neither LOV nor FFRL Re is subject to any adjustment under Section 807(f) or Section 807(e)(7)(B) of the Code which would have a material effect on Buyer. (m) The insurance reserves and the unearned premiums with respect to LOV and FFRL Re set forth in all federal Income Tax Returns of such Company were determined in all material respects in accordance with Section 807 of the Code. (n) The unpaid losses with respect to each Company set forth in all federal Income Tax Returns of such Company were based upon reasonable estimates and were discounted in all material respects in accordance with Section 846 of the Code. (o) LOV is and for all taxable periods since April 30, 1986 has been taxable as a life insurance company for purposes of Section 816 of the Code. (p) Except to the extent that the tax treatment of any Insurance Contract issued by LOV or FFRL Re is not materially less favorable than the tax treatment of substantially similar products offered by other companies, the tax treatment under the Code of Insurance Contracts is and at all times has been not materially less favorable to the purchaser thereof than the tax treatment under the Code which the Company represented could be obtained at the time of its purchase. (q) Notwithstanding anything to the contrary in Section 4.10 of the Seller Disclosure Schedule, the balances of the policyholders surplus accounts (as defined in Section 815 of the Code) of LOV and FFRL Re as of December 31, 1994 are zero (0) and zero (0), respectively. Any indemnification with respect to breaches of the representations, warranties and covenants of this Section 4.10 which also give rise to indemnification pursuant to Section 11.2 shall not provide a duplicative benefit to Buyer. 4.11 Litigation. There is no Litigation pending to which Parent or Seller or any other Subsidiary of Parent (other than any Company or any Subsidiary of a Company) is a party or by which any of such Persons or their respective assets or properties are or may be bound by or before any Federal, state, municipal, foreign or other court or Governmental or Regulatory Body, or any private tribunal, or, to the Knowledge of Parent, Seller or any Company, threatened against Parent or Seller or any other Subsidiary of Parent (other than any Company or any Subsidiary of a Company) that, in each case, (i) seeks to restrain or enjoin the consummation of the transactions contemplated by this Agreement or (ii) could reasonably be expected to have a Material Adverse Effect. Neither Seller nor any of its Affiliates (other than any Company or any Subsidiary of a Company) is bound by or subject to any existing order, 21 judgement, injunction award or decree, that, in each case, (i) seeks to restrain or enjoin the consummation of the transactions contemplated by this Agreement or (ii) could reasonably be expected to have a Material Adverse Effect. 4.12 Broker Dealer Financial Statements. The Seller has previously made available to Buyer true and complete copies of the FOCUS Reports of Forth Financial Securities Corporation for each of the years ended December 31, 1993 and 1994 and the quarters ended March 31, 1995, June 30, 1995, and September 30, 1995, as filed with the Securities and Exchange Commission. Each financial statement included in such FOCUS Reports (and the notes relating thereto) was prepared in all material respects in accordance with the regulations promulgated by the Securities and Exchange Commission. 4.13 Insurance. Section 4.13 of the Seller Disclosure Schedule contains a true, complete and correct list as of the date of this Agreement of all policies of insurance and fidelity bonds, other than those constituting an Employee Benefit Program, issued to each Company or any of its Subsidiaries showing the insurers, limits, type of coverage, annual premium, deductibles and expiration dates. All such policies and bonds are in full force and effect as of the date of this Agreement. Neither such Company nor any such Subsidiary is in default with respect to any such policy or bond. All such policies and bonds will be in effect through the Closing Date or will be replaced by the Parent or any of its Affiliates on or prior to the Closing Date by policies or bonds, as the case may be, with substantially similar coverage to the extent available on commercially reasonable terms except for failures to replace or differences in coverage which could not reasonably be expected to have a Material Adverse Effect. 4.14 Employee Benefits. (a) Section 4.14(a) of the Seller Disclosure Schedule lists each "employee benefit plan" (within the meaning of Section 3(3) of ERISA) that is maintained or otherwise contributed to by the Parent, Seller, any Company or any Subsidiary of a Company for the benefit of the Affected Employees (including, without limitation, pension, profit sharing, stock bonus, medical reimbursement, life insurance, disability and severance pay plans) (collectively, "Company Plans") and all other material employee benefit plans and arrangements, payroll practices, agreements, programs, policies or other arrangements, not subject to ERISA, that are maintained or otherwise contributed to by the Parent, Seller, any Company or any Subsidiary of a Company for the benefit of the Affected Employees and providing for deferred compensation, bonuses, stock options, employee insurance coverage or any similar compensation or welfare benefit plan (collectively, "Benefit Arrangements" and, together with the Company Plans, collectively referred to as "Employee Benefit Programs"). All Employee Benefit Programs so listed are sponsored by Parent. (b) With respect to each Company Plan, Seller has made available to Buyer a current, accurate and complete copy (or, to the extent no such copy exists, an 22 accurate description) thereof (including all existing amendments thereto that shall become effective at a later date) and, to the extent applicable, (i) any related trust agreement, annuity contract or other funding instrument; and (ii) any summary plan description. (c) Except as set forth in Section 4.14(c) of the Seller Disclosure Schedule, (i) each Employee Benefit Program has been established and administered in substantial compliance with the applicable provisions of ERISA, the Code and the terms of all documents relating to such programs; (ii) each Company Plan that is intended to be qualified under Section 401(a) of the Code has received a favorable determination letter as to its qualification; (iii) as of the date of this Agreement no "reportable event" (as such term is used in Section 4043 of ERISA, but other than any event for which notice to the Pension Benefit Guaranty Corporation has been waived), "prohibited transaction" (as such term is used in Section 4975 of the Code or Section 406 of ERISA) or "accumulated funding deficiency" (as such term is used in Section 412 or 4971 of the Code) has heretofore occurred with respect to any Company Plan where such occurrence has a reasonable probability of resulting in a termination of a Company Plan subject to Title IV of ERISA; and (iv) there are no pending or, to the Knowledge of Parent, Seller, the Companies or any of their Subsidiaries material threatened actions, claims or lawsuits which have been asserted or instituted against the Employee Benefit Programs, the assets of any of the trusts under such plans or the plan sponsor or the plan administrator, or against any fiduciary of the Employee Benefit Programs with respect to the operation of such plans (other than routine benefit claims). (d) Neither Parent, Seller, any Company nor any of their Subsidiaries maintains or contributes to any "multiemployer plan" (as such term is defined in Section 3(37) of ERISA) and neither Parent, Seller, any Company nor any of their Subsidiaries has incurred any material liability that remains unsatisfied with respect to any such plans or has incurred any material liability which remains unsatisfied under Sections 4062, 4063, 4064, 4069 or 4201 of ERISA. (e) Any individual who performs services for any Company or any Subsidiary (other than through a contract with an organization other than such individual) and who is not treated as an employee for federal income tax purposes by Parent, Seller, the Companies or any of their Subsidiaries is not an employee for such purposes. 4.15 Brokers. Other than Lazard Freres & Co. LLC and Morgan Stanley & Co. Incorporated, no broker or finder has acted directly or indirectly for Parent or Seller nor has Parent, Seller or the Companies or any Subsidiary of the Companies incurred any obligation to pay any brokerage, finder's fee or other commission in connection with the transactions contemplated by this Agreement. The fees and 23 expenses of Lazard Freres & Co. LLC and Morgan Stanley & Co. Incorporated in connection with the transactions contemplated by this Agreement shall be borne by Parent. 5. Representations and Warranties of the Companies. Each Company represents and warrants to Buyer as follows: 5.1 Corporate Authority. Each of the Subsidiaries of such Company has all requisite corporate power and authority to own, lease and operate its assets, properties and business and to carry on its business as now being conducted by it. Each of the Subsidiaries of such Company is duly qualified or otherwise authorized or admitted as a foreign corporation to transact business and is in good standing as a foreign corporation in each jurisdiction set forth in Section 5.1 of the Company Disclosure Schedule, which are the only jurisdictions in which such qualification, authorization or admission is required by law, except for any jurisdictions in which the failure to be so qualified, authorized or admitted could not reasonably be expected to have a Material Adverse Effect. 5.2 Consents and Approvals. The performance by such Company of its obligations under this Agreement and the consummation by such Company of the transactions contemplated hereby do not and will not require any of the Subsidiaries of such Company to obtain any consent, approval or action of, or make any filing with or give any notice to, any Person except (i) as set forth in Section 5.2 of the Company Disclosure Schedule, (ii) such as have been duly obtained and are in full force and effect on the date hereof and will continue to be in full force and effect on the Closing Date and (iii) those which, if not obtained, made or given, could not reasonably be expected to have a Material Adverse Effect or have a material adverse effect on Buyer's ability to own, possess or exercise the rights of an owner with respect to the Shares or such Company and its Subsidiaries. 5.3 No Conflict. The execution and delivery by each of Parent, Seller and such Company of, and the performance by each of Parent, Seller and such Company of its obligations under, this Agreement and the consummation by it of the transactions contemplated hereby in accordance with the terms and conditions hereof will not, except as set forth in Section 5.3 of the Company Disclosure Schedule, (i) violate any provision of the articles or certificate of incorporation or by-laws of such Company or any of its Subsidiaries, (ii) violate, conflict with or result in the breach of any of the terms of, result in a material modification of the effect of, otherwise give any other contracting party the right to terminate, or constitute (with or without notice or lapse of time or both) a default under, any Contract or Other Agreement to which such Company or any of the Subsidiaries of such Company is a party or by or to which such Company or any of such Subsidiaries or any of their respective assets or properties may be bound or subject, (iii) violate any existing term or provision of any law, regulation, order, writ, judgment, injunction or decree applicable to such Company or 24 any of the Subsidiaries of such Company or any of their respective assets or properties or (iv) result in the breach of any of the terms or conditions of, constitute (with or without notice or lapse of time or both) a default under, or otherwise cause an impairment of, any Permit (other than Insurance Licenses), or (v) result in the breach of any of the terms or conditions of, constitute (with or without notice or lapse of time or both) a default under, or otherwise cause an impairment of any Insurance License, except, in the case of each of clauses (ii) and (iv), for such violations, conflicts, breaches, modifications, rights, defaults and impairments that could not reasonably be expected to have a Material Adverse Effect or have a material adverse effect on Buyer's ability to own, possess or exercise the rights of an owner with respect to the Shares or such Company and its Subsidiaries. 5.4 Minute Books. The minute books of each of the Subsidiaries of such Company accurately reflect in all material respects all formal actions taken at all meetings and all consents in lieu of meetings of stockholders of such Subsidiaries since December 31, 1990 and all formal actions taken at all meetings and all consents in lieu of meetings of the Board of Directors of each of such Subsidiaries and all committees thereof since December 31, 1990. All of such minute books have previously been made available for inspection by Buyer. 5.5 Compliance With Laws. Such Company and its Subsidiaries are in compliance with all Federal, state, local or foreign laws, ordinances or regulations and other requirements (including any writ, judgment, decree, injunction, or similar order applicable to any of such Persons or the business or assets of such Persons) of any Governmental or Regulatory Body, court or arbitrator applicable to their businesses, the violation of which could reasonably be expected to have a Material Adverse Effect. 5.6 Insurance Licenses. (a) Section 5.6(a) of the Company Disclosure Schedule lists all of the jurisdictions in which such Company and its Subsidiaries hold licenses (including, without limitation, licenses or certificates of authority from applicable insurance departments), permits, or authorizations to transact insurance or reinsurance business (collectively, the "Insurance Licenses"). All such Insurance Licenses are valid, binding, and in full force and effect. Each of LOV and FFRL Re is duly licensed in all jurisdictions in which it writes the lines of insurance offered by it. No Insurance License is the subject of a proceeding for suspension or revocation or any similar proceedings and, to the Knowledge of the Parent, Seller or such Company, there is no pending threat of such suspension or revocation by any licensing authority. (b) LOV and FFRL Re have heretofore made available to Buyer true and complete copies of the reports reflecting the results of the most recent financial examination and market conduct examination of LOV or FFRL Re issued by any Insurance Department. Except as disclosed in Section 5.6(b) of the Company Disclosure Schedule, all material deficiencies or violations in such reports have been resolved. 25 5.7 Litigation. Except as set forth in Section 5.7 of the Company Disclosure Schedule, (x) there is no Litigation (other than policyholder claims submitted to such Company or any of its Subsidiaries for payment in the ordinary course of business of such Company and its Subsidiaries) pending to which such Company or any of its Subsidiaries is a party or by which any of such Subsidiaries or their respective assets or properties are or may be bound by or before any Federal, state, municipal, foreign or other court or Governmental or Regulatory Body, or any private tribunal, or, to the Knowledge of Parent, Seller or such Company, threatened against such Company or such Subsidiaries, in each case that (i) seeks to restrain or enjoin the consummation of the transactions contemplated by this Agreement or (ii) could reasonably be expected to have a Material Adverse Effect and (y) neither such Company nor any of its Subsidiaries is bound by or subject to any existing order, judgment, injunction, award or decree, in each case that (i) seeks to restrain or enjoin the consummation of the transactions contemplated by this Agreement or (ii) could reasonably be expected to have a Material Adverse Effect. Neither such Company nor any of its Subsidiaries nor, to the Knowledge of Parent, Seller or such Company, any officer, director or employee of such Company or any of its Subsidiaries has been permanently or temporarily enjoined or barred by any order, judgment or decree of any court or other tribunal or any Governmental or Regulatory Body from engaging in or continuing any conduct or practice in connection with the business conducted by such Company or any of its Subsidiaries. 5.8 Contracts and Other Agreements. (a) Section 5.8(a) of the Company Disclosure Schedule lists all Contracts and Other Agreements to which such Company or any of its Subsidiaries is a party or by which any of their assets or properties are bound as of the date of this Agreement that involve or reasonably could be expected to involve, in any instance, an obligation or commitment on the part of such Company or any of its Subsidiaries in an amount greater than $250,000 (other than Company Plans set forth in Section 4.14(a) of the Seller Disclosure Schedule, leases set forth in Section 5.9(b) of the Company Disclosure Schedule, agreements described in Section 5.13, Insurance Contracts and Investment Contracts), as well as the following: (i) all written or, to the Knowledge of Parent, Seller or such Company, oral employment, agency, consultation, or representation contracts or other contracts of any type (including, without limitation, loans or advances) with any present officer, director, employee, agent, consultant, or other similar representative of such Company or any Subsidiary of such Company (or former officer, director, employee, agent, consultant or similar representative of such Company or any Subsidiary of such Company if there exists any present or future liability with respect to such contract), other than contracts (i) with such Persons who do not receive compensation of $75,000 or more per year, or (ii) with insurance agents that are terminable without premium or penalty upon notice of 180 days or less or, by their terms, do not provide for exclusivity (including, without limitation, by territory, product, or distribution); 26 (ii) all written or, to the Knowledge of Parent, Seller or such Company, oral contracts with insurance agents or brokers that both (A) relate to the sale or distribution of insurance policies or annuity contracts issued, reinsured, or underwritten by LOV or FFRL Re, and (B) by their terms, provide for exclusivity (including, without limitation, by territory, product, or distribution); provided, however, excluded from this clause (ii) shall be any contract terminable by any Company or any Subsidiary of a Company without premium or penalty upon notice of 180 days or less; (iii) all contracts with any Person containing any stipulation, provision, or covenant limiting, in any material respect, the ability of such Company or any Subsidiary of such Company to (i) sell any products or services of any other Person, (ii) transact business or engage in any line of business, or (iii) compete with or obtain products or services from any Person; (iv) all contracts relating to the borrowing of money by such Company or any Subsidiary of such Company, relating to the deferred purchase price for property or services, or relating to the direct or indirect guarantee by such Company or any Subsidiary of such Company of any liability; (v) all contracts pursuant to which such Company or any Subsidiary of such Company has agreed to indemnify or hold harmless any Person (other than indemnifications in the ordinary course of business and consistent with past practice); (vi) all contracts or arrangements (including, without limitation, those relating to allocations of expenses, taxes, personnel, services, or facilities) between or among such Company or any Subsidiary of such Company and Seller, Parent or any Affiliate of Seller or Parent (other than such Company and its Subsidiaries); and (vii) all reinsurance, coinsurance, or other similar contracts pursuant to which LOV or FFRL Re receives or has received surplus relief. Except as set forth in Section 5.8(a) of the Company Disclosure Schedule, none of Parent, Seller, such Company or any of its Subsidiaries or, to the Knowledge of Parent, Seller or such Company, any other party to any such Contract or Other Agreement is in violation or breach of or default under any such Contract or Other Agreement (or, with or without notice or lapse of time or both, would be in violation or breach of or default under any such Contract or Other Agreement), which violation, breach or default has had or could reasonably be expected to have a Material Adverse Effect. (b) Except as set forth in Section 5.8(b) of the Company Disclosure Schedule, there have been made available to Buyer true and complete copies of all of 27 the Contracts and Other Agreements set forth in Section 5.8(a) of the Company Disclosure Schedule or in any other Section of the Company Disclosure Schedule. 5.9 Real Estate. (a) Except as set forth in Section 5.9(a) of the Company Disclosure Schedule, neither such Company nor any of its Subsidiaries owns any real property. Except as set forth in Section 5.9(a) of the Company Disclosure Schedule, such Company or a Subsidiary of such Company has good and marketable fee simple title to all real property owned by the Company or any of its Subsidiaries, free and clear of all Liens or Other Encumbrances, other than Permitted Liens. (b) Section 5.9(b) of the Company Disclosure Schedule lists all real property leased or subleased to such Company or any of its Subsidiaries. Seller has made available to Buyer correct and complete copies of each such lease or sublease as amended to the date of this Agreement. Each such lease or sublease is in full force and effect and neither such Company nor any of its Subsidiaries is in default thereunder or has received any notice of any default thereunder of any other party thereto, except in each case where any such unenforceability, ineffectiveness or default would not have a Material Adverse Effect. 5.10 Personal Property; Intellectual Property. (a) Except as set forth in Section 5.10(a) of the Company Disclosure Schedule, such Company and its Subsidiaries have good and valid title to (free and clear of all Liens or Other Encumbrances, other than Permitted Liens), or a valid leasehold interest in, the tangible personal property they use in the conduct of their businesses, except where the failure thereof would not have a Material Adverse Effect. (b) Section 5.10(b) of the Company Disclosure Schedule contains a true and complete list and description of all marks, names, trademarks, service marks, patents, patent rights, assumed names, logos, trade secrets, copyrights, trade names, and service marks that are material to the conduct of the business, operations, or affairs of such Company or its Subsidiaries. Except as set forth in Section 5.10(b) of the Company Disclosure Schedule, such Company or its Subsidiaries have, and after the Closing will have, the right to use, free and clear of any Liens or Other Encumbrances, such intellectual property and all computer software, programs, and similar systems owned by or licensed to such Company or its Subsidiaries and material to the conduct of the business, operations, or affairs of such Company or its Subsidiaries. To the Knowledge of Parent, Seller or such Company, neither such Company nor any Subsidiary of such Company is in conflict with or in violation or infringement of, nor has Seller, Parent, such Company, or any Subsidiary of such Company received any notice of any conflict with or violation or infringement of or any claimed conflict with, any asserted rights of any other Person with respect to any such intellectual property or computer software, programs, or similar systems. 28 5.11 Operations of the Companies. (a) Except as set forth in Section 5.11 of the Company Disclosure Schedule, since December 31, 1994, there has not been, occurred or arisen any change in the business, financial condition or results of operations of such Company or its Subsidiaries that has had or could reasonably be expected to have a Material Adverse Effect, other than changes after the date hereof resulting from a change in general economic conditions or matters affecting the life or health insurance industry generally, and neither such Company nor any of its Subsidiaries has: (i) sold, assigned, transferred, mortgaged, pledged, leased, granted or permitted to exist any Lien or Other Encumbrance, or otherwise disposed of any assets which are material to the business of such Company and its Subsidiaries, taken as a whole, as presently conducted, other than in the ordinary course of business; (ii) increased the rates of compensation (including bonuses) payable or to become payable to any officer, employee, agent, broker, independent contractor or consultant of such Company or any of its Subsidiaries, other than increases made in the ordinary course of business and other than the Special Bonus Program; (iii) entered into any new, or amended any existing, employment contracts, severance agreements or consulting contracts or instituted, or agreed to institute, any material increase in benefits with respect to any Company Plans, or altered its employment practices or the terms and conditions of employment other than, in each case, in the ordinary course of business or as required by applicable law; (iv) incurred any material obligation, liability or indebtedness except in the ordinary course of business, incurred any extraordinary losses, or disposed of, canceled, waived or permitted to lapse any rights of material value; (v) changed in any material respect its Tax or accounting methods, principles or practices (including, without limitation, any changes in depreciation or amortization policies or rates or any changes in any assumptions underlying any method of calculating reserves) other than as required by a change in GAAP, SAP or other applicable law; (vi) conducted its business otherwise than in the ordinary course; (vii) entered into or amended or terminated any transaction or contract that could reasonably be expected to have a Material Adverse Effect; 29 (viii) split, combined, redeemed, repurchased or reclassified the capital stock of such Company or declared, set aside, made or paid any dividend or other distribution in respect of the capital stock of such Company (other than the declaration of a $40,000,000 dividend by LOV which will be paid after the date hereof); (ix) issued or sold (or agreed to issue or sell) any note, debenture, stock, or other security or any options, warrants, conversion or other rights to purchase any such securities or any securities convertible into or exchangeable for such securities, or granted, or agreed to grant, any such options; (x) amended the articles or certificate of incorporation or by-laws or other charter or organizational documents of such Company or any of its Subsidiaries; (xi) incurred any damage, destruction, or loss (whether or not covered by insurance) affecting any of the assets of such Company or any Subsidiary of such Company (other than claims under any Insurance Contracts) which damage, destruction, or loss, individually or in the aggregate, has or could reasonably be expected to have a Material Adverse Effect; (xii) suffered any work stoppage, strike, or union organizational campaign (in process or threatened) at or affecting such Company or any Subsidiary of such Company that has or could reasonably be expected to have a Material Adverse Effect; (xiii) terminated, amended, or executed any material reinsurance, coinsurance, or other similar contract, as ceding or assuming insurer; (xiv) incurred any expenditure or commitment for additions to property, plant, or equipment of such Company or any Subsidiary of such Company, which expenditure or commitment exceeds $150,000 individually or $1,000,000 in the aggregate; or (xv) entered into any Contract or Other Agreement to do any of the foregoing. (b) The investments of LOV and FFRL Re reflected in the Annual SAP Statements of LOV and FFRL Re described in Section 4.9(c) and the Exhibit C Assets comply with all applicable requirements of law of their respective states of domicile, except where the failure to do so would not have a Material Adverse Effect. (c) Invested assets, including marketable securities, private placements, mortgages, real estate and short-term investments, reflected on the Annual SAP 30 Statements of LOV and FFRL Re described in Section 4.9(c) are valued on such Statements at cost, amortized cost or market value, as required by applicable law. (d) Each of such Company and its Subsidiaries has, and on the Closing Date will have, good and valid title to the bonds, stocks, mortgage loans and other investments purported to be owned by it and reflected in the financial statements of such Company or any of its Subsidiaries, in each case free and clear of any Lien or Other Encumbrance. (e) No outstanding insurance contract issued by LOV or FFRL Re entitles any policyholder thereunder to receive dividends, distributions or other benefits based on the revenues or earnings of LOV or FFRL Re. (f) All reserves with respect to insurance and annuities as established or reflected, and all other provisions made for policy and contract claims and, with respect to the Annual SAP Statements for the years ended December 31, 1994, 1993 and 1992, IMR and AVR in the respective Annual SAP Statements and Quarterly SAP Statements of LOV and FFRL Re described in Section 4.9(c) were determined in accordance with SAP and generally recognized actuarial methods and generally accepted actuarial standards, using prescribed or permitted morbidity and mortality tables and interest rates that are in accordance with the nature of the benefits specified in the related Insurance Contracts and in the related reinsurance, coinsurance and other similar contracts of FFRL Re, and such reserves and other provisions met the applicable requirements of the insurance laws of FFRL Re's state of domicile, except where the failure to do so would not have a Material Adverse Effect. All such reserves were adequate (under accepted actuarial standards) as of the respective dates of such Annual SAP Statements and Quarterly SAP Statements to cover the total amount of all reasonably anticipated matured and unmatured benefits, claims and other actuarially determined liabilities of LOV and FFRL Re under all Insurance Contracts under which LOV or FFRL Re had or would have had any liability (including any liability arising under or as a result of any reinsurance, coinsurance, or other similar contract), except where the failure of such reserves to be adequate to cover the total amount of such benefits, dividends, claims and other liabilities would not have a Material Adverse Effect. LOV and FFRL Re own assets that qualify as legal reserve assets under applicable insurance laws of their respective state of domicile in an amount, determined in accordance with SAP, at least equal to all required reserves, except where the failure to own a sufficient amount of such assets or the failure of such assets to so qualify would not have a Material Adverse Effect. (g) Except as set forth in Section 5.11(g) of the Company Disclosure Schedule, since June 30, 1995 through the date hereof: (i) No Person writing, selling or producing insurance business that accounted for 5% or more of the premium or annuity considerations of LOV for 31 the year ended December 31, 1994 has terminated or, to the Knowledge of Parent, Seller or LOV, threatened to terminate its relationship with LOV; and (ii) No policyholder (or group of policyholders known to LOV to be affiliated with each other) that accounted for 5% or more of the premium or annuity considerations of LOV for the year ended December 31, 1994 has terminated or, to the Knowledge of Parent, Seller or LOV, threatened to terminate its policies with LOV. (h) From December 31, 1994 through the date hereof, no rating agency has (i) imposed conditions (financial or otherwise) on retaining any rating assigned to LOV or FFRL Re or (ii) threatened to downgrade any rating assigned to LOV or FFRL Re. Parent, Seller and LOV have no Knowledge of any facts existing as of the date of this Agreement (except for the transactions contemplated by this Agreement) which can reasonably be expected to result in a downgrade in any rating assigned to LOV or FFRL Re by any rating agency. (i) The underwriting standards utilized and ratings applied by LOV and FFRL Re and by any other Person that is a party to or bound by any reinsurance, coinsurance, or other similar contract with LOV or FFRL Re conform in all material respects to industry accepted practices and to the standards and ratings required pursuant to the terms of the respective reinsurance, coinsurance, or other similar contracts. (j) Each Person who wrote, sold, or produced business for LOV or FFRL Re was duly licensed as an insurance agent at the time such Person wrote, sold or produced such business (for the type of business written, sold, or produced by such insurance agent) in the particular jurisdiction in which such agent wrote, sold, or produced such business, except where the failure to be so licensed does not or cannot reasonably be expected to have a Material Adverse Effect. (k) All outstanding insurance policies and annuity contracts issued, reinsured, or underwritten by LOV and FFRL Re are, to the extent required under applicable laws, on forms and at rates and commissions approved by the insurance regulatory authority of the jurisdiction where issued or have been filed with and not objected to by such authority within the period provided for objection, except where the failure to obtain such approval or make such filing does not have or cannot reasonably be expected to have a Material Adverse Effect. (l) The assets listed on Exhibit C constitute the investment portfolio (i) as of November 30, 1995 associated with the business to be transferred to LOV pursuant to items 1 through 4 of Exhibit A and (ii) as of July 1, 1995 associated with such business, as rolled forward to November 30, 1995 in the ordinary course of business consistent with past investment practices, except that such assets also include assets 32 that equal the amount of the balance outstanding for reinsurance recoverable from LOV on such business as of November 30, 1995. 5.12 The Mutual Fund. Except as disclosed in Section 5.12 of the Company Disclosure Schedule: (a) The Mutual Fund is a Virginia corporation duly organized, validly existing, and in good standing under the laws of the Commonwealth of Virginia and has all requisite corporate power and authority to own, use, or lease its assets and to conduct its business as now being conducted. Seller has furnished to Buyer true and complete copies of the articles of incorporation and bylaws of the Mutual Fund. (b) The Seller has previously delivered to the Buyer true and complete copies of the statement of assets and liabilities of the Mutual Fund as of the end of fiscal years 1992, 1993, and 1994 (including the schedules of investments as of such dates), and the related separate statements of operations and changes in net assets of the Mutual Fund for each of the periods then ended, together with the notes relating thereto and the unqualified report thereon of Ernst & Young, LLP. Each such financial statement (together with the notes thereto ) was prepared in accordance with GAAP and presents fairly in all material respects the financial position of the Mutual Fund as of the respective dates thereof and the related results of operations and changes in net assets of the Mutual Fund for and during the respective periods covered thereby. (c) The Mutual Fund is an open-end, diversified management company, registered as an investment company under the Investment Act and has been established and maintained as such in compliance with all applicable laws other than where such non-compliance could not be reasonably expected to have a Material Adverse Effect. Shares of beneficial interest in the Mutual Fund have been offered and sold in all material respects in accordance with all applicable laws. Each registration statement relating to shares of beneficial interest in the Mutual Fund currently offered or sold by Forth Financial Securities Corporation is currently effective under and in compliance with all applicable laws, including securities laws other than where such non-compliance could not reasonably be expected to have a Material Adverse Effect. No stop order suspending the effectiveness of any such registration statement has been issued under any law and no proceedings for such purpose are pending or, to the Knowledge of Parent, Seller or LOV, threatened. (d) The Mutual Fund does not own and, since January 1, 1994, has not owned any material investment or other asset that it is not authorized to own under applicable laws or under the terms of the investment policies established for the Mutual Fund (whether or not set forth in the registration statement or prospectus dealing with the Mutual Fund). All investment advisory services are provided to the Mutual Fund by the Investment Advisor, and the Investment Advisor is registered as such under the Investment Act, and all other laws of each other jurisdiction where such registration or a 33 similar registration is required, other than where such non-compliance could not reasonably be expected to have a Material Adverse Effect. (e) Section 5.12 of the Company Disclosure Schedule contains a true and complete list of all investment advisory contracts (true and complete copies of which have been delivered to Buyer) for the Mutual Fund. The Mutual Fund is not, and (to the Knowledge of Parent, Seller or LOV), the Investment Advisor is not, in violation, breach, or default under any such contracts, which violation, breach, or default has or could reasonably be expected to have a Material Adverse Effect. (f) Except as set forth in Section 5.12, neither the execution and delivery of this Agreement by Parent, Seller and each Company, the performance of their respective obligations under this Agreement, nor the consummation of the transactions contemplated hereby require the Mutual Fund to obtain any consent, approval or action of, or make any filing with or give any notice to, any Person, except (i) as disclosed in Section 5.12 of the Company Disclosure Schedule, or (ii) those that have been duly obtained or made, as the case may be, and are in full force and effect on the date hereof and will continue to be in full force and effect on the Closing Date, other than any failure to obtain any such consent, approval or action, make any such filing or give any such notice which could not reasonably be expected to have a Material Adverse Effect. (g) There are no writs, judgments, decrees, or similar orders outstanding against or affecting the Mutual Fund or its assets. There are no actions, suits, investigations, arbitrations, or proceedings pending, or (to the Knowledge of the Parent, Seller or LOV) threatened against or affecting the Mutual Fund or its assets which could reasonably be expected to have a Material Adverse Effect. (h) Since its formation, the Mutual Fund has qualified as a "regulated investment company" within the meaning of Section 851 of the Code and has satisfied in all material respects the requirements of Section 852(a) of the Code for each taxable year since such formation. The Mutual Fund has never incurred any excise Tax under Section 4982 of the Code. 5.13 Labor Matters. (a) Section 5.13(a) of the Company Disclosure Schedule sets forth a list containing the name, current base salary or wage rate, and position of each Affected Employee who is actively employed (including those on vacation). Parent or Seller shall, or shall cause each Company or one of its Subsidiaries to, provide Buyer on the Closing Date with an updated Section 5.13(a) of the Company Disclosure Schedule listing those Affected Employees (i) who are on disability, layoff or leave of absence as of the Closing Date or (ii) who were Inactive Employees (as defined in Section 7.8(a)) as of the date hereof who have returned to active employment with a Company or one of its Subsidiaries on or prior to the Closing Date. 34 (b) Neither any such Company nor any of its Subsidiaries is a party to any labor or collective bargaining agreement, and there are no labor or collective bargaining agreements which pertain to employees of, any such Company or any of its Subsidiaries. There are no organizing activities, strikes, work stoppages, slowdowns, lockouts, material arbitrations or material grievances or other material labor disputes pending or (to the Knowledge of Parent, Seller or any Company) threatened against or involving any such Company or any of its Subsidiaries. (c) Except as set forth on Section 5.13(c) of the Company Disclosure Schedule, there are no complaints, charges or claims against any Company or any of its Subsidiaries pending or, to the Knowledge of Parent, Seller or any such Company, threatened to be brought or filed, with any public or governmental authority, arbitrator or court based on, arising out of, in connection with or otherwise relating to the employment or termination of employment by any such Company or any of its Subsidiaries, of any individual, in each case which have or could reasonably be expected to have a Material Adverse Effect. (d) Each Company and each of its Subsidiaries is in material compliance with all laws, regulations and orders relating to the employment of labor, including all such laws, regulations and orders relating to wages, hours, WARN, collective bargaining, discrimination, civil rights, safety and health, workers' compensation and the collection and payment of withholding and/or social security taxes and any similar tax. (e) There has been no "mass layoff" or "plant closing" as defined by WARN (or any similar state or local "plant closing" laws) with respect to any such Company or any of its Subsidiaries within the six months prior to the date hereof. 5.14 No Undisclosed Liabilities. There were no liabilities of such Company or any of its Subsidiaries as of June 30, 1995 that are of a type required to be disclosed on a balance sheet (or in the notes related thereto) prepared in accordance with GAAP or SAP, except (a) policyholder benefits payable in the ordinary course of business and consistent with past practice, (b) as disclosed in Section 5.14 of the Company Disclosure Schedule, or (c) specifically reflected on the the balance sheets or other financial statements as of or for the quarterly period ended on June 30, 1995 described in Section 4.9, or in the notes or work papers related to the foregoing financial statements. Since June 30, 1995 through the date hereof, neither such Company nor any Subsidiary of a Company has incurred any liabilities that are of a type which could reasonably be expected to have a Material Adverse Effect, except (i) as disclosed in Section 5.14 of the Company Disclosure Schedule and (ii) policyholder benefits payable, or other liabilities incurred, in the ordinary course of business. 35 6. Representations and Warranties of Buyer. Buyer represents and warrants to each of Parent, Seller and the Companies as follows: 6.1 Existence and Power. Buyer is a corporation duly organized, validly existing and in good standing under the laws of the State of New York. Buyer has all requisite corporate power and authority to execute and deliver this Agreement, to perform its obligations hereunder and to consummate the transactions contemplated hereby. 6.2 Execution and Delivery. The execution and delivery by Buyer of this Agreement, the performance by Buyer of its obligations hereunder and the consummation by Buyer of the transactions contemplated hereby have been duly and validly authorized by all necessary corporate action on the part of Buyer. This Agreement has been duly executed and delivered by Buyer and constitutes the valid and binding obligation of Buyer, enforceable against Buyer in accordance with its terms, except as such enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium and other similar laws relating to or affecting creditors' rights generally, or by general equitable principles (regardless of whether such enforceability is considered in a proceeding in equity or at law). 6.3 Consents and Approvals. The execution and delivery by Buyer of this Agreement, the performance by Buyer of its obligations hereunder and the consummation by Buyer of the transactions contemplated hereby do not and will not require Buyer to obtain any consent, approval or action of, or make any filing with or give any notice to, any Governmental or Regulatory Body or Person except (i) as set forth in Section 5.2 of the Company Disclosure Schedule, (ii) such as have been duly obtained and are in full force and effect on the date hereof and will continue to be in full force and effect on the Closing Date and (iii) those which, if not obtained, made or given, could not reasonably be expected to have a material adverse effect on the ability of Buyer to consummate the transactions contemplated by this Agreement. 6.4 No Conflict. The execution and delivery by Buyer of this Agreement, the performance by Buyer of its obligations hereunder and the consummation by Buyer of the transactions contemplated hereby in accordance with the respective terms and conditions hereof will not: (i) violate any provision of the articles or certificate of incorporation or by-laws or other charter or organizational documents of Buyer, (ii) violate, conflict with or result in the breach of any of the terms of, result in a material modification of the effect of, otherwise give any other contracting party the right to terminate, or constitute (with or without notice or lapse of time or both) a default under, any Contract or Other Agreement to which Buyer is a party or by or to which Buyer or any of its assets or properties may be bound or subject or (iii) violate any existing term or provision of any law, regulation, order, writ, judgment, injunction or decree applicable to Buyer or any of its assets or properties, except, in the case of clause (ii), for such violations, conflicts, breaches, modifications, rights and defaults that could not 36 reasonably be expected to have a material adverse effect on the ability of Buyer to consummate the transactions contemplated by this Agreement. 6.5 Purchase Not for Distribution. The Shares to be acquired under the terms of this Agreement will be acquired by Buyer for its own account and not with a view to distribution. Buyer will not resell, transfer, assign or distribute the Shares, except in compliance with the applicable registration requirements of federal and state securities laws and regulations, or pursuant to an available exemption therefrom. 6.6 Financing. Buyer has, or will have at the Closing, sufficient funds (including as a result of the sale of commercial paper in the ordinary course of business), in an aggregate amount of not less than the anticipated Final Purchase Price and all contemplated fees and expenses of Buyer related to the transactions contemplated by this Agreement, which funds will be available at the Closing to pay such anticipated Final Purchase Price and all such fees and expenses. 6.7 Litigation. There is no Litigation pending to which Buyer is a party or its assets or properties are or may be bound by or before any Federal, state, municipal, foreign or other court or Governmental or Regulatory Body, or any private tribunal, or, to the Knowledge of Buyer, threatened against Buyer or any of its Affiliates that, in each case, (i) seeks to restrain or enjoin the consummation of the transactions contemplated by this Agreement or (ii) could reasonably be expected to have a material adverse effect on the ability of Buyer to consummate the transactions contemplated by this Agreement. Neither Buyer nor any of its Affiliates is bound by or subject to any existing order, judgement, injunction award or decree that, in each case, (i) seeks to restrain or enjoin the consummation of the transactions contemplated by this Agreement or (ii) could reasonably be expected to have a material adverse effect on the ability of Buyer to consummate the transactions contemplated by this Agreement. Neither Buyer nor any of its Affiliates nor, to the Knowledge of Buyer, any officer, director or employee of Buyer or any of its Affiliates has been permanently or temporarily enjoined or barred by any order, judgment or decree of any court or other tribunal or any Governmental or Regulatory Body from engaging in or continuing any conduct or practice that could reasonably be expected to have a material adverse effect on the ability of Buyer to consummate the transactions contemplated by this Agreement. 6.8 Brokers. Other than CS First Boston, no broker or finder has acted directly or indirectly for Buyer, nor has Buyer incurred any obligation to pay any brokerage, finder's fee or other commission in connection with the transactions contemplated by this Agreement. The fees and expenses of CS First Boston in connection with the transactions contemplated by this Agreement shall be borne by Buyer. 7. Covenants and Agreements. The parties covenant and agree as follows: 37 7.1 Conduct of Business. From the date hereof through the Closing Date, except as set forth in Section 7.1 of the Seller Disclosure Schedule or as may otherwise be expressly required or permitted by this Agreement (including, without limitation, the matters contemplated by Section 7.10), Parent and Seller covenant and agree that, except with the consent of Buyer: (a) Parent and Seller shall cause each Company and each of its Subsidiaries to conduct the business of such Company and its Subsidiaries only in the ordinary course of business and consistent with past practice. (b) Parent and Seller shall cause each Company and each of its Subsidiaries to use commercially reasonable efforts to maintain all Insurance Licenses and all other Permits, other than such other Permits the failure of which so to maintain shall not have had and could not reasonably be expected to have a Material Adverse Effect. (c) Parent and Seller shall cause (i) each Company and each of its Subsidiaries to use commercially reasonable efforts to maintain until their scheduled expiration, in full force and effect, all material contracts, documents, and arrangements referred to in Section 5.8, and (ii) LOV and FFRL Re to maintain each rating classification assigned as of the date hereof to LOV and FFRL Re by insurance rating agencies. (d) Parent and Seller will cause each Company and each of its Subsidiaries to (i) maintain all material assets of each of such Company and its Subsidiaries in good working order and condition, ordinary wear and tear excepted, and (ii) continue (in all material respects) all current marketing and selling activities relating to the business, operations, and affairs of such Company and its Subsidiaries. (e) Parent and Seller will cause LOV and FFRL Re to refrain from entering into any surplus relief or financial reinsurance contract. Parent and Seller will cause LOV and FFRL Re to refrain from entering into any other reinsurance, coinsurance, or similar contract, whether as reinsurer or reinsured, other than in the ordinary course of business and consistent with past practice. (f) Parent and Seller will cause each Company and its Subsidiaries to refrain from entering into any (i) contract (other than contracts with insurance agents or Insurance Contracts) that involves the payment or potential payment pursuant to the terms of such contract, by or to such Company or any Subsidiary of such Company of more than $150,000 individually or $1,000,000 in the aggregate or (ii) transaction of the type, or engaging in any of the activities, described in Section 5.11. (g) Parent and Seller will cause each Company and its Subsidiaries to refrain from entering into any contract with any insurance agent or broker that provides, 38 by its terms, for exclusivity (including, without limitation, by territory, product, or distribution) or that is not terminable by its terms within 180 days by such Company or a Subsidiary of such Company, as the case may be, without premium or penalty. (h) Parent and Seller will cause each Company and its Subsidiaries to comply with all laws applicable to the business, operations, or affairs of such entity, except to the extent that any such non-compliance does not have or is not reasonably likely to have a Material Adverse Effect. (i) Neither Parent, Seller, any Company nor any of their Subsidiaries shall make any change to, or amend in any way, the contracts, salaries, wages, or other compensation of any officer, director, employee, agent, or other similar representative of such Company or any of its Subsidiaries other than changes or amendments that (i) are made in the ordinary course of business and consistent with past practice or (ii) are required pursuant to the terms of any Employee Benefit Program or written agreement to which such Person is a party, in either case, existing as of the date hereof. (j) Neither Parent, Seller, any Company nor any of their Subsidiaries shall adopt, enter into, amend, alter, or terminate, any Employee Benefit Program relating to or affecting any employee of such Company or any of its Subsidiaries (unless required to do so by applicable law or pursuant to a preexisting binding obligation or commitment), where the effect of any of the foregoing would be material upon such Company or any of its Subsidiaries. (k) Neither any Company nor any of its Subsidiaries shall enter into any contract with an officer, director, employee, agent, or other similar representative of such Company or any of its Subsidiaries that is not terminable, without penalty or other liability, upon not more than 60 calendar days' notice where the liability for such contract exceeds $75,000 in any year in respect of such Person. (l) Neither any Company nor any of its Subsidiaries shall assume, enter into, amend, alter, or terminate any labor or collective bargaining agreement to which it is a party or is affected thereby. 7.2 Pre-Closing Maintenance of Insurance. From the date hereof through the Closing Date, Parent shall use commercially reasonable efforts to maintain or cause to be maintained in force insurance with respect to each Company and its Subsidiaries as described in Section 4.13. 7.3 Litigation; Notice of Assessments; Requests for Information. (a) From the date hereof through the Closing Date, Seller agrees to notify Buyer promptly of any Litigation that, if pending or threatened as of the date hereof, would be required to be described in Section 5.7 of the Company Disclosure Schedule and of any material 39 requests for additional information or documentary materials by any Governmental or Regulatory Body in connection with the transactions contemplated by this Agreement. (b) From the date hereof through the Closing Date, Seller agrees to notify Buyer promptly of any inquiry from the IRS or the U.S. Department of Labor that, if made on or prior to the date of this Agreement, would be required to be described in Section 4.14(a) or Section 4.14(c) of the Seller Disclosure Schedule. (c) From the date hereof through the Closing Date, Buyer shall notify Seller promptly of any Litigation that, if pending or threatened as of the date hereof, would be required to be disclosed pursuant to Section 6.7. 7.4 Access to Information; Environmental Investigation; Confidentiality. (a) Prior to the Closing Date, each of Parent, Seller and each Company shall, and shall cause the Subsidiaries of such Company and its and their respective directors, officers, employees and agents to, permit representatives of Buyer to discuss the affairs, operations, finances and accounts of such Company with the officers and employees of such Company and its Subsidiaries, all at such reasonable times and as may reasonably be requested, subject to the terms of any confidentiality agreements with third parties to which Parent, Seller, such Company or any Subsidiary of such Company is subject. Prior to the Closing Date, each of Parent, Seller and each Company shall, and shall cause the Subsidiaries of such Company and its and their respective directors, officers, employees and agents to, upon reasonable request, make available to Buyer and its representatives all of the books, records and other documents of such Company and its Subsidiaries, and permit Buyer and its representatives to examine, make extracts from and, at Buyer's expense, copy such books, records or documents at any time during normal business hours in order that the Buyer may have the opportunity to make such reasonable investigations as it shall desire to make of the affairs of such Company. All requests by Buyer for such access shall be directed to the person or persons who are or have been from time to time designated by Parent and Seller to be the recipient of such requests. After the Closing Date, each of Buyer and each Company shall, and shall cause the Subsidiaries of such Company and its and their respective directors, officers, employees and agents to, upon reasonable request, make available to each of Parent and Seller and their representatives the books, records and other documents of such Company and its Subsidiaries pertaining to the operation of such Company and its Subsidiaries prior to the Closing Date, and permit Parent, Seller and their representatives to examine, make extracts from and, at Seller's expense, copy such books, records or documents at any time during normal business hours in connection with any claim or legal proceeding for which Parent or Seller may be responsible and in order for Parent or Seller to comply with any applicable regulatory requirements or applicable requirements of law. (b) Prior to the Closing, Buyer shall, and shall cause each of its Subsidiaries and its and their respective directors, officers, employees, agents and 40 representatives to, keep confidential and, if this Agreement terminates, shall not use in any manner any information or material obtained from or on behalf of Parent, Seller, any Company or any of the Subsidiaries of any Company or any of its or their respective directors, officers, employees, agents or representatives, whether prior to, on or after the date of this Agreement, other than information and material readily ascertainable from public or published information, or trade sources, or already known by Buyer or any of its Affiliates independently of any investigation of Parent, Seller, any Company and the Subsidiaries of any Company or received from a third party who Buyer knows (or reasonably believes) is not under an obligation to any of Parent, Seller, any Company or any of the Subsidiaries of any Company to keep such information confidential. In addition, at all times, except as required by law or judicial order, Buyer shall, and shall cause each of its Subsidiaries and its and their respective directors, officers, employees, agents and representatives to, keep confidential any information or material relating to Parent or Seller or their respective Subsidiaries (other than the Companies and their Subsidiaries) obtained from or on behalf of Parent, Seller, any Company or any of the Subsidiaries of any Company or any of its or their respective directors, officers, employees, agents or representatives, whether prior to, on or after the date of this Agreement, other than information and material readily ascertainable from public or published information, or trade sources, or already known by Buyer or any of its Affiliates independently of any investigation of Parent, Seller, any Company and the Subsidiaries of any Company or received from a third party who Buyer knows (or reasonably believes) is not under an obligation to any of Parent, Seller, any Company or any of the Subsidiaries of any Company to keep such information confidential. After the Closing, except as required by law or judicial order, Parent and Seller shall, and shall cause each of their Subsidiaries and their respective directors, officers, employees, agents and representatives to, keep confidential and shall not use in any manner any information or material obtained from or on behalf of any Company or any of its Subsidiaries or any of its or their respective directors, officers, employees, agents or representatives, other than information and material readily ascertainable from public or published information, or trade sources, or known by Parent, Seller or any of their Affiliates independently of any Company or its Subsidiaries or received from a third party who Parent or Seller knows (or reasonably believes) is not under an obligation to Buyer, any Company or any of the Subsidiaries of any Company to keep such information confidential. If this Agreement terminates, any documents or material obtained by Buyer from or on behalf of Parent, Seller, any Company or any of the Subsidiaries of any Company or any of the respective directors, officers, employees, agents or representatives of such Persons and any analyses, compilations, studies or other material prepared by Buyer or its representatives containing, or based in whole or in part on, any information or material so obtained from or on behalf of Parent, Seller, any Company or any of its Subsidiaries shall promptly be destroyed and certification thereof shall promptly be furnished to Parent. (c) From the date of this Agreement until February 1, 1996, Buyer shall have the right, but not the obligation, at its expense, to retain one or more 41 environmental professionals to conduct an environmental assessment and investigation ("Environmental Investigation") of the Real Property, which Environmental Investigation shall include the right to conduct such tests of soil, groundwater, surface water or air as Buyer may request. 7.5 Approvals. (a) Each party shall use commercially reasonable efforts to obtain as promptly as practicable all necessary approvals, authorizations and consents of all Persons (including, without limitation, Governmental and Regulatory Bodies) required of it to be obtained to consummate the transactions contemplated by this Agreement and cooperate with the other parties in seeking to obtain all their respective approvals, authorizations and consents. Each party shall use commercially reasonable efforts to provide such information to Governmental and Regulatory Bodies (including applicable insurance regulators) as such bodies may request. (b) Each of the parties shall provide to the other parties copies of all insurance change of control applications filed in connection with this Agreement. 7.6 Additional Financial Statements. As soon as reasonably practicable after they become available, Seller shall make available to Buyer (i) as and to the extent prepared, the GAAP financial statements of each Company and its Subsidiaries (without footnotes) for all interim quarterly fiscal periods and all monthly periods subsequent to June 30, 1995 and prior to the Closing Date, (ii) Quarterly SAP Statements of LOV and FFRL Re for all interim periods subsequent to June 30, 1995 and prior to the Closing Date ("Interim SAP Statements") and (iii) as and to the extent prepared, consolidating pro-forma GAAP and SAP financial statements of LOV for such interim quarterly fiscal periods after giving effect to the transactions and other actions described on Exhibit A. Such GAAP financial statements will present fairly in all material respects the financial position and results of operations of the applicable Company and its consolidated subsidiaries as of each such date and for each such period in conformity with GAAP, subject to year-end adjustments and except that such financial statements shall not contain footnotes. Such SAP financial statements will present fairly the statutory financial condition of LOV or FFRL Re to which such statement relates as of the end of the calendar quarter to which such statement relates and the statutory results of its operations for the period then ended and will be prepared in conformity in all material respects with SAP. 7.7 Further Assurances. Each of the parties shall execute such documents and other papers and take such further actions as may be reasonably required or desirable to carry out the provisions of this Agreement and the transactions contemplated hereby. Each such party shall use commercially reasonable efforts to fulfill or obtain the fulfillment of the conditions to the Closing as promptly as practicable. Without limiting the generality of the foregoing, the parties shall use commercially reasonable efforts to file promptly with the FTC and Justice complete and accurate notification and report forms with respect to the transactions contemplated hereby 42 pursuant to HSR, to file as promptly as practicable such additional information and documentary materials as may be requested pursuant to HSR, and request early termination of all applicable waiting periods. 7.8 Certain Employee Matters. (a) Employment of Affected Employees. Any Affected Employee who is actively employed (including such employees who are on vacation) immediately prior to the Closing shall remain an employee of such Company or such Subsidiary, as the case may be, immediately following the Closing at the same base compensation and wage levels as in effect immediately preceding the Closing. Notwithstanding anything herein to the contrary, nothing in this Agreement shall create any obligation on the part of any Company or any of its Subsidiaries to continue the employment of any employee for any definite period following the Closing Date. Buyer shall cause each Company or its Subsidiaries to offer to employ (or offer severance benefits if such individual's position is no longer available as allowed by applicable law) each Affected Employee who is receiving sick-leave or short-term disability benefits under Parent's or Seller's sick-leave or short-term disability program or who is on an approved leave of absence on the Closing Date ("Inactive Employees"); provided, however, that no individual shall be offered employment under this provision after six months following the Closing Date or under the terms of his leave of absence or any applicable period as required by law, if longer. Each Inactive Employee shall become an employee of Parent, Seller or one of their Subsidiaries as of the Closing Date until (i) such Inactive Employee is offered employment (or paid severance) by Buyer, a Company or its Subsidiaries pursuant to this Section 7.8(a), (ii) the expiration of the period for which such Inactive Employee is entitled to such an offer of employment (or payment of severance) or (iii) such Inactive Employment is otherwise terminated by Parent, Seller or their Subsidiaries. Nothing in this Section 7.8(a) shall be interpreted as obligating Parent, Seller or their Subsidiaries to accept any Inactive Employee for active employment for any period of time. The active participation of all Affected Employees in each Employee Benefit Program shall cease as of the Closing Date. (b) Substantially Equivalent Benefits. (i) Effective as of the Closing Date, Buyer shall cause each Company or one of its Subsidiaries to provide such plans, programs, agreements or arrangements on behalf of the Transferred Employees so as to provide, in the aggregate, employee benefits which are substantially equivalent to the benefits provided to similarly situated employees at the life insurance subsidiary of Buyer. (ii) Notwithstanding the foregoing, with respect to any terminations of employment with any Company or one of its Affiliates occurring within one year after the Closing Date, Buyer shall cause to be maintained following the Closing 43 Date severance benefits for the Transferred Employees which are no less favorable to the Transferred Employees than the following: 1. Full-time exempt employees shall receive one week of severance for each year of service plus four weeks. The minimum amount of severance shall be four (4) weeks. 2. Full-time non-exempt employees shall receive one week of severance for each year of service plus two weeks. The minimum amount of severance shall be two (2) weeks. 3. Part-time exempt and non-exempt employees shall receive severance pay based upon the schedule described in item 2 immediately above, pro-rated based upon average hours worked. 4. Partial years of service shall be rounded to the closest year of service for calculation of benefit purposes. (c) Retirement Plan. On the Closing Date, Parent shall cause each Affected Employee who is a participant (other than any terminated non-vested participant) in the Parent's Retirement Plan to become fully vested, to the extent not already vested, as of the Closing Date in the benefits accrued under the Parent's Retirement Plan as of the Closing Date. Transferred Employees shall cease to accrue any benefits under the Parent's Retirement Plan, and each Company and its Subsidiaries shall cease to be participating employers in such plan, as of the Closing Date. After the Closing Date, any new benefits accrued by Affected Employees shall be accrued under the terms of the Buyer's Retirement Plan, if any, and Parent's Retirement Plan shall have no liability or obligation in respect of such accruals. (d) Defined Contribution Plans. On the Closing Date, Parent shall cause each Affected Employee who is a participant (other than any Affected Employee whose employment terminates prior to the Closing) in the Defined Contribution Plans to become fully vested, to the extent not already vested, as of the Closing Date in his account balance under each such plan. Each Company and its Subsidiaries shall cease to be participating employers in the Defined Contribution Plans as of the Closing Date. Transferred Employees shall be entitled to receive distributions pursuant to the terms of such plans and the provisions of applicable law. (e) Post-Retirement Medical and Life Benefits. Parent shall retain all obligations and liabilities for post-retirement medical benefits and life insurance under the Company Plans in respect of any Affected Employee who retired on or before the Closing and any Affected Employee who is not a Transferred Employee, whether such claims are incurred prior to, on or after the Closing Date. Following the Closing, Buyer, 44 or a Company or its Subsidiaries shall provide to the Transferred Employees coverage under a retiree welfare benefit plan which provides benefits which are substantially equivalent to the benefits provided under the retiree welfare benefit plans maintained by Parent immediately prior to the Closing. (f) Bonuses. Buyer shall cause each Company and its Subsidiaries to assume all obligations and liabilities for bonuses and incentive payments in connection with the relevant Employee Benefit Programs in effect immediately prior to the Closing Date and shall cause the payment of such bonuses or incentive payments, if any, to be made in accordance with the terms of such Employee Benefit Programs consistent with past practice to the extent such obligations and liabilities have been accrued on the Adjusted Closing SAP Balance Sheet, such accruals to be made in a manner consistent with past practices. (g) Special Bonus Program. Parent or a Subsidiary of Parent (other than a Company and its Subsidiaries) shall assume all obligations and liabilities for bonuses in connection with the Special Bonus Program in effect on the date hereof and shall cause the payment of such bonuses to be made in accordance with the terms of the Special Bonus Program. (h) Vacation. Buyer shall cause each Company and its Subsidiaries to credit each Transferred Employee with the number of unused vacation days credited to such individual through the Closing Date under the applicable vacation policies of his or her employer and shall permit or cause Transferred Employees to be permitted to use such vacation days. (i) Welfare Benefits. Effective as of the Closing, Buyer shall cause each Company or one or more of its Subsidiaries to provide coverage to all Transferred Employees and their dependents or COBRA beneficiaries under a group health plan which is substantially similar to the group health plan or plans (including any such plan that is a flexible spending account under a cafeteria plan as defined in Section 125 of the Code) covering the Transferred Employees (and their dependents and COBRA beneficiaries) immediately prior to the Closing, and such coverage shall be provided under substantially the same terms and conditions applicable to such Transferred Employees under Parent's group health plan immediately prior to the Closing. With respect to each Transferred Employee, each Company and its Subsidiaries shall retain the obligation and liability for claims by any such individual (or his or her covered dependent) or any COBRA beneficiary under such Company's or Subsidiaries employee welfare benefit plans (within the meaning of Section 3(1) of ERISA), incurred after the Closing Date. Buyer shall cause each Company and its Subsidiaries to provide for the waiver under such Company's or its Subsidiaries' welfare benefit plans covering Transferred Employees on and after the Closing Date of any conditions to coverage with respect to pre-existing medical conditions (but only with respect to conditions which are covered under Parent's or Seller's welfare benefit plans prior to 45 the Closing Date) and shall credit Transferred Employees with any amounts paid prior to the Closing Date in order to satisfy applicable deductible amounts and copayment minimums under the corresponding welfare plans of such Company or one of its Subsidiaries to the extent such payments would be taken into account under the welfare plans maintained by Buyer with respect to similarly situated employees. Buyer shall or shall cause the Companies and their Subsidiaries to recognize after the Closing Date the aggregate value of any unused balances of Transferred Employees under Parent's cafeteria plan as of the Closing Date. With respect to each Affected Employee who is not on the Closing Date a Transferred Employee and his or her dependents or COBRA beneficiaries, Parent, Seller or one of their Subsidiaries shall assume the obligation and liability for claims under any Employee Benefit Program that is an employee welfare benefit plan under Section 3(1) of ERISA incurred pursuant to the terms of such plan (as if such employee had been an employee of Parent, Seller or such Subsidiary) prior to the date on which such employee becomes a Transferred Employee. Promptly after the end of each calendar quarter after the Closing Date, Parent shall provide to Buyer a report of the payments of short-term disability salary continuation payments made pursuant to the preceding sentence, and Buyer shall within 5 business days thereafter reimburse Parent for such amount. (j) Workers' Compensation. With respect to each Affected Employee, Parent shall retain the obligation and liability for any workers' compensation or similar workers' protection claims with respect to any such individual incurred on or prior to the Closing Date. (k) Credit. Buyer, each Company and its Subsidiaries shall recognize the service credited to Transferred Employees on or prior to the Closing Date to the extent recognized under the Employee Benefit Programs as if such service had been rendered to Buyer or one of its Affiliates in connection with (i) any welfare benefit plan (within the meaning of Section 3(1) of ERISA) for purposes of any waiting period and eligibility purposes only (including eligibility for benefits that might otherwise be limited due to pre-existing medical conditions or participant co-payments and deductibles) and (ii) any employee pension plan (within the meaning of Section 3(2) of ERISA) for purposes of eligibility and vesting (but not for benefit accrual) but only with respect to a plan in which such employees participate and which is made available by Buyer or any of its Affiliates following the Closing. (l) Third-Party Rights. No provision of this Section 7.8 shall create any third-party beneficiary rights in any employee or former employee (including any beneficiary or dependent thereof) of Parent, Seller, any of their Affiliates, any Company or any Subsidiaries of any Company in respect of continued employment (or resumed employment) for any specified period of any nature or kind whatsoever, and no provision of this Section 7.8 shall create such third-party beneficiary rights in any such persons in respect of any benefits that may be provided, directly or indirectly, under 46 any employee benefit plan or arrangement, including the currently existing Employee Benefit Programs. (m) Indemnity. Buyer agrees to indemnify Parent, Seller and their Affiliates and to defend and hold Parent, Seller and their Affiliates harmless from and against any and all Losses arising out of any claims by or in respect of any Transferred Employee (or such Transferred Employee's successors or assigns) with respect to any of the obligations or liabilities which Parent or Seller has not assumed or retained hereunder or any other events arising after the Closing Date, including, but not limited to, claims with respect to (i) assumed severance, (ii) vacation, (iii) bonus or incentive payments, or (iv) WARN or any similar state notification law. Seller and Parent hereby agree to indemnify Buyer and its Affiliates and to defend and hold Buyer and its Affiliates harmless from and against any and all Losses arising out of (x) any claims under any of the Employee Benefit Programs with respect to any of the obligations or liabilities that Buyer has not agreed to cause a Company or its Subsidiaries to assume, (y) any "employee pension plan" (within the meaning of Section 3(2) of ERISA) or any "group health plan" (within the meaning of Section 607 of ERISA) in respect of which a Company or any of its Subsidiaries have any liability solely as a result of being a member of a "controlled group" (within the meaning of Section 4001(a)(14) of ERISA) prior to the Closing Date which includes Parent or Seller (but exclusive of liabilities in connection with Affected Employees under any such plan maintained or contributed to by any Company or any of its Subsidiaries) or (z) any claims by or in respect of any Affected Employee, including a Transferred Employee (or such Transferred Employee's successors or assigns), arising out of, or in connection with, or otherwise relating to, any allegations of unlawful discrimination or sexual harassment which occurred on or prior to the Closing Date. Notwithstanding any other provision of this Agreement to the contrary, the indemnities provided for herein shall not be subject to the deductible and maximum liability contained in Section 10.2, and all such indemnities shall survive until 60 days after the expiration of the applicable statute of limitations with respect thereto, other than the indemnity set forth in clause (z) herein, which shall be subject to, and be taken into account for purposes of, calculating the availability or applicability of the deductible and maximum liability contained in Section 10.2, and shall survive for two years after the Closing Date (except to the extent that a detailed notice of a specific claim giving rise to a right of indemnification shall have been given by Buyer in accordance with the procedures set forth in Section 10.4). Any claim for indemnification by Buyer, Seller or Parent pursuant to this Section 7.8(n) shall be subject to the procedures set forth in Section 10.4. (n) In addition, for a two year period following the Closing Date, neither Parent nor Seller shall solicit for employment or appointment as agent (i) any employees of any of the Companies or their Subsidiaries who have managerial responsibility or (ii) any insurance agents of the Companies or their Subsidiaries on the 47 Closing Date; provided, however, that such agreement of non-solicitation shall not apply to general advertisements as to available employment positions. 7.9 Settlement of Intercompany Accounts; Cancellation of Intercompany and Other Agreements. The parties agree that all intercompany accounts, including all accounts receivable (whether or not currently due and payable), between any Company or any of its Subsidiaries, on the one hand, and Parent, Seller and their Affiliates (other than a Company and its Subsidiaries), on the other hand, shall be settled in full on or prior to the Closing Date (subject to the next sentence). Within five days prior to the Closing Date, Seller will deliver to Buyer a schedule of all amounts to be so settled on the Closing Date. If Buyer agrees with such settlement amounts, Seller will, at Closing, cause such amounts to be settled. If Buyer disagrees with any such settlements, Buyer and Seller will resolve such disagreement in accordance with the procedures set forth in Section 2.4(g), and such settlement payments will be made after such resolution. Except for the agreements entered into pursuant to Section 7.10(a), 8.7 or 9.6 or as otherwise provided in this Agreement, each Company shall cause any Contracts or Other Agreements between such Company or its Subsidiaries, on the one hand, and Seller and its Affiliates (other than any Company or any Subsidiary of a Company), on the other hand, to be canceled. Except in the ordinary course consistent with past practice or as otherwise provided in this Agreement, each Company and its Subsidiaries, on the one hand, and Parent, Seller and their Affiliates (other than any Company or any Subsidiary of a Company), on the other hand, shall not enter into any material Contracts or Other Arrangements with each other or engage in any material transactions with each other without the consent of Buyer, which shall not be unreasonably withheld. 7.10 Actions to Address Certain Interrelationships; Dividends. (a) On or prior to the Closing Date, Buyer, Seller, Parent and the Companies shall enter into such arrangements and other relationships as are contemplated by Exhibit B hereto. (b) On or prior to the Closing Date, Parent and Seller shall not be entitled to cause any Company to declare and pay any dividend or to make any distributions to such Company's stockholders other than the declaration of a $40,000,000 dividend by LOV, which shall be paid after the date hereof. 7.11 Investments. (a) From the date hereof until the opening of business on January 2, 1996, each Company will refrain from selling, transferring, or otherwise trading in any of the Investment Assets. (b) From the opening of business on January 2, 1996 until the Closing, Seller and its Affiliates will refrain from selling, transferring or otherwise trading in or investing any of the Investment Assets except in accordance with written instructions of 48 Charles Kaminski or his designee on behalf of Buyer; provided, that such instructions comply with (x) the insurance laws of the States of Virginia and Illinois, as the case may be, and (y) the investment guidelines adopted by the insurance subsidiaries of Buyer currently in effect. 7.12 Resignations of Directors. Subject to applicable statutory and regulatory requirements and to the agreements set forth on Section 4.6 of the Seller Disclosure Schedule, Parent and Seller will cause such members of the boards of directors and such officers of each Company and its Subsidiaries as are designated by Buyer to tender, effective at the Closing, their resignations from such boards of directors or from such offices. 7.13 No Negotiations, Etc. Parent, Seller and each Company will refrain and will cause each other Person acting for or on behalf of them to refrain from taking, directly or indirectly, any action (i) to seek or encourage any offer (including in connection with any proposed public offering of securities) or proposal from any Person to acquire any assets or shares of capital stock or other securities of any Company or any to its Subsidiaries or any interests therein, (ii) to merge, consolidate, or combine, or to permit any other Person to merge, consolidate or combine, with any Company or any of its Subsidiaries, (iii) to liquidate, dissolve, or reorganize any Company or any of its Subsidiaries, (iv) to acquire or transfer any assets of any Company or any of its Subsidiaries or any interests therein, except in the ordinary course of business and consistent with past practice or except as expressly permitted by the terms of this Agreement, (v) to reach any agreement or understanding (whether or not such agreement or understanding is absolute, revocable, contingent, or conditional) for, or otherwise to attempt to consummate, any such acquisition, transfer, merger, consolidation, combination, or reorganization, or (vi) to furnish or cause to be furnished any information with respect to any Company or any of its Subsidiaries to any Person (other than Buyer) that Parent, Seller or any Company (or any Person acting for or on behalf of them) knows or has reason to believe is in the process of attempting or considering any such acquisition, transfer, merger, consolidation, combination, liquidation, dissolution or reorganization. If Parent, Seller or any Company receives from any Person (other than Buyer) any offer, proposal, or information request that is subject to this Section 7.13, Parent, Seller or such Company will promptly advise such Person, by written notice, of the terms of this Section 7.13 and will promptly deliver a copy of such notice to Buyer. 7.14 Newco Assets; Other Real Property. (a) In the event that Buyer conducts an Environmental Investigation with respect to any Real Property owned by Newco or the Lawyers Title Building and such Environmental Investigation or any environmental report received by Parent, Seller or any of the Companies identifies an Adverse Environmental Condition, then, at the option of Buyer, the parties hereto shall enter into an amendment to this Agreement that (i) eliminates the obligation of Parent to sell, and Buyer to purchase, the capital stock of Newco and/or requires Newco 49 and/or LOV to transfer to Parent or an Affiliate thereof designated by Parent (other than any Company or any Subsidiary of a Company) all ownership interest in the parcel(s) of Real Property of Newco with respect to which such contingent liability exists and/or the Lawyers Title Building, as the case may be, (ii) reduces the Closing Purchase Price by an amount equal to the aggregate Value (as hereinafter defined) of the Real Property as to which Buyer will not, by reason of the foregoing, acquire any direct or indirect ownership interest, and (iii) provides for the lease by Parent or an Affiliate thereof to an Affiliate of Buyer with respect to some or all of the Real Property as to which such ownership interest is not acquired by Buyer, it being understood that the Real Property, if any, covered by such lease(s) and the terms and conditions thereof shall be reasonably satisfactory to Parent and Buyer. As used herein, "Value" means book value in the case of the Lawyers Title Building and current appraised value in the case of other Real Property. Notwithstanding anything to the contrary contained herein, the option described in the immediately preceding sentence shall not be required to be consummated with respect to any parcel of Real Property to the extent Parent or any of its Affiliates causes the Adverse Environmental Condition thereon to be fully remedied to the satisfaction of Buyer on or before the Closing Date. (b) In the event Buyer is not entitled, or does not elect, to require this Agreement to be amended as contemplated by Section 7.14(a), Buyer may, at its option, require the parties hereto to enter into an amendment to this Agreement that provides for a purchase by Buyer or an Affiliate thereof of the assets of Newco together with an assumption of the liabilities thereof in lieu of the purchase of capital stock of Newco contemplated by this Agreement. (c) With respect to any Real Property (other than the Lawyers Title Building and the Real Property owned by Newco) as to which Buyer's Environmental Investigation identifies an Adverse Environmental Condition, at Buyer's option, Parent or Seller, as the case may be, shall cause the applicable Company or Subsidiary, on or prior to the Closing Date, to sell such Real Property to Parent or an Affiliate thereof (other than any Company or any Subsidiary of a Company) for a consideration equal in value to the book value of such Real Property, it being understood that such consideration may be an investment asset having similar income attributes to the Real Property but shall, in any event, be reasonably satisfactory to Buyer. 8. Conditions Precedent to the Obligation of Buyer. The obligation of Buyer to consummate the transactions contemplated by this Agreement shall be subject to the satisfaction or, where permissible, waiver by Buyer of the following conditions: 8.1 Representations and Warranties; Covenants and Agreements. (a) Except as otherwise permitted or contemplated by this Agreement or as consented to by Buyer, the representations and warranties of Parent, Seller and each Company contained in this Agreement shall be true, accurate and complete in all material respects as of the date hereof and on and as of the Closing Date with the same force 50 and effect as though made on and as of the Closing Date (except that any such representations and warranties that are given as of a specified date and relate solely to a specified date or period shall be true, accurate and complete in all material respects as of such date or period). Each of Parent and Seller shall have delivered to Buyer a certificate, dated the Closing Date and signed on its behalf by one of its Executive Officers, to the foregoing effect with respect to the representations and warranties of Parent and Seller and each Company shall have delivered to Buyer a certificate, dated the Closing Date and signed on its behalf by one of its Executive Officers, to the foregoing effect with respect to the representations and warranties of such Company. (b) Except as otherwise consented to by Buyer, Parent, Seller and each Company shall each have performed and complied in all material respects with all covenants and agreements required by this Agreement to be performed or complied with by it on or prior to the Closing Date. Each of Parent and Seller shall have delivered to Buyer a certificate, dated the Closing Date and signed on its behalf by one of its Executive Officers, to the foregoing effect with respect to the covenants and agreements required by this Agreement to be performed or complied with by Parent or Seller and each Company shall have delivered to Buyer a certificate, dated the Closing Date and signed on its behalf by one of its Executive Officers, to the foregoing effect with respect to the covenants and agreements required by this Agreement to be performed or complied with by such Company. 8.2 Governmental Approvals; Illegality. (a) All authorizations, approvals and consents from Governmental and Regulatory Bodies set forth in Section 4.3 of the Seller Disclosure Schedule and Section 5.2 of the Company Disclosure Schedule required for the transactions contemplated by this Agreement shall have been obtained and shall be in full force and effect and shall no longer be subject to any conditions or limitations other than the occurrence of the Closing (and other than customary conditions uniformly imposed by regulatory authorities in connection with similar acquisitions), and Buyer shall have been furnished with appropriate evidence, reasonably satisfactory to it and its counsel, of the granting of such authorizations, approvals and consents. (b) There shall not be in effect any statute, rule, regulation or order of any court, Governmental or Regulatory Body which prohibits, enjoins, or makes illegal the transactions contemplated by this Agreement. (c) There shall not be instituted or pending any action, suit, investigation, or other proceeding in, before, or by any court, governmental or regulatory authority to recover any damages or obtain other relief (which is reasonably likely to have a Material Adverse Effect or a material adverse effect on the business or condition of the Buyer) as a result of this Agreement or any of the transactions contemplated hereby. 51 8.3 Third Party Consents. There shall have been obtained all consents and approvals from parties to Contracts or Other Agreements with Parent, Seller, any Company or any Subsidiaries of Parent or any Company that are required in connection with the performance by Parent, Seller and any Company of their respective obligations under this Agreement, except for such consents and approvals the failure of which so to have obtained could not reasonably be expected to have a Material Adverse Effect. 8.4 Hart-Scott-Rodino. The waiting period under HSR, including any extension thereof, shall have expired or been terminated. 8.5 Opinions of Counsel to Parent, Seller and the Companies. Buyer shall have received the opinion of counsel to Parent, Seller and the Companies (which may be internal or external counsel), dated the Closing Date and addressed to Buyer, in form and substance reasonably acceptable to Buyer prior to the Closing. 8.6 No Material Adverse Change. There shall not have occurred since June 30, 1995 any change in the business or condition (financial or otherwise) of any Company or any Subsidiary of any Company that has had or is reasonably likely to have a Material Adverse Effect, other than changes resulting from a change in general economic conditions or matters affecting the life or health insurance industry generally. 8.7 Consummation of Certain Transactions. Each of the transactions and other actions contemplated by Exhibit A shall have been effected or taken on terms and conditions reasonably satisfactory to Buyer. 9. Conditions Precedent to the Obligations of Parent, Seller and the Companies. The obligations of Parent, Seller and each Company to consummate the transactions contemplated by this Agreement shall be subject to the satisfaction or, where permissible, waiver by Parent and Seller of the following conditions: 9.1 Representations and Warranties; Covenants and Agreements. (a) Except as otherwise permitted or contemplated by this Agreement or as consented to by Parent, the representations and warranties of Buyer contained in this Agreement shall be true, accurate and complete in all material respects as of the date hereof and on and as of the Closing Date with the same force and effect as though made on and as of the Closing Date (except that any such representations and warranties that are given as of a specified date and relate solely to a specified date or period shall be true, accurate and complete in all material respects as of such date or period). Buyer shall have delivered to Parent and Seller a certificate, dated the Closing Date and signed on its behalf by one of its Executive Officers, to the foregoing effect. (b) Buyer shall have performed and complied in all material respects with all covenants and agreements required by this Agreement to be performed or complied 52 with by it on or prior to the Closing Date. Buyer shall have delivered to Parent and Seller a certificate, dated the Closing Date and signed by one of its Executive Officers, to the foregoing effect. 9.2 Governmental Approvals; Illegality. (a) All authorizations, approvals and consents from Governmental and Regulatory Bodies set forth in Section 4.3 of the Seller Disclosure Schedule and Section 5.2 of the Company Disclosure Schedule required for the transactions contemplated by this Agreement shall have been obtained and be in full force and effect and shall no longer be subject to any conditions or limitations other than the occurrence of the Closing (and other than customary conditions uniformly imposed by regulatory authorities in connection with similar acquisitions), and Parent, Seller and each Company shall have been furnished with appropriate evidence, reasonably satisfactory to it and its counsel, of the granting of such authorizations, approvals and consents. (b) There shall not be in effect any statute, rule, regulation or order of any court, Governmental or Regulatory Body which prohibits, enjoins or makes illegal the transactions contemplated by this Agreement. 9.3 Third Party Consents. There shall have been obtained all consents and approvals from parties to Contracts or Other Agreements with Buyer or any of its Affiliates that are required in connection with the performance by Buyer of its obligations under this Agreement, except for such consents and approvals the failure of which to have so obtained could not reasonably be expected to have a material adverse effect on the ability of Buyer to consummate the transactions contemplated by this Agreement. 9.4 Hart-Scott-Rodino. The waiting period under HSR, including any extension thereof, shall have expired or been terminated. 9.5 Opinion of Counsel to Buyer. Parent, Seller and each Company shall have received the opinion of counsel to Buyer (which may be internal or external counsel), dated the Closing Date and addressed to Parent, Seller and the Company, in form and substance reasonably acceptable to Parent prior to the Closing. 9.6 Consummation of Certain Transactions. Each of the transactions and other actions contemplated by Exhibit A shall have been effected or taken on terms and conditions reasonably satisfactory to Parent. 10. Survival and Indemnification. 10.1 Survival of Representations and Warranties. All representations and warranties contained herein shall survive the execution and delivery hereof and the Closing hereunder, and thereafter (i) in the case of the representations and warranties 53 contained in Sections 4.5, 4.6, 4.10 (other than Sections 4.10(k)) and 4.14, such representations and warranties shall survive until 60 days after the expiration of the applicable statute of limitations with respect to the subject matter thereof and (ii) in the case of all other representations and warranties, such representations and warranties shall survive until the date which is 18 months after the Closing Date; provided, however, that any representation or warranty shall survive the time it would otherwise terminate pursuant to this Section 10.1 to the extent that a detailed notice of a specific breach thereof giving rise to a right of indemnification shall have been given by a party hereto in accordance with this Article 10 prior to such time. 10.2 Indemnification by Parent and Seller. From and after the Closing, subject to the provisions of Sections 10.1 and 10.4, Parent and Seller jointly and severally shall indemnify and hold harmless Buyer from and against any and all Losses incurred or suffered by Buyer, any Company and their respective Affiliates and their respective officers, directors, employees, agents and representatives arising out of, resulting from, or relating to (a) any breach of any of the representations or warranties made by Parent, Seller or the Companies in this Agreement; (b) any failure by Parent, Seller or (prior to the Closing Date) any Company to perform any of its respective covenants or agreements contained in this Agreement; (c) (i) any Environmental Law (whether or not such Losses result from a violation of Environmental Law), to the extent such Losses relate to conditions existing as of or prior to the Closing and (ii) any disposal or arrangements for disposal made prior to the Closing of solid waste, toxic or hazardous substances as defined by Environmental Law; or (d) the marketing and sales activities conducted prior to the Closing by the employees, agents, and brokers of the Companies and their Subsidiaries (which indemnification shall expire on the third anniversary of the Closing Date); provided, that Parent and Seller shall not be obligated to indemnify and hold harmless Buyer from and against the first $6,775,000 of Losses in accordance with the foregoing; and the aggregate amount of Losses in respect of which Buyer shall be entitled to indemnification in accordance with this Section 10.2 shall not exceed $293,600,000. Notwithstanding the foregoing, (i) the indemnity relating to a breach of the representation and warranty contained in Sections 4.5, 4.6, 4.10 or 4.14 or under clause (b), or (c) immediately above shall not be subject to the aforesaid deductible or maximum amount of liability; and (ii) for purposes of determining whether indemnification is available under clause (a) of this Section 10.2, all qualifications as to materiality and Material Adverse Effect contained in representations and warranties shall be disregarded. 10.3 Indemnification by Buyer. From and after the Closing, subject to the provisions of Sections 10.1 and 10.4, Buyer shall indemnify and hold harmless Seller and Parent from and against any and all Losses incurred or suffered by Parent, Seller and their respective Affiliates and their respective officers, directors, employees, agents and representatives arising out of, resulting from, or relating to (a) subject to Section 10.1, any breach of any of the representations or warranties made by Buyer in 54 this Agreement; or (b) any failure by Buyer or (following the Closing Date) any Company to perform any of its covenants or agreements contained in this Agreement. 10.4 Procedure. (a) In the event that any Person shall incur or suffer any Losses in respect of which indemnification may be sought hereunder by Buyer, Seller or Parent, the party seeking to be indemnified hereunder (the "Indemnitee") shall assert a claim for indemnification by written notice (the "Notice") to the party from whom indemnification is being sought (the "Indemnitor") stating the nature and basis of such claim. In the case of Losses arising or which may arise by reason of any third party claim, promptly after receipt by an Indemnitee of written notice of the assertion or the commencement of any Litigation with respect to any matter in respect of which indemnification may be sought by such party hereunder, the Indemnitee shall give Notice to the Indemnitor and shall thereafter keep the Indemnitor reasonably informed with respect thereto, provided that failure of the Indemnitee to give the Indemnitor prompt notice as provided herein shall not relieve the Indemnitor of any of its obligations hereunder, except to the extent that the Indemnitor is materially prejudiced by such failure. In case any such Litigation is brought against any Indemnitee, the Indemnitor shall be entitled to assume the defense thereof, by written notice of its intention to do so to the Indemnitee within 30 days after receipt of the Notice, in which event the Indemnitor shall assume all future responsibility for such Litigation. If the Indemnitor shall assume the defense of such Litigation, it shall not settle such Litigation without the consent of Indemnitees (which consent shall not be unreasonably withheld) and unless such settlement includes as an unconditional term thereof the giving by the claimant or the plaintiff of a release of the Indemnitee from all liability with respect to such Litigation. As long as the Indemnitor is contesting any such Litigation in good faith and on a timely basis, the Indemnitee shall not pay or settle any claims brought under such Litigation. Notwithstanding the assumption by the Indemnitor of the defense of any Litigation as provided in this Section 10.4(a), the Indemnitee shall be permitted to participate in the defense of such Litigation and to employ counsel at its own expense; provided, however, that if the defendants in any action shall include both an Indemnitor and any Indemnitee and such Indemnitee shall have reasonably concluded that counsel selected by Indemnitor has a conflict of interest because of the availability of different or additional defenses to such Indemnitee, such Indemnitee shall have the right to select separate counsel to participate in the defense of such action on its behalf, at the expense of the Indemnitor; provided, further, that the Indemnitor shall not be obligated to pay the expenses of more than one separate counsel for all Indemnitees. (b) If the Indemnitor shall fail to notify the Indemnitee of its desire to assume the defense of any such Litigation within the prescribed period of time and as required above, or shall notify the Indemnitee that it will not assume the defense of any such Litigation, then the Indemnitee may assume the defense of any such Litigation, in which event it may do so in such manner as it may deem appropriate, and the Indemnitor shall be bound by any determination made in such Litigation or any 55 settlement thereof effected by the Indemnitee, provided that any such determination or settlement shall not affect the right of the Indemnitor to dispute the Indemnitee's claim for indemnification and provided that the Indemnitee shall not effect any such settlement without the prior written consent of the Indemnitor (such consent not to be unreasonably withheld). The failure of the Indemnitor to assume the defense of any such Litigation shall not be deemed a concession that it is required to indemnify the Indemnitee for the subject matter of such Litigation. The Indemnitor shall be permitted to join in the defense of such Litigation and to employ counsel at its own expense. (c) Any payment by any Indemnitor in indemnification hereunder shall be treated as an adjustment to the Final Purchase Price. 10.5 Indemnification; Directors and Officers Insurance. For six years from and after the Closing Date, each Company shall, and Buyer agrees to cause each Company and its Subsidiaries to, indemnify, defend and hold harmless all past and present officers and directors of such Company and of its Subsidiaries to the same extent such persons are indemnified as of the date of this Agreement by such Company or its Subsidiaries pursuant to the certificate of incorporation or articles of incorporation, as the case may be, or the by- laws, of such Company or its Subsidiaries, as the case may be, and indemnification agreements in existence on the date hereof for acts or omissions occurring at or prior to the Closing. Parent shall provide, for a period of not less than six years from and after the Closing Date, the current directors and officers of each Company and its Subsidiaries a directors' and officers' liability insurance policy (the "D&O Insurance") that is no less favorable than the policy currently made available for their benefit by Parent or one of its Affiliates, or, if substantially equivalent insurance coverage is unavailable, the best available coverage. The provisions of this Section 10.5 are intended to be for the benefit of, and shall be enforceable by, each past and present officer or director of each Company or of its Subsidiaries and each person who becomes such prior to the Closing Date. 10.6 Certain Exclusions from Article 10 Coverage. Except for the procedural provisions of Section 10.4, this Article 10 shall not apply to the matters governed by Section 7.8(n) (except to the extent provided therein) and this Article 10 (including procedural provisions thereof) shall not apply to the matters governed by Article 11. Buyer shall not be entitled to indemnification under this Article 10 with respect to breaches of the representations, warranties and covenants contained in Section 4.10 to the extent such breaches give rise to indemnification pursuant to Section 11.2. 11. Tax Matters. 56 11.1 Section 338 Election. (a) With respect to Parent's and Seller's sale of the Shares hereunder, at the request of Buyer, Parent or Seller, as appropriate, and Buyer shall jointly make timely and irrevocable elections under Section 338(h)(10) of the Code (which elections shall be made with respect to each Company and each of its Subsidiaries requested by Buyer), and, if permissible, similar elections under any applicable state or local income tax laws. To the extent Buyer has requested an election under such Section 338(h)(10), Buyer and Seller or Parent, as the case may be, agree to report the transfer of the Shares (and the deemed sale of the shares of the affected Company's Subsidiaries) under this Agreement consistent with such elections under Section 338(h)(10) of the Code or any similar state or local tax provision (the "Elections") and agree not to take any action that could cause such Elections to be invalid, and shall take no position contrary thereto unless required to do so pursuant to a determination (as defined in Section 1313(a) of the Code) or any similar state or local tax provision. (b) To the extent Buyer has requested an Election: (y) To the extent possible, Buyer, Parent, Seller and the affected Company agree to execute at the Closing any and all forms necessary to effectuate the Elections (including, without limitation, Internal Revenue Service Form 8023-A and any similar forms under applicable state and local income tax laws (the "Section 338 Forms")). In the event, however, any Section 338 Forms are not executed at the Closing, Buyer, Parent, Seller and the affected Company agree to prepare and complete each such Section 338 Form no later than 10 Business Days prior to the date such Section 338 Form is required to be filed. Buyer, Parent, Seller and such Company shall each cause the Section 338 Forms to be duly executed by an authorized person for Buyer, Parent, Seller or such Company, in each case, and shall duly and timely file the Section 338 Forms in accordance with applicable tax laws and the terms of this Agreement. (z) As soon as practicable after the Closing Date, Buyer shall deliver to Seller and Parent a written notice setting forth (with reasonable specificity) Buyer's good faith calculation of (1) the Modified Aggregate Deemed Sales Price (as defined below) and the allocation thereof among the assets of the affected Company and the assets of such Company's Subsidiaries in accordance with the principles of Treasury Regulation (S)1.338(h)(10)-1(f)(1)(ii) and (2) the adjusted grossed-up basis of the assets of the affected Company and of the assets of such Company's Subsidiaries pursuant to Treasury Regulation (S)1.338(h)(10) - 1(e)(5) (the 57 "Deemed Purchase Price") (collectively, "Buyer's Allocation"). For such purposes, the tangible personal property of such Company and its Subsidiaries shall be valued at statutory book value as of the Closing Date, investments of such Company and its Subsidiaries shall be valued at fair market value as of the Closing Date, and insurance in force of such Company shall be valued at fair market value as of the Closing Date. Within 20 Business Days after receipt thereof, Seller or Parent shall deliver to Buyer written notice indicating whether Seller and Parent agree or disagree with Buyer's Allocation. If Seller and Parent agree with Buyer's Allocation or if both Seller and Parent fail to deliver such written notice within such 20 Business Days, Buyer's Allocation shall constitute the "Agreed Allocation." If Seller or Parent provides timely written notice to Buyer of any disagreement with Buyer's Allocation, the Agreed Allocation shall be determined through the Tax Settlement Procedure. Except as determined to the contrary by the appropriate taxing authority upon an audit of its (or its Affiliates') Tax Returns, each of Buyer, Parent, Seller, each Company and each Company's Subsidiaries shall file all Tax Returns consistent with the Agreed Allocation. For purposes of this Section 11.1, the term "Modified Aggregate Deemed Sales Price" shall mean the amount resulting from the Elections, determined pursuant to Treasury Regulation (S)1.338(h)(10)-1(f) without regard to items described in Treasury Regulation (S)1.338(h)(10)-1(f)(4) (it being understood that Parent or Seller may take such items into account in filing Tax Returns). For purposes of this Agreement, the "Tax Settlement Procedure" is as follows: Upon receipt by Parent and Seller or by Buyer, as the case may be (the "Calculating Party"), of notice from the other party (the "Disputing Party") of disagreement with any Tax calculation or determination supplied by the Calculating Party, the Calculating Party and the Disputing Party shall begin good faith negotiations to resolve such disagreement. If the Calculating Party and the Disputing Party are able to resolve such disagreement within ten Business Days after the Calculating Party's receipt of notice of disagreement (or any longer period mutually agreed to by the parties), the relevant amount will become the amount agreed upon by the Calculating Party and the Disputing Party. If the Calculating Party and the Disputing Party are unable to resolve any disagreement within ten Business Days after the Calculating Party's receipt of notice of disagreement, the Calculating Party and the Disputing Party shall jointly request the national office of Coopers & Lybrand (which may not assign the matter to its Chicago, Illinois or Stamford, Connecticut, offices), or, if such firm is unavailable, another independent nationally recognized auditing firm selected by the parties (the "Tax Settlement Auditor") to 58 resolve any issue in dispute as soon as possible and shall cooperate with the Tax Settlement Auditor to resolve such dispute. The Tax Settlement Auditor shall make a determination with respect to all disputed issues, which determination shall be set forth in a written report delivered to the Calculating Party and the Disputing Party. The Calculating Party and the Disputing Party shall each pay one-half of the fees and expenses of the Tax Settlement Auditor with respect to such determination. (c) As soon as practicable after the Closing Date, Parent or Seller shall deliver to Buyer a written notice setting forth (with reasonable specificity) Parent's and Seller's good faith calculation of the aggregate bases of the assets of the Companies (other than Newco) and their Subsidiaries on the Closing Date (without giving effect to the Elections) (the "Seller's Aggregate Asset Bases"). Within 20 Business Days after receipt thereof, Buyer shall deliver to Parent and Seller written notice indicating whether Buyer agrees or disagrees with Seller's Aggregate Asset Bases. If Buyer agrees with Seller's Aggregate Asset Bases or if Buyer fails to deliver said written notice within 20 Business Days, Seller's Aggregate Asset Bases shall constitute the "Agreed Aggregate Asset Bases." If Buyer provides timely written notice to Parent and Seller of any disagreement with Seller's Aggregate Asset Bases, the Agreed Aggregate Asset Bases shall be determined through the Tax Settlement Procedure. (d) Within ten Business Days after the Agreed Allocation and the Agreed Aggregate Asset Bases have been finally determined, Parent or Seller shall pay to Buyer as an adjustment to the Closing Purchase Price the Basis Step-Up Deficit or Buyer shall pay to Parent or Seller as an adjustment to the Closing Purchase Price the Basis Step-Up Excess, as the case may be. In either case, such payment shall bear simple interest from and including April 1, 1996 to (but not including) the date of payment at an annual interest rate of 6%. The term "Basis Step-Up Deficit" shall mean the product of (i) 0.159 times (ii) the excess of (A) $220 million over (B) the Basis Step-Up. The term "Basis Step-Up Excess" shall mean the product of (i) 0.159 times (ii) the excess of (A) the Basis step-Up over (B) $220 million. The term "Basis Step-Up" shall mean the Deemed Purchase Price (computed without regard to any payment of the Basis Step- Up Deficit or the Basis Step-Up Excess and without regard to the Deemed Purchase Price allocable to the assets of Newco) minus the Agreed Aggregate Asset Bases. Any disagreements as to such calculation shall be settled through the Tax Settlement Procedure. (e) In the event that following the Closing Date there is an adjustment for federal Income Tax purposes by a taxing authority and the effect of such adjustment is that the Agreed Aggregate Asset Bases, the Deemed Purchase Price, the Basis Step-Up Deficit, the Basis Step-Up Excess or the Basis Step-Up (including, without limitation, by reason of the invalidity of the Elections) is 59 changed, then upon final resolution of such adjustment, Buyer, Parent or Seller, as the case may be, shall recompute the Basis Step-Up Deficit or the Basis Step-Up Excess. The party computing such amount shall provide the other party with written notice of such recomputed Basis Step-Up Deficit or Basis Step-Up Excess. Within 20 Business Days after receipt thereof, the party receiving such notice shall deliver to the party delivering such notice written notice indicating whether it agrees or disagrees with said amount. If the parties disagree on said amount, the recomputed Basis Step-Up Deficit or Basis Step-Up Excess shall be determined through the Tax Settlement Procedure. Immediately following determination of such amount, Parent or Seller shall pay Buyer the excess of the recomputed Basis Step-Up Deficit over the Basis Step-Up Deficit (or the Basis Step-Up Excess, reflected as a negative number) as originally computed or the excess of the Basis Step-Up Excess as originally computed over the recomputed Basis Step- Up Excess, or Buyer shall pay to Parent or Seller the excess of the recomputed Basis Step-Up Excess over the Basis Step-Up Excess (or the Basis Step-Up Deficit reflected as a negative number) as originally computed or the excess of the Basis Step-Up Deficit as originally computed over the Basis Step-Up Deficit as recomputed, as the case may be. 11.2 Tax Indemnification. (a) Parent and Seller jointly and severally shall be responsible for, shall pay or cause to be paid, and shall indemnify and hold harmless Buyer and its Affiliates (including, after the Closing, each Company and its Subsidiaries) from and against any and all Losses for or in respect of each of the following: (i) any and all Income Taxes with respect to any taxable period of each Company or any of its Subsidiaries (or any predecessor) ending on or before the Closing Date (including Income Taxes arising as a result of the Elections), but excluding any transactions occurring on the Closing Date and after the Closing (other than the Elections) which are not related to the transfer of the Shares and the other transactions contemplated by this Agreement ("Excluded Transactions")); (ii) any and all Income Taxes resulting from any Company or any of its Subsidiaries (or any predecessor) having been (or ceasing to be) included in any affiliated, consolidated, combined or unitary Tax Return that included such Company or any of its Subsidiaries (or any predecessor) for any taxable period (or portion thereof) ending on or before the Closing Date (including, without limitation, any liability for Taxes resulting from an acceleration of an "intercompany transaction," within the meaning of Treasury Regulation (S)1.1502-13(d) (or any analogous or similar provision under state, local or foreign law or any predecessor provision or regulation), that occurred on or before the Closing Date (but excluding the Excluded Transactions); 60 (iii) any and all Income Taxes of any member of an affiliated, consolidated, combined or unitary group (other than any Company or any of its Subsidiaries) of which any Company or any of its Subsidiaries (or any predecessor) is or was a member on or prior to the Closing Date, by reason of the liability of any Company or any of its Subsidiaries pursuant to Treasury Regulation (S)1.1502-6(a) or any analogous or similar state, local or foreign law or regulation; (iv) any and all Employment and Withholding Taxes; (v) to the extent not previously paid, any and all real property Taxes allocable to the Seller pursuant to Section 11.2(c) hereof (excluding real property Taxes resulting from the Excluded Transactions and any increase in real property Taxes arising from a revaluation of the property as a result of the sale of the Shares or the Elections); (vi) any and all Income Taxes allocable to the Seller pursuant to Section 11.2(c) hereof and not previously paid thereunder; (vii) any and all Taxes (other than Taxes described in clauses (i) through (vi) of this Section 11.2(a)) with respect to taxable years ending on or before December 31, 1995; (viii) any and all Taxes (other than Taxes described in clauses (i) through (vii) of this Section 11.2(a)) with respect to taxable years ending after December 31, 1995, but only to the extent that such Taxes are attributable to the portion of the period ending on December 31, 1995; and (ix) any breach by the Seller of any representation, warranty or covenant contained in Section 4.10 or Section 11.2. (b) Buyer agrees to indemnify and hold harmless Seller and its Affiliates from and against (and Seller and its Affiliates shall have no liability under Section 11.2(a) on account of) any and all Losses for or in respect of any and all Taxes of any Company or any of its Subsidiaries (or any predecessor) that are not described in Section 11.2(a) (including Taxes resulting from an Excluded Transaction), except for such Taxes arising from a breach of a representation or warranty contained in 4.10, to the extent such representation or warranty has not expired pursuant to Section 10.1. (c) Seller and Buyer shall, to the extent permitted by applicable law, elect with the relevant taxing authority to close the taxable period of each Company and its Subsidiaries on the Closing Date. In any case where applicable law does not permit any Company or any Subsidiary of such Company to close its taxable year on the Closing Date (and in the case of Taxes described in Section 11.2(a)(v)), Taxes (other 61 than Taxes described in Section 11.2(a)(viii)) attributable to the taxable period of such Company or such Subsidiary beginning on or before and ending after the Closing Date shall be allocated (i) to Seller for the period up to and including the Closing Date, excluding any Excluded Transaction and any increase in real property Taxes arising from a revaluation of the property as a result of the sale of the Shares or the Elections, and (ii) to Buyer for the period subsequent to the Closing Date (including any Excluded Transaction and any increase in real property Taxes arising from a revaluation of the property as a result of the sale of the Shares or the Elections). Taxes described in Section 11.2(a)(viii) shall be allocated (i) to Seller for the period ending December 31, 1995 and (ii) to Buyer for the period thereafter. Any allocation required to determine any Income Taxes attributable to any period beginning on or before and ending after the Closing Date (including, without limitation, any Income Taxes resulting from a Tax audit or administrative or court proceeding) shall be made by means of a closing of the books and records of each Company and its Subsidiaries as of the close of business on the Closing Date, excluding any Excluded Transaction, and, to the extent not susceptible to such allocation, by apportionment on the basis of elapsed days, except that extraordinary items described in Treasury Regulation (S)1.1502-76(b)(2)(ii)(C) shall be allocated to the day that they are taken into account. Real property Taxes (excluding those arising from any Excluded Transaction and any increase in such Taxes arising from a revaluation of the property as a result of the sale of the Shares or the Elections) shall be allocated on the basis of elapsed days. Any allocation of Taxes described in Section 11.2(a)(viii) shall be allocated on the basis of elapsed days. (d) (i) Promptly after receipt by Buyer or its Affiliates of written notice of the assertion or commencement of any claim, audit, examination, or other proposed change or adjustment by any taxing authority concerning any Tax covered by Section 11.2(a) (each a "Tax Claim"), Buyer shall notify Seller and Parent. Such notice shall contain factual information (to the extent known by Buyer, any Company or any of its Subsidiaries) describing the asserted Tax Claim in reasonable detail and shall include copies of any notice or other document received from any taxing authority in respect of any such asserted Tax Claim. The failure of Buyer to give Seller and Parent prompt notice as provided herein shall not relieve Seller or Parent of any of its obligations under Section 11.2, except to the extent that the Seller or Parent is materially prejudiced by such failure. (ii) Seller or Parent shall have the sole right to represent each Company's or any of its Subsidiaries' interests in any Tax audit or administrative or court proceeding relating to any Tax covered by Section 11.2(a) and to employ counsel of its choice, provided that (A) with respect to any taxable period referred to in Sections 11.2(a)(v), (vi) or (viii) hereof or (B) if the results of such Tax audit or proceeding (other than a Tax audit or proceeding with respect to any Seller Consolidated and Combined Return, as to which Seller's and Parent's sole obligation shall be to keep Buyer duly informed of the progress thereof) 62 could reasonably be expected to be material to Buyer, such Company, any of such Company's Subsidiaries or their Affiliates for any taxable period including or ending after the Closing Date, then Seller, Parent and Buyer shall jointly control the defense and settlement of any such Tax audit or proceeding and each party shall cooperate with the other party at its own expense and there shall be no settlement or closing or other agreement with respect thereto without the consent of the other party, which consent shall not be unreasonably withheld. Seller and Parent shall promptly notify Buyer if it decides not to control the defense or settlement of any such Tax audit or administrative or court proceeding and Buyer thereupon shall be permitted to defend and settle such Tax audit or proceeding. (iii) Seller or Parent shall promptly notify Buyer of the commencement of any claim, audit, examination or other proposed change or adjustment by any taxing authority which could reasonably be expected to affect the liability of any Company or any of its Subsidiaries for Taxes and Seller or Parent shall keep Buyer duly informed of the progress thereof. (e) (i) Seller or Parent shall properly prepare or cause to be properly prepared, and shall timely file or cause to be timely filed, (x) all Tax Returns which include each Company or any of its Subsidiaries required to be filed on or before the Closing Date, (y) all Tax Returns which include each Company or any of its Subsidiaries or their assets or operations for all taxable periods of such Company and its Subsidiaries ending on or before the Closing Date (which Tax Returns shall include such Company and its Subsidiaries and the reportable items from the assets or operations of such Company and its Subsidiaries through and including the Closing Date), and (z) all Tax Returns with respect to Taxes described in Section 11.2(a)(vii). Such Tax Returns (insofar as they relate to any Company or any of its Subsidiaries) shall be prepared in a manner consistent with past practices and prior audit adjustments and Parent and the Seller or Parent shall pay or cause to be paid all Taxes shown as due on such Tax Returns or otherwise levied or assessed upon such Company or any Subsidiary or any of its Assets on or prior to the Closing Date. Insofar as they relate to any Company and its Subsidiaries, such Tax Returns shall be provided to Buyer for Buyer's review and comment 20 Business Days prior to filing, and Buyer shall be entitled to suggest to Seller or Parent, as the case may be, any reasonable changes to such Tax Returns. Any disagreement between the parties will be resolved through the Tax Settlement Procedure. Seller or Parent shall, subsequent to the Closing Date, provide written notice to Buyer of its intent to file any amended Tax Return or claim for refund with respect to any taxable period ending on or prior to the Closing Date that could reasonably be expected to be material to Buyer, any Company, any Company's Subsidiaries, or their Affiliates for any taxable period including or ending after the Closing Date, and Seller and Parent shall not make such filing without the consent of Buyer, which consent shall not be unreasonably withheld. 63 (ii) Except as set forth in clause (i) above, Buyer shall be responsible for the filing and payment (subject to Buyer's right to indemnification to the extent provided in Section 11.2(a)) of all other Tax Returns required to be filed after the Closing Date (including Tax Returns with respect to Taxes described in Section 11.2(a)(viii)) by or on behalf of each Company and its Subsidiaries, or with respect to their assets and operations. (iii) With respect to (x) any Income Tax Return required to be filed by Buyer for a taxable period of any Company or any of its Subsidiaries beginning on or before the Closing Date and ending after the Closing Date, (y) any Taxes described in Section 11.2(a)(v) or (z) any Tax Returns with respect to Taxes described in Section 11.2(a)(viii), Buyer shall deliver, at least 20 Business Days prior to the due date for filing such Tax Return (including extensions), to Seller and Parent a statement setting forth the amount of Tax allocated to Seller and Parent pursuant to Section 11.2(c) or Section 11.2(a)(viii), as the case may be, (the "Tax Statement") and copies of such Tax Returns, and Buyer shall cause such Company and its Subsidiaries to pay all Taxes shown as due on such Tax Returns. Seller and Parent shall have the right to review such Tax Return and the Tax Statement prior to the filing of such Tax Return and to suggest to Buyer any reasonable changes to such Tax Returns. Seller, Parent and Buyer agree to consult and resolve in good faith any issue arising as a result of the review of such Tax Return and the Tax Statement and mutually to consent to the filing as promptly as possible of such Tax Return. In the event the parties are unable to resolve any dispute within eight Business Days following the delivery of such Tax Return and the Tax Statement, the parties shall jointly request a Tax Settlement Auditor (appointed pursuant to the principles set forth in the Tax Settlement Procedure) to resolve any issue in dispute as promptly as possible. If the Tax Settlement Auditor is unable to make a determination with respect to any disputed issue within five Business Days prior to the due date (including extensions) for the filing of the Tax Return in question, then Buyer may file such Tax Return on the due date (including extensions) therefor without such determination having been made and without Seller's and Parent's consent. Notwithstanding the filing of such Tax Return, the Tax Settlement Auditor shall make a determination with respect to any disputed issue, and the amount of Taxes that are allocated to Seller and Parent pursuant to Section 11.2(c) or Section 11.2(a)(v) or (viii), as the case may be, shall be as determined by the Tax Settlement Auditor. The fees and expenses of the Tax Settlement Auditor shall be paid one-half by Buyer, on the one hand, and one-half by Seller and Parent, on the other. Nothing in this Section 11.2(e)(iii) shall excuse Seller or Parent from its indemnification obligations pursuant to Section 11.2 hereof if the amount of Taxes as ultimately determined (on audit or otherwise), for the periods covered by such Tax Returns and which are allocable to Seller or Parent pursuant to Section 11.2(c), or Section 11.2(a)(v) or (viii), as the case may be, exceeds the amount determined under this Section 11.2(e)(iii). 64 (iv) Seller, Parent and Buyer shall cooperate fully with each other and make available to each other in a timely fashion such Tax data and other information as may be reasonably required by Seller, Parent or Buyer for the preparation and timely filing of any Tax Returns required to be prepared and filed by Seller, Parent or Buyer hereunder, or in connection with the preparation or filing of any election, claim for refund, consent or certification. (f) Seller, Parent and Buyer shall provide to each other, and Buyer shall cause each Company and its Subsidiaries to provide to Seller and Parent, full access, at any reasonable time and from time to time, at the business location at which the books and records are maintained, after the Closing Date, to such Tax data of each Company and its Subsidiaries as Seller, Parent or Buyer, as the case may be, may from time to time reasonably request and shall furnish, and request the independent accountants and legal counsel of Seller, Parent, Buyer, each Company, or any Subsidiary of such Company to furnish to Seller, Parent or Buyer, as the case may be, such additional Tax and other information and documents in the possession of such persons as Seller, Parent or Buyer may from time to time reasonably request. (g) Any claim for indemnity hereunder may be made at any time prior to 60 Business Days after the expiration of the applicable Tax statute of limitations with respect to the relevant taxable period (including all extensions obtained, whether automatic or permissive). (h) The party seeking indemnification or other payment pursuant to this Section 11.2 (Seller, Parent or Buyer, as the case may be) shall give the other party written notice of claim for indemnification or payment, which notice shall include a calculation of the amount of the requested indemnity or other payment and shall furnish to the other party copies of all books, records and other information reasonably requested by the other party to the extent necessary to substantiate such claim and verify the amount thereof. If reasonably necessary in order to make or substantiate a claim (or to determine if a claim should be made), each party shall be permitted access to the other party's books, records and other information in connection therewith. The party requested to make any indemnity or other payment pursuant to this Section 11.2 shall deliver to the party requesting payment, within 20 Business Days after receiving both the foregoing notice and all books, records and other information reasonably requested by it, a detailed statement describing its objections (if any) thereto. Any such objections will be resolved through the Tax Settlement Procedure. (i) Seller and Parent shall be responsible for, shall pay or cause to be paid, and shall indemnify and hold harmless Buyer, as an adjustment to the Final Purchase Price, from and against any Losses arising after the Closing Date arising under any Tax sharing, Tax indemnity, Tax allocation or similar contracts (whether or not written) to which any Company or any of its Subsidiaries, any predecessor of such Company or any of its Subsidiaries, or any transferor to such Company or any of its 65 Subsidiaries, is a party or is obligated thereunder, in each case on or prior to the Closing Date. None of Buyer, any Company or any of its Subsidiaries shall have any liability pursuant to any such agreement after the Closing Date. 11.3 Tax Related Adjustments. (a) Seller, Parent and Buyer agree that any indemnity payment made under this Agreement shall be treated by the parties on their Tax Returns as an adjustment to the Final Purchase Price. If, notwithstanding such treatment by the parties, any indemnity payment is determined to be taxable to (i) Parent or Seller (other than as an adjustment to the Final Purchase Price) or (ii) Buyer, each Company or any of its Subsidiaries, for federal Income Tax purposes by the IRS, the indemnifying party shall indemnify the indemnified party for any additional federal Income Taxes payable by the indemnified party by reason of the receipt or accrual of such indemnity payment (including any payments under this Section 11.3). (b) An indemnity payment otherwise due and payable hereunder shall be decreased (but not below zero) to the extent of any net actual reduction in federal Income Tax liability that is actually realized by the indemnified party upon its payment of an indemnifiable loss. (c) Except as provided in Section 11.3(d), Buyer shall pay to Seller or Parent, as appropriate, any refund of any Tax for which Seller or Parent is responsible under Section 11.2(a) or the amount of actual reduction in such Taxes realized (or portion of either thereof) after the Closing Date by Buyer or any of its Affiliates (including each Company or any of its Subsidiaries) relating to such Taxes imposed on or with respect to Seller, Parent or any of their Affiliates (including any Company or any of its Subsidiaries) with respect to any taxable period (or portion thereof) ending on or prior to the Closing Date. Buyer shall pay to Seller or Parent, as appropriate, such refund (including interest received thereon) (reduced by any actual Tax increase or actual Tax detriment to Buyer, any Company or any of its Subsidiaries, but increased by any actual Tax benefit resulting from such payment) or the amount of any such reduction in Taxes promptly upon receipt thereof by the recipient thereof. Buyer shall, if Seller or Parent requests, cause the relevant entity to file for and obtain any refunds or equivalent amounts to which Seller or Parent is entitled under this Section 11.3(c), and Buyer shall permit Seller or Parent, as the case may be, to control the prosecution of any such refund claim, and shall cause the relevant entity to authorize by appropriate powers of attorney such Persons as Seller or Parent, as the case may be shall designate to represent such entity with respect to such refund claim; provided, however, that Buyer must consent to any such refund claim, which consent may not be unreasonably withheld, and that any such refund claim shall be at the sole expense of the Seller or Parent, as the case may be. (d) Seller and Parent agree that to the extent that any Company or any of its Subsidiaries realizes any Tax attribute after the Closing Date that may be carried back to a taxable period ending on or prior to the Closing Date, Seller and Parent shall, 66 at Buyer's sole expense, permit such carryback, shall cooperate in the filing of any required returns or claims for refund and shall pay Buyer any Tax refund received or the amount of any reduction in Taxes so obtained by the Seller Group (as hereinafter defined); provided, however, in the event that any Tax attribute generated after the Closing Date by Buyer, any Company or any Subsidiary or any member of any affiliated group (or other group filing on a combined basis) of which any thereof is a member (any of the foregoing being referred to herein as a "Buyer Group Member") is carried back to a taxable year (or portion thereof) of Parent's affiliated group (or other group filing on a combined basis of which Seller is a member) (the "Seller Group") that ended on or prior to the Closing Date and, as a result of such carryback, any Tax attribute generated by the Seller Group (whether in the same year or in a prior or subsequent year) is not capable of being carried back or forward to the same extent it would have been had no such Buyer Group carryback occurred, Buyer shall pay to Seller an amount sufficient to place the Seller Group in the same position as it would have been in if no such carryback occurred (except that Seller shall pay Buyer (when and as actually realized) any refund of Taxes or actual reduction of Taxes otherwise payable by the Seller Group that is subsequently realized by the Seller Group as a result of the Seller Group's use of any Tax attributes that would otherwise have been utilized by the Seller Group earlier had the Tax attribute of Buyer, any Company or any Subsidiary of such Company (or any other Buyer Group Member) not been so carried back, and provided, further, that if Seller makes a payment pursuant to this Section 11.3(d) on account of a refund of Taxes, or an actual reduction of Taxes of the Seller Group and it is later determined (as a result of an audit adjustment or otherwise) that the Seller Group is liable for the return thereof to the applicable taxing authority, Buyer shall promptly remit to Seller the amount Seller has previously paid to Buyer with respect to the item in issue (plus appropriate interest). 11.4 Transfer Taxes. Seller and Parent shall pay, or cause to be paid, any transfer Tax or fee, recordation or similar Tax or fee, deed, stamp or other Tax, grantor's or grantee's Tax, recording charge, fee, or other similar cost or expense of any kind required or customary in the applicable jurisdiction in connection with the effectuation of the transfer of the Shares and all transactions pursuant to this Agreement (including the Elections), whether such Tax or fee is imposed on Buyer, Parent, Seller, any Company or any Subsidiary. Upon demand by Seller, Buyer shall reimburse Seller for one-half of all such payments. 12. Termination. 12.1 Termination and Abandonment. This Agreement may be terminated and the transactions contemplated by this Agreement may be abandoned at any time prior to the Closing: (a) by mutual written consent of Buyer, Parent and Seller; or 67 (b) by Buyer or Parent and Seller if the Closing shall not have occurred on or before June 30, 1996; provided, however, that the right to terminate this Agreement under this Section 12.1(b) shall not be available to any party whose failure to fulfill any obligation under this Agreement shall have been the cause of, or resulted in, the failure of the Closing to occur on or before such date; or (c) by Buyer or Parent and Seller if any court of competent jurisdiction shall have issued an order, decree or ruling or taken any other action enjoining or otherwise prohibiting the transactions contemplated under this Agreement and such order, decree, ruling or other action shall have become final and nonappealable. 12.2 Survival; Expenses. (a) If this Agreement is terminated and the transactions contemplated hereby are not consummated as described above, this Agreement shall become void and of no further force and effect, except for the provisions of this Section 12.2, Section 7.4(b) and Article 13. None of the parties hereto shall have any liability in respect of a termination of this Agreement, except to the extent that such termination results from a breach of the representations, warranties, covenants or agreements of Parent and Seller, on the one hand, or Buyer, on the other hand, under this Agreement. (b) Except as otherwise specifically provided herein, the parties shall bear their respective expenses incurred in connection with the preparation, execution and performance of this Agreement and the transactions contemplated hereby, including all fees and expenses of agents, representatives, counsel, actuaries and accountants. 13. Miscellaneous. 13.1 Public Announcements. No party shall issue any news release or make any public announcement concerning this Agreement or any of the transactions contemplated hereby without the advance approval thereof by Parent and Buyer; provided, however, that any party may make any public disclosure that it reasonably believes, upon the advice of counsel, is required by applicable federal or state securities laws, in which case the disclosing party shall use commercially reasonable efforts to advise the other party or parties prior to making such disclosure. Subject to the prior sentence, Parent and Buyer shall cooperate with each other in the development and distribution of all news releases and other public announcements with respect to this Agreement or any of the transactions contemplated hereby. 13.2 Notices. Any notice or other communication required or permitted hereunder shall be in writing and shall be delivered personally, sent by facsimile transmission, sent by overnight courier or sent by certified, registered or express mail, postage prepaid. Any such notice shall be deemed given when actually received by the relevant party as follows: 68 if to Buyer, or, after the Closing, any Company, to: GNA CORPORATION Two Union Square 601 Union Street Seattle, Washington 98111-0490 Attention: Geoff Stiff Facsimile: 206-583-2882 with copies to: General Electric Capital Corporation 260 Long Ridge Road Stamford Connecticut 06927-5000 Attention: General Counsel Facsimile: 203-357-3365 and Weil Gotshal & Manges 100 Crescent Ct. Suite 1300 Dallas, Texas 75201 Attention: David Spuria, Esq. Facsimile: 214-746-7777 if to Parent, Seller or, prior to Closing, any Company, to: Aon Corporation 123 North Wacker Drive Chicago, IL 60606 Attention: Raymond I. Skilling, Esq. Facsimile: (312) 701-3080 with a copy to: Sidley & Austin One First National Plaza Chicago, IL 60603 Attention: Thomas A. Cole and Frederick C. Lowinger Facsimile: (312) 853-7036 69 Any party may by notice given in accordance with this Section 13.2 to the other parties designate another address or Person for receipt of notices hereunder. 13.3 Entire Agreement. This Agreement (including the Schedules and Exhibits hereto) contains the entire agreement among the parties with respect to the transactions contemplated hereby, and supersedes all prior agreements and understandings, written or oral, with respect thereto. 13.4 Waivers and Amendments; Noncontractual Remedies; Preservation of Remedies. This Agreement may be amended, superseded, canceled, renewed or extended, and the terms hereof may be waived, only by a written instrument signed by the parties or, in the case of a waiver, by the party waiving compliance. No delay on the part of any party in exercising any right, power or privilege hereunder shall operate as a waiver thereof. No waiver on the part of any party of any such right, power or privilege, and no single or partial exercise of any such right, power or privilege, shall preclude any further exercise thereof or the exercise of any other such right, power or privilege. The rights and remedies herein provided are cumulative and, except as provided in Section 13.11, are not exclusive of any rights or remedies that any party may otherwise have at law or in equity. 13.5 Governing Law. This Agreement and the rights and obligations of the parties hereto shall be governed by, and construed and enforced in accordance with, the laws of the State of the State of Illinois, without giving effect to the conflicts of laws principles thereof. 13.6 Binding Effect; Assignment Limited. (a) This Agreement shall be binding upon and inure to the benefit of and be enforceable by the parties hereto and their respective successors and permitted assigns and legal representatives. (b) Neither this Agreement, nor any right hereunder, may be assigned by any party without the written consent of the other parties hereto, except that Buyer may assign all or any portion of its interest in this Agreement to any one or more wholly-owned Subsidiaries of Buyer; provided that, notwithstanding any such assignment, Buyer shall remain liable to perform all obligations hereunder. 13.7 No Third-Party Beneficiaries. Except for Section 10.5, nothing in this Agreement is intended or shall be construed to give any Person, other than the parties hereto, any legal or equitable right, remedy or claim under or in respect of this Agreement or any provision contained herein. 13.8 Counterparts. This Agreement may be executed by the parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed to be an original and which together shall constitute one and the same 70 instrument. Each counterpart may consist of a number of copies hereof each signed by less than all, but together signed by all of the parties hereto. 13.9 Schedules. (a) The Schedules hereto are a part of this Agreement as if fully set forth herein. (b) Any item appearing in either the Seller Disclosure Schedule or the Company Disclosure Schedule pursuant to any one Section of this Agreement shall be deemed to have been listed in such disclosure schedules with respect to any other Section of this Agreement where such listing may be deemed to be required, and subject to Section 8.1 all disclosures in the Seller Disclosure Schedule or the Company Disclosure Schedule shall be deemed to refer solely to matters as they exist at the date of this Agreement, unless a different date is specified in such disclosure schedule. 13.10 Headings. The article, section and paragraph headings in this Agreement are for convenience only, and shall not control or affect the meaning or construction of any provision of this Agreement. 13.11 Remedies. The parties hereto agree that money damages or other remedies at law would not be sufficient or adequate remedy for any breach or violation of, or a default under, this Agreement by them and that, in addition to all other remedies available to them, each of them shall be entitled to an injunction restraining such breach, violation or default or threatened breach, violation or default and to any other equitable relief, including specific performance, without bond or other security being required. 13.12 Invalidity of Provisions. The invalidity or unenforceability of any provision of this Agreement in any jurisdiction shall not affect the validity or enforceability of the remainder of this Agreement in that jurisdiction or the validity or enforceability of this Agreement, including that provision, in any other jurisdiction. If any restriction or provision of this Agreement is held unreasonable, unlawful or unenforceable in any respect, such restriction or provision shall be interpreted, revised or applied in a manner that renders it lawful and enforceable to the fullest extent possible under law. 71 IN WITNESS WHEREOF, the parties have executed this Agreement on the date first above written. Aon CORPORATION By: /s/ Harvey N. Medvin ____________________________________ Name: Harvey N. Medvin Title: Executive Vice President, CFO and Treasurer COMBINED INSURANCE COMPANY OF AMERICA By: /s/ Harvey N. Medvin ____________________________________ Name: Harvey N. Medvin Title: Executive Vice President, CFO and Treasurer THE LIFE INSURANCE COMPANY OF VIRGINIA By: /s/ Paul E. Rutledge III ____________________________________ Name: Paul E. Rutledge III Title: President FORTH FINANCIAL RESOURCES, LTD. By: /s/ John L. Knowles ____________________________________ Name: John L. Knowles Title: President 72 NEWCO PROPERTIES, INC.. By: /s/ Jerome S. Hanner ____________________________________ Name: Jerome S. Hanner Title: Vice President GENERAL ELECTRIC CAPITAL CORPORATION By: /s/ Edward D. Stewart ________________________________ Name: Edward D. Stewart Title: Executive Vice President 73 EX-11 6 INCOME OF PER SHARE COMPUTATION EXHIBIT 11 Aon Corporation and Subsidiaries CONSOLIDATED NET INCOME PER SHARE COMPUTATION
(millions except per share data) Years Ended December 31 ----------------------------- 1995 1994 1993 ------- ------- ------- EARNINGS PER SHARE Net income.................................. $402.8 $360.0 $323.8 Preferred stock dividends................... 24.7 26.8 24.5 ------ ------ ------ Net income less preferred stock dividends. $378.1 $333.2 $299.3 ====== ====== ====== Average common shares issued................ 110.8 107.1 105.0 Net effect of treasury stock activity....... (2.8) (4.4) (3.7) Weighted average effect of Series B preferred stock........................... - 2.8 4.1 Net effect of dilutive stock compensation plans based on the treasury stock method.. 0.7 0.7 1.0 ------ ------ ------ Average common and common equivalent shares outstanding.................... 108.7 106.2 106.4 ====== ====== ====== Net income per share (1)................. $ 3.48 $ 3.14 $ 2.81 ====== ====== ======
(1) Primary and fully diluted net income per share are materially the same. EX-12.A 7 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES Exhibit 12(a) Aon Corporation and Consolidated Subsidiaries Combined With Unconsolidated Subsidiaries Computation of Ratio of Earnings to Fixed Charges
Years Ended December 31, ---------------------------------------- (millions except ratios) 1995 1994 1993 1992(1) 1991 ------- ------ ------ -------- ------- Income from continuing operations before provision for income tax(2) $ 458.0 $ 397.0 $ 331.6 $ 179.1 $ 242.4 Add back fixed charges: Interest on indebtedness 55.5 46.4 42.3 41.9 40.7 Interest on ESOP 5.3 5.9 6.5 6.9 7.2 Portion of rents representative of interest factor 21.4 28.7 26.1 19.2 15.4 ------- ------- ------- ------- ------- Income as adjusted $ 540.2 $ 478.0 $ 406.5 $ 247.1 $ 305.7 ======= ======= ======= ======= ======= Fixed charges: Interest on indebtedness $ 55.5 $ 46.4 $ 42.3 $ 41.9 $ 40.7 Interest on ESOP 5.3 5.9 6.5 6.9 7.2 Portion of rents representative of interest factor 21.4 28.7 26.1 19.2 15.4 ------- ------- ------- ------- ------- Total fixed charges $ 82.2 $ 81.0 $ 74.9 $ 68.0 $ 63.3 ======= ======= ======= ======= ======= Ratio of earnings to fixed charges 6.6 5.9 5.4 3.6 4.8 ======= ======= ======= ======= ======= Ratio of earnings to fixed charges (3) 8.4 7.6 7.4 5.3 6.2 ======= ======= ======= ======= =======
(1) Income from continuing operations before provision for income taxes excludes the cumulative effect of changes in accounting principles. (2) Income statement data has been reclassified to reflect continuing operations for the years ended 1991 through 1994. (3) The calculation of this ratio of earnings to fixed charges reflects the addition of the income from discontinued operations before the provision for income tax component for the years ended 1991 through 1995. EX-12.B 8 COMPUTATION OF RATIO OF EARNINGS Exhibit 12(b) Aon Corporation and Consolidated Subsidiaries Combined With Unconsolidated Subsidiaries Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends
Years Ended December 31, -------------------------------------- (millions except ratios) 1995 1994 1993 1992(1) 1991 ------ ------ ------ --------- ----- Income from continuing operations before provision for income tax (2) $ 458.0 $ 397.0 $ 331.6 $ 179.1 $ 242.4 Add back fixed charges: Interest on indebtedness 55.5 46.4 42.3 41.9 40.7 Interest on ESOP 5.3 5.9 6.5 6.9 7.2 Portion of rents representative of interest factor 21.4 28.7 26.1 19.2 15.4 ------- ------- ------- ------- ------- INCOME AS ADJUSTED $ 540.2 $ 478.0 $ 406.5 $ 247.1 $ 305.7 ======= ======= ======= ======= ======= FIXED CHARGES AND PREFERRED STOCK DIVIDENDS: Interest on indebtedness: $ 55.5 $ 46.4 $ 42.3 $ 41.9 $ 40.7 Preferred stock dividends 37.5 48.4 47.5 20.3 3.5 ------- ------- ------- ------- ------- INTEREST AND DIVIDENDS 93.0 94.8 89.8 62.2 44.2 Interest on ESOP 5.3 5.9 6.5 6.9 7.2 Portion of rents representative of interest factor 21.4 28.7 26.1 19.2 15.4 ------- ------- ------- ------- ------- TOTAL FIXED CHARGES AND PREFERRED STOCK DIVIDENDS $ 119.7 $ 129.4 $ 122.4 $ 88.3 $ 66.8 ======= ======= ======= ======= ======= RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS 4.5 3.7 3.3 2.8 4.6 ======= ======= ======= ======= ======= Ratio of earnings to combined fixed charges and preferred stock dividends (3) 5.8 4.8 4.5 4.1 5.9 ======= ======= ======= ======= =======
(1) Income from continuing operations before provision for income taxes excludes the cumulative effect of changes in accounting principles. (2) Income statement data has been reclassified to reflect continuing operations for the years ended 1991 through 1994. (3) This calculation of ratio of earnings to combined fixed charges and preferred stock dividends reflects the addition of the income from discontinued operations before the provision for income tax component for the years ended 1991 through 1995. EX-13 9 ANNUAL REPORT Aon Corporation's Operating Companies Aon Corporation is a family of insurance brokerage, consulting and consumer insurance companies serving clients and policyholders through global distribution networks owned by Aon subsidiary companies. Aon's talented professionals provide innovative risk management, insurance services and consulting solutions for commercial and industrial enterprises, financial institutions, insurance organizations, municipalities and individuals. In 1995, Aon Corporation reported $3.5 billion in total revenues, an increase of 14 percent over 1994. Earnings from continuing operations rose 13 percent to $304 million in 1995. Brokerage and Consulting Companies In early 1996, Aon's brokerage and consulting operation changed its name from Rollins Hudig Hall Group to Aon GROUP. As the second-largest and fastest-growing international brokerage and consulting organization, Aon Group offers commercial insurance brokerage, reinsurance and wholesale brokerage, alternative risk solutions, risk management, employee benefit and human resources consulting, and managing general underwriting services. Aon Group has 14,000 employees in more than 350 offices around the world. In 1995, Aon Group revenue increased to $1.7 billion for a 20 percent gain over 1994. Aon RISK SERVICES Aon SPECIALTY GROUP Aon RE WORLDWIDE Aon CONSULTING WORLDWIDE Insurance Underwriting Companies Aon's insurance businesses serve consumers in North America, Europe, Latin America and the Pacific by providing a variety of insurance products, including accident and health coverage, traditional life insurance, extended warranties and credit insurance. The career sales forces of Aon's subsidiaries market insurance products through global distribution networks that are directly owned by the company, to efficiently respond to policyholders' needs for quality products. In 1995, revenue from insurance underwriting operations totaled $1.6 billion, an increase of 9 percent over 1994. COMBINED INSURANCE RYAN GROUP Aon WARRANTY GROUP VIRGINIA SURETY / LONDON GENERAL --------------------------------- LIFE OF VIRGINIA / UNION FIDELITY (Inside Cover - Page 1) Aon Corporation Annual Report 1995 Photographs located in the top third of the page from left to right illustrating a football player, scenes of London, a global view of the earth, an airplane, and the Great Wall of China. Aon Group is a leading provider of insurance solutions for niche markets, including sporting events, entertainment, aviation, construction, environmental, marine, energy, fine arts, directors and officers liability, media, financial institutions and municipalities. Aon Group offers clients access to the London and other international specialty markets. Since 1987, Aon Re Worldwide has grown from approximately $20 million in revenues to $190 million in 1995. Aon Consulting instituted Playing to Win(R) culture change programs in 1995 for a major international airline and for other multinational corporations. Aon expanded in Asia with the creation of Aon/China in Beijing and the acquisition of the remaining interest in its joint venture Asian brokerage and consulting network. GROWTH IN Aon's BROKERAGE AND CONSULTING REVENUE Since 1991, the compound average growth rate of Aon's global brokerage and consulting revenue exceeds 40%. Aon brokerage and consulting revenue, bar graph (lower left corner) representing $400 million, $727 million, $1,215 million, $1,422 million and $1,701 million in revenue for the years ended 1991, 1992, 1993, 1994 and 1995, respectively. Aon RISK SERVICES Aon Risk Services is the new name for Aon's global retail insurance brokerage and risk management services. Through a worldwide distribution system, Aon Risk Services provides a full array of risk services, including insurance placement, specialized brokerage services, program development and administration, premium financing services, risk management and loss control consulting. Aon SPECIALTY GROUP Aon Specialty Group delivers highly specialized insurance products and services for professional groups, service businesses, governments, health care providers and commercial organizations. Aon Specialty Group also provides specialized managing general underwriting and wholesale brokerage services for insurance organizations. (Inside Cover - Page 2) Aon Corporation Annual Report 1995 Photographs located in the top third of the page from left to right depicting an automobile on the assembly line and a collection of computer equipment. In 1995, Aon Consulting assessed and recruited workforces for major automobile manufacturers. Aon helped found the World Insurance Network, a comprehensive global electronic network linking insurance companies and brokers to reduce costs and enhance service for clients. Aon RE WORLDWIDE Aon Re Worldwide is the second-largest reinsurance intermediary in the world. Aon Re Worldwide serves the alternative market with reinsurance placement, alternative risk services, captive management services and catastrophe information forecasting. Aon CONSULTING WORLDWIDE Aon Consulting Worldwide is one of the world's largest integrated human resources consulting organizations. Our innovative professionals link people strategies with business strategies to benefit clients through expertise in the areas of employee benefits, human resources, change management and compensation. COMBINED INSURANCE COMPANY OF AMERICA Combined Insurance Company of America is a leading underwriter of supplemental disability accident, health and life insurance for individual consumers. Combined Insurance products are sold by several thousand career agents in North America, Europe, Latin America and the Pacific. RYAN GROUP Ryan Group is a major marketer of extended warranties and credit-related life and disability products for the automotive industry. Ryan Group also pioneered specialized training services for this industry. (Inside Cover - Page 3) Aon Corporation Annual Report 1995 Photographs located in the top third of the page from left to right depicting a hand with a pen signing paper, three individuals discussing insurance, an automobile, a cellular phone, and a cappuccino machine. With more than 5 million policyholders, Combined Insurance Company of America has more individual accident and health policies in force than any other U.S. company. Combined Insurance career agents provide insurance protection for individuals in North America, Europe, Latin America and the Pacific. Ryan Group is North America's largest independent marketer of automotive extended warranties. Aon Warranty Group is one of the world's largest independent providers and administrators of consumer warranties. Virginia Surety Company and London General are among the world's largest underwriters of consumer extended warranties. Aon WARRANTY GROUP Aon Warranty Group, a recognized leader in specialty consumer warranty programs for electronics, appliances, personal computers, cellular telephones and automobiles, serves manufacturers, distributors and wholesalers in North America and in Europe. VIRGINIA SURETY/LONDON GENERAL Aon's specialized property and casualty underwriting units, Virginia Surety Company in North America and London General Insurance Company in Europe, are among the world's largest underwriters of consumer extended warranties. - ------------------------------- LIFE OF VIRGINIA/UNION FIDELITY In late 1995, Aon entered into agreements to sell Life of Virginia and Union Fidelity. These sales are expected to close in the first half of 1996. COMPARATIVE TOTAL RETURNS The five-year total return on Aon common stock was 21% compared with 16.6% for the S&P 500 Stock Index, and 5.2% for the S&P Insurance Brokerage Index. Aon Corporation, S&P 500 Stock Index, and S&P Insurance Brokerage Index, bar graph representing the five year total return on Aon common stock of 21%, the S&P 500 Stock Index of 16.6%, and the S&P Insurance Brokerage Index of 5.2%. (Inside Cover - Page 4) Aon Corporation Annual Report 1995 Brokerage and Consulting In early 1996, Aon changed the name of Rollins Hudig Hall Group, its brokerage and consulting operation, to Aon Group. This change emphasizes Aon's continuing evolution into an interdependent organization offering innovative brokerage, risk management and specialized consulting services worldwide. Aon Group is now the world's second-largest and fastest-growing international brokerage and consulting organization. Aon Group is a global network of specialized insurance services and consulting companies that work with dedication and imagination to meet the diverse and challenging needs of clients. The major operating subsidiaries also have changed their names to reflect the strength and market leadership of Aon Group. Our global retail brokerage and risk management business now operates as Aon Risk Services. Aon Consulting Worldwide, which provides consulting and administrative services in employee benefits, human resources, change management and compensation, is one of the world's largest integrated human resources consulting organizations. These newly named operations join Aon Specialty Group and Aon Re Worldwide to comprise Aon Group. Aon has become a name to which businesses increasingly turn for innovative business solutions anywhere in the world. United States brokerage and consulting revenue, line graph representing retail brokerage revenue of $267.5 million for 1991, $337.7 million for 1992, $535.7 million for 1993, $630.0 million for 1994, and $718.8 million for 1995; reinsurance and wholesale brokerage revenue of $60.1 million for 1991, $86.9 million for 1992, $189.3 million for 1993, $247.1 million for 1994, and $279.7 million for 1995; and consulting revenue of $52.9 million for 1991, $70.2 million for 1992, $130.0 million for 1993, $155.9 million for 1994, and $177.8 million for 1995. International brokerage and consulting revenue, line graph representing retail brokerage revenue of $12.0 million for 1991, $169.5 million for 1992, $204.5 million for 1993, $199.3 million for 1994, and $274.9 million for 1995; reinsurance and wholesale brokerage revenue of $7.4 million for 1991, $62.0 million for 1992, $91.7 million for 1993, $123.5 million for 1994, and $177.3 million for 1995; and consulting revenue of $0.0 million for 1991, $0.4 million for 1992, $63.8 million for 1993, $66.3 million for 1994, and $72.8 million for 1995. 6 Aon Corporation Annual Report 1995 Insurance Underwriting Combined Insurance remains a cornerstone of Aon's insurance underwriting business. With Ryan Group and Aon Warranty Group, it provides the global distribution networks that are key to Aon's growth in specialized insurance underwriting. Aon's insurance underwriting companies, working with its global brokerage and consulting business, are paving the way for expanded international opportunities, especially in South America and the Pacific. The late 1995 agreements to sell Life of Virginia and Union Fidelity demonstrate Aon's commitment to directly controlling its distribution channels and significantly reducing its exposure to the interest rate risk historically associated with capital accumulation business. With the sale of Life of Virginia, Aon will have a significant reduction in policy liabilities and related invested assets. The charts below illustrate key 1995 financial statement values apportioned between continuing and discontinued businesses. Aon believes in the future of the consumer insurance business, especially in disability coverages, traditional whole life products, extended warranty and credit-related protections. Aon's insurance underwriting businesses continue to meet the changing needs of individuals throughout the world by offering innovative products, distributed through directly owned and managed networks. Mortgage backed securities-continuing operations, other fixed maturities-continuing operations, other invested assets-continuing operations, mortgage backed securities-discontinued operations, other fixed maturities-discontinued operations, and other invested assets-discontinued operations, pie chart representing 0.6%, 31.8%, 16.1%, 18.5%, 21.3% and 11.7%, respectively of the total 1995 invested assets. Future policy benefits and unearned and advance premiums-continuing operations, policy and contract claims-continuing operations, other policyholder funds-continuing operations, future policy benefits and unearned and advance premiums-discontinued operations, policy and contract claims-discontinued operations, other policyholder funds-discontinued operations, pie chart representing 24.3%, 8.3%, 2.9%, 8.4%, 1.8%, and 54.3%, respectively of the total 1995 policy liabilities. Life-continuing operations, accident and health-continuing operations, extended warranty and specialty-continuing operations, life-discontinued operations, and accident and health-discontinued operations, pie chart representing 9.3%, 36.9%, 14.2%, 27.2%, and 12.4%, respectively of the total 1995 insurance underwriting revenue. 7 Aon Corporation Annual Report 1995 Management's Analysis of Operating Results and Financial Condition CONSOLIDATED General In fourth quarter 1995, Aon reached definitive agreements to sell two of its domestic insurance subsidiaries, Union Fidelity Life Insurance Company (UFLIC) and The Life Insurance Company of Virginia (LOV) (see note 3). Pending the receipt of the required regulatory consents, the sale of UFLIC and LOV is expected to close during the first half of 1996. Consequently, their results are classified in the consolidated statements of income as discontinued operations. For purposes of the following consolidated results discussions (1995 compared to 1994 and 1994 compared to 1993), comparisons against prior years' results are based on continuing operations. Revenue and Income Before Income Tax Consolidated Results for 1995 Compared to 1994 Total revenue amounted to $3,466 million, an increase of 14%. This increase was primarily due to the growth in brokerage commissions and fees resulting from business combination activity and internal growth. Brokerage commissions and fees increased 19% to $1,628 million. Premiums earned of $1,427 million increased 8% in 1995. Extended warranty premiums earned increased $87 million or 46% reflecting a higher volume of new business in the electronic and appliance lines. The continued phase-out of certain specialty liability programs partially offset this increase. There was also continued growth in Combined Insurance Company of America's (CICA) direct sales international business. Net investment income of $329 million increased 28% for the year. Net investment income on insurance brokerage and consulting short-term investments totaled $73 million in 1995 compared to $47 million the prior year. Higher levels of short- term investments, primarily due to brokerage acquisition activity and internal growth, contributed to the increase. Net realized investment gains of $13 million decreased 31% from 1994 levels. Revenues excluding realized investment gains increased 14% or $431 million when compared to 1994. Commissions and general expenses (excluding interest expense) increased 15% for the year, primarily due to growth in the brokerage businesses. Benefits to policyholders increased 12% when compared to 1994, primarily due to a higher volume of new extended warranty business. Partially offsetting this increase was the reduction in benefits on specialty liability products, which primarily reflected the runoff of certain specialty programs. Interest expense increased 14%, primarily due to higher levels of short-term borrowings for the year. Amortization of intangibles, which include deferred policy acquisition costs, increased $24 million or 9%, primarily due to continued growth in operations. Overall, benefit and expense margins for the insurance underwriting segment did not suggest any significant shift in operating trends in 1995. Total benefits and expenses increased 14% or $364 million over 1994. Income before income tax increased $61 million or 15%, largely due to growth in the insurance brokerage and consulting businesses, and to a lesser extent, growth in the insurance underwriting extended warranty business. Fourth quarter revenue increased 10% when compared to 1994 to $895 million reflecting brokerage business combination activity and internal growth. Benefits and expenses of $798 million increased 13% for the quarter. Income before income tax decreased $6 million or 6%, reflecting a lower level of realized investment gains in 1995. Excluding these gains, income before income tax increased 7%. Revenue and Income Before Income Tax Consolidated Results for 1994 Compared to 1993 Total revenue amounted to $3,041 million in 1994, an increase of 10%. Brokerage commissions and fees increased 17% to $1,370 million resulting from business combination activity and internal growth. Premiums and policy fees were $1,322 million or 4% above 1993. A higher volume of new business in the extended warranty line was partially offset by the anticipated decrease in specialty liability premiums earned which reflected reduced underwriting of certain specialty liability programs. Net investment income of $257 million increased 13% for the year. Benefits to policyholders increased slightly when compared to 1993. However, benefit ratios were lower. Commissions and general expenses (excluding interest expense) increased 12% for the year, primarily reflecting brokerage growth. Total benefits and expenses increased 8% over 1993. Income before income tax increased by 20% or $65 million due largely to growth in the brokerage businesses and the continued favorable phase-out of certain specialty liability underwriting programs. MAJOR LINES OF BUSINESS General With the execution of sale agreements for UFLIC and LOV in 1995, Aon reclassified its operating segments to reflect the focus of its continuing operations. Beginning in fourth quarter 1995, insurance underwriting operations are presented as one segment based on the related nature, distribution channels and markets of the continuing products. Insurance underwriting primarily includes life, accident and health insurance and extended warranty products. Prior period segments have been reclassified to conform to the 1995 presentation. Supplemental revenue and income before income tax information, consistent with prior segmentation, is located on page 13. 9 Aon Corporation Annual Report 1995 Management's Analysis of Operating Results and Financial Condition For purposes of the major lines of business discussion, comparisons of 1995 revenue and income before income tax to 1994 are based on continuing operations. A discussion of discontinued operations performance follows the major lines of business section. Continuing Operations Insurance Brokerage and Consulting Services In early 1996, Aon's commercial brokerage and consulting operation changed its name from Rollins Hudig Hall Group to Aon Group. Aon Group offers retail insurance brokerage, reinsurance and wholesale brokerage, and consulting services. In 1995, Aon invested approximately $160 million related to business combinations in its brokerage and consulting businesses. These business combinations were financed primarily by internal funds and the issuance of common stock. The major 1995 acquisitions include: Berkely-ARM, Inc., a reinsurance and wholesale brokerage firm specializing in providing insurance products to the travel industry; purchase of the remaining 50% interest in HHL Holdings Limited (HHL), a joint venture Asian brokerage and consulting network; and Morency Weible Sapa, a retail operation specializing in construction business coverages. Total brokerage revenue, which includes investment income, was $1,701 million in 1995, up 20%. Acquisitions accounted for approximately one-third of this revenue growth. Domestic revenue of $1,176 million was up 14% while international revenue increased 35%. Pretax income was $205 million in 1995, up 29% from $159 million in 1994. Domestic pretax income was up 27% from 1994. International pretax income rose 34%. Retail brokerage benefited from integration efficiencies and growth from acquisition activity, in particular the late 1994 acquisition of Energy International Inc., the late 1995 acquisition of the remaining interest in HHL and various other business combinations. Domestic retail brokerage results continued to be influenced by a highly competitive property and casualty pricing environment. Reinsurance and wholesale income improved due to internal growth, international expansion of alternative market services, and to a lesser extent, the inclusion of a full year of operating results for acquisitions completed in fourth quarter 1994. In the consulting line, expansion of the integrated human resources consulting programs marketed primarily through a 1994 acquisition, Pecos River Learning Centers Inc., and to a lesser extent, the acquisition of Hutchison & Associates, Inc., in mid-1995, partially offset slow growth in benefit plan product sales. Insurance Underwriting The insurance underwriting line of business provides a variety of direct sales life and accident and health products, credit insurance and extended warranty products to individuals. Revenue was $1,640 million in 1995, up 9% from $1,509 million in 1994. Domestic revenue of $1,188 million was up 7% while international revenue rose 12%. Traditional life business in Europe and the Pacific is continuing to runoff as planned. In addition, a higher volume of new business in the electronic and appliance extended warranty lines offset the runoff of certain specialty liability programs in 1995. Pretax income was $246 million in 1995, up 5% from $235 million last year. Domestic and international pretax income rose 5% and 4%, respectively. Benefit and expense margins did not suggest any significant shift in operating trends. Combined's direct sales accident and health business improved in part due to good general expense controls and to strong international health product sales, offset in part by slightly higher claims cost. Corporate and Other Revenue consists primarily of investment income on capital, service fee revenue from the placement of insurance premium and retail auto financing services and realized investment gains. Allocation of investment income to the insurance underwriting segment is based on the invested assets which underlie policyholder liabilities for the insurance underwriting product line. Excess invested assets and related investment income, which do not underlie these liabilities, are reported in this segment. Expenses include interest and other financing expenses, corporate administrative costs, and goodwill amortization associated with acquisitions. Revenue increased 14% over 1994 to $125 million. Realized investment gains declined $6 million in 1995 when compared to 1994. Excluding these gains from both years, revenue increased 23% reflecting growth in financing service fees and a higher level of income received from private placement equity holdings. Higher short-term interest expense, due to an increased volume of short-term borrowings that were principally used to finance the repurchase of Aon's 8% cumulative perpetual preferred stock (8% preferred stock), partially offset the revenue increase. Pretax income of $7 million increased $4 million in 1995. Excluding realized investment gains from both years, pretax income increased $10 million. The increase primarily reflects improved investment yields, due in part, to higher levels of income received from private placement equity holdings and changes in investment mix. In addition, financing costs and goodwill amortization related to acquisitions grew more slowly when compared to the growth in investment income. 10 Aon Corporation Annual Report 1995 Management's Analysis of Operating Results and Financial Condition Major Lines of Business--Continuing Operations
(millions) - ------------------------------------------------------------------------------------------ INSURANCE BROKERAGE AND CONSULTING SERVICES Years ended December 31 1995 1994 1993 - ------------------------------------------------------------------------------------------ Revenue: Retail brokerage $ 994 $ 829 $ 740 Reinsurance and wholesale 457 371 281 Consulting 250 222 194 ---------------------- Total revenue 1,701 1,422 1,215 ---------------------- Operating expenses 1,448 1,216 1,039 Amortization of intangibles 48 47 48 ---------------------- Total expenses 1,496 1,263 1,087 ---------------------- Income before income tax $ 205 $ 159 $ 128 ---------------------- Identifiable assets $3,301 $2,967 $2,706 ========================================================================================== INSURANCE UNDERWRITING* Years ended December 31 1995 1994 1993 - ------------------------------------------------------------------------------------------ Revenue: Combined direct sales $1,014 $ 976 $ 939 Extended warranty and specialty 386 316 326 Other 240 217 200 ---------------------- Total revenue 1,640 1,509 1,465 ---------------------- Benefits to policyholders 699 626 622 Operating expenses 488 458 451 Amortization of intangibles 207 190 180 ---------------------- Total benefits and expenses 1,394 1,274 1,253 ---------------------- Income before income tax $ 246 $ 235 $ 212 ---------------------- Identifiable assets $3,736 $3,119 $2,771 ========================================================================================== CORPORATE AND OTHER* Years ended December 31 1995 1994 1993 - ------------------------------------------------------------------------------------------ Revenue: Investment income on capital and other $ 86 $ 71 $ 44 Premium and auto financing service revenue 26 20 17 Realized investment gains 13 19 30 ---------------------- Total revenue 125 110 91 ---------------------- Operating expenses 46 45 45 Interest expense 37 33 29 Amortization of intangibles 35 29 25 ---------------------- Total expenses 118 107 99 ---------------------- Income before income tax $ 7 $ 3 $ (8) ---------------------- Identifiable assets $2,990 $2,837 $2,443 ==========================================================================================
*Reclassified to conform to the 1995 presentation (see note 13). 11 Aon Corporation Annual Report 1995 Management's Analysis of Operating Results and Financial Condition Geographic Segments--Continuing Operations
(millions) - --------------------------------------------------------------------------- REVENUE Years ended December 31 1995 1994 1993 - --------------------------------------------------------------------------- Domestic $ 2,449 $2,208 $2,011 European 769 635 575 Other 248 198 185 ----------------------- Revenue $ 3,466 $3,041 $2,771 =========================================================================== INCOME BEFORE INCOME TAX Years ended December 31 1995 1994 1993 - --------------------------------------------------------------------------- Domestic $ 328 $ 279 $ 214 European 81 78 72 Other 49 40 46 ----------------------- Income before income tax $ 458 $ 397 $ 332 =========================================================================== IDENTIFIABLE ASSETS As of December 31 1995 1994 1993 - --------------------------------------------------------------------------- Domestic $ 6,427 $6,086 $5,331 European 2,921 2,343 2,100 Other 679 494 489 ----------------------- Identifiable assets $10,027 $8,923 $7,920 ===========================================================================
Financing Services Operations In the U.S., Aon offers financing services to commercial clients of Aon Group and other independent organizations for their liability and casualty premiums through Cananwill Inc., and offers auto financing and leasing for individual purchasers in partnership with retail auto dealers through Premier Auto Finance, Inc. In agreements entered into with financial institutions, certain receivables generated by these activities are sold with limited recourse. Total service fee revenue rose to $26 million, a 30% increase over 1994. Geographic Segments International operations are composed of insurance brokerage and consulting services, insurance underwriting products of CICA, Ryan Group credit insurance, and extended warranty products. Overall, international results were modestly influenced by favorable foreign exchange rates in 1995. Total international revenue increased 22% to $1,017 million primarily reflecting the improvement in brokerage revenue relating to internal growth and acquisitions. Total 1995 European revenue of $769 million rose 21%, while all other international revenue increased 25% when compared to prior year. International pretax income increased 10% to $130 million, while pretax income from European operations, excluding realized investment gains and losses, increased 10% when compared to 1994. Other international pretax income rose 23% or $9 million in 1995. Domestic revenue increased 11%, primarily reflecting internal growth and brokerage acquisition activity. Domestic pretax income increased 18%, primarily on the strength of acquisition activity and overall expense controls. 12 Aon Corporation Annual Report 1995 Management's Analysis of Operating Results and Financial Condition Discontinued Operations Discontinued operations are composed principally of capital accumulation products and direct response and credit disability products. Substantially all of the revenue and income before income tax generated from discontinued operations is domestic. These amounts have been segregated as "Income From Discontinued Operations" in the consolidated statements of income. 1995 and 1994 revenues of $1,145 million and $1,116 million increased 3% and 4%, respectively, when compared to prior years, due to modest increases in premiums and policy fees. Income before income tax, excluding realized investment losses of $9 million, $13 million and $3 million in 1995, 1994 and 1993, respectively, improved 5% in 1995 and 3% in 1994 when compared to prior years. Improved 1995 results were in part due to favorable claims experience at LOV and improved interest spreads. Strong growth in third party business was offset by the continued runoff of the medicare supplement line. The effective operating income tax rate was 35% in 1995, 1994 and 1993, respectively. Realized investment losses were credited at a 36% tax rate for the three years. Insurance underwriting supplemental revenue and income before income tax information, consistent with prior segmentation, is as follows:
(millions) Years ended December 31 1995 1994 - ------------------------------------------------------------------------- CONTINUING OPERATIONS: Life Combined direct sales $ 132 $ 130 Other 121 103 - ------------------------------------------------------------------------- Total revenue $ 253 $ 233 ========================================================================= Income before income tax $ 37 $ 32 ========================================================================= Accident and health Combined direct sales $ 882 $ 846 Other 119 114 - ------------------------------------------------------------------------- Total revenue $1,001 $ 960 ========================================================================= Income before income tax $ 156 $ 150 ========================================================================= Extended warranty and specialty revenue $ 386 $ 316 ========================================================================= Income before income tax $ 53 $ 53 ========================================================================= DISCONTINUED OPERATIONS: Life Capital accumulation products $ 542 $ 530 Other 197 184 - ------------------------------------------------------------------------- Total revenue $ 739 $ 714 ========================================================================= Income before income tax $ 91 $ 81 ========================================================================= Accident and health Direct response and Group $ 316 $ 314 Other 21 22 - ------------------------------------------------------------------------- Total revenue $ 337 $ 336 ========================================================================= Income before income tax $ 28 $ 28 =========================================================================
Income Tax and Net Income Net income for 1995 was $403 million or $3.48 per share compared to $360 million or $3.14 per share in 1994. Dividends on the 8% preferred stock, 6.25% Cumulative Convertible Exchangeable Preferred Stock (6.25% preferred stock) and redeemable preferred stock of $25 million and $27 million in 1995 and 1994, respectively, have been deducted from net income to compute earnings per share. Net income for fourth quarter 1995 amounted to $93 million or $0.80 per share compared to $86 million or $0.74 per share for 1994. Operating income (including discontinued operations) amounted to $400 million or $3.45 per share, up from $356 million or $3.10 per share in 1994. Operating income excludes after-tax realized investment gains in 1995 and 1994. Operating income from continuing operations, which also excludes realized investment gains, was $295 million or $2.49 per share in 1995 compared to $256 million or $2.16 per share in 1994. The effective operating income tax rate on continuing operations was 33.7% in 1995 and 32.4% in 1994, while realized investment gains were taxed at a 36% rate for both years. Average shares outstanding for 1995 increased 2% primarily due to the issuance of common shares related to business combinations and offset, in part, by net treasury stock repurchases for employee benefit plans. LIQUIDITY The accompanying consolidated statements of financial position as of December 31, 1995 and 1994, and the related consolidated statements of stockholders' equity and cash flows for each of the three years in the period ended December 31, 1995, reflect Aon's financial position and cash flows including discontinued operations. Accordingly, for purposes of the following discussions relating to Aon's liquidity and capital resources, comparisons of 1995 to 1994 are reflective of both continuing and discontinued operations. Aon's operating subsidiaries anticipate that there will be adequate liquidity to meet their needs in the foreseeable future. Aon's liquidity needs are primarily for servicing its debt and for the payment of dividends on stock issues. Dividends from Aon's subsidiaries are the primary source for meeting these requirements. There are certain regulatory restrictions relating to dividend capacity of insurance subsidiaries that are discussed in note 8. Insurance subsidiaries' statutory capital and surplus as of December 31, 1995 again exceeded the risk-based capital target set by the National Association of Insurance Commissioners by a satisfactory level. At December 31, 1995, Aon had short-term back-up lines of credit available of $500 million. The businesses of Aon continue to provide substantial positive cash flow. Brokerage cash flow has been used primarily for acquisitions and related debt servicing. Due to the contractual nature of its policyholder liabilities, which are intermediate to long-term in nature, Aon's insurance underwriting subsidiaries have invested primarily in investment grade fixed maturities and equity securities. 13 Aon Corporation Annual Report 1995 Management's Analysis of Operating Results and Financial Condition Aon measures capital accumulation product asset and liability durations (included in discontinued operations) to determine its net exposure to changes in interest rates. The duration match associated with interest-sensitive products is closely monitored. Because there is a reasonable duration match between these investments and their related liabilities, changes in prevailing interest rates can, to a large extent, be matched by congruent changes in credited interest rates. However, mismatches do occur. Aon adjusts its duration mismatch subject to market conditions and its outlook on interest rate trends. Aon's exposure to interest-sensitive products will be substantially diminished following the sale of LOV because LOV's products are principally interest- sensitive and investment-type. As a result, the need for close monitoring of the duration matching associated with interest-sensitive products will also be substantially reduced. Non-interest-sensitive insurance products do not require as close monitoring of duration matching. As of December 31, 1995, LOV's interest-sensitive assets and associated insurance liabilities were closely matched with the aggregate estimated duration variance of less than one year. Through the use of derivative financial instruments (see note 11), Aon improved its overall asset and liability duration match. Given Aon's bond portfolio's average life of 6.1 years, access to lines of credit, and an uninterrupted trend in Aon's positive cash flow, Aon expects sufficient cash flow to meet both short-term and long-term cash needs. Future cash flow to service debt and pay dividends will be enhanced by the completion of the sale of UFLIC and LOV in the first half of 1996. Sales proceeds are expected to generate approximately $1,400 million before taxes and other costs of sale. The after-tax proceeds in excess of the carrying value of the companies sold will generate a statutory gain at CICA, the parent company of LOV and UFLIC. Subject to regulatory approval, the statutory gain will be available for dividend to Aon. It is anticipated that CICA will reinvest remaining proceeds, primarily in non-affiliated invested assets. The potential uses of a dividend to Aon are: the pay down of short-term borrowings to maintain its current debt to equity ratio; the buy back of capital stock; and other general corporate purposes, including acquisitions. In the short-term, some of these uses may yield returns that are lower than could have been received from the subsidiaries being sold. Cash provided by operating activities in 1995 decreased $86 million from 1994 to $610 million. This decrease primarily reflects the timing of estimated federal income tax payments and the timing of investment income cash flows. Investment activities used $624 million, up $263 million from prior year primarily due to higher levels of brokerage short-term investments as well as growth in unearned extended warranty liabilities. Cash totalling $377 million was used in 1995 for financing activities. Aon repurchased $46 million of treasury stock, net of reissued shares. In 1995, Aon purchased and retired 3 million shares of its 8% preferred stock at a total cost of $75 million which was primarily funded by additional short-term borrowings. A reduced level of funds available from capital accumulation products, included in discontinued operations, reduced cash flows by $200 million. Cash was used to pay dividends of $146 million on common stock, $16 million on 8% preferred stock, $7 million on 6.25% preferred stock and $2 million on redeemable preferred stock. On November 15, 1995, the Financial Accounting Standards Board (FASB) issued a Special Report, "A Guide to Implementation of Statement 115 on Accounting for Certain Investments in Debt and Equity Securities." In accordance with the provisions in that report, Aon chose to reclassify its held to maturity securities, substantially all of which relate to discontinued operations, to available for sale (see note 3). To minimize the volatility of the changes in this component of stockholders' equity, Aon enters into derivatives to hedge its available for sale asset positions. In administering its hedging programs, Aon performs analyses that have demonstrated that Aon achieves a high degree of correlation. With a carrying value of $8 billion, Aon's total fixed maturity portfolio for both continuing and discontinued operations is invested primarily in investment grade holdings (96%) and has a fair value which is 102% of amortized cost. At December 31, 1995 and 1994, Aon's fixed maturity portfolio includes mortgage- backed securities with an amortized cost of $2 billion and $3 billion, respectively. The amortized cost and fair value of Aon's mortgage-backed securities are also presented in note 4. Substantially all of the mortgage- backed securities included in Aon's fixed maturities portfolio at December 31, 1995 relate to discontinued operations. Upon the finalization of the sale, Aon's interest in and exposure to certain market risks associated with mortgage-backed securities will be minimal. The following table summarizes Aon's mortgage-backed securities held at December 31, 1995 and 1994, respectively.
Par Amortized Fair (millions) As of December 31, 1995 Value Cost Value - -------------------------------------------------------------------------------- Collateralized mortgage obligations (CMOs): Principally targeted amortization classes $ 40 $ 37 $ 38 Principally sequential pay class 1,735 1,730 1,730 - -------------------------------------------------------------------------------- Total collateralized mortgage obligations 1,775 1,767 1,768 Mortgage-backed pass-through securities 264 266 267 - -------------------------------------------------------------------------------- Total mortgage-backed securities $2,039 $2,033 $2,035 ================================================================================ Par Amortized Fair (millions) As of December 31, 1995 Value Cost Value - -------------------------------------------------------------------------------- Collateralized mortgage obligations (CMOs): Principally targeted amortization classes $ 323 $ 315 $ 291 Principally sequential pay class 2,429 2,401 2,160 - -------------------------------------------------------------------------------- Total collateralized mortgage obligations 2,752 2,716 2,451 Mortgage-backed pass-through securities 349 352 345 - -------------------------------------------------------------------------------- Total mortgage-backed securities $3,101 $3,068 $2,796 ================================================================================
Aon does not have any CMO residuals, interest only, inverse floating or principal only type securities. CMO's have been acquired as alternatives to mortgage-backed pass-through securities. Aon's insurance subsidiaries have generally acquired shorter tranche CMO's classified in the form of sequential pay- 14 Aon Corporation Annual Report 1995 Management's Analysis of Operating Results and Financial Condition ment, targeted amortization classes (TACs) or support TACs. Historically, fair values for CMO's are established each quarter based primarily on information received from broker-dealer market makers. However, at December 31, 1995, the fair value for all mortgage-backed securities relating to discontinued operations is based on the underlying purchase agreements. Certain mortgage-backed securities are subject to duration extension risk in periods of rising interest rates and to prepayment risk, especially in periods of declining interest rates. To limit its credit risk, Aon's CMO investments are concentrated in AAA and AA rated securities. Aon maintained investment loss reserves related to mortgage loans, real estate ventures and limited partnerships, totalling $31 million in 1995, down $5 million from the year-end 1994 level of $36 million. These reserves are a product of Aon's continuing review of the characteristics and risks of its investment portfolio and current environmental and economic conditions. Assets and liabilities held under special contracts, which relate primarily to discontinued operations, increased $712 million from 1994, primarily relating to increased funds in variable life and annuity programs. The net investment income generated from these assets is not included in the consolidated statements of income. Aon maintains well-capitalized operating companies. The financial strength of these companies permits an overall diversified investment portfolio for stability in volatile financial markets. Aon invests in broad asset categories related to its diversified operations. Investments are managed with the objective of maximizing earnings while matching asset and liability durations and considering regulatory requirements. Investment characteristics mirror liability characteristics of the respective operating units. Aon's insurance brokerage and consulting businesses invest fiduciary funds in short-term obligations. Investments underlying interest- sensitive capital accumulation insurance products are primarily intermediate- term obligations, while indemnity and other types of non-interest sensitive insurance liabilities are supported by longer-term instruments. Longer-term assets also include private equity investments that are expected to generate returns in excess of those available in the public capital markets. Through Aon Advisors, Aon manages funds and provides consulting services on behalf of clients in addition to our operating units. This includes acting as investment advisor to mutual funds which are among the investment options available to purchasers of LOV annuities. CAPITAL RESOURCES In 1995, short-term borrowings increased $109 million to satisfy Aon's short- term cash needs. This increase was used primarily to finance the repurchases of 8% preferred stock and common stock as well as acquisition related activities. The credit agreements providing lines of credit for commercial paper contain no restrictive covenants. In 1989, Aon Corporation unconditionally guaranteed loan agreements to purchase Aon common stock for the employee stock ownership plan (ESOP) (see note 5). Based on certain provisions in the loan agreements relating to the sale of principal subsidiaries, Aon may be required to refinance the remaining principal balance of $57 million on these loans during 1996. Commencing November 1, 1996, any remaining outstanding shares of Aon's 6.25% preferred stock (see note 8) that have not been previously converted into common stock are exchangeable at Aon's option for 6.25% convertible subordinated debentures, the interest expense on which would be tax deductible. Given the current market value of Aon stock and the option to convert the 6.25% preferred stock to debt, it is anticipated that the holders of the 6.25% preferred stock will most likely exercise their option to convert shares held into 1.22 shares of common stock. At December 31, 1995, 2,136,000 shares of 6.25% preferred stock were outstanding. Aon Corporation continues to maintain an internal lending program with its various subsidiaries where the parent company is able to borrow or lend funds. As of December 31, 1995, Aon Corporation held notes payable to its subsidiaries of approximately $450 million. Generally, these notes have competitive interest rates. The portion of the notes payable related to UFLIC and LOV will be assumed by the remaining insurance companies following completion of the sale. In 1995, stockholders' equity per common share increased to $22.77, up from $18.30 in 1994. The principal factors influencing this increase were net income, a $266 million increase in net unrealized investment gains and dividends. 15 Aon Corporation Annual Report 1995 Consolidated Statements of Financial Position
(millions) As of December 31 1995 1994 - ---------------------------------------------------------------------------------------------------- ASSETS INVESTMENTS Fixed maturities Available for sale-at fair value (amortized cost: 1995-$7,572; 1994-$4,318) $ 7,687.1 $4,160.3 Held to maturity-at amortized cost (fair value: 1994-$2,750) - 2,983.8 Equity securities-at fair value (cost: 1995-$928; 1994-$989) 1,006.3 939.3 Mortgage loans on real estate (net of reserve for losses: 1995-$26; 1994-$30) 632.0 567.5 Real estate (net of accumulated depreciation: 1995-$8; 1994-$8) 36.5 35.6 Policy loans 226.3 214.9 Other long-term investments 112.6 97.9 Short-term investments 938.3 783.2 -------------------- Total investments 10,639.1 9,782.5 ==================================================================================================== CASH 115.3 508.8 RECEIVABLES Insurance brokerage and consulting services receivables (net of allowance for doubtful accounts: 1995-$47; 1994-$45) 2,264.1 1,882.0 Premiums and other (net of allowance for doubtful accounts: 1995-$4; 1994-$3) 580.2 637.7 Accrued investment income 152.4 133.5 -------------------- Total receivables 2,996.7 2,653.2 ==================================================================================================== DEFERRED POLICY ACQUISITION COSTS 1,261.5 1,181.6 COST OF INSURANCE AND RENEWAL RIGHTS PURCHASED (net of accumulated amortization: 1995-$625; 1994-$567) 640.1 678.6 EXCESS OF COST OVER NET ASSETS PURCHASED (net of accumulated amortization: 1995-$157; 1994-$121) 957.6 869.4 PROPERTY AND EQUIPMENT AT COST (net of accumulated depreciation: 1995-$307; 1994-$281) 307.8 266.5 ASSETS HELD UNDER SPECIAL CONTRACTS 2,307.2 1,595.1 OTHER ASSETS 510.5 386.2 ==================================================================================================== TOTAL ASSETS (note 3) $19,735.8 $17,921.9 ====================================================================================================
See accompanying notes to consolidated financial statements. 16 Aon Corporation Annual Report 1995
(millions) As of December 31 1995 1994 - ------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY POLICY LIABILITIES Future policy benefits $ 1,475.1 $1,434.5 Policy and contract claims 970.9 944.2 Unearned and advance premiums 1,646.2 1,428.4 Other policyholder funds 5,464.2 5,503.3 --------------------- Total policy liabilities 9,556.4 9,310.4 ===================================================================================== GENERAL LIABILITIES Insurance premiums payable 2,722.8 2,408.7 Commissions and general expenses 562.4 526.6 Accrued income taxes Current 107.1 200.9 Deferred 225.5 129.3 Short-term borrowings 352.7 243.9 Notes payable 497.5 495.5 Debt guarantee of employee stock ownership plan 56.8 65.5 Liabilities held under special contracts 2,307.2 1,595.1 Other liabilities 623.7 638.6 --------------------- TOTAL LIABILITIES (note 3) 17,012.1 15,614.5 ===================================================================================== COMMITMENTS AND CONTINGENT LIABILITIES REDEEMABLE PREFERRED STOCK 50.0 50.0 STOCKHOLDERS' EQUITY Preferred stock-$1 par value Authorized-25 shares; issued 8% cumulative perpetual preferred stock 6.0 9.0 6.25% cumulative convertible exchangeable preferred stock 2.1 2.1 Common stock-$1 par value Authorized-300 shares; issued 111.4 110.6 Paid-in additional capital 431.8 485.2 Net unrealized investment gains (losses) 123.1 (142.8) Net foreign exchange gains (losses) 1.8 (19.7) Retained earnings 2,212.1 1,998.1 Less treasury stock at cost (shares: 1995-3.1; 1994-2.9) (97.3) (72.9) Less deferred compensation (117.3) (112.2) --------------------- TOTAL STOCKHOLDERS' EQUITY 2,673.7 2,257.4 ===================================================================================== TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $19,735.8 $17,921.9 =====================================================================================
17 Aon Corporation Annual Report 1995 Consolidated Statements of Income
(millions except per share data) Years ended December 31 1995 1994 1993 - -------------------------------------------------------------------------------------------- REVENUE Brokerage commissions and fees $1,628.2 $1,369.6 $1,173.2 Premiums earned 1,426.5 1,322.3 1,277.4 Net investment income (note 4) 329.4 257.1 227.2 Realized investment gains (note 4) 13.1 19.1 29.6 Other income 68.5 73.1 63.4 ---------------------------- Total revenue 3,465.7 3,041.2 2,770.8 ============================================================================================ BENEFITS AND EXPENSES Commissions and general expenses 1,982.3 1,719.2 1,534.4 Benefits to policyholders 698.5 626.2 622.2 Interest expense 37.3 32.7 29.3 Amortization of deferred policy acquisition costs 207.5 189.3 178.7 Amortization of intangible assets 82.1 76.8 74.6 ---------------------------- Total benefits and expenses 3,007.7 2,644.2 2,439.2 ============================================================================================ INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAX 458.0 397.0 331.6 Provision for income tax (note 6) 154.3 128.5 103.7 ---------------------------- INCOME FROM CONTINUING OPERATIONS 303.7 268.5 227.9 INCOME FROM DISCONTINUED OPERATIONS, NET OF TAX (note 3): 99.1 91.5 95.9 ---------------------------- NET INCOME $ 402.8 $ 360.0 $ 323.8 ============================================================================================ Net income available for common stockholders $ 378.1 $ 327.6 $ 291.0 ============================================================================================ PER SHARE Income from continuing operations $ 2.57 $ 2.28 $ 1.91 Income from discontinued operations 0.91 0.86 0.90 ---------------------------- Net income $ 3.48 $ 3.14 $ 2.81 ---------------------------- Cash dividends paid on common stock $ 1.34 $ 1.26 $ 1.18 ============================================================================================ AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING 108.7 106.2 106.4 ============================================================================================
See accompanying notes to consolidated financial statements 18 Aon Corporation Annual Report 1995 Consolidated Statements of Stockholders' Equity
(millions) Years ended December 31 1995 1994 1993 - ----------------------------------------------------------------------------------------------- PREFERRED STOCK Balance at January 1 $ 11.1 $ 13.8 $ 15.2 Retirement of preferred stock (3.0) (1.3) (0.4) Conversion of preferred stock to common stock - (1.4) (1.0) ------------------------------ 8.1 11.1 13.8 =============================================================================================== COMMON STOCK Balance at January 1 110.6 70.0 68.3 Shares issued for business combinations 0.8 5.3 0.7 Effect of three-for-two stock split - 35.3 - Conversion of preferred stock to common stock - - 1.0 ------------------------------ 111.4 110.6 70.0 =============================================================================================== PAID-IN ADDITIONAL CAPITAL Balance at January 1 485.2 605.7 600.9 Stock awards and options 19.2 10.8 20.6 Adjustment for business combinations (0.6) 1.9 1.4 Retirement and conversion of preferred stock (72.0) (97.9) (17.2) Effect of three-for-two stock split - (35.3) - ------------------------------ 431.8 485.2 605.7 =============================================================================================== NET UNREALIZED INVESTMENT GAINS (LOSSES) Balance at January 1 (142.8) 50.3 32.9 Effect of a change in accounting principles at January 1 - 148.2 - Net unrealized investment gains (losses) 265.9 (341.3) 17.4 ------------------------------ 123.1 (142.8) 50.3 =============================================================================================== NET FOREIGN EXCHANGE GAINS (LOSSES) Balance at January 1 (19.7) (61.0) (39.1) Net foreign exchange gains (losses) 21.5 41.3 (21.9) ------------------------------ 1.8 (19.7) (61.0) =============================================================================================== RETAINED EARNINGS Balance at January 1 1,998.1 1,784.9 1,603.2 Net income 402.8 360.0 323.8 Dividends to stockholders (170.4) (162.0) (151.0) Loss on treasury stock reissued (21.7) - - Adjustment for business combinations 3.7 27.6 10.4 Retirement of preferred stock (0.4) (12.4) (1.5) ------------------------------ 2,212.1 1,998.1 1,784.9 =============================================================================================== TREASURY STOCK Balance at January 1 (72.9) (69.3) (79.7) Cost of shares acquired (71.8) (26.6) (0.6) Shares reissued at average cost 47.4 73.0 11.0 Conversion of common stock to redeemable preferred stock - (50.0) - ------------------------------ (97.3) (72.9) (69.3) =============================================================================================== DEFERRED COMPENSATION Balance at January 1 (112.2) (106.6) (97.8) Issuance of stock awards (21.2) (18.3) (18.3) Debt guarantee of employee stock ownership plan 8.7 7.0 5.8 Amortization of deferred compensation 7.4 5.7 3.7 ------------------------------ (117.3) (112.2) (106.6) =============================================================================================== STOCKHOLDERS' EQUITY AT DECEMBER 31 $2,673.7 $2,257.4 $2,287.8 ===============================================================================================
See accompanying notes to consolidated financial statements 19 Aon Corporation Annual Report 1995 Consolidated Statements of Cash Flows
(millions) Years ended December 31 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 402.8 $ 360.0 $ 323.8 Adjustments to reconcile net income to cash provided by operating activities Policy liabilities 445.4 298.6 273.0 Deferred policy acquisition costs (410.3) (414.5) (325.9) Amortization of deferred policy acquisition costs 302.7 276.2 257.7 Amortization of intangible assets 94.2 92.2 91.4 Other amortization and depreciation 63.7 57.3 50.7 Other operating assets and liabilities (284.6) 31.8 (39.3) Realized investment gains (4.3) (5.8) (26.6) --------------------------------- CASH PROVIDED BY OPERATING ACTIVITIES 609.6 695.8 604.8 ============================================================================================================ CASH FLOWS FROM INVESTING ACTIVITIES: Sale (purchase) of short-term investments-net (126.9) 143.4 (160.2) Sale or maturity of fixed maturities Held to maturity-Maturities 3.9 49.2 116.8 Calls and prepayments 142.0 727.6 2,021.7 Sales 3.0 - 60.4 Available for sale-Maturities 121.2 109.5 13.9 Calls and prepayments 249.5 312.2 484.3 Sales 2,425.8 883.9 496.1 Sale or maturity of other investments 1,480.8 979.2 925.4 Purchase of fixed maturities-Held to maturity - (734.8) (2,171.7) Purchase of fixed maturities-Available for sale (3,222.1) (1,591.2) (1,326.8) Purchase of other investments (1,493.9) (1,141.6) (990.3) Acquisition of subsidiaries (109.6) (22.0) (96.3) Property and equipment and other (97.9) (76.9) (47.1) --------------------------------- CASH USED BY INVESTING ACTIVITIES (624.2) (361.5) (673.8) ============================================================================================================ CASH FLOWS FROM FINANCING ACTIVITIES: Treasury stock transactions-net (46.4) (15.4) 11.4 Issuance of short-term borrowings-net 108.8 75.3 53.5 Issuance of long-term debt 20.1 99.7 149.6 Repayment of long-term debt (12.5) (128.0) (192.8) Interest sensitive life, annuity and investment contracts-Deposits 1,287.5 1,557.5 1,376.0 Interest sensitive life, annuity and investment contracts-Withdrawals (1,487.6) (1,362.4) (1,089.9) Retirement of preferred stock (75.4) (58.3) (7.3) Cash dividends to stockholders (171.3) (162.3) (151.0) --------------------------------- CASH PROVIDED (USED) BY FINANCING ACTIVITIES (376.8) 6.1 149.5 ============================================================================================================ EFFECT OF EXCHANGE RATE CHANGES ON CASH (2.1) 4.6 (4.4) INCREASE (DECREASE) IN CASH (393.5) 345.0 76.1 CASH AT BEGINNING OF YEAR 508.8 163.8 87.7 --------------------------------- CASH AT END OF YEAR $ 115.3 $ 508.8 $ 163.8 ============================================================================================================
See accompanying notes to consolidated financial statements 20 Aon Corporation Annual Report 1995 Notes to Consolidated Financial Statements 1. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES AND PRACTICES Principles of Consolidation The accompanying consolidated financial statements have been prepared in conformity with generally accepted accounting principles and include the accounts of Aon Corporation and its operating subsidiaries (Aon). These statements include informed estimates and assumptions that affect the amounts reported. Actual results could differ from the amounts reported. All material intercompany accounts and transactions have been eliminated. Consistent with financial statement presentation, amounts disclosed in these notes to consolidated financial statements pertain to continuing operations as they relate to income statement amounts and total operations as they relate to statements of financial position or cash flow amounts. Brokerage Commissions and Fees In general, commission income is recognized at the later of the billing or effective date of the related insurance policies. Contingent commissions, certain life insurance commissions and commissions on premiums billed directly by insurance companies are generally recognized as income when received. Commissions on premium adjustments, including policy cancellations, are recognized as they occur. Fees for claim administration services, benefit consulting, reinsurance services and other services are recognized when the services are rendered. Recognition of Premium Revenue In general, for accident and health, extended warranty and credit products, premiums collected are reported as earned in proportion to insurance protection provided over the period covered by the policies. For life products, other than credit, premiums are recognized as revenue when due. Reinsurance Reinsurance premiums, commissions, and expense reimbursements on reinsured business are accounted for on a basis consistent with those used in accounting for the original policies issued and the terms of the reinsurance contracts. Premiums and benefits ceded to other companies have been reported as a reduction of premium revenue and benefits. Expense reimbursements received in connection with reinsurance ceded have been accounted for as a reduction of the related policy acquisition costs or, to the extent such reimbursements exceed the related acquisition costs, as other revenue. All reinsurance receivables and prepaid reinsurance premium amounts are reported as assets. Income Tax Deferred income tax has been provided for the effects of temporary differences between financial reporting and tax bases of assets and liabilities and has been measured using the enacted marginal tax rates and laws that are currently in effect. Earnings Per Share Earnings per share are computed based on the weighted average number of common and common equivalent shares outstanding during the respective period. Common shares outstanding include 3,267,000 shares, 3,386,000 shares, and 3,476,000 shares held by the employee stock ownership plan in 1995, 1994 and 1993, respectively. Common equivalent shares include dilutive stock awards and stock options and, prior to 1995, Series B conversion preferred stock. The 8% cumulative perpetual preferred stock (8% preferred stock), the 6.25% cumulative convertible exchangeable preferred stock (6.25% preferred stock) and the redeemable preferred stock are not considered common equivalent shares. Accordingly, the dividends on the 8%, 6.25% and redeemable preferred stock in 1995 and 1994 and the dividends on the 8% and 6.25% preferred stocks in 1993 have been deducted from net income to compute earnings per share. There is no material difference between primary and fully diluted per share amounts. Income available for common stockholders is net of dividends on all preferred stock. Investments Fixed maturities that are available for sale are carried at fair value. Fixed maturities, where the intent is to hold to maturity, are carried generally at amortized cost. The amortized cost of fixed maturities is adjusted for amortization of premiums to the first call date and the accretion of discounts to maturity that are included in net investment income. Included in fixed maturities are investments in collateralized mortgage obligations (CMOs) whose amortized cost is determined using the interest method including anticipated prepayments. Prepayment assumptions are obtained from dealer surveys. The retrospective adjustment method is used to adjust for prepayment activity. Equity securities are valued at fair value. Unrealized gains and temporary unrealized losses on fixed maturities available for sale and equity securities are excluded from income and are recorded directly to stockholders' equity, net of related deferred income taxes and adjustments to amortization of deferred policy acquisition costs. Aon has not categorized any fixed maturities or equity securities as trading securities. Mortgage loans are carried at amortized cost, net of reserves. Real estate is carried generally at cost less accumulated depreciation. Policy loans are carried at unpaid principal balance. Other long- term investments are carried generally at cost. Realized investment gains or losses are computed using specific costs of securities sold. 21 Aon Corporation Annual Report 1995 Notes to Consolidated Financial Statements Investments that have declines in fair value below cost that are judged to be other than temporary, are written down to estimated fair values and reported as realized investment losses. Additionally, as a result of the adoption of Financial Accounting Standards Board (FASB) Statement No. 114, "Accounting by Creditors for Impairment of a Loan," the 1995 reserve for mortgage loan losses is based on discounted cash flows using the loan's initial effective interest rate. Prior to 1995, the reserve related to loans was based on past credit loss experience and current economic conditions. Reserves for certain other long-term investments are established based on an evaluation of the respective investment portfolio and current economic conditions. Writedowns and reserves are included in realized investment gains and losses in the statements of income. In general, Aon ceases to accrue investment income where interest or dividend payments are in arrears. Accounting policies relating to derivative financial instruments are discussed in note 11. Deferred Policy Acquisition Costs Costs of acquiring new and renewal business, principally the excess of new commissions over renewal commissions, underwriting, and sales expenses that vary with and are primarily related to the production of new business, are deferred. For continuing long-duration life and health products, amortization of deferred policy acquisition costs is related to and based on the expected premium revenues of the policies. In general, such amortization is adjusted to reflect current withdrawal experience. Expected premium revenues are estimated by using the same assumptions used in estimating future policy benefits. For extended warranty and short-duration health insurance, costs of acquiring and renewing business, which are deferred, are amortized as the related premium is earned. To the extent that unrealized gains or losses on available for sale securities related to universal life-type policies and investment products included in discontinued operations would result in an adjustment of deferred policy acquisition costs had those gains or losses actually been realized, the related deferred policy acquisition cost adjustments are recorded along with the unrealized gains or losses included in stockholders' equity with no effect on income from discontinued operations. Other Intangible Assets In general, the excess of cost over net assets purchased relating to business acquisitions is being amortized into income over periods not exceeding forty years using the straight-line method. The cost of insurance and renewal rights purchased of certain subsidiaries is being amortized over a range of 11 to 25 years. Property and Equipment Property and equipment are generally depreciated using the straight-line method over their estimated useful lives. Fair Value of Financial Instruments The following methods and assumptions were used to estimate fair values for financial instruments. The carrying amounts in the consolidated statements of financial position for cash and cash equivalents and short-term investments approximate their fair value. Fair value for fixed maturity and equity securities is based on quoted market prices or, if they are not actively traded, on estimated values obtained from independent pricing services. However, the fair value for fixed maturity and equity securities relating to the discontinued operations are based on the underlying purchase agreements. The fair value for mortgage loans and policy loans is estimated using discounted cash flow analyses, using interest rates currently being offered for similar loans to borrowers with similar credit ratings. Fair value of derivatives is based on quoted prices for exchange-traded instruments or the cost to terminate or offset with other contracts. In general, other long-term investments are comprised of real estate joint ventures and limited partnerships. It was not practicable to estimate the fair value of other long-term investments because of the lack of quoted market prices and the inability to estimate fair value without incurring excessive costs. In addition, the determination of the fair value of investment commitments was deemed impractical due to the inability to estimate future cash flows. Fair value for liabilities for investment-type contracts primarily related to the discontinued operations is estimated using discounted cash flow calculations based on interest rates currently being offered for similar contracts with maturities consistent with those remaining for the contracts being valued. The fair value for notes payable is based on quoted market prices for the publicly traded portion and on estimates using discounted cash flow analyses based on current borrowing rates for similar types of borrowing arrangements for the non- publicly traded portion. Assets and Liabilities Held Under Special Contracts Assets held under special contracts primarily relate to discontinued operations and principally represent designated funds of group pension, variable life, annuity, and unit-linked policyholders. These assets are offset by liabilities that represent such policyholders' equity in those assets. The net investment income generated from these assets is not included in the consolidated statements of income. 22 Aon Corporation Annual Report 1995 Notes to Consolidated Financial Statements Future Policy Benefits, Unearned Premiums, and Policy and Contract Claims Future policy benefit liabilities on non-universal life-type and accident and health products have been provided on the net level premium method. The liabilities are calculated based on assumptions as to investment yield, mortality, morbidity, and withdrawal rates that were determined at the date of issue, and provide for possible adverse deviations. Interest assumptions are graded and range from 9.3% to 5.0% at December 31, 1995. Withdrawal assumptions are based principally on insurance subsidiaries' experience and vary by plan, year of issue, and duration. Policyholder liabilities on universal life-type and investment products of the discontinued operations are generally based on policy account values. Interest credit rates for these products range from 7.0% to 5.0% at December 31, 1995. Unearned premiums generally are calculated using the pro rata method based on gross premiums. However, in the case of credit and extended warranty products, the unearned premiums are calculated such that the premiums are earned over the period of risk in a reasonable relationship to anticipated claims. Policy and contract claim liabilities represent estimates for reported claims, as well as provisions for losses incurred, but not yet reported. These claim liabilities are based on historical experience and are estimates of the ultimate amount to be paid when the claims are settled. Changes in the estimated liability are reflected in income as the estimates are revised. Foreign Currency Translation In general, foreign revenues and expenses are translated at average exchange rates. Foreign assets and liabilities are translated at year end exchange rates. Net foreign exchange gains and losses on translation are generally reported in stockholders' equity, net of deferred income tax (credit) of $1 million, ($11) million and ($33) million at December 31, 1995, 1994 and 1993, respectively. Accounting Changes In 1995, Aon adopted FASB Statement Nos. 114 and 118 which relate to accounting by creditors for impairment of a loan. Implementation of these Statements did not have a material effect on Aon's financial statements. Aon adopted FASB Statement No. 115, "Accounting for Certain Investments in Debt and Equity Securities" in 1994, which requires categorization of fixed maturities either as held to maturity, available for sale or trading and equity securities as available for sale or trading. On November 15, 1995, the FASB issued a Special Report, "A Guide to Implementation of Statement 115 on Accounting for Certain Investments in Debt and Equity Securities." In accordance with provisions in that Special Report, Aon chose to reclassify all held to maturity securities, substantially all of which relate to discontinued operations, to available for sale (see note 3). In 1995, the FASB issued Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Aon anticipates adopting this Statement in its 1996 financial statements as required. Implementation of this Statement is not expected to have a material effect on Aon's financial statements. 2. BUSINESS COMBINATIONS Pooling of Interests Method In 1995, 1994 and 1993, Aon issued 1,404,000 shares, 5,546,000 shares and 1,044,000 shares of common stock, respectively, for mergers with insurance brokerage and consulting organizations. In connection with several of the mergers, 700,000 shares are being held in escrow at December 31, 1995 pending the resolution of contingencies. Aon's prior period financial statements have not been restated because the effect of the above mergers was not material. Purchase Method During 1995, 1994 and 1993, subsidiaries of Aon acquired certain insurance brokerage and consulting services operations that were financed primarily by internal funds and the reissuance of common stock from treasury. Pursuant to a 1994 purchase agreement with one of the brokerage operations, over the next five years, Aon is contingently liable to issue up to 249,000 additional shares of common stock based on a formula relating to future earnings of that operation. The aggregate cost of these acquisitions was $110 million, $22 million and $176 million in 1995, 1994 and 1993, respectively. The pro forma results of these operations, as if the acquisitions had occurred as of the beginning of the year, have an immaterial effect on Aon's consolidated revenue and net income. In accordance with a 1992 purchase agreement, securities with a value of $125 million are being held in escrow. The escrowed securities will be released on a pre-determined schedule between 1997 and 2007. 3. DISCONTINUED OPERATIONS In the fourth quarter 1995, Aon reached definitive agreements to sell its domestic direct response life and health subsidiary, Union Fidelity Life Insurance Company (UFLIC), headquartered in Trevose, Pennsylvania, and its capital accumulation life insurance subsidiary, The Life Insurance Company of Virginia (LOV), headquartered in Richmond, Virginia, to General Electric Capital Corporation (GE Capital). Sales proceeds will approximate $1.4 billion before taxes and other costs of sale. Pending the receipt of the required regulatory consents by Combined Insurance Company of America (the parent company), the sale of these two subsidiaries is expected to close during the first half of 1996. Any gain or loss is expected to be immaterial. 23 Aon Corporation Annual Report 1995 Notes to Consolidated Financial Statements For 1995, 1994 and 1993, the discontinued operations had revenues of $1,145 million, $1,116 million and $1,074 million, respectively. The revenues and corresponding benefits and expenses were reported on a net basis in the consolidated statements of income, and were net of taxes of $53 million, $49 million and $52 million in 1995, 1994 and 1993, respectively. Income from discontinued operations in 1995 includes $15 million, net of taxes, that was earned in the fourth quarter, subsequent to the commitment to the plan to dispose. Included in discontinued operations is pretax interest expense of $18 million, $14 million and $13 million in 1995, 1994 and 1993, respectively. The allocation of interest expense was based on the ratio of discontinued net assets to the total of consolidated equity and debt. Pretax interest expense of $2 million was included in post-measurement date discontinued operating income. The assets and liabilities after reinvestment of net sales proceeds of discontinued operations included in the consolidated statement of financial position at December 31, 1995 are as follows:
(millions) - --------------------------------------------------------------------------------- Investments $5,470 Deferred policy acquisition costs 630 Intangible assets 150 Assets held under special contracts 2,020 Receivables and other assets 260 - --------------------------------------------------------------------------------- Total Assets $8,530 ================================================================================= Policy liabilities $6,170 Liabilities held under special contracts 2,020 General and other liabilities 340 - --------------------------------------------------------------------------------- Total Liabilities $8,530 =================================================================================
Due to the planned 1996 sale of LOV and UFLIC, net unrealized gains on discontinued available for sale investments are not reflected in Aon's stockholders' equity as of December 31, 1995. Accordingly, net unrealized gains during 1995 were not impacted by the transfer of $2,856 million of discontinued held to maturity investments to available for sale. 4. INVESTMENTS The components of net investment income from continuing operations are as follows:
(millions) Years ended December 31 1995 1994 1993 - --------------------------------------------------------------------------------- Fixed maturities $164 $132 $130 Equity securities 59 56 41 Short-term investments 86 58 45 Other 28 19 17 - --------------------------------------------------------------------------------- Gross investment income 337 265 233 Investment expenses 8 8 6 - --------------------------------------------------------------------------------- Net investment income $329 $257 $227 =================================================================================
Realized gains (losses) on investments from continuing operations are as follows:
(millions) Years ended December 31 1995 1994 1993 - --------------------------------------------------------------------------------- Fixed maturities available for sale: Gross gains $ 8 $ 12 $ - Gross losses (3) (4) - Fixed maturities held to maturity: Gross gains - - 15 Gross losses - - (1) Equity securities 12 31 44 Other (4) (20) (28) - --------------------------------------------------------------------------------- Total before tax 13 19 30 Less applicable tax 5 7 11 - --------------------------------------------------------------------------------- Total net realized investment gains $ 8 $ 12 $ 19 =================================================================================
The components of net unrealized gains (losses) are as follows:
(millions) As of December 31 1995 1994 1993 - --------------------------------------------------------------------------------- Gross unrealized investment gains (losses): Fixed maturities available for sale $115 $(158) $ - Equity securities 78 (50) 81 Deferred tax credit (charge) (70) 35 (31) Deferred policy acquisition costs - 30 - - --------------------------------------------------------------------------------- Net unrealized investment gains (losses) $123 $(143) $ 50 =================================================================================
The changes in net unrealized investment gains (losses) are as follows:
(millions) Years ended December 31 1995 1994 1993 - --------------------------------------------------------------------------------- Fixed maturities: Available for sale $273 $(403) $ 28 Held to maturity 234 (351) 81 Equity securities 128 (131) 31 - --------------------------------------------------------------------------------- Total $635 $(885) $140 =================================================================================
The cumulative effect of the adoption of Statement No. 115 on January 1, 1994, increased stockholders' equity by $148 million (net of adjustments to deferred policy acquisition costs of $14 million and deferred income taxes of $83 million) to reflect the net unrealized fixed maturities holding gains on securities previously carried at amortized cost; there was no effect on net income as a result of the adoption. 24 Aon Corporation Annual Report 1995 Notes to Consolidated Financial Statements The amortized cost and fair value of investments in fixed maturities and equity securities are as follows:
As of December 31, 1995 Gross Gross Amortized Unrealized Unrealized Fair (millions) Cost Gains Losses Value - ------------------------------------------------------------------------ Available for sale: U.S. government and agencies $ 151 $ 4 $ - $ 155 States and political subdivisions 444 31 - 475 Foreign governments 798 34 - 832 Corporate securities 4,046 57 (11) 4,092 Mortgage-backed securities 2,033 2 - 2,035 Other fixed maturities 100 1 (3) 98 - ------------------------------------------------------------------------ Total fixed maturities 7,572 129 (14) 7,687 Total equity securities 928 120 (42) 1,006 - ------------------------------------------------------------------------ Total available for sale $8,500 $249 $ (56) $8,693 ======================================================================== As of December 31, 1994 Gross Gross Amortized Unrealized Unrealized Fair (millions) Cost Gains Losses Value - ------------------------------------------------------------------------ Available for sale: U.S. government and agencies $ 189 $ 2 $ (4) $ 187 States and political subdivisions 393 17 (3) 407 Foreign governments 608 13 (11) 610 Corporate securities 1,581 37 (83) 1,535 Mortgage-backed securities 1,478 3 (123) 1,358 Other fixed maturities 69 - (6) 63 - ------------------------------------------------------------------------ Total fixed maturities 4,318 72 (230) 4,160 Total equity securities 989 50 (100) 939 - ------------------------------------------------------------------------ Total available for sale $5,307 $122 $(330) $5,099 ======================================================================== As of December 31, 1994 Gross Gross Amortized Unrealized Unrealized Fair (millions) Cost Gains Losses Value - ------------------------------------------------------------------------ Held to maturity: U.S. government and agencies $ 3 $ - $ - $ 3 States and political subdivisions 3 - - 3 Corporate securities 1,388 15 (97) 1,306 Mortgage-backed securities 1,590 1 (153) 1,438 - ------------------------------------------------------------------------ Total held to maturity $2,984 $ 16 $(250) $2,750 ========================================================================
The amortized cost and fair value of fixed maturities, by contractual maturity, as of December 31, 1995 are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Amortized Fair (millions) Cost Value - ------------------------------------------------------------------------ Available for sale: Due in one year or less $ 220 $ 222 Due after one year through five years 1,425 1,455 Due after five years through ten years 2,472 2,521 Due after ten years 1,422 1,454 Mortgage-backed securities 2,033 2,035 - ------------------------------------------------------------------------ Total available for sale $7,572 $7,687 ========================================================================
Securities on deposit for regulatory authorities as required by law amounted to $320 million at December 31, 1995 and $296 million at December 31, 1994. As required by the by-laws of Lloyd's brokers, assets subject to floating charges for the benefit of insurance creditors amounted to $566 million and $594 million at December 31, 1995 and 1994, respectively. Aon maintains premium trust bank accounts for premiums collected from insureds but not yet remitted to insurance companies of $495 million and $475 million at December 31, 1995 and 1994, respectively. At December 31, 1995 and 1994, respectively, Aon had $72 million and $118 million of non-income producing investments.
5. DEBT AND LEASE COMMITMENTS Notes Payable The following is a summary of notes payable: (millions) As of December 31 1995 1994 - ------------------------------------------------------------------------ 6.3% debt securities, due January 2004 $100 $100 6.7% debt securities, due June 2003 150 150 6.875% debt securities, due October 1999 100 100 7.4% debt securities, due October 2002 100 100 Notes payable, due in varying installments, with interest at 4% to 8% 48 46 - ------------------------------------------------------------------------ Total notes payable $498 $496 ========================================================================
25 Aon Corporation Annual Report 1995 Notes to Consolidated Financial Statements Interest is payable semiannually on all debt securities. In addition, the debt securities are not redeemable by Aon prior to maturity and contain no sinking fund provisions. Maturities of notes payable are $14 million, $10 million, $21 million, $102 million and $1 million in 1996, 1997, 1998, 1999 and 2000, respectively. In addition, Aon has credit agreements providing lines of credit for commercial paper. The available commercial paper back-up lines of credit totaled $500 million at December 31, 1995. Information related to notes payable and short-term borrowings is as follows:
(millions except interest rates) Years ended December 31 1995 1994 1993 - ------------------------------------------------------------------------------- Interest paid $54 $44 $41 Weighted average interest rates--short-term borrowings 5.9% 4.5% 3.4% ===============================================================================
Guaranteed Debt During 1989, Aon's employee stock ownership plan (ESOP) entered into loan agreements amounting to $90 million to purchase Aon common stock. The loans are unconditionally guaranteed by Aon and therefore the unpaid balance of the loans is reflected as debt in the accompanying statements of financial position. An equivalent amount, representing deferred compensation, is recorded as a deduction from stockholders' equity. Based on certain provisions in the loan agreements relating to the sale of principal subsidiaries, Aon may be required to refinance the remaining principal balance of $57 million on these loans during 1996. The ESOP paid $14 million, $13 million and $12 million in 1995, 1994 and 1993, respectively, in loan principal and interest from contributions made by Aon to the ESOP as well as dividend proceeds of common stock held by the ESOP. The loans have an interest rate of 8.35% and serially mature through 1999. Interest expense incurred by the ESOP related to these loans amounted to $5 million, $6 million and $7 million in 1995, 1994 and 1993, respectively. Future contributions, as determined by Aon's Board of Directors, plus dividends earned on shares held by the ESOP will be used to service the loans. Lease Commitments Aon has noncancelable operating leases for certain office space, equipment and automobiles. Future minimum rental payments required under operating leases that have initial or remaining noncancelable lease terms in excess of one year at December 31, 1995 related to continuing operations are as follows:
(millions) Minimum Lease Payments - ------------------------------------------------------------------------------ 1996 $102 1997 91 1998 81 1999 72 2000 61 Later years 206 - ------------------------------------------------------------------------------ Total minimum payments required $613 ==============================================================================
Rental expenses in continuing operations for all operating leases for the years ended December 31, 1995, 1994 and 1993, amounted to $103 million, $93 million and $102 million, respectively. 6. INCOME TAX Aon and its principal domestic subsidiaries are included in a consolidated life- nonlife federal income tax return. Aon's foreign subsidiaries file various income tax returns in their foreign jurisdictions. A reconciliation of the income tax provisions for continuing operations based on the statutory corporate tax rate to the provisions reflected in the consolidated financial statements is as follows:
Years Ended December 31 1995 1994 1993 - ------------------------------------------------------------------------------ Statutory tax rate 35.0% 35.0% 35.0% Tax-exempt investment income (3.8) (4.0) (3.9) State income taxes 2.8 2.3 2.2 Other--net (0.3) (0.9) (2.0) - ------------------------------------------------------------------------------ Effective tax rate 33.7% 32.4% 31.3% ==============================================================================
The provision for income tax for continuing operations is made up of the following components:
(millions) Years ended December 31 1995 1994 1993 - ------------------------------------------------------------------------------- Current: Federal $111 $ 59 $ 49 Foreign 45 62 38 State 20 14 11 - ------------------------------------------------------------------------------- Total current $176 $135 $ 98 =============================================================================== Deferred (credit): Federal $(17) $ 1 $ 11 Foreign (4) 3 (7) State (1) (10) 2 - ------------------------------------------------------------------------------- Total deferred (22) (6) 6 - ------------------------------------------------------------------------------- Provision for income tax $154 $129 $104 ===============================================================================
Significant components of Aon's deferred tax liabilities and assets are as follows:
(millions) As of December 31 1995 1994 - ------------------------------------------------------------------------------- Deferred tax liabilities: Policy acquisition costs $298 $291 Unrealized investment gains 70 - Other--net 197 148 - ------------------------------------------------------------------------------- Total deferred tax liabilities 565 439 - ------------------------------------------------------------------------------- Deferred tax assets: Insurance reserve amounts 217 196 Unrealized investment losses - 45 Other--net 122 69 - ------------------------------------------------------------------------------- Total deferred tax assets 339 310 - ------------------------------------------------------------------------------- Net deferred tax liabilities $226 $129 ===============================================================================
26 Aon Corporation Annual Report 1995 Notes to Consolidated Financial Statements As of December 31, 1994, the deferred tax asset relating to unrealized investment losses is net of a $30 million valuation allowance that was provided directly in stockholders' equity in 1994. In 1995, this valuation allowance was reversed. Prior to 1984, the life insurance companies were required to accumulate certain untaxed amounts in a memorandum "policyholders' surplus account." Under the Tax Reform Act of 1984, the "policyholders' surplus account" balances were "capped" at December 31, 1983 and the balances will be taxed only to the extent distributed to stockholders or when they exceed certain prescribed limits. As of December 31, 1995, the combined "policyholders' surplus account" of Aon's life insurance subsidiaries approximates $363 million. Aon's life insurance subsidiaries do not intend to make any taxable distributions or exceed the prescribed limits in the foreseeable future; therefore, no income tax provision has been made. However, if such taxes were assessed, the amount of tax payable would be $127 million. The amount of income taxes paid for 1995, 1994 and 1993 was $256 million, $167 million and $130 million, respectively. 7. REINSURANCE AND CLAIM RESERVES Aon's insurance subsidiaries are involved in both the cession and assumption of reinsurance with other companies. Aon's reinsurance consists primarily of short- duration contracts that are entered into with numerous automobile dealerships, financial institutions and insurers. Aon's insurance subsidiaries would remain liable to the extent that the reinsuring companies were unable to meet their obligations. A summary of reinsurance activity is as follows:
(millions) Years ended December 31 1995 1994 1993 - ------------------------------------------------------------------------- Ceded premiums earned $316 $319 $296 Ceded premiums written 369 340 322 Assumed premiums earned 83 91 121 Assumed premiums written 101 99 114 Ceded benefits to policyholders 153 170 125 =========================================================================
Activity in the liability for policy contract claims is summarized as follows: (millions) Years ended December 31 1995 1994 1993 - ------------------------------------------------------------------------- Liabilities at beginning of year $681 $686 $669 Incurred losses: Continuing operations-current year 726 596 606 Continuing operations-prior year (71) (59) (40) Discontinued operations 361 386 344 - ------------------------------------------------------------------------- Total 1,016 923 910 - ------------------------------------------------------------------------- Payment of claims: Current year (651) (582) (523) Prior years (331) (346) (370) - ------------------------------------------------------------------------- Total (982) (928) (893) - ------------------------------------------------------------------------- Liabilities at end of year (net of insurance recoverables): 1995--$256, 1994--$263, 1993--$235) $ 715 $ 681 $ 686 =========================================================================
Prior years' incurred losses reflect continued favorable development. 8. REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY Redeemable Preferred Stock In 1994, Aon issued 1,000,000 shares of redeemable preferred stock to a former officer in exchange for 1,500,000 shares of Aon common stock. Dividends are cumulative at an annual rate of $2.55 per share. The shares of redeemable preferred stock will be redeemable at the option of Aon or the holders, in whole or in part, at $50.00 per share no sooner than February 9, 1999. Common Stock Aon repurchased 1,979,000, 844,000 and 16,000 shares in 1995, 1994 and 1993, respectively, of its common stock, primarily to provide shares for stock compensation plans and the 1994 conversion of Series B conversion preferred stock. Series B Conversion Preferred Stock At December 1, 1994, 1,439,000 shares of Series B conversion preferred stock were outstanding and each share of stock was automatically converted, pursuant to the stock's terms, into one and one half shares of common stock issued from treasury. Dividends were cumulative at an annualized rate of $3.04 per share. Aon repurchased 1,210,000 shares and 151,000 shares of its outstanding stock for $58 million and $7 million in 1994 and 1993, respectively. These shares were canceled and retired. 8% Cumulative Perpetual Preferred Stock At December 31, 1995, 5,998,900 shares of cumulative 8% perpetual preferred stock are outstanding. In 1995, 3,001,100 shares were purchased and retired at a total cost of $75 million. Dividends are cumulative at the annual rate of $2.00 per share. At its option, Aon may redeem all or any part of the stock at any time on or after November 1, 1997 at a redemption price of $25.00 per share plus all accrued and unpaid dividends. The holders of the stock have limited voting rights. 6.25% Cumulative Convertible Exchangeable Preferred Stock At December 31, 1995, 2,136,000 shares of 6.25% cumulative convertible exchangeable preferred stock are outstanding. Dividends are cumulative at the annual rate of $3.125 per share. The stock is convertible at any time at the option of the holder into 1.22 shares of common stock for each share held. The stock is exchangeable at Aon's option, in whole but not in part, on any dividend payment date commencing November 1, 1996 for 6.25% convertible subordinated debentures due November 1, 2022 at the rate of $50.00 principal amount of the debentures for each share. At its option, Aon may redeem all or any part of the outstanding stock, on or after November 1, 1996 at prices ranging from $51.875 per share in 1996 declining to $50.00 per share in 2002 and thereafter, plus accrued and unpaid dividends. The holders of the stock have limited voting rights. 27 Aon Corporation Annual Report 1995 Notes to Consolidated Financial Statements Dividends A summary of dividends incurred is as follows:
(millions) Years ended December 31 1995 1994 1993 - ---------------------------------------------------------------------- Redeemable preferred stock $ 2 $ 2 $ - Common stock 145 129 118 Series B conversion preferred stock - 6 8 8% cumulative perpetual preferred stock 16 18 18 6.25% cumulative convertible exchangeable preferred stock 7 7 7 - ---------------------------------------------------------------------- Total dividends incurred $170 $162 $151 ======================================================================
Statutory Capital and Surplus Generally, the capital and surplus of Aon's insurance subsidiaries available for transfer to the parent company are limited to the amounts that the insurance subsidiaries' statutory capital and surplus exceed minimum statutory capital requirements; however, payments of the amounts as dividends may be subject to approval by regulatory authorities. See note 6 for possible tax effects of distributions made out of untaxed earnings. Net statutory income of the insurance subsidiaries, including LOV and UFLIC, is summarized as follows:
(millions) Years ended December 31 1995 1994 1993 - ---------------------------------------------------------------------- Life insurance $197 $ 272 $ 255 Property casualty 58 34 62 ======================================================================
Statutory capital and surplus of the insurance subsidiaries is summarized as follows:
(millions) As of December 31 1995 1994 - ---------------------------------------------------------------------- Life insurance $766 $ 714 Property casualty 296 284 ======================================================================
9. EMPLOYEE BENEFITS Savings and Profit Sharing Plans Certain of Aon's subsidiaries maintain a contributory savings plan for the benefit of United States salaried and commissioned employees and a contributory profit sharing plan for the benefit of Canadian salaried employees and commissioned agents. The company contribution for the savings plan is based on a match of 100% of employee contributions up to a maximum of 3% of eligible compensation. Provisions made for these plans in continuing operations were $14 million in 1995 and $13 million in 1994 and 1993, respectively. Employee Stock Ownership Plan Certain of Aon's subsidiaries maintain a leveraged ESOP for the benefit of the United States salaried and certain commissioned employees. Shares are allocated to eligible employees over a period of ten years through 1998. Contributions to the ESOP charged to continuing operations amounted to $11 million, $9 million and $8 million in 1995, 1994 and 1993, respectively. Domestic Pension Plan Certain of Aon's subsidiaries maintain a non-contributory defined benefit pension plan providing retirement benefits for salaried employees and certain commissioned employees in the United States based on years of service and salary. Aon's funding policy is to contribute amounts to the plan sufficient to meet the minimum funding requirements set forth in the Employee Retirement Income Security Act of 1974, plus such additional amounts as Aon determines to be appropriate from time to time. A summary of the components of net periodic pension cost for the defined benefit plans in 1995, 1994 and 1993 is as follows:
(millions) Years ended December 31 1995 1994 1993 - ---------------------------------------------------------------------- Defined benefit plan: Service cost-benefit earned $ 17 $ 21 $ 19 Interest cost on projected benefit obligation 19 17 16 Actual return on plan assets (66) (3) (27) Net amortization and deferral 44 (18) 6 - ---------------------------------------------------------------------- Net periodic pension cost $ 14 $ 17 $ 14 ======================================================================
The weighted average assumptions used in accounting for the defined benefit plan were:
Years ended December 31 1995 1994 1993 - ---------------------------------------------------------------------- Assumed discount rate 7.5% 8.5% 7.0% Rate of compensation increase 5.0% 5.0% 5.0% Expected long-term rate of return on plan assets 9.0% 9.0% 9.0% ======================================================================
During 1993, the Aon Pension Plan was amended to include certain additional amounts of compensation in determining plan benefits and in 1994 to reduce the maximum amount of compensation that can be considered under the plan as required by law. Further, the Pension Plan was amended in 1994 to provide increases in benefits to current pensioners. Net periodic pension cost for 1994 decreased $2 million and increased $2 million in 1993 as a result of these amendments. There were no amendments in 1995 that affected the net periodic pension cost. The following table sets forth the funded status and amounts recognized in the consolidated statements of financial position for Aon's U.S. defined benefit pension plan.
(millions) As of December 31 1995 1994 - ---------------------------------------------------------------------- Actuarial present value of benefit obligations: Vested benefit obligation $218 $ 183 Accumulated benefit obligation 224 189 - ---------------------------------------------------------------------- Projected benefit obligation 286 228 Plan assets at fair value 282 228 - ---------------------------------------------------------------------- Plan assets less than projected benefit obligation (4) - Unrecognized net gain (26) (14) Unrecognized prior service cost 2 2 Unrecognized net transition assets - (3) - ---------------------------------------------------------------------- Pension cost included in other liabilities $(28) $ (15) ======================================================================
28 Aon Corporation Annual Report 1995 Notes to Consolidated Financial Statements Plan assets include marketable equity securities, deposit administration insurance contracts, and corporate and government debt securities. Included are securities issued by Aon totaling $28 million and $18 million in 1995 and 1994, respectively. In addition, $186 million and $143 million of plan assets are held under a special contract with a subsidiary of Aon in 1995 and 1994, respectively. Foreign Pension Plans Certain of Aon's foreign subsidiaries maintain contributory and non-contributory defined benefit pension plans for employees outside of the United States that provide retirement benefits based on service and salary. Material plans are maintained in the United Kingdom and The Netherlands. The funding policy for these plans is to contribute the amounts required by the plan provisions or applicable regulations, although additional amounts may be contributed from time to time. A summary of the components of net periodic pension cost in continuing operations for the material defined benefit plans, grouped by country, is as follows:
(millions) Years ended December 31 1995 1994 1993 - ------------------------------------------------------------------------------- United Kingdom: Service cost-benefit earned $ 11 $ 8 $ 8 Interest cost on projected benefit obligation 15 10 8 Actual loss (return) on plan assets (29) 6 (11) Net amortization and deferral 11 (20) - - ------------------------------------------------------------------------------- Net periodic pension cost $ 8 $ 4 $ 5 - ------------------------------------------------------------------------------- The Netherlands: Service cost-benefit earned $ 4 $ 2 $ 2 Interest cost on projected benefit obligation 9 8 7 Actual return on plan assets (11) (9) (10) Net amortization and deferral - 1 - - ------------------------------------------------------------------------------- Net periodic pension cost (credit) $ 2 $ 2 $ (1) ===============================================================================
The weighted average assumptions used in accounting for these defined benefit plans were:
Years ended December 31 1995 1994 1993 - ------------------------------------------------------------------------------- United Kingdom: Assumed discount rate 9.0% 9.0% 7.3% Rate of compensation increase 7.0% 7.0% 5.0% Expected long-term rate of return on plan assets 10.0% 10.0% 10.0% - ------------------------------------------------------------------------------- The Netherlands: Assumed discount rate 7.0% 7.0% 7.0% Rate of compensation increase 4.0% 4.0% 4.0% Expected long-term rate of return on plan assets 7.0% 7.0% 7.0% ===============================================================================
The following table sets forth the funded status and the amounts recognized in the 1995 and 1994 consolidated statements of financial position for Aon's foreign defined benefit pension plans.
United Kingdom: (millions) As of December 31 1995 1994 - ------------------------------------------------------------------------------- Projected benefit obligation $192 $172 Plan assets at fair value 212 179 - ------------------------------------------------------------------------------- Plan assets in excess of projected benefit obligation 20 7 Unrecognized net loss 4 14 Unrecognized prior service cost 1 1 Unrecognized net transition obligation 1 1 Adjustment to recognize minimum liability - (4) - ------------------------------------------------------------------------------- Prepaid pension cost included in other assets $ 26 $ 19 - -------------------------------------------------------------------------------
The Netherlands:
(millions) As of December 31 1995 1994 - ------------------------------------------------------------------------------- Projected benefit obligation $140 $123 Plan assets at fair value 168 146 - ------------------------------------------------------------------------------- Plan assets in excess of projected benefit obligation 28 23 Unrecognized net loss 19 18 - ------------------------------------------------------------------------------- Prepaid pension cost included in other assets $ 47 $ 41 - -------------------------------------------------------------------------------
Postretirement Benefits Other Than Pensions Aon sponsors defined benefit postretirement health and welfare plans that cover both salaried and nonsalaried employees in the U.S., as well as certain other salaried employees in Canada. In the U.S., one plan provides medical benefits, prior to and subsequent to Medicare eligibility, and the other provides life insurance benefits. In Canada, the plans provide both extended health care benefits and life insurance benefits. The postretirement health care plans are contributory, with retiree contributions adjusted annually; the life insurance plans are noncontributory. The employer's liability for future plan cost increase is limited in any year to 5% per annum. All plans are funded on a pay- as-you go basis. The following table sets forth the plans' combined funded status:
(millions) As of December 31, 1995 Medical Life - ------------------------------------------------------------------------------- Accumulated postretirement benefit obligation: Retirees $15 $ 8 Fully eligible active plan participants 8 4 Other active plan participants 9 2 - ------------------------------------------------------------------------------- 32 14 Unrecognized prior service 22 6 Unrecognized net gain 20 5 - ------------------------------------------------------------------------------- Accrued postretirement benefit liability $74 $25 ===============================================================================
(millions) As of December 31, 1994 Medical Life - ------------------------------------------------------------------------------- Accumulated postretirement benefit obligation: Retirees $16 $ 6 Fully eligible active plan participants 7 4 Other active plan participants 8 2 - ------------------------------------------------------------------------------- 31 12 Unrecognized prior service 26 8 Unrecognized net gain 22 6 - ------------------------------------------------------------------------------- Accrued postretirement benefit liability $79 $26 ===============================================================================
29 Aon Corporation Annual Report 1995 Notes to Consolidated Financial Statements Net periodic postretirement benefit cost in continuing operations includes the following components:
(millions) Years ended December 31 1995 1994 1993 - --------------------------------------------------------------------- Service cost $ 1 $ 1 $ 3 Interest cost 3 4 5 Amortization of prior service (7) (6) (5) - --------------------------------------------------------------------- Net periodic postretirement benefit cost (credit) $(3) $(1) $ 3 =====================================================================
For measurement purposes in 1995, 1994 and 1993, a 10.5%, 11.5% and 12.5%, respectively, annual rate of increase in the per capita cost of covered health care benefits (trend rate) adjusted for actual current year cost experience was assumed, decreasing gradually to 6% in year 2000 and remaining the same thereafter. However, with the employer funding increase cap limited to 5% per year, net employer trend rates are effectively limited to 5% per year in the future. Increasing the assumed health care cost trend rates by one percentage point would result in a negligible change in the accumulated postretirement benefit obligation (APBO) as of December 31, 1995 because of the 5% cap on future employer funding increases for domestic medical plans. Assumptions used in determining the APBO are summarized below:
As of December 31 1995 1994 1993 - --------------------------------------------------------------------- Weighted-average discount rate 7.5% 8.5% 7.0% Weighted-average rate of compensation increase 5.0% 5.0% 5.5% =====================================================================
10. STOCK COMPENSATION PLANS Stock Award Plan In 1994, Aon's stockholders approved an amendment to the Aon Stock Award Plan that increased the aggregate number of shares of common stock that Aon can award from 1,350,000 to 3,350,000 shares. Generally, the award plan requires the employees to complete three continuous years of service before the award begins to vest in increments until the completion of a ten year period of continuous employment. All awarded shares are issued as they become vested. With certain limited exceptions, any break in continuous employment will cause forfeiture of all unvested awards. The compensation cost associated with each award is deferred and amortized over the period of continuous employment using the straight line method. Aon common stock awards outstanding consist of the following:
(thousands) Years ended December 31 1995 1994 1993 - --------------------------------------------------------------------- Shares outstanding at beginning of year 2,169 1,672 1,269 Granted 709 726 539 Vested and exercised (216) (214) (107) Canceled (53) (15) (29) - --------------------------------------------------------------------- Shares outstanding at end of year 2,609 2,169 1,672 =====================================================================
Stock Option Plan Under a nonqualified stock option plan, options to purchase common stock were granted to certain officers and employees of Aon and its subsidiaries at 100% of market value on the date of grant. Common stock options outstanding consisted of the following:
Years ended December 31 1995 1994 - --------------------------------------------------------------------- No. of Price No. of Price (shares in thousands) Shares Range Shares Range - --------------------------------------------------------------------- Options outstanding at beginning of year 3,346 $14-36 2,699 $14-36 Granted 1,086 32-38 1,134 31-36 Exercised (747) 14-29 (353) 14-26 Canceled (210) 17-36 (134) 14-36 - --------------------------------------------------------------------- Options outstanding at end of year 3,475 $20-38 3,346 $14-36 - --------------------------------------------------------------------- Options exercisable at end of year 425 $20-35 648 $14-32 - --------------------------------------------------------------------- Options available for grant at end of year 1,450 2,326 =====================================================================
11. FINANCIAL INSTRUMENTS Financial Risk Management Aon is exposed to market risk from changes in interest rates and foreign currency exchange rates. To manage the volatility related to these exposures, Aon enters into various derivative transactions that have the effect of minimizing these risks by creating offsetting market exposures. If Aon did not use derivative contracts, its exposure and market risk would be higher. The derivative financial instruments held by Aon are held for purposes other than trading. Derivative transactions are governed by a uniform set of policies and procedures covering areas such as authorization, counterparty exposure and hedging practices. Positions are monitored using techniques such as market value and sensitivity analyses. In addition to creating market risks that offset the underlying business exposures, derivative instruments also give rise to credit risks due to possible non-performance by counterparties. The credit risk is generally limited to the fair value of those contacts that are favorable to Aon. Aon has limited its credit risk by restricting investments in derivative contracts to a diverse group of highly rated major financial institutions and by using exchange-traded instruments. Aon closely monitors the credit worthiness of, and exposure to, its counterparties and considers its credit risk to be minimal. At December 31, 1995 and 1994, Aon placed securities in escrow amounting to $1 million and $21 million, respectively, relating to these derivative contracts. 30 Aon Corporation Annual Report 1995 Notes to Consolidated Financial Statements Interest Rate Risk Management Aon uses interest rate derivative contracts to manage the interest rate risk associated with assets and liabilities underlying its underwriting businesses. Interest rate derivatives are also utilized to manage the company's funding and other corporate risks. Interest rate swap agreements have been used primarily to manage asset and liability durations relating to the discontinued capital accumulation annuity business. Exchange-traded Eurodollar futures, used in conjunction with basis rate swaps, are used to manage asset liability durations related to various other crediting arrangements emanating from other insurance businesses. As of December 31, 1995 and 1994, these swap agreements had the net effect of lengthening liability durations. Variable rates received on interest rate and basis rate swap agreements correlate with crediting rates paid on outstanding liabilities. The net effect of swap payments is settled periodically and reported in income. There is no settlement of underlying notional amounts. Exchange-traded treasury futures and options are used primarily as a hedge against the value of Aon's available for sale fixed maturity investments. Aon sells futures as well as writes call options and limits its risk on these written options to a spread by purchasing call options. Exchange-traded futures and options are valued and settled daily. The premium that Aon pays for purchased options and receives for written options represents the cost basis of the option until it expires or is closed. Aon also enters into interest rate swap agreements, sells exchange-traded interest rate futures and purchases interest rate caps to limit its interest expense on short-term borrowings. The premium that Aon pays for interest rate caps represents the cost basis of the position until it expires or is closed. Aon performs frequent analyses to measure the degree of correlation associated with its derivative programs. Aon assesses the adequacy of the correlation analyses results in determining whether the derivatives qualify for hedge accounting. Realized gains and losses on derivatives that qualify as hedges are deferred and reported as an adjustment of the cost basis of the hedged item. Deferred gains and losses are amortized into income over the life of the hedged item. Outstanding derivatives that are hedges of items carried at fair value are reflected in the financial statements with the derivative fair value reported as unrealized gains and losses directly in stockholders' equity. Foreign Exchange Risk Management Aon uses foreign currency futures, options, and forward contracts to hedge against the effects of foreign currency fluctuations on the translation of the financial statements of Aon's foreign operations. Generally, realized and unrealized gains and losses on those derivatives are recorded directly to stockholders' equity, as a component of net unrealized foreign exchange gains and losses. Certain of Aon's foreign brokerage subsidiaries receive revenues in currencies that differ from the currency in which their operating costs are denominated. To reduce the variability of cash flows from these operations, foreign forward exchange contracts having settlement dates that are primarily less than one year are used. Related gains or losses on these contracts are reflected as an adjustment to the expense component on the statement of income when the currencies are exchanged to settle expense commitments. Contracts entered into require no up-front premium and settle at the expiration of the related contract. Notional and Other Data The following are the notional amounts of Aon's outstanding derivatives grouped by the types of risks being managed:
(millions) As of December 31 1995 1994 - -------------------------------------------------------------------------------- Interest rate and asset/liability duration management Eurodollar futures sold $820 $ 50 Treasury futures sold - 866 Call options - 1,089 Interest rate swaps-pay fixed 260 750 Interest rate swaps-receive fixed 10 10 Basis rate swaps-pay and receive variable 70 - Interest rate management for anticipated transactions Interest rate caps 72 58 Interest rate swaps-pay fixed - 41 Foreign currency management-forwards 62 37 ================================================================================
During 1995 and 1994, Aon amortized $3 million of net deferred gains relating to derivatives into income. Deferred losses related to anticipated transactions were immaterial at December 31, 1995 and 1994. The interest rates on Aon's principal outstanding swaps at December 31 are presented below:
Pay Receive Fixed Variable - -------------------------------------------------------------------------------- 1995 7.9-8.3% 5.4% 1994 7.7-8.3% 7.8% ================================================================================
As of December 31, 1995, the principal swaps have maturities ranging from September 1999 to October 2000 and variable rates based on five-year treasury rates. Basis rate swaps mature in December 2000 and require payments based on the three month LIBOR index and provide for receipts based on the two-year treasury rate. Eurodollar futures, with maturities ranging from March 1996 to September 2000, effectively convert the variable rate basis swap payments to fixed payments. Other Financial Instruments Aon has certain investment commitments to provide capital and fixed-rate loans as well as certain forward contract purchase commitments. The investment commitments, which would be collateralized by related properties of the underlying investments, involve varying elements of credit and market risk. Investment commitments outstanding at December 31, 1995 and 1994 totaled $196 million and $134 million, respectively. 31 Aon Corporation Annual Report 1995 Notes to Consolidated Financial Statements Subsidiaries of Aon have entered into agreements with financial institutions, whereby the subsidiaries sold certain receivables, with limited recourse. Agreements provide for sales of receivables on a continuing basis through November 1996. As of December 31, 1995 and 1994, the maximum commitment contained in these agreements was $752 million and $525 million, respectively. Accounts receivable sold in 1995, 1994 and 1993 amounted to $1,253 million, $1,095 million and $879 million, respectively. Outstanding receivables of $687 million and $512 million, remained to be collected at December 31, 1995 and 1994, respectively. Aon's credit risk relates to amounts that may be due under recourse provisions that could exceed recorded estimates. At December 31, 1995 and 1994, this exposure was approximately $42 million and $34 million, respectively. Fair Value of Financial Instruments Accounting standards require the disclosure of fair values for certain financial instruments. The fair value disclosures are not intended to encompass the majority of policy liabilities, various other non-financial instruments, or other intangible items related to Aon's business. Accordingly, care should be exercised in deriving conclusions about Aon's business or financial condition based on the fair value disclosures. The carrying value and fair value of certain of Aon's financial instruments are as follows:
As of December 31 1995 1994 - ---------------------------------------------------------------- Carrying Fair Carrying Fair (millions) Value Value Value Value - ---------------------------------------------------------------- Assets: Fixed maturities and equity securities (note 4) $8,693 $8,693 $8,083 $7,849 Mortgage loans on real estate 632 684 568 557 Policy loans 226 223 215 212 Cash, short-term and other long-term investments and receivables 4,163 4,163 4,043 4,043 Derivatives 1 1 -- -- Liabilities: Investment type insurance contracts $3,666 $3,711 $3,830 $3,745 Short-term borrowings, premium payables and commissions and general expenses 3,638 3,638 3,179 3,179 Notes payable 498 513 496 453 Derivatives -- 24 8 12 ================================================================
As of December 31, 1995, the principal differences between carrying value and fair value in the forgoing table, related to mortgage loans on real estate, policy loans and investment type insurance contracts, primarily represent discontinued operations. 12. LITIGATION Aon and its subsidiaries are subject to numerous claims and lawsuits that arise in the ordinary course of business. Some of these cases are being litigated in jurisdictions which have judicial precedents and evidentiary rules which are generally believed to favor individual plaintiffs against corporate defendants. The damages that may be claimed in these and other jurisdictions are substantial, including in many instances claims for punitive or extraordinary damages. Accruals for these lawsuits have been provided to the extent that losses are deemed probable and are estimable. Although the ultimate outcome of these suits cannot be ascertained and liabilities in indeterminate amounts may be imposed on Aon or its subsidiaries, on the basis of present information, availability of insurance coverages, and advice received from counsel, it is the opinion of management that the disposition or ultimate determination of such claims and lawsuits will not have a material adverse effect on the consolidated financial position of Aon. 13. SEGMENT INFORMATION Aon Corporation is a multinational holding company. Its businesses serve consumers and commercial operations in North America, Latin and South America, Europe, Asia and the Pacific markets. With the planned 1996 sale of UFLIC and LOV (see note 3), Aon reclassified its operating segments to reflect the focus of the company's continuing operations. Aon's continuing operations are concentrated into two core businesses. Insurance brokerage and consulting services provide services for commercial, industrial and insurance company clients. Insurance underwriting provides life, accident and health insurance and extended warranty products for individual consumers, delivered through controlled distribution channels. Beginning in fourth quarter 1995, insurance underwriting operations are presented as one segment based on the related nature, distribution channels and markets of the continuing products. Prior period segments have been reclassified to conform to the 1995 presentation. The segment information located on pages 11 and 12 is incorporated herein by reference. 32 Aon Corporation Annual Report 1995 Reports by Independent Auditors and Management REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS BOARD OF DIRECTORS AND STOCKHOLDERS Aon CORPORATION We have audited the accompanying consolidated statements of financial position of Aon Corporation as of December 31, 1995 and 1994, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Aon Corporation at December 31, 1995 and 1994, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. As discussed in note 4, the Company changed its method of accounting for certain investments in 1994. /S/ Ernst & Young LLP Chicago, Illinois February 8, 1996 REPORT BY MANAGEMENT The management of Aon Corporation is responsible for the integrity and objectivity of the financial statements and other financial information in the annual report. The statements have been prepared in conformity with generally accepted accounting principles. These statements include informed estimates and judgments for those transactions not yet complete or for which the ultimate effects cannot be measured precisely. Financial information elsewhere in this report is consistent with that in the financial statements. The consolidated financial statements have been audited by our independent auditors. Their role is to render an independent professional opinion on Aon's financial statements. Management maintains a system of internal control designed to meet its responsibilities for reliable financial statements. The system is designed to provide reasonable assurance, at appropriate costs, that assets are safeguarded and that transactions are properly recorded and executed in accordance with management's authorization. Judgments are required to assess and balance the relative costs and expected benefits of those controls. It is management's opinion that its system of internal control, as of December 31, 1995, was effective in providing reasonable assurance that its financial statements were free of material misstatement. In addition, management supports and maintains a professional staff of internal auditors who coordinate audit coverage with the independent auditors and conduct an extensive program of financial and operational audits. The Board of Directors selects an Audit Committee from among its members. No member of the Audit Committee is an employee of Aon. The Audit Committee is responsible to the Board for reviewing the accounting and auditing procedures and financial practices of Aon and for recommending appointment of the independent auditors. The Audit Committee meets periodically with management, internal auditors and independent auditors to review the work of each and satisfy itself that those parties are properly discharging their responsibilities. Both the independent auditors and the internal auditors have free access to the Committee, without the presence of management, to discuss the adequacy of internal control and to review the quality of financial reporting. 33 Aon Corporation Annual Report 1995 Selected Financial Data
(millions except common stock and per share data) 1995 1994 1993 1992 1991 - ------------------------------------------------------------------------------------------------------------------------------ INCOME STATEMENT DATA* Brokerage commissions and fees $ 1,628 $ 1,370 $ 1,173 $ 697 $ 375 Premiums earned 1,427 1,322 1,278 1,275 1,214 Net investment income 329 257 227 223 215 Realized investment gains 13 19 30 24 27 Other income 69 73 63 59 94 ------------------------------------------------------------------------- Total revenue 3,466 3,041 2,771 2,278 1,925 - ------------------------------------------------------------------------------------------------------------------------------ Income from continuing operations $ 304 $ 269 $ 228 $ 134 $ 185 Income from discontinued operations 99 91 96 72 57 Net income 403 360 324 127 242 Operating income from continuing operations** 295 256 214 171 165 Operating income*** 400 356 312 265 239 ============================================================================================================================== PER SHARE DATA Income from continuing operations $ 2.57 $ 2.28 $ 1.91 $ 1.24 $ 1.89 Income from discontinued operations 0.91 0.86 0.90 0.69 0.58 Net income 3.48 3.14 2.81 1.17 2.47 Operating income from continuing operations** 2.49 2.16 1.79 1.60 1.68 Operating income*** 3.45 3.10 2.70 2.49 2.44 ============================================================================================================================== BALANCE SHEET DATA ASSETS Investments $ 10,639 $ 9,783 $ 9,652 $ 9,088 $ 8,360 Other 9,097 8,139 6,627 5,202 3,273 ------------------------------------------------------------------------- Total assets $ 19,736 $ 17,922 $ 16,279 $ 14,290 $ 11,633 ============================================================================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY Policy liabilities $ 9,556 $ 9,310 $ 8,776 $ 7,759 $ 7,342 Notes payable 554 561 594 556 501 General liabilities 6,902 5,744 4,621 3,871 2,015 ------------------------------------------------------------------------- Total liabilities 17,012 15,615 13,991 12,186 9,858 Redeemable preferred stock 50 50 -- -- -- Stockholders' equity 2,674 2,257 2,288 2,104 1,775 ------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 19,736 $ 17,922 $ 16,279 $ 14,290 $ 11,633 ============================================================================================================================== COMMON STOCK DATA Dividends paid per share $ 1.34 $ 1.26 $ 1.18 $ 1.11 $ 1.05 Stockholders' equity per share 22.77 18.30 18.95 17.48 17.39 Price range 50 7/8-31 3/8 35 3/4-29 1/4 39-30 7/8 36-26 1/8 27 7/8-19 7/8 Market price at year-end 49.875 32.000 32.250 36.000 26.375 Common stockholders 13,520 14,163 14,615 14,746 15,168 Shares outstanding (in millions) 108.3 107.7 101.6 100.0 97.9 ============================================================================================================================== *Income statement data has been reclassified to reflect continuing operations. **Operating income from continuing operations excludes after-tax realized investment gains, a retroactive tax charge in 1993 of $5.4 million, the 1992 cumulative effect of changes in accounting principles of $79.6 million, and 1992 special charges of $54.3 million. ***Operating income excludes after-tax realized investment gains, a retroactive tax charge in 1993 of $5.4 million, the 1992 cumulative effect of changes in accounting principles of $79.6 million, and 1992 special charges of $61.4 million.
34 Aon Corporation Annual Report 1995 Quarterly Financial Data
(millions except common stock and per share data) 1Q 2Q 3Q 4Q 1995 - ----------------------------------------------------------------------------------------------------------------------- INCOME STATEMENT DATA* Brokerage commissions and fees $ 419.7 $ 394.7 $ 394.5 $ 419.3 $ 1,628.2 Premiums earned 335.7 364.7 358.1 368.0 1,426.5 Net investment income 80.9 77.5 86.6 84.4 329.4 Realized investment gains 1.1 (0.6) 8.8 3.8 13.1 Other income 15.8 15.6 17.7 19.4 68.5 --------------------------------------------------------------------- Total revenue 853.2 851.9 865.7 894.9 3,465.7 --------------------------------------------------------------------- Income from continuing operations 90.5 71.7 77.0 64.5 303.7 Income from discontinued operations 20.7 27.0 23.0 28.4 99.1 Net income 111.2 98.7 100.0 92.9 402.8 Operating income from continuing operations** 89.8 72.0 71.4 62.0 295.2 Operating income*** 110.8 97.8 99.1 92.3 400.0 ======================================================================================================================== PER SHARE DATA Income from continuing operations $ 0.77 $ 0.60 $ 0.66 $ 0.54 $ 2.57 Income from discontinued operations 0.19 0.25 0.21 0.26 0.91 Net income 0.96 0.85 0.87 0.80 3.48 Operating income from continuing operations** 0.76 0.60 0.61 0.52 2.49 Operating income*** 0.96 0.84 0.86 0.80 3.45 ======================================================================================================================== COMMON STOCK DATA Dividends paid per share $ 0.32 $ 0.34 $ 0.34 $ 0.34 $ 1.34 Stockholders' equity per share 19.79 21.63 21.89 22.77 22.77 Price range 37 1/2-31 3/8 38-35 5/8 41 3/4-36 1/4 50 7/8-40 1/2 50 7/8-31 3/8 Average dividend yield 3.7% 3.7% 3.4% 3.0% 3.3% Shares outstanding (in millions) 108.0 107.1 108.0 108.3 108.3 Average monthly trading volume (in millions) 1.4 1.8 2.1 3.1 2.1 ======================================================================================================================== (millions except common stock and per share data) 1Q 2Q 3Q 4Q 1994 - ------------------------------------------------------------------------------------------------------------------------ INCOME STATEMENT DATA* Brokerage commissions and fees $ 342.2 $ 336.1 $ 336.7 $ 354.6 $ 1,369.6 Premiums earned 315.2 331.2 327.2 348.7 1,322.3 Net investment income 61.2 60.1 63.5 72.3 257.1 Realized investment gains (2.6) 1.9 3.8 16.0 19.1 Other income 19.6 17.3 16.7 19.5 73.1 --------------------------------------------------------------------- Total revenue 735.6 746.6 747.9 811.1 3,041.2 --------------------------------------------------------------------- Income from continuing operations 74.1 63.0 61.8 69.6 268.5 Income from discontinued operations 25.0 25.2 24.9 16.4 91.5 Net income 99.1 88.2 86.7 86.0 360.0 Operating income from continuing operations** 75.8 61.7 59.4 59.3 256.2 Operating income*** 98.0 87.1 85.6 85.6 356.3 ======================================================================================================================== PER SHARE DATA Income from continuing operations $ 0.64 $ 0.53 $ 0.52 $ 0.58 $ 2.28 Income from discontinued operations 0.24 0.24 0.24 0.16 0.86 Net income 0.88 0.77 0.76 0.74 3.14 Operating income from continuing operations** 0.66 0.52 0.50 0.48 2.16 Operating income*** 0.87 0.76 0.75 0.73 3.10 ======================================================================================================================== COMMON STOCK DATA Dividends paid per share $ 0.30 $ 0.32 $ 0.32 $ 0.32 $ 1.26 Stockholders' equity per share 18.88 18.73 18.75 18.30 18.30 Price range 35-30 32 3/8-32 35 3/4-32 3/8 34-29 1/4 35 3/4-29 1/4 Average dividend yield 3.7% 4.0% 3.8% 4.0% 3.9% Shares outstanding (in millions) 101.1 101.8 102.1 107.7 107.7 Average monthly trading volume (in millions) 1.6 1.1 1.5 1.9 1.5 ========================================================================================================================
*Income statement data has been reclassified to reflect continuing operations. **Operating income from continuing operations excludes after-tax realized investment gains of $8.5 million and $12.3 million in 1995 and 1994, respectively. ***Operating income excludes after-tax realized investment gains of $2.8 million and $3.7 million in 1995 and 1994, respectively. 35 Aon Corporation Annual Report 1995 EX-21 10 SUBSIDIARIES OF THE REGISTRANT
AON CORPORATION SUBSIDIARIES ========================================================================================== CORPORATION JURISDICTION - ------------------------------------------------------------------------------------------ A. J. Norcott & Company (Holdings) Limited United Kingdom - ------------------------------------------------------------------------------------------ A. J. Norcott & Partners (Northern) Limited United Kingdom - ------------------------------------------------------------------------------------------ A. J. Norcott & Partners (Scotland) Limited United Kingdom - ------------------------------------------------------------------------------------------ A. J. Norcott & Partners Limited United Kingdom - ------------------------------------------------------------------------------------------ A. J. Norcott Benefit Consultants Limited United Kingdom - ------------------------------------------------------------------------------------------ A.H. Laseur B.V. Netherlands - ------------------------------------------------------------------------------------------ AMLT, Inc. Alabama - ------------------------------------------------------------------------------------------ AOPA Insurance Agency, Inc. Maryland - ------------------------------------------------------------------------------------------ AOPA Insurance Agency, Inc. Texas - ------------------------------------------------------------------------------------------ APS International Limited United Kingdom - ------------------------------------------------------------------------------------------ APS Life & Pensions Limited United Kingdom - ------------------------------------------------------------------------------------------ APS Overseas Investments Limited United Kingdom - ------------------------------------------------------------------------------------------ ARM COVERAGE INC. New York - ------------------------------------------------------------------------------------------ ARS Holdings, Inc. Illinois - ------------------------------------------------------------------------------------------ ARS Holdings, Inc. Louisiana - ------------------------------------------------------------------------------------------ Acedale Co. Ltd. Hong Kong - ------------------------------------------------------------------------------------------ Adams & Porter Financial Services, Inc. Texas - ------------------------------------------------------------------------------------------ Adams & Porter Services, Inc. Texas - ------------------------------------------------------------------------------------------ Advantage Plus Insurance Services, Inc. Illinois - ------------------------------------------------------------------------------------------ Adviser 151 Limited United Kingdom - ------------------------------------------------------------------------------------------ Agricola Training Limited United Kingdom - ------------------------------------------------------------------------------------------ Agricola Underwriting Limited United Kingdom - ------------------------------------------------------------------------------------------ Agricultural Risk Management North America, Inc. Kansas - ------------------------------------------------------------------------------------------ Agricultural Risk Management, Limited United Kingdom - ------------------------------------------------------------------------------------------ Airscope Insurance Services Limited United Kingdom - ------------------------------------------------------------------------------------------ Alpenbeck Limited United Kingdom - ------------------------------------------------------------------------------------------ American Associates, Inc. Texas - ------------------------------------------------------------------------------------------ American Attorneys' Protection Plan Co. Illinois - ------------------------------------------------------------------------------------------ American Combined Life Insurance Company Illinois - ------------------------------------------------------------------------------------------ American Combined Life Insurance Company Nebraska - ------------------------------------------------------------------------------------------ American Insurance Brokers, Ltd. Indiana - ------------------------------------------------------------------------------------------ American National General Agencies, Inc. Colorado - ------------------------------------------------------------------------------------------ Anchor Reinsurance Company, Ltd. Bermuda - ------------------------------------------------------------------------------------------ Anchor Underwriting Managers, Ltd. Bermuda - ------------------------------------------------------------------------------------------ Anscor Insurance Brokers Inc. Philippines - ------------------------------------------------------------------------------------------ Aon Advisors (U.K.) Limited United Kingdom - ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------ Aon Advisors, Inc. Virginia - ------------------------------------------------------------------------------------------ Aon Asset Management Fund, Inc. Virginia - ------------------------------------------------------------------------------------------ Aon Aviation, Inc. Illinois - ------------------------------------------------------------------------------------------ Aon Broker Services, Inc. Illinois - ------------------------------------------------------------------------------------------ Aon Capital Corporation Delaware - ------------------------------------------------------------------------------------------ Aon Capital Management, Inc. Delaware - ------------------------------------------------------------------------------------------ Aon Captive Management, Ltd. U.S. Virgin Islands - ------------------------------------------------------------------------------------------ Aon Consultants Limited United Kingdom - ------------------------------------------------------------------------------------------ Aon Consulting Limited United Kingdom - ------------------------------------------------------------------------------------------ Aon Direct Group, Inc. California - ------------------------------------------------------------------------------------------ Aon Direct Group, Inc. Pennsylvania - ------------------------------------------------------------------------------------------ Aon Entertainment, Ltd. California - ------------------------------------------------------------------------------------------ Aon Entertainment, Ltd. New York - ------------------------------------------------------------------------------------------ Aon Entertainment, Ltd. (Divertissement Aon, Ltee.) Canada - ------------------------------------------------------------------------------------------ Aon Financial Institutions Services, Inc. Illinois - ------------------------------------------------------------------------------------------ Aon H&R, Inc. New York - ------------------------------------------------------------------------------------------ Aon Holdings Limited United Kingdom - ------------------------------------------------------------------------------------------ Aon Insurance Management Services - Virgin Islands, Inc. U.S. Virgin Islands - ------------------------------------------------------------------------------------------ Aon Insurance Management Services, Inc. Delaware - ------------------------------------------------------------------------------------------ Aon Insurance Management of Texas, Inc. Texas - ------------------------------------------------------------------------------------------ Aon Insurance Services California - ------------------------------------------------------------------------------------------ Aon Insurance Services, Inc. Pennsylvania - ------------------------------------------------------------------------------------------ Aon Intermediaries (Bermuda) Ltd. Bermuda - ------------------------------------------------------------------------------------------ Aon Managed Care, Inc. California - ------------------------------------------------------------------------------------------ Aon Nominees Limited United Kingdom - ------------------------------------------------------------------------------------------ Aon Overseas Holdings Limited United Kingdom - ------------------------------------------------------------------------------------------ Aon Partnership Limited United Kingdom - ------------------------------------------------------------------------------------------ Aon Re (Bermuda) Ltd. Bermuda - ------------------------------------------------------------------------------------------ Aon Re Accident & Health Limited United Kingdom - ------------------------------------------------------------------------------------------ Aon Re Aviation Limited United Kingdom - ------------------------------------------------------------------------------------------ Aon Re Inc. Illinois - ------------------------------------------------------------------------------------------ Aon Re International Limited United Kingdom - ------------------------------------------------------------------------------------------ Aon Re Latinoamericana, S.A. Mexico - ------------------------------------------------------------------------------------------ Aon Re Non-Marine Limited United Kingdom - ------------------------------------------------------------------------------------------ Aon Re North American Limited United Kingdom - ------------------------------------------------------------------------------------------ Aon Re Panama, S.A. Panama - ------------------------------------------------------------------------------------------ Aon Re Seascope Limited United Kingdom - ------------------------------------------------------------------------------------------ Aon Re Services, Inc. Delaware - ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------ Aon Re Worldwide Limited United Kingdom - ------------------------------------------------------------------------------------------ Aon Re Worldwide, Inc. Delaware - ------------------------------------------------------------------------------------------ Aon Reengineering & Consulting Services, Inc. Delaware - ------------------------------------------------------------------------------------------ Aon Risk Consultants (Bermuda ) Ltd. Bermuda - ------------------------------------------------------------------------------------------ Aon Risk Consultants (Europe) Limited United Kingdom - ------------------------------------------------------------------------------------------ Aon Risk Consultants, Inc. Illinois - ------------------------------------------------------------------------------------------ Aon Risk Resources Limited United Kingdom - ------------------------------------------------------------------------------------------ Aon Risk Resources, Inc. Delaware - ------------------------------------------------------------------------------------------ Aon Risk Services (Bermuda) Ltd. Bermuda - ------------------------------------------------------------------------------------------ Aon Risk Services (Europe) S.A. Luxembourg - ------------------------------------------------------------------------------------------ Aon Risk Services (Vermont) Inc. Vermont - ------------------------------------------------------------------------------------------ Aon Risk Services Limited United Kingdom - ------------------------------------------------------------------------------------------ Aon Risk Services, Inc. Delaware - ------------------------------------------------------------------------------------------ Aon Risk Services, Inc. U.S.A. New York - ------------------------------------------------------------------------------------------ Aon Risk Technologies, Inc. Delaware - ------------------------------------------------------------------------------------------ Aon Service Corporation Illinois - ------------------------------------------------------------------------------------------ Aon Specialty Group of Tennessee, Inc. Tennessee - ------------------------------------------------------------------------------------------ Aon Specialty Group, Inc. Delaware - ------------------------------------------------------------------------------------------ Aon Specialty Limited United Kingdom - ------------------------------------------------------------------------------------------ Aon Technical Insurance Services, Inc. Illinois - ------------------------------------------------------------------------------------------ Aon UK Limited United Kingdom - ------------------------------------------------------------------------------------------ Aon Warranty Group, Inc. Illinois - ------------------------------------------------------------------------------------------ Artscope Insurance Services Limited United Kingdom - ------------------------------------------------------------------------------------------ Artscope International Insurance Services Agency GmbH Germany - ------------------------------------------------------------------------------------------ Artscope International Insurance Services Limited United Kingdom - ------------------------------------------------------------------------------------------ Ascom B.V. Netherlands - ------------------------------------------------------------------------------------------ Asia Area Underwriters Ltd. Hong Kong - ------------------------------------------------------------------------------------------ Assigned Settlement, Inc. Virginia - ------------------------------------------------------------------------------------------ Assurantie Groep Langeveldt c.v. Netherlands - ------------------------------------------------------------------------------------------ Atlantic Underwriters Agency, Incorporated Kentucky - ------------------------------------------------------------------------------------------ Attorneys' Advantage Insurance Agency, Inc. Illinois - ------------------------------------------------------------------------------------------ Auto Conduit Corporation, The Delaware - ------------------------------------------------------------------------------------------ Automotive Development Centers, Inc. Illinois - ------------------------------------------------------------------------------------------ B.V. Assurantiekantoor Langeveldt-Schroder Netherlands - ------------------------------------------------------------------------------------------ BRIC, Inc. North Carolina - ------------------------------------------------------------------------------------------ Banker's Acceptance, L.P. Illinois - ------------------------------------------------------------------------------------------ Bankers Insurance Service Corp. Illinois - ------------------------------------------------------------------------------------------ Bauer & Associates, Inc. Michigan - ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------ BenefitsMedia, Inc. Tennessee - ------------------------------------------------------------------------------------------ Berkely Agency Ltd. New York - ------------------------------------------------------------------------------------------ Berkely Coverage Corporation New York - ------------------------------------------------------------------------------------------ Berkely-ARM, Inc. New York - ------------------------------------------------------------------------------------------ BerkelyCare, LTD. New York - ------------------------------------------------------------------------------------------ Big Sky Finance, L.P. Illinois - ------------------------------------------------------------------------------------------ Blanco Finance, L.P. Illinois - ------------------------------------------------------------------------------------------ Blom & Van der Aa BV Netherlands - ------------------------------------------------------------------------------------------ Blom & Van der Aa Holding BV Netherlands - ------------------------------------------------------------------------------------------ Brennan Group, Inc., The Delaware - ------------------------------------------------------------------------------------------ Bruno Sforni S.p.A. Italy - ------------------------------------------------------------------------------------------ Bruns Ten Brink & Co. b.v. Netherlands - ------------------------------------------------------------------------------------------ Bruns Ten Brink Groep b.v. Netherlands - ------------------------------------------------------------------------------------------ Bruns Ten Brink Herverzekeringen b.v. Netherlands - ------------------------------------------------------------------------------------------ Bryson Associates Incorporated Pennsylvania - ------------------------------------------------------------------------------------------ C.I.C. Realty, Inc. Illinois - ------------------------------------------------------------------------------------------ C.V. 'T Huys Ter Merwe Netherlands - ------------------------------------------------------------------------------------------ CCC Agency, Inc. of Illinois Illinois - ------------------------------------------------------------------------------------------ CIC - Atlanta, Inc. Illinois - ------------------------------------------------------------------------------------------ CIC - Hilldale, Inc. Illinois - ------------------------------------------------------------------------------------------ CIC - Wells, Inc. Illinois - ------------------------------------------------------------------------------------------ CIC - Westmont, Inc. Illinois - ------------------------------------------------------------------------------------------ CICA - 123, Inc. Illinois - ------------------------------------------------------------------------------------------ CICA - Court, Inc. Illinois - ------------------------------------------------------------------------------------------ CICA Realty Corporation Illinois - ------------------------------------------------------------------------------------------ CICA Seguros de Mexico SA de CV Mexico - ------------------------------------------------------------------------------------------ CICA Superannuation Nominees Pty. Ltd. Australia - ------------------------------------------------------------------------------------------ CJP, Inc. Delaware - ------------------------------------------------------------------------------------------ Cabinet Servet et Baud S.a.r.l. Annecy France - ------------------------------------------------------------------------------------------ California Auto Finance, L.P. Illinois - ------------------------------------------------------------------------------------------ California Group Services California - ------------------------------------------------------------------------------------------ Camperdown 100 Limited United Kingdom - ------------------------------------------------------------------------------------------ Camperdown 101 Limited United Kingdom - ------------------------------------------------------------------------------------------ Cananwill Corporation Delaware - ------------------------------------------------------------------------------------------ Cananwill, Inc. California - ------------------------------------------------------------------------------------------ Cananwill, Inc. Pennsylvania - ------------------------------------------------------------------------------------------ Catz & Lips B.V. Netherlands - ------------------------------------------------------------------------------------------ Central States Acceptance, L.P. Illinois - ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------ Cinema Completions International, Inc. Delaware - ------------------------------------------------------------------------------------------ Citadel Insurance Company Texas - ------------------------------------------------------------------------------------------ City and County Purchasing Group Unknown - ------------------------------------------------------------------------------------------ Cole Booth Potter of New Jersey, Inc. New Jersey - ------------------------------------------------------------------------------------------ Cole Booth Potter, Inc. Pennsylvania - ------------------------------------------------------------------------------------------ Combined Administrative Services Corp. Illinois - ------------------------------------------------------------------------------------------ Combined Insurance Company of America Illinois - ------------------------------------------------------------------------------------------ Combined Insurance Company of Ireland Limited Ireland - ------------------------------------------------------------------------------------------ Combined Insurance Company of New Zealand Limited New Zealand - ------------------------------------------------------------------------------------------ Combined Life Assurance Company Limited United Kingdom - ------------------------------------------------------------------------------------------ Combined Life Assurance Company of Europe Limited Ireland - ------------------------------------------------------------------------------------------ Combined Life Insurance Company of Australia Limited Australia - ------------------------------------------------------------------------------------------ Combined Life Insurance Company of New York New York - ------------------------------------------------------------------------------------------ CompLogic, Inc. Rhode Island - ------------------------------------------------------------------------------------------ Consumer Program Administrators, Inc. Illinois - ------------------------------------------------------------------------------------------ Cooreman & Saverys IBC & Co. nv Belgium - ------------------------------------------------------------------------------------------ Cooreman & Saverys N.V. Belgium - ------------------------------------------------------------------------------------------ Coughlan General Insurances Limited Ireland - ------------------------------------------------------------------------------------------ Courtiers D'Assurances Rollins Hudig Hall du Quebec, Inc. Canada - ------------------------------------------------------------------------------------------ Crotty MacRedmond Insurance Limited Ireland - ------------------------------------------------------------------------------------------ Cush Finance Group, L.P. Illinois - ------------------------------------------------------------------------------------------ Customer Loyalty Institute Michigan - ------------------------------------------------------------------------------------------ D. Hudig & Co. b.v. Netherlands - ------------------------------------------------------------------------------------------ D.W.F.S., L.P. Illinois - ------------------------------------------------------------------------------------------ DPR, Dansk Pensionsradgivning A/S Denmark - ------------------------------------------------------------------------------------------ Dealer Development Services, Ltd. United Kingdom - ------------------------------------------------------------------------------------------ Deanborne Limited United Kingdom - ------------------------------------------------------------------------------------------ Dearborn Insurance Company Illinois - ------------------------------------------------------------------------------------------ Direct Co., Inc. Michigan - ------------------------------------------------------------------------------------------ Dobson Park L. G. Limited Guernsey - ------------------------------------------------------------------------------------------ Dominion Mutual Insurance Brokers Ltd. Canada - ------------------------------------------------------------------------------------------ Don Flower Aviation Underwriters, Inc. Kansas - ------------------------------------------------------------------------------------------ Dreadnaught Insurance Company Limited Bermuda - ------------------------------------------------------------------------------------------ DuPage Acceptance, L.P. Illinois - ------------------------------------------------------------------------------------------ E. Lillie & Co. Limited United Kingdom - ------------------------------------------------------------------------------------------ ERCO Services, Inc. Ohio - ------------------------------------------------------------------------------------------ Elm Lane Limited United Kingdom - ------------------------------------------------------------------------------------------ Energy Insurance International, Inc. Texas - ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------ Equiscope Insurance Services Limited United Kingdom - ------------------------------------------------------------------------------------------ Excess Underwriters Agency, Inc. New York - ------------------------------------------------------------------------------------------ Expatriate Consultancy Limited, The United Kingdom - ------------------------------------------------------------------------------------------ FFRL Re Corp. Virginia - ------------------------------------------------------------------------------------------ Fabels-Versteeg b.v. Netherlands - ------------------------------------------------------------------------------------------ Far East Agency Korea - ------------------------------------------------------------------------------------------ Finance Associates, Inc. Texas - ------------------------------------------------------------------------------------------ Forth Financial Resources (Hawaii), Ltd. Hawaii - ------------------------------------------------------------------------------------------ Forth Financial Resources Insurance Agency of Massachusetts, Inc. Massachusetts - ------------------------------------------------------------------------------------------ Forth Financial Resources of Alabama, Inc. Alabama - ------------------------------------------------------------------------------------------ Forth Financial Resources of Ohio, Inc. Ohio - ------------------------------------------------------------------------------------------ Forth Financial Resources of Oklahoma Agency, Inc. Oklahoma - ------------------------------------------------------------------------------------------ Forth Financial Resources of Texas, Inc. Texas - ------------------------------------------------------------------------------------------ Forth Financial Resources, Ltd. Virginia - ------------------------------------------------------------------------------------------ Forth Financial Securities Corporation Virginia - ------------------------------------------------------------------------------------------ France Fenwick Limited United Kingdom - ------------------------------------------------------------------------------------------ Frank B. Hall & Co. Holdings (N.Z.) Limited New Zealand - ------------------------------------------------------------------------------------------ Frank B. Hall (Reinsurance) France S.A. France - ------------------------------------------------------------------------------------------ Frank B. Hall Iberica S.A. Spain - ------------------------------------------------------------------------------------------ Frank B. Hall Ireland Ltd. Ireland - ------------------------------------------------------------------------------------------ Frank B. Hall Management Services Pty. Ltd. Australia - ------------------------------------------------------------------------------------------ Frank B. Hall Re (Latin America) Inc. Panama - ------------------------------------------------------------------------------------------ Friis & Company, Inc. California - ------------------------------------------------------------------------------------------ G.E.F. Insurance Ltd. U.S. Virgin Islands - ------------------------------------------------------------------------------------------ GBV Gesellschaft Fur Betriebliche Beratung und verwaltung GmbH Germany - ------------------------------------------------------------------------------------------ Gateway Alternatives, L.L.C. Delaware - ------------------------------------------------------------------------------------------ Gateway Insurance Company, Ltd. Bermuda - ------------------------------------------------------------------------------------------ Go Pro Agency, Inc. of San Antonio Texas - ------------------------------------------------------------------------------------------ Go Pro Life Agency, Inc. of San Antonio Texas - ------------------------------------------------------------------------------------------ Go Pro Underwriting Managers of Virginia, Inc. Virginia - ------------------------------------------------------------------------------------------ Go Pro Underwriting Managers, Inc. Texas - ------------------------------------------------------------------------------------------ Godolphin Bloodstock Limited United Kingdom - ------------------------------------------------------------------------------------------ Godwins (Overseas) Limited United Kingdom - ------------------------------------------------------------------------------------------ Godwins (Trustees) Limited United Kingdom - ------------------------------------------------------------------------------------------ Godwins Acquisition Co. North Carolina - ------------------------------------------------------------------------------------------ Godwins Australia Pty. Limited Australia - ------------------------------------------------------------------------------------------ Godwins Booke & Dickenson Insurance Services California - ------------------------------------------------------------------------------------------ Godwins Booke & Dickenson Insurance Services, Inc. Massachusetts - ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------ Godwins Booke & Dickenson, Inc. Ohio - ------------------------------------------------------------------------------------------ Godwins Employee Benefits Services (Texas), Inc. Texas - ------------------------------------------------------------------------------------------ Godwins General Agency, Inc. Texas - ------------------------------------------------------------------------------------------ Godwins Group Limited United Kingdom - ------------------------------------------------------------------------------------------ Godwins International, Inc. Delaware - ------------------------------------------------------------------------------------------ Godwins Investment Advisors, Inc. Florida - ------------------------------------------------------------------------------------------ Godwins Limited United Kingdom - ------------------------------------------------------------------------------------------ Godwins Nederland pensioen- en employee benefits adviseurs en Netherlands actuarissen c.v - ------------------------------------------------------------------------------------------ Godwins Nominees Pty. Limited Australia - ------------------------------------------------------------------------------------------ Godwins Securities, Inc. Washington - ------------------------------------------------------------------------------------------ Godwins of New York, Inc. New York - ------------------------------------------------------------------------------------------ Godwins, Inc. Pennsylvania - ------------------------------------------------------------------------------------------ Gotuaco del Rosario & Associates, Inc. Philippines - ------------------------------------------------------------------------------------------ Group Organization, Inc. District of Columbia - ------------------------------------------------------------------------------------------ H.Z. Financial, Limited Partnership Illinois - ------------------------------------------------------------------------------------------ HHL (Holdings) Ltd. Hong Kong - ------------------------------------------------------------------------------------------ HHL (Taiwan) Ltd. Taiwan - ------------------------------------------------------------------------------------------ HHL (Thailand) Ltd. Thailand - ------------------------------------------------------------------------------------------ HHL Employee Benefits Ltd. Thailand - ------------------------------------------------------------------------------------------ HHL Ltd. Hong Kong - ------------------------------------------------------------------------------------------ HHL Management Ltd. Hong Kong - ------------------------------------------------------------------------------------------ HHL Pte Ltd. Singapore - ------------------------------------------------------------------------------------------ HHL Re Ltd. Thailand - ------------------------------------------------------------------------------------------ HHL Reinsurance Brokers Inc. Philippines - ------------------------------------------------------------------------------------------ HHL Reinsurance Brokers Pte. Ltd. Singapore - ------------------------------------------------------------------------------------------ HHL Reinsurance Services Ltd. Hong Kong - ------------------------------------------------------------------------------------------ HLS Hudig-Langeveldt Stanner GmbH Germany - ------------------------------------------------------------------------------------------ HR Strategies, Inc. Michigan - ------------------------------------------------------------------------------------------ Hanseatische Assekuranz Kontor GmbH Germany - ------------------------------------------------------------------------------------------ Hanseatische Assekuranz Vermittlungs AG Germany - ------------------------------------------------------------------------------------------ Havag Hudig-Langeveldt GmbH Germany - ------------------------------------------------------------------------------------------ Heinz Hahn GmbH Germany - ------------------------------------------------------------------------------------------ Heli Agency Korea - ------------------------------------------------------------------------------------------ Highplain Limited United Kingdom - ------------------------------------------------------------------------------------------ Hodgson McCreery & Company Limited United Kingdom - ------------------------------------------------------------------------------------------ Hudig-Langeveldt Berlin GmbH Germany - ------------------------------------------------------------------------------------------ Hudig-Langeveldt Borghuis B.V. Netherlands - ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------ Hudig-Langeveldt Coens N.V. Belgium - ------------------------------------------------------------------------------------------ Hudig-Langeveldt Janson Elffers B.V. Netherlands - ------------------------------------------------------------------------------------------ Hudig-Langeveldt Kyoritsu Ltd. Japan - ------------------------------------------------------------------------------------------ Hudig-Langeveldt Makelaardij in Assurantien bv Netherlands - ------------------------------------------------------------------------------------------ Hudig-Langeveldt Merwestad bv Netherlands - ------------------------------------------------------------------------------------------ Hudig-Langeveldt Nijmegen B.V. Netherlands - ------------------------------------------------------------------------------------------ Hudig-Langeveldt Pensioenbureau B.V. Netherlands - ------------------------------------------------------------------------------------------ Hudig-Langeveldt Reinsurance B.V. Netherlands - ------------------------------------------------------------------------------------------ Hudig-Langeveldt Reinsurance Brokers C.V. Netherlands - ------------------------------------------------------------------------------------------ Hudig-Langeveldt S.A. France - ------------------------------------------------------------------------------------------ Hudig-Langeveldt SECA S.A. France - ------------------------------------------------------------------------------------------ Hudig-Langeveldt Tilburg B.V. Netherlands - ------------------------------------------------------------------------------------------ Hudig-Langeveldt Van Bruggen & De Laat B.V. Netherlands - ------------------------------------------------------------------------------------------ Huntington T. Block Insurance Agency, Inc. District of Columbia - ------------------------------------------------------------------------------------------ Huntington T. Block Insurance Agency, Inc. Ohio - ------------------------------------------------------------------------------------------ IRISC L.L.C. Delaware - ------------------------------------------------------------------------------------------ IRISC Limited United Kingdom - ------------------------------------------------------------------------------------------ IRISC Specialty, Inc. Delaware - ------------------------------------------------------------------------------------------ IRISC, Inc. New Jersey - ------------------------------------------------------------------------------------------ ISPP Purchasing Group Missouri - ------------------------------------------------------------------------------------------ Impact Forecasting, L.L.C. Illinois - ------------------------------------------------------------------------------------------ Independent Dealer Services, Inc. Missouri - ------------------------------------------------------------------------------------------ Independent Homeowner Services, Inc. Missouri - ------------------------------------------------------------------------------------------ Independent Inspections, Inc. Illinois - ------------------------------------------------------------------------------------------ Inmobiliaria Ramos Rosada, S.A. de C.V. Mexico - ------------------------------------------------------------------------------------------ Insurance Brokers Service, Inc. Illinois - ------------------------------------------------------------------------------------------ Insurance Underwriters Agency, Inc. Arizona - ------------------------------------------------------------------------------------------ Insurmark Agency Corp. Ohio - ------------------------------------------------------------------------------------------ Intassco Versicherungsmakler GmbH Austria - ------------------------------------------------------------------------------------------ Integrated Insurance Industries, Inc. Delaware - ------------------------------------------------------------------------------------------ Integrated Insurance Industries, Inc. Missouri - ------------------------------------------------------------------------------------------ Intercept Corporation Illinois - ------------------------------------------------------------------------------------------ Interims Limited United Kingdom - ------------------------------------------------------------------------------------------ International Industrial Insurances Limited Ireland - ------------------------------------------------------------------------------------------ International Shipowners Mutual Insurance Association Limited Bermuda - ------------------------------------------------------------------------------------------ Interocean (Italia) S.p.A. Italy - ------------------------------------------------------------------------------------------ Interocean Reinsurance Company, S.A. Panama - ------------------------------------------------------------------------------------------ J.C.J. Van Dalen Beheer B.V. Netherlands - ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------ J.H. Blades & Co. (Agency), Inc. Texas - ------------------------------------------------------------------------------------------ J.H. Blades & Co., Inc. Texas - ------------------------------------------------------------------------------------------ J.H. Blades Insurance Services California - ------------------------------------------------------------------------------------------ J.H. Blades, Inc. Oklahoma - ------------------------------------------------------------------------------------------ J.H. Lea & Company, Inc. Illinois - ------------------------------------------------------------------------------------------ JFS Fenchurch Limited United Kingdom - ------------------------------------------------------------------------------------------ JFS Greig Fester Limited United Kingdom - ------------------------------------------------------------------------------------------ James S. Kemper & Co. International, Limited Bermuda - ------------------------------------------------------------------------------------------ James S. Kemper Insurance Services, Inc. Texas - ------------------------------------------------------------------------------------------ Jenner Fenton Slade (Special Risks) Limited United Kingdom - ------------------------------------------------------------------------------------------ Jenner Fenton Slade Group Limited United Kingdom - ------------------------------------------------------------------------------------------ Jenner Fenton Slade Limited United Kingdom - ------------------------------------------------------------------------------------------ Jenner Fenton Slade Political Risks Limited United Kingdom - ------------------------------------------------------------------------------------------ Jenner Fenton Slade Reinsurance Brokers Limited United Kingdom - ------------------------------------------------------------------------------------------ Jenner Fenton Slade Surety and Specie Limited United Kingdom - ------------------------------------------------------------------------------------------ John Scott Insurance Brokers Limited United Kingdom - ------------------------------------------------------------------------------------------ K & K Insurance Group, Inc. Indiana - ------------------------------------------------------------------------------------------ K & K Insurance Specialties, Inc. Indiana - ------------------------------------------------------------------------------------------ K & K Specialties, Inc. Indiana - ------------------------------------------------------------------------------------------ Karl Alt & Co. GmbH Germany - ------------------------------------------------------------------------------------------ Keeling & Company California - ------------------------------------------------------------------------------------------ Key-Royal Automotive Company, Inc. Alabama - ------------------------------------------------------------------------------------------ Keystone Insurance Management, Inc. Unknown - ------------------------------------------------------------------------------------------ Kininmonth Limited Ireland - ------------------------------------------------------------------------------------------ L & G LMX Limited United Kingdom - ------------------------------------------------------------------------------------------ L & G Seascope Insurance Holdings Limited United Kingdom - ------------------------------------------------------------------------------------------ Langeveldt Groep B.V. Netherlands - ------------------------------------------------------------------------------------------ Langeveldt de Vos b.v. Netherlands - ------------------------------------------------------------------------------------------ Laverack & Haines, Inc. New York - ------------------------------------------------------------------------------------------ Lescorp Limited United Kingdom - ------------------------------------------------------------------------------------------ Leslie & Godwin (C.I.) Limited Guernsey - ------------------------------------------------------------------------------------------ Leslie & Godwin (Reinsurance) Copenhagen A/S Denmark - ------------------------------------------------------------------------------------------ Leslie & Godwin (Scotland) Limited Scotland - ------------------------------------------------------------------------------------------ Leslie & Godwin (U.K.) Limited United Kingdom - ------------------------------------------------------------------------------------------ Leslie & Godwin (WFG) Limited United Kingdom - ------------------------------------------------------------------------------------------ Leslie & Godwin AXL Limited United Kingdom - ------------------------------------------------------------------------------------------ Leslie & Godwin Aviation Holdings Limited United Kingdom - ------------------------------------------------------------------------------------------ Leslie & Godwin Aviation Limited United Kingdom - ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------ Leslie & Godwin Aviation Reinsurance Services Limited United Kingdom - ------------------------------------------------------------------------------------------ Leslie & Godwin Financial Risks Limited United Kingdom - ------------------------------------------------------------------------------------------ Leslie & Godwin GmbH Germany - ------------------------------------------------------------------------------------------ Leslie & Godwin Group Limited United Kingdom - ------------------------------------------------------------------------------------------ Leslie & Godwin Insurance Brokers Ltd. Ontario - ------------------------------------------------------------------------------------------ Leslie & Godwin Insurance Brokers, Inc. New York - ------------------------------------------------------------------------------------------ Leslie & Godwin International Limited United Kingdom - ------------------------------------------------------------------------------------------ Leslie & Godwin Investments Limited United Kingdom - ------------------------------------------------------------------------------------------ Leslie & Godwin Limited United Kingdom - ------------------------------------------------------------------------------------------ Leslie & Godwin Marine Holdings Limited United Kingdom - ------------------------------------------------------------------------------------------ Leslie & Godwin Non-Marine Limited United Kingdom - ------------------------------------------------------------------------------------------ Leslie & Godwin Overseas Reinsurance Holdings Limited United Kingdom - ------------------------------------------------------------------------------------------ Leslie & Godwin Reinsurance Holdings Limited United Kingdom - ------------------------------------------------------------------------------------------ Leslie & Godwin Risk Management Limited United Kingdom - ------------------------------------------------------------------------------------------ Leslie & Godwin Technical Services Limited United Kingdom - ------------------------------------------------------------------------------------------ Life Insurance Company of Virginia, The Virginia - ------------------------------------------------------------------------------------------ Life of Virginia Series Fund, Inc. Virginia - ------------------------------------------------------------------------------------------ Lloyd Paulista Corretores de Seguros e Reaseguros S.A. Brazil - ------------------------------------------------------------------------------------------ London General Holdings Limited United Kingdom - ------------------------------------------------------------------------------------------ London General Insurance Company Limited United Kingdom - ------------------------------------------------------------------------------------------ Lowndes Lambert Insurance Limited Ireland - ------------------------------------------------------------------------------------------ Lumley JFS Limited United Kingdom - ------------------------------------------------------------------------------------------ Lynn & Schaller Insurance Brokers, Inc. California - ------------------------------------------------------------------------------------------ MTSA S.a.r.l., Annecy France - ------------------------------------------------------------------------------------------ MacDonagh & Boland (International) Limited Ireland - ------------------------------------------------------------------------------------------ MacDonagh & Boland Group Limited Ireland - ------------------------------------------------------------------------------------------ MacDonagh Boland Beech Hill Limited Ireland - ------------------------------------------------------------------------------------------ MacDonagh Boland Crotty MacRedmond Limited Ireland - ------------------------------------------------------------------------------------------ MacDonagh Boland Cullen Duggan Limited Ireland - ------------------------------------------------------------------------------------------ MacDonagh Boland Foley Woollam Limited Ireland - ------------------------------------------------------------------------------------------ Macey Clifton Walters Limited United Kingdom - ------------------------------------------------------------------------------------------ Macey Williams Insurance Services Limited Ireland - ------------------------------------------------------------------------------------------ Macey Williams Insurance Services Limited United Kingdom - ------------------------------------------------------------------------------------------ Macey Williams Limited Ireland - ------------------------------------------------------------------------------------------ Madison Intermediaries Pty. Limited Australia - ------------------------------------------------------------------------------------------ Madison Reinsurance Holdings, Inc. Illinois - ------------------------------------------------------------------------------------------ Mahamy Company plc (Rollins Hudig Hall Iran) Iran - ------------------------------------------------------------------------------------------ Maritime Underwriters, Ltd. Bermuda - ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------ Marketing and Training Resources, Inc. Illinois - ------------------------------------------------------------------------------------------ Martin Boyer Company, Inc. Illinois - ------------------------------------------------------------------------------------------ Mayflower National Life Insurance Company Indiana - ------------------------------------------------------------------------------------------ Media/Professional Insurance Agency, Inc. Missouri - ------------------------------------------------------------------------------------------ Media/Professional International Limited United Kingdom - ------------------------------------------------------------------------------------------ Minahan Reinsurance Management Limited United Kingdom - ------------------------------------------------------------------------------------------ Morency, Weible & Sapa, Inc. Illinois - ------------------------------------------------------------------------------------------ Motorists Service Corporation Delaware - ------------------------------------------------------------------------------------------ Motorplan Limited United Kingdom - ------------------------------------------------------------------------------------------ Muirfield Underwriters, Ltd. Delaware - ------------------------------------------------------------------------------------------ N.V. Assurantiehuis Holding (Curacao) Netherland Antilles - ------------------------------------------------------------------------------------------ NB Life Agents, Inc. New York - ------------------------------------------------------------------------------------------ NSU Benefit Corporation Indiana - ------------------------------------------------------------------------------------------ Nask bv Netherlands - ------------------------------------------------------------------------------------------ National Benefits Corporation Pennsylvania - ------------------------------------------------------------------------------------------ National Care Provider Insurance, Inc. California - ------------------------------------------------------------------------------------------ National Product Care Company Illinois - ------------------------------------------------------------------------------------------ National Sports Underwriters, Inc. Indiana - ------------------------------------------------------------------------------------------ Nesdale Holdings Limited New Zealand - ------------------------------------------------------------------------------------------ Newco Properties, Inc. Virginia - ------------------------------------------------------------------------------------------ Nicholson Chamberlain Colls Australia Limited Australia - ------------------------------------------------------------------------------------------ Nicholson Chamberlain Colls Group Limited United Kingdom - ------------------------------------------------------------------------------------------ Nicholson Chamberlain Colls Marine Limited United Kingdom - ------------------------------------------------------------------------------------------ Nicholson Leslie (North America) Limited United Kingdom - ------------------------------------------------------------------------------------------ Nicholson Leslie Accident & Health Limited United Kingdom - ------------------------------------------------------------------------------------------ Nicholson Leslie Agencies Limited United Kingdom - ------------------------------------------------------------------------------------------ Nicholson Leslie Asia Pte. Ltd. Singapore - ------------------------------------------------------------------------------------------ Nicholson Leslie Australia Holdings Limited Australia - ------------------------------------------------------------------------------------------ Nicholson Leslie Aviation Limited United Kingdom - ------------------------------------------------------------------------------------------ Nicholson Leslie Aviation Reinsurance Brokers United Kingdom - ------------------------------------------------------------------------------------------ Nicholson Leslie BankAssure Limited United Kingdom - ------------------------------------------------------------------------------------------ Nicholson Leslie Bankscope Insurance Services Limited United Kingdom - ------------------------------------------------------------------------------------------ Nicholson Leslie Bankscope Marine Insurance Consultants United Kingdom - ------------------------------------------------------------------------------------------ Nicholson Leslie Energy Resources Limited United Kingdom - ------------------------------------------------------------------------------------------ Nicholson Leslie Financial Institutions Limited United Kingdom - ------------------------------------------------------------------------------------------ Nicholson Leslie Group Limited United Kingdom - ------------------------------------------------------------------------------------------ Nicholson Leslie International (Reinsurance Brokers) Limited United Kingdom - ------------------------------------------------------------------------------------------ Nicholson Leslie International Limited United Kingdom - ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------ Nicholson Leslie International Limited United Kingdom - ------------------------------------------------------------------------------------------ Nicholson Leslie Investments Limited United Kingdom - ------------------------------------------------------------------------------------------ Nicholson Leslie Italia S.P.A. Italy - ------------------------------------------------------------------------------------------ Nicholson Leslie Limited United Kingdom - ------------------------------------------------------------------------------------------ Nicholson Leslie Management Services United Kingdom - ------------------------------------------------------------------------------------------ Nicholson Leslie Marine Limited United Kingdom - ------------------------------------------------------------------------------------------ Nicholson Leslie Nominees Limited United Kingdom - ------------------------------------------------------------------------------------------ Nicholson Leslie Non-Marine Reinsurance Brokers Limited United Kingdom - ------------------------------------------------------------------------------------------ Nicholson Leslie North American Reinsurance Brokers, Limited United Kingdom - ------------------------------------------------------------------------------------------ Nicholson Leslie Property Limited United Kingdom - ------------------------------------------------------------------------------------------ Nicholson Leslie Seascope Limited United Kingdom - ------------------------------------------------------------------------------------------ Nicholson Leslie Special Risks Limited United Kingdom - ------------------------------------------------------------------------------------------ Nicholson Stewart-Brown Limited United Kingdom - ------------------------------------------------------------------------------------------ North Derbyshire Finance Company Limited, The United Kingdom - ------------------------------------------------------------------------------------------ Nova Reinsurance Brokers, Inc. Illinois - ------------------------------------------------------------------------------------------ OLD BENEFITS CORPORATION Illinois - ------------------------------------------------------------------------------------------ OUM & Associates of California, A Corporation California - ------------------------------------------------------------------------------------------ OUM & Associates of New York, A Corporation New York - ------------------------------------------------------------------------------------------ OUM & Associates of Ohio, A Corporation Ohio - ------------------------------------------------------------------------------------------ OUM & Associates, Inc., A Corporation Washington - ------------------------------------------------------------------------------------------ OUM Risk Consultants, Inc. Washington - ------------------------------------------------------------------------------------------ Oak Brook Holding, Inc. Delaware - ------------------------------------------------------------------------------------------ Oak Brook Life Insurance Company Arizona - ------------------------------------------------------------------------------------------ Oceanic Adjusters Limited New York - ------------------------------------------------------------------------------------------ Ogle & Waters, Inc. Florida - ------------------------------------------------------------------------------------------ Ohrinsoo Agency Korea - ------------------------------------------------------------------------------------------ Olandis Insurance Agency, Inc. Illinois - ------------------------------------------------------------------------------------------ Olarescu & B. I. Davis Asesores y Corredores de Seguros S.A. Peru - ------------------------------------------------------------------------------------------ Old RHH North, Inc. California - ------------------------------------------------------------------------------------------ P M R Re, Inc. New York - ------------------------------------------------------------------------------------------ P.I. Consultants Ltd. Hong Kong - ------------------------------------------------------------------------------------------ PFS, L.P. Illinois - ------------------------------------------------------------------------------------------ PLCM Group, Inc. Florida - ------------------------------------------------------------------------------------------ PLCM Group, Inc. Illinois - ------------------------------------------------------------------------------------------ PLCM Group, Inc. Pennsylvania - ------------------------------------------------------------------------------------------ PT RNJ Ratna Nusa Jaya Indonesia - ------------------------------------------------------------------------------------------ Pandimar Consultants, Inc. New York - ------------------------------------------------------------------------------------------ Paribas Assurantien B.V. Netherlands - ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------ Parker Risk Management (Barbados) Ltd. Barbados - ------------------------------------------------------------------------------------------ Parker Risk Management (Bermuda) Ltd. Bermuda - ------------------------------------------------------------------------------------------ Parker Risk Management (Cayman) Ltd. Cayman Islands - ------------------------------------------------------------------------------------------ Parker Risk Management (Guernsey) Ltd. Guernsey - ------------------------------------------------------------------------------------------ Parker Risk Management (S) Pte Ltd Singapore - ------------------------------------------------------------------------------------------ Parker Risk Management, Inc. Colorado - ------------------------------------------------------------------------------------------ Pat Ryan & Associates, B.V. Netherlands - ------------------------------------------------------------------------------------------ Pecos River Learning Centers, Inc. Minnesota - ------------------------------------------------------------------------------------------ Pernas HHL Malaysia - ------------------------------------------------------------------------------------------ Piercey Auto Group Finance, L.P. Illinois - ------------------------------------------------------------------------------------------ Pikes Peak Holding Company, Inc. Delaware - ------------------------------------------------------------------------------------------ Powell & Company Georgia - ------------------------------------------------------------------------------------------ Preferred Risk Strategies, A Corporation Washington - ------------------------------------------------------------------------------------------ Premier Auto Finance, Inc. Delaware - ------------------------------------------------------------------------------------------ Premier Auto Finance, L.P. Illinois - ------------------------------------------------------------------------------------------ Product Care, Inc. Illinois - ------------------------------------------------------------------------------------------ Production Life Insurance Company Arizona - ------------------------------------------------------------------------------------------ Professional Sports Insurance Co. Ltd. Bermuda - ------------------------------------------------------------------------------------------ Property Owners Database Limited United Kingdom - ------------------------------------------------------------------------------------------ Provider Services, Ltd. Bermuda - ------------------------------------------------------------------------------------------ Pyramid Services, Inc. Connecticut - ------------------------------------------------------------------------------------------ RAMRO y Asociados, S.C. Mexico - ------------------------------------------------------------------------------------------ RBH Acquisition Co. Delaware - ------------------------------------------------------------------------------------------ RBH Equities, Inc. New York - ------------------------------------------------------------------------------------------ RBH General Agencies (Canada) Inc. Quebec - ------------------------------------------------------------------------------------------ RHH Captive Management Ltd. Bermuda - ------------------------------------------------------------------------------------------ RHH Empreendimentos e Servicos Ltda. Brazil - ------------------------------------------------------------------------------------------ RHH Europe, Inc. Delaware - ------------------------------------------------------------------------------------------ RHH Financial Services Group of New York, Inc. New York - ------------------------------------------------------------------------------------------ RHH Financial Services Group, Inc. California - ------------------------------------------------------------------------------------------ RHH Financial Services Group, Inc. Illinois - ------------------------------------------------------------------------------------------ RHH Financial Services Group, Inc. Pennsylvania - ------------------------------------------------------------------------------------------ RHH Financial Services Group, Inc. Texas - ------------------------------------------------------------------------------------------ RHH General Agency, Inc. Texas - ------------------------------------------------------------------------------------------ RHH Hazard Limited United Kingdom - ------------------------------------------------------------------------------------------ RHH Life Agency of Texas, Inc. Texas - ------------------------------------------------------------------------------------------ RHH Special Risks, Inc. Illinois - ------------------------------------------------------------------------------------------ RHH/Albert G. Ruben Insurance Services, Inc. California - ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------ RIP Services Limited Guernsey - ------------------------------------------------------------------------------------------ Rae Liness & Duffus Limited Scotland - ------------------------------------------------------------------------------------------ Regent Acceptance, L.P. New Jersey - ------------------------------------------------------------------------------------------ Resource Insurance Services, Inc. Indiana - ------------------------------------------------------------------------------------------ Retailer Acceptance, L.P. Illinois - ------------------------------------------------------------------------------------------ Rockford Holding, Inc. Delaware - ------------------------------------------------------------------------------------------ Rockford Life Insurance Company Arizona - ------------------------------------------------------------------------------------------ Rolins Hudig Hall (Sweden) A.B Sweden - ------------------------------------------------------------------------------------------ Rollins Financial Brokers, Inc. Oklahoma - ------------------------------------------------------------------------------------------ Rollins Financial Services Co. Illinois - ------------------------------------------------------------------------------------------ Rollins Heath (Japan) Ltd. Japan - ------------------------------------------------------------------------------------------ Rollins Hudig Hall & Co. (N.S.W.) Pty. Ltd. Australia - ------------------------------------------------------------------------------------------ Rollins Hudig Hall (Bermuda) Limited Bermuda - ------------------------------------------------------------------------------------------ Rollins Hudig Hall (Finland) OY Finland - ------------------------------------------------------------------------------------------ Rollins Hudig Hall (Hong Kong) Ltd. Hong Kong - ------------------------------------------------------------------------------------------ Rollins Hudig Hall (Nederland) Limited United Kingdom - ------------------------------------------------------------------------------------------ Rollins Hudig Hall (Norway) A/S Norway - ------------------------------------------------------------------------------------------ Rollins Hudig Hall (Scandinavia) A/S Norway - ------------------------------------------------------------------------------------------ Rollins Hudig Hall (Scandinavia) Holding A/S Denmark - ------------------------------------------------------------------------------------------ Rollins Hudig Hall (Singapore) Pte Ltd Singapore - ------------------------------------------------------------------------------------------ Rollins Hudig Hall Agency of Texas, Inc. Texas - ------------------------------------------------------------------------------------------ Rollins Hudig Hall Antillen N.V. Netherland Antilles - ------------------------------------------------------------------------------------------ Rollins Hudig Hall Aruba N.V. Netherland Antilles - ------------------------------------------------------------------------------------------ Rollins Hudig Hall Associates B.V. Netherlands - ------------------------------------------------------------------------------------------ Rollins Hudig Hall Ceska Republika spol.s r.o. Czech Republic - ------------------------------------------------------------------------------------------ Rollins Hudig Hall Co. Delaware - ------------------------------------------------------------------------------------------ Rollins Hudig Hall Consulting Italia srl Italy - ------------------------------------------------------------------------------------------ Rollins Hudig Hall Denmark A/S Denmark - ------------------------------------------------------------------------------------------ Rollins Hudig Hall Employee Benefits of Ohio, Inc. Ohio - ------------------------------------------------------------------------------------------ Rollins Hudig Hall Entertainment Brokers Ltd. United Kingdom - ------------------------------------------------------------------------------------------ Rollins Hudig Hall Espana Correduria de Seguros, SA Spain - ------------------------------------------------------------------------------------------ Rollins Hudig Hall Groep B.V. Netherlands - ------------------------------------------------------------------------------------------ Rollins Hudig Hall Group, Inc. Delaware - ------------------------------------------------------------------------------------------ Rollins Hudig Hall Healthcare Risk, Inc. Florida - ------------------------------------------------------------------------------------------ Rollins Hudig Hall Holdings (Deutschland) GmbH Germany - ------------------------------------------------------------------------------------------ Rollins Hudig Hall Holdings Limited Australia - ------------------------------------------------------------------------------------------ Rollins Hudig Hall Holdings Limited United Kingdom - ------------------------------------------------------------------------------------------ Rollins Hudig Hall Holdings bv Netherlands - ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------ Rollins Hudig Hall Insurance Brokers, Inc. Ontario - ------------------------------------------------------------------------------------------ Rollins Hudig Hall International b.v. Netherlands - ------------------------------------------------------------------------------------------ Rollins Hudig Hall Italia S.p.A. Italy - ------------------------------------------------------------------------------------------ Rollins Hudig Hall Limited United Kingdom - ------------------------------------------------------------------------------------------ Rollins Hudig Hall Magyarorszag Biztositasi Alkusz Hungary - ------------------------------------------------------------------------------------------ Rollins Hudig Hall Mexico Mexico - ------------------------------------------------------------------------------------------ Rollins Hudig Hall Middle East United Arab Emirates - ------------------------------------------------------------------------------------------ Rollins Hudig Hall Nederland Makelaars in Assurantien bv Netherlands - ------------------------------------------------------------------------------------------ Rollins Hudig Hall Netherlands b.v. Netherlands - ------------------------------------------------------------------------------------------ Rollins Hudig Hall Polska Ltd. Poland - ------------------------------------------------------------------------------------------ Rollins Hudig Hall Pty. Ltd. Australia - ------------------------------------------------------------------------------------------ Rollins Hudig Hall Risk Management Services A/S Denmark - ------------------------------------------------------------------------------------------ Rollins Hudig Hall Services Limited United Kingdom - ------------------------------------------------------------------------------------------ Rollins Hudig Hall Sigorta Brokerlik ve Musavirlik AS Turkey - ------------------------------------------------------------------------------------------ Rollins Hudig Hall Slovensko spol.s r.o. Slovak Republic - ------------------------------------------------------------------------------------------ Rollins Hudig Hall Surety & Guarantee Limited United Kingdom - ------------------------------------------------------------------------------------------ Rollins Hudig Hall Vancouver Inc. British Columbia - ------------------------------------------------------------------------------------------ Rollins Hudig Hall do Brazil Corretora de Seguros Ltda. Brazil - ------------------------------------------------------------------------------------------ Rollins Hudig Hall of Alabama, Inc. Alabama - ------------------------------------------------------------------------------------------ Rollins Hudig Hall of Alaska, Inc. Alaska - ------------------------------------------------------------------------------------------ Rollins Hudig Hall of Arizona, Inc. Arizona - ------------------------------------------------------------------------------------------ Rollins Hudig Hall of Arkansas, Inc. Arkansas - ------------------------------------------------------------------------------------------ Rollins Hudig Hall of Canada Inc. Canada - ------------------------------------------------------------------------------------------ Rollins Hudig Hall of Central California, Inc. Insurance Services California - ------------------------------------------------------------------------------------------ Rollins Hudig Hall of Colorado, Inc. Colorado - ------------------------------------------------------------------------------------------ Rollins Hudig Hall of Connecticut, Inc. Connecticut - ------------------------------------------------------------------------------------------ Rollins Hudig Hall of Florida, Inc. Florida - ------------------------------------------------------------------------------------------ Rollins Hudig Hall of Georgia, Inc. Georgia - ------------------------------------------------------------------------------------------ Rollins Hudig Hall of Hawaii, Inc. Hawaii - ------------------------------------------------------------------------------------------ Rollins Hudig Hall of Idaho, Inc. Idaho - ------------------------------------------------------------------------------------------ Rollins Hudig Hall of Illinois, Inc. Illinois - ------------------------------------------------------------------------------------------ Rollins Hudig Hall of Indiana, Inc. Indiana - ------------------------------------------------------------------------------------------ Rollins Hudig Hall of Kansas, Inc. Kansas - ------------------------------------------------------------------------------------------ Rollins Hudig Hall of Latin America, Inc. Delaware - ------------------------------------------------------------------------------------------ Rollins Hudig Hall of Louisiana, Inc. Louisiana - ------------------------------------------------------------------------------------------ Rollins Hudig Hall of Massachusetts, Inc. Massachusetts - ------------------------------------------------------------------------------------------ Rollins Hudig Hall of Michigan, Inc. Michigan - ------------------------------------------------------------------------------------------ Rollins Hudig Hall of Minnesota, Inc. Minnesota - ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------ Rollins Hudig Hall of Missouri, Inc. Missouri - ------------------------------------------------------------------------------------------ Rollins Hudig Hall of Montana, Inc. Montana - ------------------------------------------------------------------------------------------ Rollins Hudig Hall of Nebraska, Inc. Nebraska - ------------------------------------------------------------------------------------------ Rollins Hudig Hall of Nevada, Inc. Nevada - ------------------------------------------------------------------------------------------ Rollins Hudig Hall of New Jersey, Inc. New Jersey - ------------------------------------------------------------------------------------------ Rollins Hudig Hall of New York, Inc. New York - ------------------------------------------------------------------------------------------ Rollins Hudig Hall of Northern California, Inc. Insurance Services California - ------------------------------------------------------------------------------------------ Rollins Hudig Hall of Ohio, Inc. Ohio - ------------------------------------------------------------------------------------------ Rollins Hudig Hall of Oklahoma, Inc. Oklahoma - ------------------------------------------------------------------------------------------ Rollins Hudig Hall of Oregon, Inc. Oregon - ------------------------------------------------------------------------------------------ Rollins Hudig Hall of Pennsylvania, Inc. Pennsylvania - ------------------------------------------------------------------------------------------ Rollins Hudig Hall of Rhode Island, Inc. Rhode Island - ------------------------------------------------------------------------------------------ Rollins Hudig Hall of Southern California, Inc. California - ------------------------------------------------------------------------------------------ Rollins Hudig Hall of Tennessee, Inc. Tennessee - ------------------------------------------------------------------------------------------ Rollins Hudig Hall of Utah, Inc. Utah - ------------------------------------------------------------------------------------------ Rollins Hudig Hall of Virginia, Inc. Virginia - ------------------------------------------------------------------------------------------ Rollins Hudig Hall of Washington, D.C., Inc. District of Columbia - ------------------------------------------------------------------------------------------ Rollins Hudig Hall of Washington, Inc. Washington - ------------------------------------------------------------------------------------------ Rollins Hudig Hall of Wisconsin, Inc. Wisconsin - ------------------------------------------------------------------------------------------ Rollins Hudig Hall of Wyoming, Inc. Wyoming - ------------------------------------------------------------------------------------------ Rollins Hudig Hall of the Americas, Inc. Illinois - ------------------------------------------------------------------------------------------ Rollins Hudig Hall of the Carolina's North Carolina - ------------------------------------------------------------------------------------------ Rollins Risk & Benefit Management Services, Inc. Nevada - ------------------------------------------------------------------------------------------ Rollins Technical Services Co. Illinois - ------------------------------------------------------------------------------------------ Rollins Technology Brokers, Inc. California - ------------------------------------------------------------------------------------------ Roundwise Limited United Kingdom - ------------------------------------------------------------------------------------------ Ryan Dealer Group of Alabama, Inc. Alabama - ------------------------------------------------------------------------------------------ Ryan Dealer Group of Arizona Insurance Services, Inc. Arizona - ------------------------------------------------------------------------------------------ Ryan Dealer Group of Indiana, Inc. Indiana - ------------------------------------------------------------------------------------------ Ryan Dealer Group of Massachusetts Insurance Agency, Inc. Massachusetts - ------------------------------------------------------------------------------------------ Ryan Dealer Group of Mississippi, P.A. Mississippi - ------------------------------------------------------------------------------------------ Ryan Dealer Group of New Mexico, Inc. New Mexico - ------------------------------------------------------------------------------------------ Ryan Dealer Group of Ohio Agency, Inc. Ohio - ------------------------------------------------------------------------------------------ Ryan Dealer Group of Washington, Inc. Washington - ------------------------------------------------------------------------------------------ Ryan Dealer Group, Inc Texas - ------------------------------------------------------------------------------------------ Ryan Dealer Group, Inc. Illinois - ------------------------------------------------------------------------------------------ Ryan Dealer Group, Inc. Mississippi - ------------------------------------------------------------------------------------------ Ryan Dealer Insurance Services of California, Inc. California - ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------ Ryan Financial Services, Inc. Illinois - ------------------------------------------------------------------------------------------ Ryan Insurance Group Espana, Correduria de Seguros, S.A. Spain - ------------------------------------------------------------------------------------------ Ryan Insurance Group France S.A.R.L. France - ------------------------------------------------------------------------------------------ Ryan Insurance Group, Inc. Delaware - ------------------------------------------------------------------------------------------ Ryan Warranty Services Canada, Inc. Canada - ------------------------------------------------------------------------------------------ Ryan Warranty Services Quebec, Inc. Ontario - ------------------------------------------------------------------------------------------ Ryan Warranty Services of Florida, Inc. Florida - ------------------------------------------------------------------------------------------ Ryan Warranty Services, Inc. Delaware - ------------------------------------------------------------------------------------------ Ryan/CSI, Inc. Illinois - ------------------------------------------------------------------------------------------ SIS Services of New York, Inc. New York - ------------------------------------------------------------------------------------------ SLE International Underwriters, Inc. Delaware - ------------------------------------------------------------------------------------------ SLE Underwriters, Inc. Delaware - ------------------------------------------------------------------------------------------ SLE Worldwide Australia Pty Limited Australia - ------------------------------------------------------------------------------------------ SLE Worldwide Canada Brokers, Ltd. Ontario - ------------------------------------------------------------------------------------------ SLE Worldwide Limited United Kingdom - ------------------------------------------------------------------------------------------ SLE Worldwide Mexico, Agente de Seguros, S.A. de C.V. Mexico - ------------------------------------------------------------------------------------------ SLE Worldwide, Inc. Delaware - ------------------------------------------------------------------------------------------ SRS Management Antilles N.V. Netherland Antilles - ------------------------------------------------------------------------------------------ Saat Van Marwijk Beheer B.V. Netherlands - ------------------------------------------------------------------------------------------ Saat Van Marwijk Noordwijk B.V. Netherlands - ------------------------------------------------------------------------------------------ Safeguard Risk Services (Bermuda) Ltd. Bermuda - ------------------------------------------------------------------------------------------ Safeguard Risk Services Antilles N.V. Netherland Antilles - ------------------------------------------------------------------------------------------ Safeguard Risk Services b.v. Netherlands - ------------------------------------------------------------------------------------------ Sang Woon Agency Korea - ------------------------------------------------------------------------------------------ Scarborough & Company Illinois - ------------------------------------------------------------------------------------------ Scarborough & Company, Inc. Delaware - ------------------------------------------------------------------------------------------ Scarborough Insurance Agency of Massachusetts, Inc. Massachusetts - ------------------------------------------------------------------------------------------ Seascope Cargo Insurance Services Limited United Kingdom - ------------------------------------------------------------------------------------------ Seascope Insurance Holdings Limited United Kingdom - ------------------------------------------------------------------------------------------ Seascope Insurance Services Limited United Kingdom - ------------------------------------------------------------------------------------------ Seascope Marine Insurance Services Limited United Kingdom - ------------------------------------------------------------------------------------------ Seascope Marine Limited United Kingdom - ------------------------------------------------------------------------------------------ Seascope Reinsurance Services Limited United Kingdom - ------------------------------------------------------------------------------------------ Select Direct Limited Scotland - ------------------------------------------------------------------------------------------ Self-Insurers Service, Inc. Delaware - ------------------------------------------------------------------------------------------ Service Protection, Inc. Illinois - ------------------------------------------------------------------------------------------ Service Saver, Incorporated Florida - ------------------------------------------------------------------------------------------ ServicePlan, Inc. Illinois - ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------ Servicios Y Garantias Ryan S.L. Spain - ------------------------------------------------------------------------------------------ Sherwood Insurance Services California - ------------------------------------------------------------------------------------------ Shoreline Insurance Agency, Inc. Rhode Island - ------------------------------------------------------------------------------------------ Singer Group, Inc., The Texas - ------------------------------------------------------------------------------------------ Singer Plan, Inc. Delaware - ------------------------------------------------------------------------------------------ Skyline Agency, Ltd., The Illinois - ------------------------------------------------------------------------------------------ Square One, Inc. Texas - ------------------------------------------------------------------------------------------ Steetley Leslie & Godwin Limited Guernsey - ------------------------------------------------------------------------------------------ Sterling Life Insurance Company Arizona - ------------------------------------------------------------------------------------------ Stichting Employee Fund Hudig-Langeveldt Groep B.V. Netherlands - ------------------------------------------------------------------------------------------ Stichting Verum-HLG Netherlands - ------------------------------------------------------------------------------------------ Stichting Werknemerscertificaten HLG Netherlands - ------------------------------------------------------------------------------------------ Superannuation Fund (CICNZ) Limited New Zealand - ------------------------------------------------------------------------------------------ Suras B.V. Netherlands - ------------------------------------------------------------------------------------------ Surety & Guarantee Consultants Limited United Kingdom - ------------------------------------------------------------------------------------------ TREV Properties Corporation Delaware - ------------------------------------------------------------------------------------------ Tabma-Hall Insurance Services Pty. Limited Australia - ------------------------------------------------------------------------------------------ Tarik Acceptance, L.P. Unknown - ------------------------------------------------------------------------------------------ Texas Star Insurance Agency Texas - ------------------------------------------------------------------------------------------ Texecur Versicherungs Vermittlungs GmbH Germany - ------------------------------------------------------------------------------------------ The Auto Leasing Corporation Delaware - ------------------------------------------------------------------------------------------ Trans Caribbean Insurance Services, Inc. American Samoa - ------------------------------------------------------------------------------------------ U.S. Rating Bureau, Inc. Delaware - ------------------------------------------------------------------------------------------ Underwriters Marine Services Limited United Kingdom - ------------------------------------------------------------------------------------------ Underwriters Marine Services of Texas, Inc. Texas - ------------------------------------------------------------------------------------------ Underwriters Marine Services, Inc. Louisiana - ------------------------------------------------------------------------------------------ Union Fidelity Life Insurance Company Illinois - ------------------------------------------------------------------------------------------ Universal Acceptance, L.P. Illinois - ------------------------------------------------------------------------------------------ VOL Properties Corporation Delaware - ------------------------------------------------------------------------------------------ Verum-HLG B.V. Netherlands - ------------------------------------------------------------------------------------------ Virginia Surety Company, Inc. Illinois - ------------------------------------------------------------------------------------------ Wacus/Hudig-Langeveldt GmbH Germany - ------------------------------------------------------------------------------------------ Wacus/Hudig-Langeveldt, Kreditversicherungsmakler und Beratungs Germany GmbH - ------------------------------------------------------------------------------------------ Walker Persson & Partners Limited United Kingdom - ------------------------------------------------------------------------------------------ Western Premier Auto Finance, L.P. Unknown - ------------------------------------------------------------------------------------------ Wexford Underwriting Managers, Inc. Delaware - ------------------------------------------------------------------------------------------ Wilfredo Armstrong S.A. Argentina - ------------------------------------------------------------------------------------------ Worldwide Integrated Services Company Texas - ------------------------------------------------------------------------------------------
EX-23 11 CONSENT OF ERNST AND YOUNG LLP Exhibit 23 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference in this Annual Report (Form 10-K) of Aon Corporation of our report dated February 8, 1996, included in the 1995 Annual Report to Stockholders of Aon Corporation. Our audits also included the financial statement schedules of Aon Corporation listed in Item 14(a). These schedules are the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, with respect to which the date is February 8, 1996, the financial statement schedules referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. As discussed in Note 4 to the consolidated financial statements in the 1995 Annual Report to Stockholders of Aon Corporation, the Company changed its method of accounting for certain investments in 1994. We also consent to the incorporation by reference in the Registration Statements pertaining to the employer's stock option and savings plans (Form S-8 Nos. 2-79114, 2-82791, 33-27984, 33-42575 and 33-59037) and the right to offer preferred stock (Form S-3 No. 33-57562) of Aon Corporation of our report dated February 8, 1996, with respect to the consolidated financial statements incorporated herein by reference, and our report, included in the preceding paragraph with respect to the financial statement schedules included in this Annual Report (Form 10-K) of Aon Corporation. /s/ ERNST & YOUNG LLP ------------------ ERNST & YOUNG LLP Chicago, Illinois March 27, 1996 EX-27 12 FINANCIAL DATA SCHEDULE
7 This schedule contains summary financial information extracted from Consolidated Statements of Financial Position and Consolidated Statements of Income and is qualified in its entirety by reference to such financial statements. 1,000,000 12-MOS DEC-31-1995 JAN-01-1995 DEC-31-1995 7,687 0 0 1,006 632 37 10,639 115 19 1,262 19,736 1,475 1,646 971 5,464 907 111 50 8 2,555 19,736 1,427 329 13 1,697 699 208 2,101 458 154 304 99 0 0 403 3.48 3.48 681 1,084 (68) 651 331 715 0 Includes short-term borrowings and debt guarantee of ESOP. Common stock at par value. Preferred stock at par value. Includes brokerage commissions and fees and other income. Includes discontinued operations.
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