-----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, FPq96+1etbC11r/C7uISSjQLt1MN9yXkBEy8Yk2lHYQzJz/602jqW+U29PPrEByO zDBM6+GIIWQ6VcvI/BKOtw== 0000950109-00-001252.txt : 20000331 0000950109-00-001252.hdr.sgml : 20000331 ACCESSION NUMBER: 0000950109-00-001252 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 18 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MUTUAL RISK MANAGEMENT LTD CENTRAL INDEX KEY: 0000826918 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 000000000 STATE OF INCORPORATION: D0 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-10760 FILM NUMBER: 586721 BUSINESS ADDRESS: STREET 1: 44 CHURCH ST STREET 2: BERMUDA CITY: HAMILTON HM 12 BERMU STATE: D0 BUSINESS PHONE: 4412955688 MAIL ADDRESS: STREET 1: PO BOX 2064 STREET 2: BERMUDA CITY: HAMILTON HM HX STATE: D0 10-K 1 FORM 10-K FOR MUTUAL RISK MANAGEMENT - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- FORM 10-K [X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1999 or [_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File No. 1-10760 ---------------- MUTUAL RISK MANAGEMENT LTD. (Exact name of registrant as specified in its charter) Bermuda Not Applicable (Jurisdiction of Incorporation) (I.R.S. Employer Identification No.) 44 Church Street Hamilton HM 12 Bermuda (441) 295-5688 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices). ---------------- Securities registered pursuant to Section 12(b) of the Act: - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
Title of Each Class Name of Each Exchange on Which Registered - -------------------------------------------------------------------------------------- Common Shares, $.01 par value............. New York Stock Exchange - -------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------
---------------- Securities registered pursuant to Section 12(g) of the Act: None ---------------- 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 the registrant's knowledge, in definitive proxy or information statements incorporated by reference into Part III of this Form 10-K or any amendment to this Form 10-K. At March 17, 2000 registrant had outstanding 41,209,500 Common Shares, the only class of registrant's common stock outstanding, and the aggregate market value of voting stock held by non-affiliates at such date was $620,718,093 (based on the closing price of such Common Shares of $15 1/16 on March 17, 2000, as reported on the New York Stock Exchange, Inc., composite listings). DOCUMENTS INCORPORATED BY REFERENCE Certain portions of registrant's Proxy Circular relating to its Annual General Meeting of Shareholders scheduled to be held on May 16, 2000, are incorporated by reference into Part III of this report. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- MUTUAL RISK MANAGEMENT LTD TABLE OF CONTENTS
Item Page ---- ---- PART I 1. Business.......................................................... 3 2. Properties........................................................ 16 3. Legal Proceedings................................................. 16 4. Submission of Matters to Security Holders......................... 16 PART II 5. Market for Common Shares.......................................... 18 6. Selected Consolidated Financial Data.............................. 19 7. Management's Discussion and Analysis of Financial Condition and Results of Operations............................................. 20 7A. Quantitative and Qualitative Disclosures about Market Risk........ 28 8. Financial Statements and Supplementary Data....................... 29 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.............................................. 29 PART III 10. Management........................................................ 11. Executive Compensation............................................ 30 12. Security Ownership of Certain Beneficial Owners and Management.... 30 13. Certain Relationships and Related Transactions.................... 30 PART IV 14. Exhibits, Financial Statement Schedules and Reports on Form 8K.... 31
2 PART I ITEM 1. BUSINESS The Company Mutual Risk Management Ltd., also known as MRM, is a Bermuda company incorporated in 1977. Our principal business is the provision of risk management services to clients seeking an alternative to traditional commercial insurance for certain of their risk exposures. Risk management involves a process of analyzing loss exposures and developing risk financing methods to reduce exposure to loss and to control associated costs. The use of such loss financing methods in place of traditional insurance has become known as the alternative market and involves clients participating in a significant amount of their loss exposure and transferring only the unpredictable excess risk to insurers. The benefits of such alternative market techniques typically include lower and more stable costs, greater control over the client's risk management program and an increase in the emphasis within the client's organization on loss prevention and loss control. Our insurance business can be divided into three segments: Program The fastest growing of our business segments, Program Business: Business involves us replacing traditional insurers as the conduit between producers of specialty books of business and reinsurers wishing to write that business. We provide a wide range of services for a fee and the underwriting profit is shared between the producer and the reinsurers. Corporate Risk Our original business segment, Corporate Risk Management Management: involves providing services to businesses and associations seeking to insure a portion of their risk in a loss sensitive alternative market structure. Specialty This business segment provides access to alternative risk Brokerage: transfer insurers and reinsurers in Bermuda and Europe. The two components of this segment are MRM Hancock Limited, which provides access to London and European reinsurers, and H&H Park International Limited, which brokers to the Bermuda market. In addition to its insurance industry services, in 1996, we entered the financial services business through its acquisition of The Hemisphere Group Limited. Hemisphere, which is based in Bermuda, provides administrative and other services to offshore mutual funds and other companies. Financial Services is our fourth business segment. Insurance Services Our principal source of profits is fees received for the various insurance and other services provided to clients in connection with our programs. The structure of our programs places most of the underwriting risk with our clients or reinsurers. For regulatory and other reasons, however, we are required to assume a limited amount of risk. We seek to limit this risk to the minimum level feasible. This approach to risk distinguishes us from typical property/casualty companies, which assume significant levels of underwriting risk as part of their business. We do not seek to earn income from underwriting risk but rather from fees for services provided. We market our services exclusively to retail insurance brokers and consultants representing clients. The services offered to clients in connection with our products typically include the following: [_]design and implementation of a risk financing program; [_]issuance of an insurance policy by one of our wholly-owned, licensed insurance companies, Legion Insurance Company, Legion Indemnity Ltd., also referred to as Legion Indemnity, and Villanova Insurance Company, also referred to as Villanova . These companies are collectively referred to as the Legion Companies. In December 1997, A.M. Best Company extended the Legion Insurance group rating of "A ," excellent, to include Villanova; 3 [_]use of our Insurance Profit Center Program, also known as the IPC Program, as the vehicle within which to fund a chosen portion of the client's risk or, alternatively, the management by us of the client's captive insurance company. [_]brokering to unaffiliated reinsurers the excess risk which the client chooses not to fund and, in some cases, arranging for insurers, other than Legion Insurance, to issue the original insurance policy; and [_]coordinating the purchase, on behalf of the client, of loss prevention, loss control and claims administration services from unaffiliated providers. Our major product is the IPC Program. This program allows the client to retain a significant portion of its own loss exposure without the administrative costs and capital commitment necessary to establish and operate its own captive insurance company. The actual amount of underwriting profit and investment income produced by the client's IPC Program is returned to the client creating a direct incentive for it to engage in loss prevention and loss control in order to reduce the overall cost of financing its loss exposures. In recent years, the fastest growing segment of our insurance business is its Program Business, in which third-parties other than the insured, typically the broker and reinsurers, finance a portion of the insured's risk and participate in any underwriting profit or loss. For a discussion of our Corporate Risk Management and Program Business segments, see "Management's Discussion and Analysis of Financial Condition and Results of Operations." Lines of Business Our programs can be utilized by clients for many lines of insurance. In 1999, approximately 53% of our fee income was derived from workers' compensation insurance. During the 1980's and through 1993, workers' compensation presented many employers with substantial problems due to cost increases and the limited availability of commercial coverage in certain states. Workers' compensation costs accelerated rapidly because of: (i) the general level of medical cost inflation, as medical costs generally amount to 40% or more of all workers' compensation costs; (ii) an increase in the number of workers' compensation claims which resulted in litigation; (iii) a broadening of injuries which are considered to be work-related; and (iv) an increase in state mandated benefit levels. Since 1993, workers' compensation reforms have been occurring in a number of states, most notably in California, which have addressed many of these issues in the last five years. A number of markets have seen a significant decline in premium rates due to new capacity, entering the market subsequent to these reforms. These lower premium rates have reduced the fees we earn on our programs as fees are based on premiums. Notwithstanding the changes in the market, workers' compensation continues to be suitable for the alternative market because many states set rates or enforce minimum rate laws which prohibit the commercial insurance market from offering premium discounts to insureds with favorable loss experience. This causes these clients to seek an alternative method of funding their workers' compensation exposure, which rewards their status as a preferred risk. In addition, workers' compensation involves relatively frequent, predictable levels of loss, which are the type favored by clients for alternative market insurance programs. In addition to workers' compensation, our programs have been utilized for other casualty insurance lines such as medical malpractice, general liability, commercial auto liability and auto physical damage. At December 31, 1999, we had a total of 1,143 employees. Marketing--Commonwealth Risk Services, L.P. Our wholly owned subsidiary, Commonwealth Risk Services, L.P., also referred to as CRS, markets our services in the United States, Canada and Europe to insurance brokers and consultants representing clients. CRS also designs risk financing programs for potential clients in conjunction with their insurance brokers and consultants. Through offices in Philadelphia, California and London, CRS markets these services using direct mail, advertising, seminars and trade and industry conventions. 4 CRS seeks to become actively involved with the insurance broker in the presentation of our services to potential clients and maintains a direct relationship with the client after the sale. CRS assists brokers in the design and implementation of risk financing programs, although the extent of this involvement depends on the size, experience and resources of the particular broker. Members of the CRS staff frequently provide supporting promotional materials and assist in the preparation of financial analyses comparing the net present value, after-tax cost of an IPC Program with alternative approaches. Representatives of CRS seek to be present at meetings with potential clients to explain how the IPC Program works, including how reinsurance is handled, how funds are invested and how underwriting profits and investment income are returned. The Insurance Profit Center Program and Program Business In 1980, we developed a program which provides clients with a facility for managing their insurance exposures. This type of structure is frequently referred to as a "rent-a-captive," although the facility has many significant differences from a captive insurance company. The facility was designed to provide certain of the benefits available through captive insurance companies without the administrative cost and capital commitment necessary to establish and operate a captive insurance company. Since the IPC Program involves a retention of risk by the client, it encourages the implementation of risk management and risk reduction programs to lower the losses incurred. The IPC Program is appropriate for corporations and associations which generate $.75 million or more in annual premiums. Typically, clients which use an IPC Program are profitable and have adequate working capital but generate insufficient premium to consider, or are otherwise unsuitable for, a wholly- owned captive. During 1999, the Company increased the number of agency IPC Programs in which an insurance agent or broker, rather than the insured, becomes the preferred shareholder and participates in the profit or loss on the program. These types of programs are referred to as "Program Business" and are discussed below, Return on the IPC program is a function of the loss experience of the insured. The principal benefits of the IPC Program to the client are: [_]a reduction of the net present value, after-tax cost of financing the client's risks; [_]a lower commitment of funds than would be necessary to capitalize and maintain a captive insurance company; [_]access to commercial reinsurance markets for the client's excess risk; and [_]program structure that is customized, flexible and relatively easily implemented. We operate the IPC Program from offices in Bermuda. The Bermuda office is involved in designing, negotiating and administering IPC Programs and reviews each prospective client, negotiates the shareholder's agreement with the client and the reinsurance agreement with Legion Insurance or another policy- issuing company. One of the Company's foreign insurance companies, also referred to as the IPC Companies, receives and invests premiums, administers policy claims, establishes reserves, provides quarterly financial reports to clients and, ultimately, returns the underwriting profit and investment income to the client as preferred share dividends. The funds of each IPC Program are invested by our subsidiary, Mutual Finance Ltd. The funds are invested using the services of professional investment advisors. Neither Legion Insurance nor the IPC Companies underwrite risk in the traditional sense. Rather, their function is to ensure that substantially all of the underwriting risk of the client is either retained by the client in the IPC Program or its captive insurance company, as the case may be, or transferred to unaffiliated reinsurers. In the event that the IPC Company sustains an underwriting loss on a program which exceeds that program's investment income, the IPC Company recovers this loss from the client. Since the client has generally 5 collateralized the IPC Company for at least the difference between the funds available in that client's IPC Program and the level of currently expected losses by cash or a letter of credit, the IPC Company should not be affected by the bankruptcy of a client. In the event, however, that the IPC Company is unable to recover the full amount of its loss from the cash collateral or the letter of credit, the IPC Company would seek to recover from the client pursuant to the indemnity provisions of the shareholder's agreement. As of December 31, 1999, we maintained a provision of $10.0 million against losses which may occur on programs where we may be forced to rely solely on the clients indemnity. See "Management's Discussion and Analysis of Financial Condition and Results of Operations". In addition to programs for corporate clients, we also offer an association IPC Program, which allows smaller insureds to collectively take advantage of the financial benefits available to larger corporate insureds individually. The Legion Companies Legion Insurance is domiciled in Pennsylvania and is admitted to write primary insurance, often called being admitted or writing insurance on an admitted basis, in all 50 states of the United States, the District of Columbia and Puerto Rico. Legion Indemnity is domiciled in Illinois, is an admitted insurer in Illinois and is an authorized surplus lines insurer in 42 states, the District of Columbia, Guam and the Virgin Islands. An authorized surplus lines insurer writes specialty property and liability coverage when the specific specialty coverage is unavailable from admitted insurers. Villanova is domiciled in Pennsylvania and is admitted to write primary insurance in 43 states. In our Corporate Risk Management business segment, one of the Legion Companies issues an insurance policy to the client, which either fulfills a legal requirement that the client have a policy from a licensed insurer or satisfies a business need the client may have for an admitted policy. The client and the Legion Company determine the level of exposure the client wishes to retain and the Legion Company transfers the specific excess risk and the aggregate excess risk beyond that retention to unaffiliated reinsurers. The Legion Company then reinsures the client's chosen retention to one of the IPC Companies or to the client's captive insurance company. In certain cases the Legion Company may issue a large deductible type policy through which the client pays claims up to its chosen retention directly. Payments within the deductible are covered by a deductible reimbursement policy issued by one of the IPC Companies. In either type of policy, the Legion Company retains only a relatively small portion of the risk on each program for its own account. In Program Business, the Legion Company replaces traditional insurers as the conduit between producers of specialty books of business and reinsurers wishing to write that business. In this line of business, the reinsurer replaces the insured as the risk-bearing entity. As with the Corporate Risk Management line of business, the Legion Company negotiates the reinsurance and performs certain administrative services in connection with the program. Program Business differs from the Corporate Risk Management line of business in that policy underwriting, issuance and premium collection are usually provided by the general agent, rather than the Legion Company. The Legion Company analyzes each program prior to inception, arranges for quota share or specific and aggregate excess reinsurance coverage through its reinsurance treaties, collects the premium from the client, prepares accounting cessions for the reinsurers, audits the final premium, supervises the independent claims adjuster, collects claim reimbursements from reinsurers and performs certain other related services for each account. For the Corporate Risk Management business, the Legion Companies have established a reinsurance treaty with an unaffiliated reinsurer to transfer the specific and aggregate excess risk above the client's retention. The client's retention is negotiated separately for each program and reflects the amount of risk the client wishes to retain for its program on both a specific and aggregate basis. For the Program Business, each Legion Company purchases a separate reinsurance treaty, both on a quota share and a specific and aggregate excess of loss basis. 6 The Legion Companies currently place substantially all reinsurance with unaffiliated commercial reinsurers whose ratings from A.M. Best Company are A- or higher. At December 31, 1999, the largest reinsurance recoverables from unaffiliated commercial reinsurers were $172.6 million from Transatlantic Reinsurance Company, a participant on several layers of specific and aggregate reinsurance with respect to various of our Program and Corporate Risk Management business and substantially all of our American Psychiatric Association program, $161.3 million from First Excess and Reinsurance Corp. and $145.4 million from American Re-insurance Company, which are both reinsurers on several current treaties. Transatlantic is rated "A++," First Excess, now GE Reinsurance Corporation and part of the Employers Re US Group, is rated "A++" and American Re-insurance is rated "A++" by A.M. Best Company. Through its reinsurance arrangements, each Legion Company places significant amounts of reinsurance with a variety of unaffiliated reinsurance companies. In order to maintain an acceptable level of net written premium for regulatory purposes, each Legion Company seeks to develop a level of net written premium which will not involve a significant degree of underwriting risk. In most Legion programs, the Legion Company retains liability for a specified amount of losses equal to at least 10% of the gross written premium. The level of losses retained by the Legion Company are set at a level such that no significant underwriting profit or loss should occur. In order to take regulatory credit for reinsurance ceded to one of the IPC Companies or to a captive insurance company, the Legion Company must receive a letter of credit for the amount of the insurance reserves ceded since the companies to which the reinsurance is ceded are not licensed reinsurers in any state of the United States. The letter of credit must be issued or confirmed by a bank which is a member of the U.S. Federal Reserve System. At December 31, 1999, the Legion Companies had $371 million of such letters of credit, of which $257 million was supplied by the IPC Companies. Legion Insurance, Legion Indemnity and Villanova are also subject to other regulation by the insurance departments of Pennsylvania, Illinois and other states where they are licensed. See "Regulatory Considerations." As of December 31, 1999, the Legion Companies had 355 accounts, they wrote gross statutory premiums of $1.2 billion during 1999 and had statutory capital of $349.9 million. See "Management's Discussion and Analysis of Financial Conditions and Results of Operations." Specialty Brokerage In 1991, we acquired a 51% interest in a newly-formed London reinsurance brokerage firm, MRM Hancock Limited. MRM Hancock specializes in the placement of reinsurance for captive insurance companies in the London market, including Lloyds of London. In 1996, we acquired the remaining 49% of MRM Hancock from the management of MRM Hancock and General International Ltd., a Bermuda insurance subsidiary of General Motors Corporation. MRM Hancock is now a wholly owned subsidiary. In July 1992, we acquired 100% of Park International Limited, a Bermuda broker specializing in placing coverage with Bermuda-based excess liability and corporate officers' and directors' liability carriers. In 1998, we acquired H&H Reinsurance Brokers, Ltd., a Bermuda-based specialty reinsurance broker that was part of the IAS Group. During 1999, all of our brokerage business was combined into one unit to better coordinate the specialty brokerage activities and to improve customer service. Segment information relating to our Specialty Brokerage operations is contained in footnote 16 of the Notes to the Consolidated Financial Statements set forth herein. Financial Services In July 1996, we acquired The Hemisphere Group Limited, a Bermuda financial services company. Hemisphere, which has been in business since 1980, has three active subsidiary operations in Bermuda providing company management, corporate secretarial, fund administration and trust management services. It also has a 7 wholly-owned Cayman Islands subsidiary. With a total staff of 158, Hemisphere had approximately 279 mutual fund clients as of December 31, 1999. In addition, Hemisphere administers investment holding companies, trading companies and trusts. Hemisphere has formed a network of professional relationships in the major financial centers of the world and this network is the source for significant ongoing referrals of business. During 1997, Hemisphere expanded its trust operations by the acquisition of Hugo Trust Company based in Jersey in the Channel Islands. Hemisphere Trust (Jersey) Limited, which is comprised of Hugo Trust Company and Augres Trust Company, provides a base to develop European based trust business and had revenues of $2.8 million in 1999. In January 1997, we incorporated MRM Life Ltd. in Bermuda to provide life insurance and related products, including annuities and variable annuities. We began marketing these products in the fourth quarter of 1997. In 1998, Hemisphere expanded its operations to Dublin, Ireland and Boston, Massachusetts in order to service the European offshore and US hedge fund industries, respectively. Competition Our insurance services compete with self-insurance plans, captive insurance companies managed by others and a variety of risk financing insurance policies. We believe that the IPC Program is the largest independent alternative market facility that is not affiliated with either a major retail insurance broker or a major insurance company. We face significant competition in marketing the IPC Program from other risk management programs offered by U.S. insurance companies, from captive insurance companies for large insureds and from rent-a-captives organized by large insurance companies and brokers. The primary basis for competition among these alternative risk management vehicles varies with the financial and insurance needs and resources of each potential insurance buyer. The principal factors that are considered include an analysis of the net present-value, after-tax cost of financing the client's expected level of losses, the amount of premium and collateral required, the attachment point of excess coverage provided in the event losses exceed expected levels as well as cash flow and tax planning considerations and the expected quality and consistency of the services to be provided. We believe that for insureds with financial characteristics and loss experience lending themselves to an IPC Program, the IPC Companies compete effectively with other risk financing alternatives. In the present soft insurance market characterized by excess capital and competitive pricing, it is generally easier for us to structure programs because of the availability and pricing of reinsurance but more difficult to attract potential participants and sell programs because of competition. In a hard market, such as that experienced during 1985-1987, it is more difficult to structure programs due to the high price and unavailability of reinsurance but we experience less competition in attracting clients and selling programs. Regulatory Considerations The Bermuda-based IPC Companies, Mutual Indemnity Ltd., Mutual Indemnity (Bermuda) Ltd. and Mutual Indemnity (US) Ltd., are subject to regulation under the Bermuda Companies Act of 1981 and as insurers under the Bermuda Insurance Act of 1978, as amended by the Insurance Amendment Act 1995, and the regulations promulgated thereunder. They are required, among other things, to meet and maintain certain standards of solvency, to file periodic reports in accordance with Bermuda statutory accounting rules, to produce annual audited financial statements and to maintain a minimum level of statutory capital and surplus. In general, the regulation of insurers in Bermuda relies heavily upon the auditors, directors and managers of the Bermuda insurer, each of which must certify that the insurer meets the solvency and capital requirements of the Bermuda Insurance Act of 1978. Mutual Indemnity (Barbados) Ltd. and Mutual Indemnity (Dublin) Ltd. are subject to similar regulation in Barbados and Ireland, respectively. The Legion Companies are subject to regulation and supervision by the insurance regulatory authorities of the various states of the United States in which they conduct business. This regulation is intended primarily for 8 the benefit of policyholders. Legion Insurance is admitted in 50 states, the District of Columbia and Puerto Rico, and is subject to regulation in each jurisdiction. Legion Indemnity is admitted in Illinois and is authorized as a surplus lines insurer in 42 states, the District of Columbia, Guam and the Virgin Islands. Legion Indemnity is regulated in Illinois but is generally not subject to regulation in those states where it acts as a surplus lines insurer. Villanova is admitted in 43 states and is subject to regulation in each jurisdiction. State insurance departments have broad regulatory, supervisory and administrative powers. These powers relate primarily to the standards of solvency which must be met and maintained, the licensing of insurers and their agents, the approval of rates and forms and policies used, the nature of, and limitations on, insurers investments, the form and content of periodic and other reports required to be filed, and the establishment of reserves required to be maintained for unearned premiums, losses and loss expenses or other purposes. The Legion Companies are also subject to state laws regulating insurance holding companies. Under these laws, state insurance departments may examine the Legion Companies at any time, require disclosure of material transactions by the holding company and require prior approval of certain "extraordinary" transactions, such as dividends from the insurance subsidiary to the holding company and purchases of certain amounts of the insurance subsidiary's capital stock. These laws also generally require approval of changes of control, which are usually triggered by the direct or indirect acquisition of 10% or more of the insurer. Most states require all admitted insurance companies to participate in their respective guaranty funds, which cover certain claims against insolvent insurers. Solvent insurers licensed in these states are required to cover the losses paid on behalf of insolvent insurers by the guaranty funds and are generally subject to annual assessments in the state by its guaranty fund to cover these losses. Some states also require licensed insurance companies to participate in assigned risk plans which provide coverage for workers' compensation, automobile insurance and other lines for insureds which, for various reasons, cannot otherwise obtain insurance in the open market. This participation may take the form of reinsuring a portion of a pool of policies or the direct issuance of policies to insureds. Generally, the Legion Companies participates as a pool reinsurer or assigns to other companies the direct policy issuance obligations. The calculation of an insurer's participation in these plans is usually based on the amount of premium for that type of coverage that was written by the insurer on a voluntary basis in a prior year. Assigned risk pools tend to produce losses which result in assessments to insurers writing the same lines on a voluntary basis. The Legion Companies also pay a fee to carriers assuming their direct policy issuance obligations. For each program a Legion Company writes, it estimates the amount of assigned risk and guaranty fund assessments that it will incur as a result of having written that program. If that estimate proves to be inadequate, the Legion Company is entitled under its reinsurance agreements with the IPC Companies to recover from the reinsurer the amount of any assessments in excess of the estimate. The IPC Companies are then entitled under the terms of each shareholder's agreement to recover this excess from the client. However, the IPC Companies are generally only able to collateralize this obligation up to the amount of the estimated assessments. The National Association of Insurance Commissioners, ("NAIC") has established the Insurance Regulatory Information System, ("IRIS") to assist state insurance departments in their regulation and oversight of insurance companies domiciled or operating in their respective states. IRIS has established a set of twelve financial ratios with specified "unusual values" for each ratio. Companies reporting four or more unusual values on the IRIS ratios may expect inquiries from individual state insurance departments concerning specific aspects of the insurer's financial position. As of December 31, 1999, Legion Insurance Company, Villanova Insurance Company and Legion Indemnity Company, had six, four and three unusual values, respectively. Four of the Legion Insurance Company's ratios,: Change in Net Writings, Surplus Aid to Surplus, Agent's Balance to Surplus and Estimated Current Reserve Deficiency to Surplus are directly related to premium growth. Change in Surplus was unusual due to the $143.0 million of additional capital contributed during 1999. The final ratio, Liabilities to Liquid Assets, was unusual on account of receiving $35 million in premium prior to receiving policy level detail to record the written premium. This inflates the ratio as it represents funds awaiting application to actual policies. Villanova had two unusual values related to premium growth, Change in Net Writings and Estimated Current Reserve Deficiency to Surplus. It also has an unusual value for a low investment yield. The low value for investment yield is the result of actual investments made late in the year while the ratio is calculated assuming 9 investments were made evenly throughout the year. The last unusual value for Villanova was a decrease in surplus. This was the result of the dividends to its parent and the sharing of receivables write-offs under the Company's pooling arrangement. Legion Indemnity had three unusual values, all premium growth related. They were Change in Net Writings, Surplus Aid to Surplus and Agent's Balance to Surplus. The NAIC has also adopted a Risk Based Capital for Insurers Model Act. The Risk Based Capital Model Act sets forth a risk based capital formula for property and casualty insurers. The formula measures minimum capital and surplus needs based on the risk characteristics of a company's products and investment portfolio. The formula is part of each company's annual financial statement filings and is to be used as a tool to identify weakly capitalized companies. In those states having enacted the Risk Based Capital Model Act, companies having capital and surplus greater than the minimum required by the formula but less than a specified multiple of the minimum may be subject to additional regulatory scrutiny from domiciliary state insurance departments. To date, nearly all states have adopted the Risk Based Capital Model Act. At December 31, 1999, the Legion Companies combined risk-based capital was $347.4 million. Under the risk-based capital tests, the threshold that constitutes the authorized control level which authorizes the commissioner to take whatever regulatory action considered necessary to protect the best interest of the policyholders and creditors of the Legion Companies, was $121 million. Therefore, the Legion Companies capital exceeds all requirements of the Risk Based Capital Model Act. In reaction to increasing rates for and decreasing availability of workers' compensation insurance starting in the early 1990's, many states began to enact reforms designed to reduce the cost of workers' compensation insurance, principally through a reduction in benefits or an increase in efficiencies in the system. In California, a reform package was enacted in 1993 providing for, in part, a reduction of premium rates, an increase in the standard necessary to prove "stress-related" work injuries, group-self insurance for employers and the repeal of the minimum rate law effective January 1, 1995. In Florida, the assigned risk plan was abolished and replaced by a joint underwriting authority. Other states have enacted or are considering similar reforms. Workers' compensation reform, together with the effects of competition and other factors, has led to reduced premiums in many states. This has reduced the appeal of alternative market products such as those offered by us. This is apparent in California where workers' compensation rates have declined by more than 50% since mid-1993 while benefit levels have increased. This will inevitably lead to significant losses for those traditional carriers who are writing this business. A number of these carriers have recently filed for significant rate increases. The Legion Companies are permitted to pay dividends only from statutory earned surplus. Subject to this limitation, the maximum amount of dividends that it is able to pay in any twelve-month period will be the greater of statutory net income in the preceding year or 10% of statutory surplus. Based on 1999 results, the maximum dividend the Legion Companies would be permitted to pay in 2000 is $35.0 million. Losses and Loss Reserves We establish reserves for losses and loss adjustment expenses related to claims which have been reported on the basis of the evaluations of independent claims adjusters under the supervision of each Legion Company's claims staff. In addition, reserves are established for losses which have occurred but have not yet been reported and for adverse development of reserves on reported losses by us on a quarterly basis. The estimate of claims arising for accidents which have not yet been reported is based upon our's and the insurance industry's experiences together with statistical information with respect to the probable number and nature of these claims. Gross loss reserves of $136.0 million and $121.0 million at December 31, 1999 and 1998 have been discounted by $39.5 million and $36.2 million, respectively, assuming interest rates of 6% for medical malpractice reserves and 4% for excess workers' compensation reserves based on the recommended rate under Pennsylvania law. These reserves are also discounted in our regulatory filings. In 1993, we adopted SFAS 113 and reclassified substantially all of our net retained medical malpractice reserves as claims deposit liabilities. On 10 a net basis, therefore, the only discounted reserves are those relating to the Company's share of the excess reinsurance coverage provided in connection with each program. This discounting reduced net loss reserves on our consolidated balance sheets by $3.8 million and $4.7 million at December 31, 1999 and 1998, respectively. Prior to 1995 loss development has been generally favorable. The adverse development in recent years has principally been a result of losses on terminated programs. The following table sets forth a reconciliation of beginning and ending reserves for losses and loss adjustment expenses in accordance with generally accepted accounting principles, also referred to as GAAP:
Year ended December 31, -------------------------------- 1999 1998 1997 ---------- ---------- -------- (In thousands) Gross reserves for losses and loss adjustment expenses, beginning of year.......................... $1,190,426 $ 716,461 $419,737 Recoverable from reinsurers................. 1,079,562 630,697 350,318 ---------- ---------- -------- Net reserves for losses and loss adjustment expenses, beginning of year.......................... 110,864 85,764 69,419 Less: Other net reserves(1)................. (10,184) (3,542) (1,008) ---------- ---------- -------- 100,680 82,222 68,411 Provision for losses and loss adjustment expenses for claims occurring in: Current year.............................. 140,574 74,476 50,301 Prior years............................... 7,131 3,782 (444) ---------- ---------- -------- Total losses and loss adjustment expenses incurred................................... 147,705 78,258 49,857 ---------- ---------- -------- Payments for losses and loss adjustment expenses for claims occurring in: Current year.............................. (61,697) (15,039) (10,850) Prior years............................... (64,562) (44,761) (25,196) ---------- ---------- -------- Total payments.............................. (126,259) (59,800) (36,046) ---------- ---------- -------- Net reserves for losses and loss adjustment expenses, end of year...................... 122,126 100,680 82,222 Other net reserves(1)....................... 8,058 10,184 3,542 ---------- ---------- -------- 130,184 110,863 85,764 ---------- ---------- -------- Recoverable from reinsurers................. 1,729,936 1,079,563 630,697 ---------- ---------- -------- Gross reserves for losses and loss adjustment expenses, end of year................................ $1,860,120 $1,190,426 $716,461 ========== ========== ========
- -------- (1) Other reserves represent reinsurance contracts which are being run-off and which were written in subsidiaries other than Legion, plus reserves for other run-off business. 11 The following table reconciles the difference between the Legion Companies' portion of the GAAP reserves and those contained in regulatory filings made by the Legion Companies' in accordance with statutory accounting practices, also referred to as SAP. Reconciliation of SAP and GAAP Reserves
Year ended December 31, -------------------------------- 1999 1998 1997 ---------- ---------- -------- (in thousands) Reserves for Legion losses and loss adjustment expenses, end of year SAP............................. $ 141,709 $ 109,506 $114,211 Gross-up for ceded reinsurance reserves...... 1,728,988 1,077,349 629,227 Provision for reinsurance uncollectible on a GAAP basis reported as a provision for unauthorized reinsurance on a SAP basis..... -- 302 924 Reclassification of loss reserves to claims deposit liabilities......................... (13,853) (19,163) (29,011) Reclassification of retroactive reinsurance reserve to receivable from affiliate........ 2,777 8,598 -- Elimination of statutory increase in assigned risk reserves............................... (15,000) (15,000) (15,000) Reserves for audit premium estimates not included on SAP basis....................... 4,260 2,745 730 ---------- ---------- -------- Reserves for Legion losses and loss adjustment expenses......................... 1,840,361 1,164,337 701,081 Other non-US Reserves........................ 11,567 13,813 10,489 ---------- ---------- -------- Liabilities for unpaid losses and loss adjustment expenses......................... 1,851,928 1,178,150 711,570 Reserves on run-off business................. 8,192 12,276 4,891 ---------- ---------- -------- Total Reserves for Losses and Loss adjustment expenses, end of year GAAP............................ $1,860,120 $1,190,426 $716,461 ========== ========== ========
The following table presents the development of the Company's ongoing net reserves for 1989 through 1999. The top line of the table shows the estimated reserve for unpaid losses and loss adjustment expenses recorded at the balance sheet date for each of the indicated years. This amount represents the estimated amount of losses and loss adjustment expenses for claims that are unpaid at the balance sheet date, including losses that have been incurred but not yet reported to the Company. The table also shows the re-estimated amount of the previously recorded reserve based on experience as of the end of each succeeding year. The estimate changes as more information becomes known about the frequency and severity of claims for individual years. The "cumulative redundancy (deficiency)" represents the aggregate change in the estimates over all prior years. It should be noted that the following table presents a "run- off" of balance sheet reserves, rather than accident or policy year loss development. Therefore, each amount in the table includes the effects of changes in reserves for all prior years. 12 ANALYSIS OF LOSS AND LOSS EXPENSE DEVELOPMENT (Net of Reinsurance Recoverable)
Year Ended December 31, --------------------------------------------------------------------------------------------------------------- 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 ------- ------- -------- -------- -------- -------- -------- -------- --------- ---------- ---------- (In thousands) Gross reserve for losses and loss adjustment expenses (1) $43,339 $88,437 $142,605 $191,775 $205,272 $242,189 $315,689 $419,737 $ 716,461 $1,190,426 $1,860,120 Reinsurance reserves (22,221) (52,321) (89,295) (113,075) (148,637) (178,002) (256,678) (350,318) (630,697) (1,079,562) (1,729,936) ------- ------- -------- -------- -------- -------- -------- -------- --------- ---------- ---------- Net reserve for losses and loss adjustment expenses 21,118 36,116 53,310 78,700 56,635 64,187 59,011 69,419 85,764 110,864 130,184 Other reserves (3) (2,540) (1,357) (1,464) (1,531) (1,118) (1,006) (1,008) (1,008) (3,542) (10,184) (8,058) ------- ------- -------- -------- -------- -------- -------- -------- --------- ---------- ---------- 18,578 34,759 51,846 77,169 55,517 63,181 58,003 68,411 82,222 100,680 122,126 Reclassification of reserves to claim deposit liabilities (2) (12,560) (20,796) (28,322) (36,078) -- -- -- -- -- -- -- ------- ------- -------- -------- -------- -------- -------- -------- --------- ---------- ---------- Reserve for losses and loss adjustment expenses restated for the effects of SFAS 113 : 6,018 13,963 23,524 41,091 55,517 63,181 58,003 68,411 82,222 100,680 122,126 Reserve re- estimated as of : One year later 20,220 35,453 53,193 40,443 55,131 60,917 54,982 67,966 86,002 107,811 Two years later 20,476 34,953 24,269 41,433 52,381 56,767 54,328 70,502 91,809 Three years later 20,434 13,131 23,298 39,351 47,657 56,291 56,576 74,294 Four years later 6,328 12,132 22,010 36,330 47,740 57,760 59,198 Five years later 6,397 12,268 20,390 36,424 48,162 60,762 Six years later 5,993 10,649 20,500 36,652 51,532 Seven years later 4,737 10,700 20,689 37,515 Eight years later 4,768 10,750 23,472 Nine years later 4,672 10,757 Ten years later 4,522 Cumulative Redundancy (Deficiency) 1,496 3,206 52 3,576 3,985 2,419 (1,195) (5,883) (9,587) (7,131) Percentage 25% 23% 0% 9% 7% 4% -2% -9% -12% -7% Reserve for Losses and Loss Adjustment Expenses without the effect of Discounting : Discounted reserve $18,578 $34,759 $ 51,846 $ 77,169 $ 55,517 $ 63,181 $ 58,003 $ 68,411 $ 82,222 $ 100,680 $ 122,126 Total Discount 4,144 6,091 8,345 10,785 1,387 2,905 3,291 3,547 3,671 4,667 3,745 ------- ------- -------- -------- -------- -------- -------- -------- --------- ---------- ---------- Ultimate Reserve Liability 22,722 40,850 60,191 87,954 56,904 66,086 61,294 71,958 85,893 105,347 125,871 Reclassification of reserves to claim deposit liabilities (2) (16,704) (26,889) (36,667) (46,862) -- -- -- -- -- -- -- ------- ------- -------- -------- -------- -------- -------- -------- --------- ---------- ---------- Ultimate reserve liability restated for the effects of SFAS 113 6,018 13,961 23,524 41,092 56,904 66,086 61,294 71,958 85,893 105,347 125,871 Reserve re- estimated as of : One year later 23,493 41,084 60,820 40,443 56,272 63,480 57,866 71,008 89,347 111,972 Two years later 23,760 39,668 24,269 41,433 53,410 59,186 57,097 73,790 95,584 Three years later 23,025 13,131 23,298 39,351 48,499 58,558 59,456 77,490 Four years later 6,328 12,132 22,010 36,330 48,400 60,096 61,943 Five years later 6,397 12,268 20,390 36,424 48,854 62,919 Six years later 5,993 10,649 20,500 36,652 52,031 Seven years later 4,737 10,700 20,689 37,515 Eight years later 4,768 10,750 23,472 Nine years later 4,672 10,757 Ten years later 4,522 Cumulative Redundancy (Deficiency) without discount effect 1,346 3,211 2,835 4,440 8,050 5,990 1,838 (1,832) (3,454) (6,625) Percentage 22% 23% 12% 11% 14% 9% 3% -3% -4% -6% Cumulative Amount of Reserve Paid through : One year later $ 1,768 $ 4,705 $ 9,647 $ 15,972 $ 17,909 $ 19,720 $ 10,955 $ 25,196 $ 44,761 $ 65,931 Two years later 2,590 4,986 13,158 21,121 25,306 21,054 22,422 43,068 62,781 Three years later 3,541 6,077 15,104 24,991 27,134 28,547 31,925 49,571 Four years later 3,857 6,859 16,897 25,510 31,972 34,398 41,684 Five years later 4,093 7,533 17,311 28,110 35,967 45,706 Six years later 4,322 7,381 17,943 30,793 41,392 Seven years later 3,842 7,484 19,494 33,432 Eight years later 3,662 8,304 20,920 Nine years later 4,010 8,845 Ten years later 4,279
(1) Medical malpractice reserves have been discounted at 8.25% in 1989 and 1990, and 6% in 1991, 1992, 1993, 1994, 1995, 1996, 1997, 1998 and 1999. (2) The re-classification of reserves to claims deposit liablilties is a result of the adoption of SFAS 113. (3) Other reserves represent reinsurance contracts which are being run-off and which were written in subsidiaries other than Legion, plus reserves on other run-off business. 13 Investments and Investment Results For a complete description of our investments and investment results, see note 5 to the consolidated financial statements. Risk Factors You should carefully consider the risks described below regarding us and our common shares. The risks and uncertainties described below are not the only ones we face. There may be additional risks and uncertainties. If any of the following risks actually occur, our business, financial condition or results of operations could materially be affected and the trading price of our common shares could decline significantly. New insurance legislation in some states has increased competition, which has reduced our fee revenues and made sales and renewals more difficult. Beginning in 1993, legislative reforms designed to reduce the cost of workers' compensation insurance in some important workers' compensation markets caused competition to increase significantly. This heightened level of competition has persisted. Increased competition has lowered the premium rates that we may charge, which has reduced our fee revenue. Increased competition also has made sales and renewals of our programs more difficult. Workers' compensation reform, to the extent it reduces premiums and introduces relative stability in the traditional workers' compensation market, may reduce the appeal of alternative market products such as those offered by us. If we are unable to purchase reinsurance and transfer risk to reinsurers, our net income would be reduced or we could incur a loss. A significant feature of our risk management programs is the utilization of reinsurance to transfer all or a portion of risk not retained by the insured. The availability and cost of reinsurance is subject to market conditions, which are outside of our control. As a result, we may not be able to successfully purchase reinsurance and transfer risk through reinsurance arrangements. A lack of available reinsurance would adversely affect the marketing of our programs and force us to retain all or a part of the risk that cannot be reinsured. If we were required to retain these risks and ultimately pay claims with respect to these risks, our net income would be reduced or we could incur a loss. In addition, we are subject to credit risk with respect to our reinsurers because the transfer of risk to a reinsurer does not relieve us of our liability to the insured. The failure of a reinsurer to honor its obligations would reduce our net income or could cause us to incur a loss. If the issuers of letters of credit and clients fail to honor their obligations, our net income would be reduced or we could incur a loss. Each of our clients chooses a level of risk retention, which is reinsured either by one of our foreign reinsurance subsidiaries or by the client's captive insurance company. Letters of credit generally also supports this retention. In addition, we rely extensively on letters of credit issued or confirmed by a bank in order to secure a portion of the client's obligation to reimburse us for losses on a program. The failure of a bank to honor its letter of credit or the inability of a client to honor its uncollateralized reimbursement obligation would reduce our net income or could cause us to incur a loss. If tax laws prevent our IPC Program participants from deducting premiums paid to us, we would be unable to competitively market this program. The tax treatment of the IPC Program is not clear and varies significantly with the circumstances of each IPC Program participant. However, some participants deduct the premiums paid to us for federal income tax purposes. A determination that a significant portion of the IPC Program participants are not entitled to deduct the premiums paid to us, without a similar determination as to competing products, would adversely affect the marketability of the IPC Program. 14 If our loss reserves are inadequate to meet our actual losses, our net income would be reduced or we could incur a loss. We are required to maintain reserves to cover our estimated ultimate liability losses and loss adjustment expenses for both reported and unreported claims incurred. These reserves are only estimates of what we think the settlement and administration of claims will cost based on facts and circumstances then known to us. Because of the uncertainties that surround estimating loss reserves and loss adjustment expenses, we cannot be certain that ultimate losses will not exceed these estimates of loss and loss adjustment reserves. If our reserves are insufficient to cover our actual losses and loss adjustment expenses, we would have to increase our reserves and our net income would be reduced or we could incur a loss. Insurance laws and regulations restrict our ability to operate. We are subject to extensive regulation under state and foreign insurance laws. These laws limit the amount of dividends that can be paid by our operating subsidiaries, impose restrictions on the amount and type of investments that they can hold, prescribe solvency standards that must be met and maintained by them and require them to maintain reserves. These laws also require disclosure of material transactions by MRM and require prior approval of certain "extraordinary" transactions. These "extraordinary" transactions include declaring dividends that exceed statutory maximums from operating subsidiaries to MRM or purchases of an operating subsidiary's capital stock. These laws also generally require approval of changes of control. Our failure to comply with these laws could subject us to fines and penalties and restrict us from conducting business. The application of these laws could affect our liquidity and could restrict our ability to expand our business operations through acquisitions involving our insurance subsidiaries. Our investment objectives may not be realized. The success of our investment objectives is affected by general economic conditions that are outside of our control. General economic conditions can adversely affect the markets for interest-rate-sensitive securities, including the extent and timing of investor participation in those markets, the level and volatility of interest rates and, consequently, the value of fixed income securities. We may not be able to realize our investment objectives, which could reduce our net income or cause us to incur a loss. Our industry is highly competitive and we may not be able to compete successfully in the future. Our industry is highly competitive and has experienced severe price competition over the last several years. We compete in the United States and international markets with domestic and international insurance companies. Some of these competitors have greater financial resources than we do, have been operating for longer than we have and have established long-term and continuing business relationships throughout the industry, which can be a significant competitive advantage. In addition, we expect to face further competition in the future. We may not be able to compete successfully in the future. We are dependent on our key personnel. Our success has been, and will continue to be, dependent on our ability to retain the services of our existing key executive officers and to attract and retain additional qualified personnel in the future. The loss of the services of any of our key executive officers or the inability to hire and retain other highly qualified personnel in the future could adversely affect our ability to conduct our business. If U.S. tax law changes, our net income may be reduced. Certain members of Congress have recently expressed concern over an alleged competitive advantage that foreign-controlled insurers and reinsurers may have over U.S.-controlled insurers and reinsurers due to the purchase of reinsurance by U.S. insurers from affiliates operating in certain foreign jurisdictions, including Bermuda. In this connection, it is possible that legislation will be proposed which would increase the U.S. tax 15 burden on such transactions. No prediction can be made as to whether such legislation will ever be enacted into law. Were such legislation to be implemented, the U.S. tax burden on any business ceded from our licensed U.S. insurance subsidiaries to certain offshore reinsurers could be increased which could adversely affect our net income. ITEM 2. PROPERTIES We and our subsidiaries operate out of leased premises, the most significant of which are in Philadelphia and Bermuda. ITEM 3. LEGAL PROCEEDINGS At December 31st 1999, the Company was engaged in three separate arbitration proceedings against reinsurers who have withheld payment under reinsurance agreements with Legion. These proceedings are being conducted in accordance with the arbitration provisions contained in the relevant reinsurance agreements and will be held before arbitration panels in Philadelphia. At December 31st, 1999, the amount currently owing from these reinsurers for paid losses was approximately $6 million although this amount will increase if the reinsurers continue to withhold payment of reinsurance recoveries on future paid losses. These arbitrations are in the preliminary stages and, to date, none of the reinsurers has produced any evidence that causes the Company to believe it will not recover all amounts owing to it under the relevant agreements. In 1997 The United States Internal Revenue Service (the "IRS") commenced an examination of the Company's calculation of "Related Party Insurance Income" ("RPII") for 1993 and 1994. We calculate RPII on behalf of certain of our clients participating in its Insurance Profit Center Program in order to provide those clients with information used in preparing their United States income tax returns. We believe that our calculation of RPII was materially correct in both years. As a part of this examination, the IRS also questioned whether certain clients of the Insurance Profit Center Program properly deducted all or a portion of the premium paid in connection with their program. We believe that the IRS has completed its examination. No adjustments were required as a result of the examination either to the Company's RPII calculations or generally to client's tax returns with regard to the deductibility of premiums paid to the IPC Program. ITEM 4. SUBMISSION OF MATTERS TO SECURITY HOLDERS None 16 EXECUTIVE OFFICERS OF THE REGISTRANT
Officer Principal Occupation Name Age Since & Business Experience ---- --- ------- --------------------- Robert A. Mulderig...... 47 1982 Chief Executive Officer of MRM since 1982; Chairman of Legion Insurance Co.; Director of The Galtney Group, Inc., and The Bank of N.T. Butterfield & Sons Ltd. Also serves as a director or officer of a number of unaffiliated captive insurance companies to which we provide management services. John Kessock, Jr. ...... 51 1979 President of the MRM, Mutual Group Ltd. and Legion Insurance; primarily responsible for marketing the Company's programs since 1979; Chairman of Commonwealth Risk Services L.P. and the IPC Companies. Director of Ward North America, Inc. Richard G. Turner....... 49 1984 Executive Vice President of MRM; President of CRS since 1984; Vice President of Marketpac International, a subsidiary of American International Group, from 1979 to 1984. Director of Colonial Penn Insurance Company, Glenn R. Partridge...... 46 1983 Executive Vice President of MRM; Senior Vice President of Legion Insurance; primarily responsible for Legion Insurance's underwriting function since 1987; Vice President of CRS from 1983 to 1987. James C. Kelly.......... 45 1985 Senior Vice President and Chief Financial Officer of MRM; Vice President and Chief Financial Officer since March 1991; Vice President & Controller since 1985. Paul D. Watson.......... 41 1986 Senior Vice President and Chief Operating Officer of MRM; Vice President of MRM since March 1991; President of the IPC Companies from July 1992 until December 1998; held various management and accounting positions since joining MRM in 1986. Richard E. O'Brien...... 42 1995 Senior Vice President and General Counsel of MRM since March 1995. Prior thereto partner in the law firm of Dunnington, Bartholow & Miller, New York.
All Executive Officers are appointed by MRM's Board of Directors and serve until the next annual general meeting of the shareholders or until their successors are appointed. Section 16 (a) Beneficial Ownership Reporting Compliance Section 16 (a) of the Exchange Act requires our directors and executive officers, and persons who own more than ten percent of a registered class of our equity securities, to file with the United States Securities and Exchange Commission, also known as the SEC, initial reports of ownership and reports of changes in ownership of Common Stock and other of our equity securities . Officers, directors and greater than ten-percent shareholders are required by SEC regulation to furnish us with copies of all Section 16(a) forms they file. To our knowledge, based solely on review of the copies of the reports furnished to us and written representations that no other reports were required, during the year ended December 31, 1999, all Section 16(a) filing requirements applicable to our officers, directors and greater than ten- percent beneficial owners were complied with, except that Mrs. Patrick filed a Form 4 late with respect to the sale of common stock, and Mr. Galtney filed a Form 4 late with respect to the purchase of common stock. 17 PART II ITEM 5. MARKET FOR COMMON SHARES AND RELATED STOCKHOLDER MATTERS Our common shares have been listed on the New York Stock Exchange under the symbol MM since June 25, 1991. Our common shares were listed in connection with our initial public offering completed in July 1991. There were 411 holders of record of our common shares as of February 25, 2000. The following table sets forth the high and low closing sale prices for the shares during 1998 and 1999 for the calendar quarters indicated as reported by the New York Stock Exchange Composite Tape.
High Low -------- ------- Year Ended December 31, 1998 First Quarter............................................. 34 7/16 28 3/16 Second Quarter............................................ 36 31 1/2 Third Quarter............................................. 38 15/16 30 Fourth Quarter............................................ 39 7/8 27 1/2 Year Ended December 31, 1999 First Quarter............................................. 42 5/8 32 7/8 Second Quarter............................................ 40 3/8 33 3/8 Third Quarter............................................. 35 12 1/4 Fourth Quarter............................................ 16 15/16 10 3/8 Year Ended December 31, 2000 First Quarter (through March 17, 2000).................... 17 12 5/8
The last reported closing price per share of our common shares on the New York Stock Exchange Composite Tape on March 17, 2000 was $15 1/16. During 1999 and 1998 we paid dividends of $.25 and $.21 per common share, respectively. Dividends are paid quarterly. Our ability to pay dividends is restricted due to certain insurance regulations. See "Management's Discussion and Analysis of Financial Conditions and Results of Operations" and Note 12 to the consolidated financial statements. 18 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA INCOME STATEMENT DATA:
Year Ended December 31, ------------------------------------------------------ 1999 1998(3) 1997(3) 1996(3) 1995(3) ---------- ---------- ---------- ---------- ---------- (In thousands, except per share amounts) Revenues................ $ 387,626 $ 287,914 $ 230,498 $ 171,426 $ 138,659 ---------- ---------- ---------- ---------- ---------- Income before income taxes and minority interest............... 50,307 72,970 60,109 46,465 40,368 ---------- ---------- ---------- ---------- ---------- Income before minority interest............... 50,672 64,434 49,477 38,322 31,502 ---------- ---------- ---------- ---------- ---------- Income before extraordinary loss..... 50,620 64,527 49,477 38,067 31,027 ---------- ---------- ---------- ---------- ---------- Net income.............. 50,438 64,527 49,477 38,067 31,027 ---------- ---------- ---------- ---------- ---------- Net income available to common shareholders.... 50,438 64,527 49,372 37,900 30,837 ---------- ---------- ---------- ---------- ---------- Net income available to common shareholders --Basic................ $ 1.18 $ 1.56 $ 1.25 $ 99 $ .82 --Diluted.............. $ 1.14 $ 1.42 $ 1.15 $ .93 $ .79 ---------- ---------- ---------- ---------- ---------- Weighted average number of common shares outstanding(1) --Basic................ 42,797 41,275 39,379 38,369 37,442 --Diluted.............. 49,607 50,233 48,785 47,281 40,313 ---------- ---------- ---------- ---------- ---------- Dividends per common share.................. $ .25 $ .21 $ .19 $ .16 $ .13 ---------- ---------- ---------- ---------- ---------- BALANCE SHEET DATA: As at December 31, ------------------------------------------------------ 1999 1998(3) 1997(3) 1996(3) 1995(3) ---------- ---------- ---------- ---------- ---------- (In thousands) Total assets............ $4,033,174 $3,074,257 $2,206,050 $1,690,428 $1,425,411 ---------- ---------- ---------- ---------- ---------- Reserve for losses and loss expenses.......... 1,860,120 1,190,426 716,461 419,737 315,689 ---------- ---------- ---------- ---------- ---------- Debt(2)................. 227,898 125,485 128,711 122,211 116,039 ---------- ---------- ---------- ---------- ---------- Redeemable preferred and common shares.......... -- -- 1,929 4,462 4,026 ---------- ---------- ---------- ---------- ---------- Shareholders' equity.... 358,144 343,166 263,575 211,343 169,207 ---------- ---------- ---------- ---------- ----------
- -------- (1) See Note 14 of Notes to Consolidated Financial Statements for an explanation of the method used to determine the number of shares used to compute per share amounts. (2) See Note 6 and 7 of Notes to Consolidated Financial Statements. (3) All prior period results have been restated to reflect the pooling of interests following the acquisition of Captive Resources, Inc. 19 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's Discussion and Analysis of Financial Condition and Results of Operations CONSOLIDATED RESULTS OF OPERATIONS For the Years Ended December 31, 1999, 1998 and 1997 Consolidated Net income decreased by 22% to $50.4 million in 1999 from $64.5 million in 1998 which was in turn a 30% increase over the $49.5 million earned in 1997. The decline in earnings in 1999 is due to slower growth in the Program Business segment and a decline in Corporate Risk Management offset, in part, by growth in Specialty Brokerage and Financial Services. 1999 earnings were also adversely affected by the third quarter provisions related to net losses incurred on terminated programs of $8 million, net of tax. The increase in 1998 earnings was primarily attributable to the growth experienced in the Program Business and Financial Services segments. All prior period results have been restated to reflect a pooling of interests following the acquisition of Captive Resources, Inc. Set forth in Table I is an analysis of the components of the Company's revenues for each of the last three years. TABLE I--REVENUES (In thousands)
Year Ended December 31, ------------------------------------------ 1999 Growth 1998 Growth 1997 -------- ------ -------- ------ -------- Fee income.......................... $177,711 13% $157,271 30% $121,258 Premiums earned..................... 181,798 78 101,913 21 84,200 Net investment income............... 33,616 14 29,590 11 26,592 Realized capital losses............. (5,199) 418 (1,003) (38) (1,608) Other income........................ (300) (310) 143 155 56 -------- -------- -------- Total........................... $387,626 35% $287,914 25% $230,498 ======== ======== ========
The growth of Fee income and Premiums earned over the past three years has been primarily due to the strong growth in Program Business, which has compensated for the decline in Corporate Risk Management business. Overall, pre-tax profit margins on Fee income fell in 1999 to 28% compared to 35% in 1998 and 37% in 1997. SEGMENT ANALYSIS The components of Fee income by business segment are illustrated in Table II. TABLE II--FEE INCOME BY BUSINESS SEGMENT (In thousands)
Year Ended December 31, ---------------------------------------- 1999 Growth 1998 Growth 1997 -------- ------ -------- ------ -------- Program Business fees.................. $ 95,132 16% $ 82,267 67% $ 49,363 Corporate Risk Management fees...................... 49,365 (4) 51,640 (6) 54,800 Specialty Brokerage fees............. 13,692 52 9,021 8 8,351 Financial Services fees.............. 19,522 36 14,343 64 8,744 -------- -------- -------- Total.............................. $177,711 13% $157,271 30% $121,258 ======== ======== ========
20 Program Business Program Business involves replacing traditional insurers and acting as the conduit between producers of specialty books of business and reinsurers wishing to write that business. Program Business accounted for 53% of total Fees for 1999 compared to 52% in 1998 and 41% in 1997. This growth has resulted from the continued expansion of this business as a result of reinsurers' increased appetite for premium volume in the current soft market. Fees earned on individual Program accounts are more likely to grow compared to Corporate accounts because new policy holders are constantly being added in each program. Program Business also has historically had a higher retention rate than Corporate Risk Management. Pre-tax margins in this segment were 28% for 1999 compared to 40% in 1998 and 39% in 1997. The second half of 1999 saw a decline in the growth rate and margins in this segment as a result of a decline in premium rates, especially at the Company's underwriting management subsidiary, Small Business Underwriters. Corporate Risk Management Corporate Risk Management, the Company's original business segment, involves providing services to businesses and associations seeking to insure a portion of their risk in a loss sensitive Alternative Market structure. This segment, which accounted for 28% of total Fee income for 1999 compared to 33% in 1998 and 45% in 1997, has been the most affected by the extremely soft insurance market cycle for commercial risks. Corporate Risk Management Fees decreased in both 1998 and 1999 due to these soft market conditions. The number of Corporate Risk Management accounts decreased in 1999 to 103 from 118 in 1998 which was in turn down from 154 in 1997. Profit margins fell in 1999 to 32% compared to 39% in 1998 and 37% in 1997. The 1999 profit margin was negatively impacted by the decrease in Fees on Program Business because certain Operating expenses are not separately identified by segment, but rather are apportioned by Fee income. Historically, workers' compensation has been the major line of business written by the Company in both its Corporate Risk and Program Business segments. Generally, competition for workers' compensation business has increased in recent years and the resulting under-pricing of workers' compensation risks by traditional insurers has reduced the incentive for insureds to enter "Alternative Market" vehicles such as those offered by the Company in its Corporate Risk Management segment. However, the Company is beginning to see price increases in a number of lines, particularly in California workers' compensation and in accident and health across the U.S., resulting in increased submission activity. Despite these competitive forces, the Company was successful in increasing its business as a result of the attractiveness of Program Business in this soft reinsurance market. The Company continued to diversify its business to reduce its reliance on the workers' compensation market and was successful in doing so. As a percentage of Total Fee income, workers' compensation accounts decreased from over 80% at December 31, 1994 to 53% at December 31, 1999 as a result of the Company writing accounts comprising other lines of coverage such as accident and health, commercial, auto liability, auto physical damage and other liability coverages as well as the expansion of the Company's Financial Services segment. Specialty Brokerage The Company's Specialty Brokerage business segment provides access to Alternative Risk Transfer insurers and reinsurers in Bermuda and Europe. Fees in this segment grew by 52% in the year as a result of increased business placed in Bermuda and London. Profit margins improved to 38% from 25% in 1998 and 31% in 1997 primarily as a result of the increased revenues. Financial Services Financial Services, the Company's newest business segment, provides administrative services to offshore mutual funds and other companies. This segment also includes the Company's family of proprietary mutual funds as well as asset accumulation life insurance products for the high net worth market. Financial Services accounted for 11% of total Fee income for 1999, up from 9% for 1998 and 7% in 1997. Fees from Financial Services 21 increased primarily as a result of an increase in the number of mutual funds under management from 129 in 1997 and 195 in 1998, to 279 in 1999. Profit margins decreased from 26% in 1997 to 4% in 1998, and improved to 7% in 1999. Margins in the Financial Services segment were adversely affected in both 1998 and 1999 by the previously announced revised Executive Incentive Plan implemented in 1998. The effect of this revised Executive Incentive Plan will continue through 2000. Excluding the effect of the revised Executive Incentive Plan, the profit margins in this segment would have been 17% and 18% for the years ended December 31, 1999 and 1998 respectively. UNDERWRITING The Company generally requires each Corporate Risk Management client to indemnify it against an underwriting loss and the client normally provides collateral for at least the difference between the funds available in that client's account and the level of expected losses as actuarially determined by the Company, although in certain circumstances the collateral level is below the level of expected losses. This is also the case for Program Business clients who participate in the IPC Programs. For Program Business clients that do not participate in the IPC Programs, reinsurance protection is purchased by the Company to minimize its underwriting risk. The Company faces a credit exposure in the event that losses exceed their expected level and the client is unable or unwilling to honor its indemnity to the Company. The Company also faces credit exposure on both Program and Corporate Risk Business if its clients or brokers fail to pay the premium due, through failure of the program manager or broker to properly administer the program and through failure of reinsurers to honor their obligations. Lastly, the Company is exposed to underwriting risk if losses incurred under programs exceed their reinsurance limits or where there is a gap in purchased reinsurance cover. The Company has established provisions for losses as a result of these exposures for certain clients.These provisions, which totaled $18.0 million at December 31, 1999, $7.3 million in 1998 and $5.6 million in 1997, reduced the level of Fee income in each year by $3.1 million, $.9 million and $1.1 million respectively. These provisions also adversely impacted the underwriting results in each year by $7.6 million, $.8 million and $0 in 1999, 1998, and 1997 due to programs where losses exceeded reinsurance limits and uncollected premiums. The increase in provisions from 1998 to 1999 relates primarily to provisions established in the third quarter on a number of terminated programs. The 1999 provisions are net of a reinsurance recovery of $14.7 million under a contingency excess of loss policy. The increase in the number of accounts and their inherent growth in premium volume, the increase in the clients' aggregate retentions since 1991, the amounts recoverable from reinsurers, which amounted to $2.0 billion at December 31, 1999 and $1.3 billion at December 31, 1998, in addition to competitive factors which have limited the amount of collateral that clients are willing to provide, have significantly increased the Company's exposure to such losses. The Company evaluates the financial condition of its clients, brokers and reinsurers to minimize its exposure to losses from insolvencies. During 1999, the Company initiated binding arbitration proceedings for the payment of reinsurance recoverables from a number of reinsurers who have withheld payment due to the Company. The amounts due to the Company relate primarily to reinsurance on workers' compensation coverage. The Company believes it will ultimately prevail in such arbitrations and any related actions that may arise. Premiums earned increased by 78% in 1999, 21% in 1998 and 49% in 1997. These increases are attributable to the shift in business from the Corporate Risk Management segment to the Program Business segment and the strong growth within this segment. Program Business usually involves higher premiums than business derived from the Corporate Risk Management segment due to new policies constantly being added by agents. Premiums earned represent the net premiums retained by the Company on which it bears underwriting risk. The Company believes that both the volatility of underwriting profit or loss and the probability of experiencing a severe underwriting loss are less than would ordinarily be expected for a traditional property/casualty insurer, due to the nature of the business written by the Company and the structure of its reinsurance. In the past, the level of Premiums earned has been closely matched by the level of Total insurance costs, resulting in small amounts of underwriting loss as a percentage of Premiums earned. However, in 1999, Losses incurred under certain 22 programs exceeded their reinsurance limits and caused underwriting losses to be higher than historical levels. The fact that Premiums earned have historically matched Total insurance costs means that even a significant fluctuation in Premiums earned should have a relatively insignificant impact on the Company's Net income. Included in Premiums earned are assigned risk premiums of $1.8 million in 1999 as compared to $2.5 million in 1998 and $8.4 million in 1997. The underwriting losses associated with these assigned risk premiums, together with other charges imposed by certain states on voluntary insurers such as Legion to support involuntary market losses ("residual market loads"), are passed on by Legion to clients' accounts. Other than the risks described above, the Company's principal exposure to underwriting loss exists in relation to the premium associated with the Company's retention of a portion of the specific and aggregate excess risk on each client's account. On this retained excess risk the Company may experience volatility in underwriting results. The portion of the Company's Premiums earned which relate to this risk was $4.1 million in 1999 as compared to $2.1 million in 1998 and $2.2 million in 1997, representing 2%, 2%, and 3% of Premiums earned in 1999, 1998 and 1997 respectively. The Company incurred an underwriting loss of $17.5 million in 1999, $2.4 million in 1998 and $1.5 million in 1997. The large loss in 1999 was principally due to the provisions on terminated programs described above. These underwriting losses were also a result of retained risk on the Company's treaties and underwriting expenses. The Company takes 100% of the risk within the first $1.25 million layer of the aggregate excess exposure on its main treaty up to a deductible amount equal to 1.5% of the Company's gross premiums (as defined) and 10% of the risk over a loss ratio of 120%, in the event that the loss ratio for the first layer exceeds 120%. The Company takes no share of the risk in the layer $3.75 million excess of $1.25 million per account. The maximum retention for specific excess losses is 10% of $.75 million excess of $.25 million per occurrence. INVESTMENT INCOME Gross investment income increased by $.8 million in 1999 to $35.9 from $35.1 million in 1998 and $30.0 million in 1997 as a result of increases in gross invested assets. Net investment income, after adjusting for investment income which is payable to others, increased by 14% to $33.6 million in 1999 from $29.6 million in 1998 and $26.6 million in 1997. The increase in Net investment income for 1999 is due, in part, to the inclusion of investment income from one of the Company's programs, accounted for as Claims deposit liabilities, which added $2.8 million for the year. Net invested assets increased $88 million or 20% to $527 million in 1999 from $439 million in 1998 and $402 million in 1997. The yield on these assets remained steady at 6.9% in 1999 and 1998, which was up slightly from 6.7% in 1997. The Company's investment income is produced through the investment of its capital funds, long term debt, other funds held representing amounts due others and reserves held by the Company for unearned premiums and unpaid losses. The breakdown of expenses for each of 1999, 1998 and 1997 is set forth in Table III. TABLE III--EXPENSES (In thousands)
Year Ended December 31, ---------------------------------------- 1999 Growth 1998 Growth 1997 -------- ------ -------- ------ -------- Losses incurred........................ $147,705 89% $ 78,258 57% $ 49,857 Acquisition costs...................... 51,582 98 26,061 (27) 35,816 -------- -------- -------- Total insurance costs.................. 199,287 91 104,319 22 85,673 Operating expenses..................... 128,524 26 101,687 32 76,795 Interest expense....................... 6,807 0 6,819 1 6,752 Other expenses......................... 2,701 27 2,119 81 1,169 -------- -------- -------- Total................................ $337,319 57% $214,944 26% $170,389 ======== ======== ========
23 The increases in Total insurance costs are typically the direct result of the increases in Premiums earned during the relevant period. However, Total insurance costs during 1999 exceeded the increase in Premiums earned. During the year, the Company established a provision related to net losses incurred on a number of terminated programs of $8 million net of tax. This resulted in a $12.3 million increase in Losses and loss expenses incurred offset by a $4.3 million reduction in Income taxes. Losses incurred also increased as a direct result of the decreased use of large deductible policies and the increase in Program Business. The 27% decrease in Acquisition costs from 1997 to 1998 is due to the reduction in the number of deductible programs, which have high expense levels; the loss of one large account that was fully retained; and reduction in expenses charged by the assigned risk pools. The primary factors responsible for the increases in Operating expenses were: (a) the increased cost of administering the Company's highly regulated policy- issuing subsidiaries, as the volume of policies issued increased; (b) increased personnel costs in all areas, caused by an increase in the number of full time employees from 743 in 1997 to 934 in 1998 to 1,143 in 1999, resulting from the growth of the Company's businesses as well as the impact of the Company's growth in revenues and profits on employee bonus plans; and (c) the acquisitions of SBU, Hugo Trust, Avreco, Capital Management and the Hemisphere expansions to Boston and Ireland. The charges for Income taxes represent effective tax rates of 17.6%, 11.7% and (.7)% in 1997 through 1999 respectively. The reduced tax rate in 1998 and 1999 is due to increased earnings outside of the United States. The tax rate in 1999 was reduced further by the provisions on terminated programs. These factors, plus interest earned on tax-fee municipal securities and the tax benefit derived from the exercise of employee stock options, are the major causes of the difference between the expected federal income tax rate in the United States of 35% plus state income taxes and the Company's effective rates in the year. The Legion Companies, as insurance companies in the United States, are subject to income tax on an accelerated basis and, as a result, a deferred tax benefit was carried on the Consolidated Balance Sheets of $4.2 million in 1999 and $.9 million in 1998. LIQUIDITY AND CAPITAL RESOURCES Investments At December 31, 1999 the market value of the Company's Total marketable investments was $607 million, as compared to $580 million at December 31, 1998. In accordance with SFAS 115, Investments available for sale are reported at fair market value with unrealized gains and losses included as a separate component of Shareholders' equity. These Investments generally consist of investment grade fixed-income securities that the Company believes are readily marketable and could be liquidated to meet cash requirements, if necessary. Cash Flow Cash flow from operations has historically provided the Company its principal source of liquidity. The Company has continued to produce a positive cash flow with $20.6 million of cash provided from operations during 1999, as compared to $62.4 million in 1998 and $56.4 million in 1997. Cash flow in 1999 was adversely affected by delays in recovering reinsurance payments in the Company's Program Business segment but improved in the second half of 1999 from the first and second quarters. The Company recently established a $250 million bridge loan facility, $117 million of which was outstanding at December 31, 1999. The Company made an additional contribution to the policyholders' surplus of its U.S. insurance companies in the amount of $110 million from this facility. As of December 31, 1999, the Company had repurchased $14 million face amount of its Convertible Exchangeable Subordinated Debentures due 2015 at a cost of $6.3 million, also from this facility. The Company expects to refinance this bridge loan facility with permanent financing during 2000, and recently filed an S-3 Shelf Registration Statement with the U.S. Securities and Exchange Commission for the future issuance of $500 million of debt and preferred securities. 24 The Company believes that funds generated from operations and available credit will be sufficient to finance its current operations and to fund the repurchase of the remaining Convertible Exchangeable Subordinated Debentures as well as the 2.4 million remaining Common Shares of the Company's 5.0 million share repurchase authorization. Insurance Operations At the end of 1999 and 1998, 61% and 56% of the Company's Total marketable investments were held by the Company's policy-issuing subsidiaries in the United States. These companies are restricted by regulation in the amount of dividends they can pay without prior regulatory approval to $35.0 million in 2000 (based on 1999 results) and will continue to face these restrictions in the future. During 1999 they paid a dividend of $7 million. They are also required to maintain certain deposits with or supply letters of credit to regulatory authorities which totaled $166 million at December 31, 1999 ($59 million of deposits and $107 million of letters of credit) as compared to $152 million at December 31, 1998 ($60 million of deposits and $92 million of letters of credit). A widely accepted factor used by regulators and rating agencies in evaluating insurance companies is the ratio of net premiums written to policyholders' surplus which is an indication of the degree to which an insurer is leveraged. Because of the low level of net premiums written, they have produced a relatively low ratio on this basis of approximately 0.6:1 in 1999, 0.5:1 in 1998 and 0.4:1 in 1997 and should continue to produce relatively low ratios in the future. Due to the nature of the Company's operations, a more appropriate indication of leverage is the ratio of gross premiums written to policyholders' surplus, which amounted to 3.6:1 in 1999, 3.6:1 in 1998 and 3.0:1 in 1997. The National Association of Insurance Commissioners ("NAIC") has established that an "unusual value" for this ratio would be 9:1 or higher. The Company has adopted a policy that this ratio should not exceed 4:1. The NAIC has adopted a risk-based capital ("RBC") formula to be applied to all property/casualty insurance companies. The formula measures capital and surplus needs based on an insurance company's products and investment portfolio and is to be used as a tool to identify weakly capitalized companies. An insurance company that does not meet the threshold RBC measurement standards could be required to reduce the scope of its operations and ultimately could become subject to statutory receivership proceedings. At December 31, 1999 the Company's policy-issuing subsidiaries met the RBC requirements with a combined required risk-based capital of $121.0 million and an actual adjusted capital of $347.4 million. Shareholders' Equity Shareholders' equity increased 4% to $358 million at December 31, 1999 from $343 million at December 31, 1998. This increase was attributable to Net income in 1999, less dividends paid, plus the value of shares issued on the exercise of employee stock options, and the conversion of debentures. During 1999 the total number of Common Shares outstanding decreased to 41,205,191 from the 1998 level of 42,205,596, mainly as a result of the Company repurchase of 2.6 million shares in the fourth quarter at an average price of $11.31 per share. This decrease in Common Shares outstanding for the year was partly offset by the conversion of debentures and the exercise of employee stock options. Total Assets Total assets increased to $4.0 billion at December 31, 1999, a 31% increase from $3.1 billion at December 31, 1998. $693.4 million, or 17% of Total assets in 1999 and $722.3 million, or 23%, in 1998 related to Assets held in separate accounts. As detailed in Note 2A to the Consolidated Financial Statements, such assets are principally managed assets attributable to participants in the Company's IPC Programs. Total assets also increased due to the increase in Reinsurance receivables from $1,079.6 million in 1998 to $1,729.9 million in 1999. This increase, which is largely offset by corresponding increases in the Reserve for losses and loss expenses and Accounts payable, is due to the greater amount of reinsurance utilized in connection with the Company's Program Business segment. 25 Inflation The Company does not believe its operations have been materially affected by inflation. The potential adverse impacts of inflation include: (a) a decline in the market value of the Company's fixed maturity investment portfolio; (b) an increase in the ultimate cost of settling claims which remain unresolved for a significant period of time; and (c) an increase in the Company's Operating expenses. However, the Company generally holds its fixed maturity investments to maturity and currently believes that an acceptable amount is included in the yield to compensate the Company for the risk of inflation. In addition, any increase from inflation in the ultimate cost of settling unpaid claims will be borne by the Company's clients and offset by investment income earned for the benefit of the client during the period that the claim is outstanding. Finally, the increase in Operating expenses resulting from inflation should generally be matched by similar inflationary increases in the client's premium and the Company's Fee income, which includes a fee based upon a percentage of the client's premium. Market Sensitive Instruments Market risk generally represents the risk of loss that may result from potential change in the value of a financial instrument due to a variety of market conditions. The Company's exposure to market risk is generally limited to potential losses arising from changes in the level or volatility of interest rates on market values of investment holdings and on a bridging loan. The Company's exposure to movements in exchange rates and equity prices is limited. The Company does not hold or issue significant derivative financial instruments for trading or speculative purposes. a) Interest Rate Risk Interest rate risk results from the Company' holdings in interest-rate- sensitive instruments. The Company is exposed to potential losses arising from changes in the level or volatility of interest rates on fixed rate instruments held. The Company is also exposed to credit spread risk resulting from possible changes in the issuer's credit rating. To manage its exposure to interest rate risk the Company attempts to select investments with characteristics that match the characteristics of the related insurance and contract holder liabilities. Additionally, the Company generally only invests in higher-grade interest bearing instruments. The Company is also exposed to interest rate risk on the $117 million bridging loan, which bears interest at LIBOR plus 0.75%. $110 million of this facility was contributed to the U.S. insurance companies and has been invested in a variable rate debt instrument with matching terms and maturity to cover the interest cost of the bridge loan financing. b) Foreign Exchange Risk When the Company invests in non-U.S. dollar denominated financial instruments it is subject to exposure from exchange rate movements. This risk arises from the possibility that changes in foreign exchange rates will impact adversely upon the value of financial instruments. Due to the Company's limited holdings of non-U.S. dollar denominated investments, management does not believe the Company is exposed to a material risk from exchange rate movements. c) Equity Price Risk Equity price risk arises from fluctuations in the value of securities held. Changes in the level or volatility of equity prices affect the value of equity securities held by the Company. Management does not believe the Company is exposed to a material risk from changes in equity prices due to its limited investment in equity securities. 26 The tables below provide information about the Company's available for sale investments that are sensitive to changes in interest rates at December 31, 1999 and 1998 respectively. The tables present expected cash flows and related weighted-average interest rates by expected maturity dates. Separate account assets and liabilities are not included in this analysis as gains and losses related to these accounts generally accrue to the program holders. There were no material quantitative changes in market risk exposure between the current and preceding fiscal year with respect to available for sale investments. YEAR ENDED DECEMBER 31, 1999--EXPECTED MATURITY DATE
Total 2000 2001 2002 2003 2004 Thereafter Value Fair ----- ----- ----- ----- ----- ---------- ------ ------ (dollars in millions, except average interest rates) Assets Investments Available for sale.... $29.3 $40.5 $50.1 $50.3 $52.3 $137.8 $360.3 $352.3 Average Interest Rate................. 5.9% 6.6% 6.3% 6.7% 7.1% 6.4%
YEAR ENDED DECEMBER 31, 1998--EXPECTED MATURITY DATE
Total 1999 2000 2001 2002 2003 Thereafter Value Fair ----- ----- ----- ----- ----- ---------- ------ ------ (dollars in millions, except average interest rates) Assets Investments Available for sale.... $45.4 $34.6 $45.2 $50.2 $32.4 $139.1 $346.9 $352.5 Average Interest Rate................. 6.6% 5.8% 6.5% 6.3% 7.1% 6.4%
Impact of Year 2000 The Company has not experienced any significant Year 2000 issues to date. All systems identified for replacement before the Year 2000 were replaced. Since the Company regularly updates its hardware and software, the pure additional cost of Year 2000 compliance was not material. The Company has taken steps that it believes are reasonably designed to obtain assurances that its critical customers, reinsurance intermediaries, managing general agents, suppliers and others have addressed their Year 2000 compliance efforts. Although the change in date to Year 2000 has occurred, it is not possible to conclude that all aspects of the Year 2000 issue that may affect the Company relating to other third party providers have been fully resolved. The inability of the Company's third party providers to properly address the Year 2000 issue could have an adverse material impact on the Company's financial position or results of operations. Management will continue to monitor the status of and its exposure to this issue, however, the Company has not experienced any significant Year 2000 issues to date. Contingency plans are still in place should critical customers, reinsurance intermediaries, managing general agents, suppliers and others fail to resolve their own Year 2000 issues. To date, the Company has not been notified of any Year 2000 related claims. Acquisitions On March 1, 1999, the Company acquired Captive Resources, Inc., ("CRI") a provider of services to member owned group captive insurance companies. CRI has long-term contracts with more than 20 well established captives. Recent Accounting Pronouncements In October 1998, the Accounting Standards Executive Committee issued Statement of Position 98-7, "Deposit Accounting: Accounting for Insurance and Reinsurance Contracts That Do Not Transfer Insurance 27 Risk". The Statement provides guidance on how to account for insurance and reinsurance contracts that do not transfer insurance risk under deposit accounting. The Statement is effective for fiscal years beginning after June 15, 1999 with early adoption encouraged. The Company does not expect the Statement to have a material impact on its financial position or results of operations. In June 1998, the Financial Accounting Standards Board issued Statement 133, "Accounting for Derivative Instruments and Hedging Activities" which was amended by Statement 137 in June 1999. The Statement requires recording all derivative instruments as assets or liabilities, measured at fair value. The Statement is effective for fiscal years beginning after June 15, 2000. The Company does not expect the Statement to have a material impact on its financial position or results of operations. Subsequent Events During the first quarter of 2000, the Company repurchased convertible Debentures representing a principal amount of $222 million in the open market at a cost of $101.3 million. The repurchased debentures were convertible into $4.8 million Common Shares and their repurchase will result in a one-time extraordinary loss of approximately $4.3 million, net of tax. Safe Harbor Disclosure For Forward-Looking Statements In connection with the "safe harbor' provisions of the Private Securities Litigation Reform Act of 1995 (the "Act"), the Company sets forth below cautionary statements identifying important factors that could cause the Company's actual results to differ materially from those which might be projected, forecasted, or estimated or otherwise implied in the Company's forward-looking statements, as defined in the Act, made by or on behalf of the Company in press releases, written statements or documents filed with the Securities and Exchange Commission, or in its communications and discussions with investors and analysts in the normal course of business through meetings, telephone calls and conference calls. Such statements may include, but are not limited to, projections of Fee income, Premiums earned, Net investment income, Other income, Losses and loss expenses incurred, Acquisition costs, Operating expenses, Other expenses, earnings (including earnings per share), cash flows, plans for future operations, Shareholders' equity, financing needs, capital plans, dividends, plans relating to products or services of the Company, and estimates concerning the effects of litigation or other disputes, as well as assumptions for any of the foregoing and are generally expressed with words such as "believes", "estimates", "expects", "anticipates", "could have", "may have", and similar expressions. Forward-looking statements are inherently subject to risks and uncertainties. The Company cautions that factors which may cause the Company's results to differ materially from such forward-looking statements include, but are not limited to, the following: (a) Changes in the level of competition in the reinsurance or primary insurance markets that adversely affect the volume or profitability of the Company's business. These changes include, but are not limited to, the intensification of price competition, the entry of new competitors, existing competitors exiting the market, and the development of new products by new and existing competitors; (b) Changes in the demand for reinsurance, including changes in ceding companies'retentions, and changes in the demand for primary and excess and surplus lines insurance coverages; (c) The ability of the company to execute its business strategies and its reliance on key personnel; (d) Adverse development on claims and claims expense liabilities related to business and the failure of clients, reinsurers or others to meet their obligations to the Company in connection with such losses. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK See Item 7. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Our consolidated financial statements for the years ended December 31, 1999, 1998 and 1997 are filed herewith in response to Item 14. 28 ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING DISCLOSURE None. 29 PART III ITEM 10. MANAGEMENT ITEM 11. EXECUTIVE COMPENSATION ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS MANAGEMENT ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Pursuant to General Instructions G(3) of Form 10-K, Items 10 to 13, inclusive, have not been restated or answered since we intend to file within 120 days after the close of our fiscal year with the SEC a definitive proxy statement pursuant to Regulation 14A under the Exchange Act and the information contained in the proxy is hereby incorporated by reference. The information included in the proxy statement pursuant to the requirements of Sections 402(k) and (l) of Regulation S-K is not incorporated by reference in this annual report. 30 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8K A. Exhibits
Exhibit No. Description ------- ----------- 3.1 Memorandum of Association(1) 3.2 Bye-Laws of Registrant(4) 3.3 Bye-Laws of IPC Mutual Holdings Ltd.(1) 4.1 Form of Stock Certificate(1) 4.2 Indenture dated as of October 30, 1995 relating to the Company's Zero Coupon Convertible Exchangeable Subordinated Debentures due 2015.(5) 10.1 Share Purchase Agreements with Messrs. Partridge, Turner and Kelly(1)(3) 10.2 Mutual Risk Management Ltd. 1988 Stock Option Plan(1)(3) 10.3 1991 Long Term Incentive Plan(2)(3) 10.4 Form of Director's Stock Option Grant Agreement(2)(3) 10.5 Form of Non-Qualified Stock Option Grant Agreement(2)(3) 10.6 Form of Shareholders Agreement relating to the IPC Program(1) 10.7 Agreement between Mutual Risk Management (Bermuda) Ltd. and Robert A. Mulderig relating to Hemisphere Trust Company Limited.(6) 10.8 Directors Deferred Cash Compensation Plan(3)(5) 10.9 Directors Restricted Stock Plan(3)(5) 10.10 Deferred Compensation Plan(7) 10.11 1998 Long Term Incentive Plan(7) 10.12 Credit Agreement dated December 6, 1999 between Mutual Risk Management, certain subsidiaries and Prudential Securities Credit Corporation. 12.0 Consolidated Ratio of Earnings to Fixed Charges 21.1 List of subsidiaries 23.1 Consent and Reports of Ernst & Young 24 Powers of Attorney 27.1 Financial Data Schedule for (current) fiscal year ended Dec-31-1999 27.2 Restated FDS for quarter ended Sep-30-1999 27.3 Restated FDS for quarter ended June-30-1999 27.4 Restated FDS for quarter ended Mar-31-1999 27.5 Restated FDS for fiscal year ended Dec-31-1998 27.6 Restated FDS for quarter ended Sep-30-1998 27.7 Restated FDS for quarter ended Jun-30-1998 27.8 Restated FDS for quarter ended Mar-31-1998 27.9 Restated FDS for fiscal year ended Dec-31-1997 27.10 Restated FDS for quarter ended Sep-30-1997 27.11 Restated FDS for quarter ended Jun-30-1997 27.12 Restated FDS for quarter ended Mar-31-1997
- -------- (1) Incorporated by reference to Form S-1 Registration Statement (No. 33-40152) of Mutual Risk Management Ltd. declared effective June 25, 1991. 31 (2) Incorporated by reference to the 1991 Annual Report on Form 10-K of Mutual Risk Management Ltd. (3) This exhibit is a management contract or compensatory plan or arrangement. (4) Incorporated by reference to Form 10-Q of Mutual Risk Management Ltd. for the period ended June 30, 1996. (5) Incorporated by reference to 1995 Annual Report on Form 10-K of Mutual Risk Management Ltd. (6) Incorporated by reference to 1996 Annual Report on Form 10-K of Mutual Risk Management Ltd. (7) Incorporated by reference to 1998 Annual Report on Form 10-K of Mutual Risk Management Ltd. B. Financial Statements and Financial Statement Schedules Consolidated Financial Statements..................................... F-1 Notes to Consolidated Financial Statements............................ F-5 Independent Auditors' Report.......................................... F-26 Schedule II Condensed Financial Information of Registrant............. S-1 Schedule VI Supplementary Insurance Information....................... S-4
All other schedules required by Article 7 of Regulation S-X are not required under the related instructions, are inapplicable or are included elsewhere in this filing, and therefore have been omitted. C. Reports on Form 8-K None 32 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, in Hamilton, Bermuda, on March 28, 2000. Mutual Risk Management Ltd. /s/ Robert A. Mulderig By: _________________________________ Robert A. Mulderig Chairman 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/ Robert A. Mulderig Chairman and Chief March 28, 2000 ______________________________________ Executive Officer Robert A. Mulderig (Principal Executive Officer) /s/ John Kessock, Jr. President, Director and March 28, 2000 ______________________________________ Authorized U.S. John Kessock, Jr. Representative /s/ Richard G. Turner Executive Vice President March 28, 2000 ______________________________________ and Director Richard G. Turner /s/ Glenn R. Partridge Executive Vice President March 28, 2000 ______________________________________ and Director Glenn R. Partridge /s/ James C. Kelly Senior Vice President and March 28, 2000 ______________________________________ Chief Financial Officer James C. Kelly (Principal Financial and Accounting Officer) /s/ Roger E. Dailey Director March 28, 2000 ______________________________________ Roger E. Dailey /s/ David J. Doyle Director March 28, 2000 ______________________________________ David J. Doyle /s/ Arthur E. Engel Director March 28, 2000 ______________________________________ Arthur E. Engel
33
Signature Title Date --------- ----- ---- /s/ Allan W. Fulkerson Director March 28, 2000 ______________________________________ Allan W. Fulkerson /s/ William F. Galtney, Jr. Director March 28, 2000 ______________________________________ William F. Galtney, Jr. /s/ Jerry S. Rosenbloom Director March 28, 2000 ______________________________________ Jerry S. Rosenbloom /s/ Norman L. Rosenthal Director March 28, 2000 ______________________________________ Norman L. Rosenthal /s/ Joseph D. Sargent Director March 28, 2000 ______________________________________ Joseph D. Sargent
34 MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
At December 31, ---------------------- 1999 1998(1) ---------- ---------- (In thousands) ASSETS Cash and cash equivalents............................... $ 155,387 $ 117,423 Investments--Held in available for sale account at fair value (Amortized cost $466,857; 1998--$455,648)........ 451,920 462,434 ---------- ---------- Total marketable investments.......................... 607,307 579,857 Other investments....................................... 28,426 20,664 Investment income due and accrued....................... 5,173 5,252 Accounts receivable..................................... 564,590 353,869 Reinsurance receivables................................. 1,729,936 1,079,563 Deferred expenses....................................... 30,406 27,215 Prepaid reinsurance premiums............................ 281,078 206,487 Fixed assets............................................ 28,880 19,671 Deferred tax benefit.................................... 4,233 899 Goodwill................................................ 52,924 52,901 Other assets............................................ 6,831 5,616 Assets held in separate accounts........................ 693,390 722,263 ---------- ---------- Total Assets.......................................... $4,033,174 $3,074,257 ========== ========== LIABILITIES & SHAREHOLDERS' EQUITY LIABILITIES Reserve for losses and loss expenses.................... $1,860,120 $1,190,426 Reserve for unearned premiums........................... 335,265 241,893 Pension fund reserves................................... 67,981 79,753 Claims deposit liabilities.............................. 27,924 37,448 Accounts payable........................................ 353,966 243,418 Accrued expenses........................................ 11,054 12,052 Taxes payable........................................... 23,181 14,850 Bridging loan........................................... 117,000 -- Other loans payable..................................... 4,049 3,538 Prepaid fees............................................ 58,026 47,126 Debentures.............................................. 110,898 125,485 Other liabilities....................................... 12,176 12,839 Liabilities related to separate accounts................ 693,390 722,263 ---------- ---------- Total Liabilities..................................... 3,675,030 2,731,091 ---------- ---------- SHAREHOLDERS' EQUITY Common Shares--Authorized 180,000,000 (par value $0.01) Issued and outstanding 41,205,191 (excluding 2,636,716 cumulative shares held in treasury) (1998-- 42,205,596)............................................ 412 422 Additional paid-in capital.............................. 110,755 114,916 Accumulated other comprehensive (loss) income........... (14,937) 4,456 Retained earnings....................................... 261,914 223,372 ---------- ---------- Total Shareholders' Equity............................ 358,144 343,166 ---------- ---------- Total Liabilities & Shareholders' Equity.............. $4,033,174 $3,074,257 ========== ==========
- -------- (1) Prior periods have been restated to reflect a pooling of interests following the acquisition of Captive Resources, Inc. See accompanying notes to consolidated financial statements F-1 MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Year ended December 31, ---------------------------------- 1999 1998(1) 1997(1) ---------- ---------- ---------- (In thousands except per share data) REVENUES Fee income............................... $ 177,711 $ 157,271 $ 121,258 Premiums earned.......................... 181,798 101,913 84,200 Net investment income.................... 33,616 29,590 26,592 Realized capital losses.................. (5,199) (1,003) (1,608) Other (losses) income.................... (300) 143 56 ---------- ---------- ---------- Total Revenues.......................... 387,626 287,914 230,498 ---------- ---------- ---------- EXPENSES Losses and loss expenses incurred........ 147,705 78,258 49,857 Acquisition costs........................ 51,582 26,061 35,816 Operating expenses....................... 128,524 101,687 76,795 Interest expense......................... 6,807 6,819 6,752 Other expenses........................... 2,701 2,119 1,169 ---------- ---------- ---------- Total Expenses.......................... 337,319 214,944 170,389 ---------- ---------- ---------- INCOME BEFORE INCOME TAXES AND MINORITY INTEREST.................................. 50,307 72,970 60,109 Income taxes (benefit)................... (365) 8,536 10,632 ---------- ---------- ---------- INCOME BEFORE MINORITY INTEREST............ 50,672 64,434 49,477 Minority interest........................ (52) 93 -- ---------- ---------- ---------- INCOME BEFORE EXTRAORDINARY LOSS........... 50,620 64,527 49,477 Extraordinary loss on extinguishment of debentures, net of tax.................. 182 -- -- ---------- ---------- ---------- NET INCOME................................. 50,438 64,527 49,477 Preferred share dividends................ -- -- (105) ---------- ---------- ---------- NET INCOME AVAILABLE TO COMMON SHAREHOLDERS.............................. 50,438 64,527 49,372 OTHER COMPREHENSIVE INCOME, NET OF TAX Unrealized (losses) gains on investments, net of reclassification adjustment...... (19,393) 421 3,987 ---------- ---------- ---------- COMPREHENSIVE INCOME....................... $ 31,045 $ 64,948 $ 53,359 ========== ========== ========== EARNINGS PER COMMON SHARE(2) Net income available to Common Shareholders: Basic.................................... $ 1.18 $ 1.56 $ 1.25 Diluted.................................. $ 1.14 $ 1.42 $ 1.15 Dividends per Common Share............... $ 0.25 $ 0.21 $ 0.19 Weighted average number of Common Shares outstanding--Basic...................... 42,797,133 41,275,156 39,379,122 ========== ========== ========== Weighted average number of Common Shares outstanding--Diluted.................... 49,606,913 50,233,147 48,785,252 ========== ========== ==========
- -------- (1) Prior periods have been restated to reflect a pooling of interests following the acquisition of Captive Resources, Inc. (2) Prior periods' per share calculations have been restated to reflect the two-for-one stock split to holders of record at September 26, 1997. See accompanying notes to consolidated financial statements F-2 MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Series B Preferred Common Dividend Treasury Change in Share Share of Opening Shares Shares Unrealized Net Dividends Dividends Acquired Closing Balance Issued Purchased Gain (Loss)(4) Income Declared(1) Declared(2) Companies(6) Balance -------- ------- --------- -------------- ------- ----------- ----------- ------------ -------- (In thousands) Year Ended December 31, 1999 Common Shares.......... $ 422 $ 16 $ (26) $ -- $ -- $ -- $ -- $ -- $ 412 Additional paid-in capital............... 114,916 25,626 (29,787) -- -- -- -- -- 110,755 Accumulated other comprehensive income (loss)................ 4,456 -- -- (19,393) -- -- -- -- (14,937) Retained earnings...... 223,372 -- -- -- 50,438 -- (11,005) (891) 261,914 -------- ------- -------- -------- ------- ----- -------- ------- -------- Total Shareholders' Equity at December 31, 1999.................. $343,166 $25,642 $(29,813) $(19,393) $50,438 $ -- $(11,005) $ (891) $358,144 ======== ======= ======== ======== ======= ===== ======== ======= ======== Year Ended December 31, 1998(5) Common Shares.......... $ 399 $ 23 $ -- $ -- $ -- $ -- $ -- $ -- $ 422 Additional paid-in capital............... 89,339 25,577 -- -- -- -- -- -- 114,916 Accumulated other comprehensive income.. 4,035 -- -- 421 -- -- -- -- 4,456 Retained earnings...... 169,801 -- -- -- 64,527 -- (8,826) (2,130) 223,372 -------- ------- -------- -------- ------- ----- -------- ------- -------- Total Shareholders' Equity at December 31, 1998.................. $263,574 $25,600 $ -- $ 421 $64,527 $ -- $ (8,826) $(2,130) $343,166 ======== ======= ======== ======== ======= ===== ======== ======= ======== Year Ended December 31, 1997(3)(5)(7) Common Shares.......... $ 392 $ 7 $ -- $ -- $ -- $ -- $ -- $ -- $ 399 Additional paid-in capital............... 82,049 7,290 -- -- -- -- -- -- 89,339 Accumulated other comprehensive income.. 48 -- -- 3,987 -- -- -- -- 4,035 Retained earnings...... 128,854 -- -- -- 49,477 (105) (7,311) (1,114) 169,801 -------- ------- -------- -------- ------- ----- -------- ------- -------- Total Shareholders' Equity at December 31, 1997.................. $211,343 $ 7,297 $ -- $ 3,987 $49,477 $(105) $ (7,311) $(1,114) $263,574 ======== ======= ======== ======== ======= ===== ======== ======= ========
- -------- (1) Dividend per share amount was $.04 for 1997. (2) Dividend per share amounts were $.25, $.21 and $.19 for 1999, 1998 and 1997 respectively (prior periods restated for stock splits). (3) Effective September 26, 1997 the Company effected a two-for-one stock split recorded in the form of a stock dividend. 18,741,121 Common Shares were issued in respect of this split. Prior periods have been restated. (4) Net of reclassification adjustment, net of tax (see Note 8). (5) Prior periods have been restated to reflect a pooling of interests following the acquisition of Captive Resources, Inc. (6) Prior to the merger, International Advisory Services paid cash dividends of $1.51 and $1.09 in 1998 and 1997 respectively based on the equivalent number of Common Shares that would have been outstanding on the dividend dates after giving effect to the pooling of interests in 1998. Captive Resources, Inc. paid cash dividends of $.51, $2.05 and $2.18 in 1999, 1998 and 1997 respectively based on the equivalent number of Common Shares that would have been outstanding on the dividend dates after giving effect to the pooling of interests in 1999. (7) See Note 18. See accompanying notes to consolidated financial statements F-3 MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31, ---------------------------- 1999 1998(1) 1997(1) -------- -------- -------- (In thousands) NET CASH FLOW FROM OPERATING ACTIVITIES Net income....................................... $ 50,438 $ 64,527 $ 49,477 Items not affecting cash Depreciation.................................... 8,306 6,021 4,372 Amortization of investments..................... (1,344) (1,907) (1,608) Net loss on sale of investments................. 5,587 1,498 1,619 Other investment gains.......................... (361) (599) -- Amortization of convertible debentures.......... 5,997 6,605 6,500 Deferred tax benefit............................ (1,004) 3,194 (2,789) Other items..................................... 2,254 1,570 1,002 Net changes in non-cash balances relating to operations: Accounts receivable............................. (210,721) (166,668) (38,469) Reinsurance receivables......................... (650,373) (448,866) (280,379) Investment income due and accrued............... 79 (1,452) 1,191 Deferred expenses............................... (3,191) 2,777 (9,380) Prepaid reinsurance premiums.................... (74,591) (50,469) (82,430) Other assets.................................... (1,215) 2,050 (1,512) Reserve for losses and loss expenses............ 669,694 473,965 296,724 Prepaid fees.................................... 10,900 6,414 7,498 Reserve for unearned premium.................... 93,372 53,504 94,647 Accounts payable................................ 110,548 102,331 1,843 Taxes payable................................... 8,331 (161) 5,748 Accrued expenses................................ (998) 3,896 2,102 Other liabilities............................... (1,074) 4,121 196 -------- -------- -------- NET CASH FLOW FROM OPERATING ACTIVITIES.......... 20,634 62,351 56,352 -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sale of investments--Available for sale........................................... 85,312 145,745 209,745 Proceeds from maturity of investments--Available for sale....................................... 53,183 57,175 44,685 Fixed assets purchased.......................... (17,732) (9,890) (8,483) Investments purchased--Available for sale....... (153,949) (268,868) (243,861) Acquisitions and other investments.............. (10,130) (28,886) (25,792) Proceeds from sale of other investments......... 577 2,929 -- Other items..................................... 104 9 21 -------- -------- -------- NET CASH APPLIED TO INVESTING ACTIVITIES......... (42,635) (101,786) (23,685) -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Loan repayment and interest received............ -- 389 419 Bridging loan received.......................... 117,000 -- -- Other loans received............................ 511 1,379 -- Redemption of preferred shares.................. -- -- (2,952) Extinguishment of convertible debentures........ (6,163) -- -- Proceeds from shares issued..................... 11,209 8,055 7,297 Purchase of Treasury shares..................... (29,813) -- -- Claims deposit liabilities...................... (9,524) (4,997) (3,244) Pension fund reserves........................... (11,773) 79,753 -- Dividends paid.................................. (11,482) (10,427) (8,301) -------- -------- -------- NET CASH FLOW FROM (APPLIED TO) FINANCING ACTIVITIES...................................... 59,965 74,152 (6,781) -------- -------- -------- Net increase in cash and cash equivalents....... 37,964 34,717 25,886 Cash and cash equivalents at beginning of year.. 117,423 82,706 56,820 -------- -------- -------- Cash and cash equivalents at end of year........ $155,387 $117,423 $ 82,706 ======== ======== ======== Supplemental cash flow information: Interest paid................................... $ 810 $ 214 $ 252 ======== ======== ======== Income taxes paid, net.......................... $ 3,217 $ 5,622 $ 11,848 ======== ======== ========
- -------- (1) Prior periods have been restated to reflect a pooling of interests following the acquisition of Captive Resources, Inc. See accompanying notes to consolidated financial statements F-4 MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--DECEMBER 31, 1999 1. GENERAL Mutual Risk Management Ltd. (the "Company") was incorporated under the laws of Bermuda in 1977. The Company is a holding company engaged, through its subsidiaries, in providing risk management and financial services in the United States, Bermuda, Barbados, the Cayman Islands and Europe. The "IPC Companies" offer the IPC Program, an alternative risk facility for insureds. The Company also provides administrative, accounting and reinsurance services for unaffiliated captive insurers. Legion Insurance Company, a Pennsylvania insurance company, Legion Indemnity Company, an Illinois excess and surplus lines insurance company and Villanova Insurance Company, a Massachusetts insurance company (together "Legion" or the "Legion Companies") act as policy- issuing companies on many of the IPC Programs reinsuring a portion of the liability and premium to one of the IPC Companies. MRM Financial Services Ltd. provides financial services to offshore mutual funds and other companies. Other subsidiaries provide specialty brokerage, proprietary loss control services and underwriting management. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES These Consolidated Financial Statements have been prepared in accordance with generally accepted accounting principles prevailing in the United States ("GAAP") and are presented in United States Dollars. A. Consolidation (i) General The Consolidated Financial Statements include the accounts of the Company and all of its subsidiaries. All significant intercompany transactions and balances have been eliminated on consolidation. Prior period results have been restated to reflect a pooling of interests following the acquisition of Captive Resources, Inc. ("CRI") (See note 18). All of the voting common shares of the IPC companies are owned by wholly owned subsidiaries of the Company. All of the earnings, assets and liabilities of the IPC companies attributable to the common shareholders are consolidated on a line by line basis. All of the non-voting preferred shares of the IPC companies are owned by program holders (see note 2A(ii)). Management is required to make estimates that affect the amounts reported in the Consolidated Financial Statements and accompanying notes. Actual results may differ from those estimates. (ii) Assets Held in and Liabilities Related to Separate Accounts A substantial majority of the assets and liabilities of the IPC Companies represents assets under management and related liabilities of the IPC Programs. The program holders, through their ownership of preferred shares in the IPC Companies, enter into a Preferred Shareholder Agreement. The preferred shares are redeemable after five years. The Preferred Shareholder Agreements provide for the payment of dividends to the preferred shareholders based on Premiums earned, investment income, expenses paid and losses and loss expenses incurred in each separate account. The final dividend on a program is determined when all incurred losses in all underwriting years of a program are ultimately paid; the preferred shareholder may not terminate its indemnity obligation under the Preferred Shareholder Agreement before this time. Under the Preferred Shareholder Agreement the program holder assumes investment and underwriting risk and the IPC Company receives an administrative fee for managing the program. Accordingly, the Company treats the Premium written in connection with these programs, whether written directly or assumed as reinsurance, as Premiums ceded to the separate accounts of the IPC Companies and does not include such amounts in the Company's Premiums earned on the Consolidated Statements of Income and Comprehensive Income. This Premium ceded amounted to $257.8 million in 1999 (1998--$251.4 million; 1997--$277.4 million) of which over 80% in each year relates to workers' compensation risks. The assets and liabilities of the IPC Companies relating to the preferred shareholders interest are included within "Assets held in and Liabilities related to separate accounts" on the F-5 MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Consolidated Balance Sheets. Included in these assets are cash and marketable investments of $340.1 million at December 31, 1999 (1998--$381.8 million) and other assets of $220.0 million (1998--$243.5 million). B. Investments Investments are comprised of bonds, redeemable preferred shares and mutual funds. All Investments are classified as available for sale in accordance with SFAS 115 and are reported at fair market value with unrealized gains and losses, net of tax, included in Accumulated other comprehensive income in Shareholders' equity. Realized gains and losses on the sale of Investments are recognized in Net income using the specific identification basis for Bonds and the average cost method for Mutual Funds. Investments which incur a decline in value, which is other than temporary, are written down to fair value as a new cost basis with the amount of the write down included in Net income. Investment income is accrued as earned and includes amortization of premium and discount relative to bonds acquired at amounts other than their par value. C. Revenue Recognition (i) Policy issuing fees earned are recorded as the premium is written and earned over the applicable policy period. The unearned portion is included in Prepaid fees on the Consolidated Balance Sheets. (ii) Underwriting fees of the IPC Companies are earned over the applicable policy period. The unearned portion of such fees is included in Prepaid fees on the Consolidated Balance Sheets. (iii) Investment fees earned by the IPC Companies are accrued on a daily basis. (iv) Commissions and brokerage fees are recorded and earned when the business is placed with the reinsurance carrier, at which time substantially all of the services have been performed. (v) Premiums written and assumed are recorded on an accrual basis. Premiums earned are calculated on a pro-rata basis over the terms of the applicable underlying insurance policies with the unearned portion deferred on the Consolidated Balance Sheets as Reserve for unearned premiums. Reinsurance premiums ceded are similarly pro-rated with the prepaid portion recorded as an asset in the Consolidated Balance Sheets. Premiums written which are related to the separate accounts of the IPC Companies are included in Premiums ceded (see Note 2A(ii)). (vi) Net investment income is included after deducting various items as detailed in Note 5C. (vii) Realized capital (losses) gains include gains and losses on the sale of investments available for sale, other investments and fixed assets (see Note 5B(ii)). D. Losses and Loss Expenses Incurred Losses and related loss adjustment expenses are charged to income as they are incurred and are net of losses recovered and recoverable of $1,185.7 million in 1999 (1998--$657.8 million; 1997--$521.9 million). Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured policy. Included in loss reserves are gross loss reserves of $136.0 million and $121.0 million at December 31, 1999 and 1998 which have been discounted by $39.5 million and $36.2 million respectively, assuming interest rates of approximately 6% for medical malpractice reserves and 4% for specific and aggregate workers' compensation reserves. These reserves are also discounted for regulatory filings. After reinsurance, the net effect of this discounting was to decrease Net income by $.8 million in 1999 and increase Net income by $.9 million and $.1 million in 1998 and 1997. Discounting also reduced net loss reserves by $3.8 million and $4.7 million at December 31, 1999 and 1998 respectively. F-6 MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Reserves are established for losses and loss adjustment expenses relating to claims which have been reported on the basis of evaluations of independent claims adjusters under the supervision of the Company's claims staff. In addition, reserves are established, in consultation with the Company's independent actuaries, for losses which have occurred but have not yet been reported to the Company and for adverse development of reserves on reported losses. Reinsurance receivables are shown separately on the Consolidated Balance Sheets. Management believes that the resulting estimate of the liability for losses and loss adjustment expenses at December 31, 1999 and 1998 is adequate to cover the ultimate net cost of losses and loss expenses incurred, however, such liability is necessarily an estimate and no representation can be made that the ultimate liability will not exceed such estimate. E. Claims Deposit Liabilities The Company records certain programs that do not meet the conditions for reinsurance accounting as Claims deposit liabilities on the Consolidated Balance Sheets. In October 1998, the Accounting Standards Executive Committee issued Statement Of Position 98-7, "Deposit Accounting: Accounting for Insurance and Reinsurance Contracts That Do Not Transfer Insurance Risk". The Statement provides guidance on how to account for insurance and reinsurance contracts that do not transfer insurance risk under deposit accounting. This Statement is effective for fiscal years beginning after June 15, 1999 with early adoption encouraged. The Company does not expect the Statement to have a material impact on its financial position or results of operations. F. Income Taxes The Company records its income tax liability and deferred tax asset in accordance with SFAS 109. In accordance with this statement, the Company records deferred income taxes which reflect the net tax effect of the temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. G. Depreciation and Amortization Depreciation of furniture and equipment is provided on a straight-line basis over their estimated useful lives ranging from 2 to 10 years. Amortization of leasehold improvements is computed on a straight-line basis over the terms of the leases. Accumulated depreciation at December 31, 1999 amounted to $29 million (1998--$21.1 million). Goodwill related to the acquisition of subsidiaries is amortized on a straight-line basis over 25 to 40 years, is evaluated periodically for any impairment in value and is included in Other expenses on the Consolidated Statements of Income and Comprehensive Income. Accumulated amortization at December 31, 1999 amounted to $7.6 million (1998-- $4.9 million). H. Deferred Expenses Deferred expenses which consist primarily of policy acquisition costs are deferred and charged to income on a pro-rata basis over the periods of the related policies. I. Earnings per Common Share Basic earnings per share is based on weighted average common shares and excludes any dilutive effects of options and convertible securities. Diluted earnings per share assumes the conversion of dilutive convertible securities and the exercise of all dilutive stock options (see Note 14). Earnings per share for 1997 have been restated to reflect the two-for-one stock split effective September 26, 1997 (see Note 12). All earnings per share have been restated to reflect the pooling of interests following the acquisition of Captive Resources, Inc. F-7 MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) J. Cash and Cash Equivalents Cash and cash equivalents include cash on hand, money market instruments and other debt issues purchased with an original maturity of ninety days or less. K. Zero Coupon Convertible Exchangeable Subordinated Debentures The Debentures are recorded at original issue price plus accrued original issue discount. The current amortization of the original issue discount is included in Interest expense on the Consolidated Statements of Income and Comprehensive Income. L. Stock-Based Compensation The Company applies APB Opinion 25 and related interpretations in accounting for its stock option plans and accordingly, does not recognize compensation cost as all options are issued with an exercise price equal to the market price of the stock on the date of issue. Note 13 contains a summary of the pro-forma effects to reported Net income and earnings per share for 1999, 1998 and 1997 had the Company elected to recognize compensation cost based on the fair value of the options granted at grant date as prescribed by SFAS 123. M. Pension Fund Reserves Pension fund reserves represent receipts from the issuance of pension investment contracts. Such receipts are considered deposits on investment contracts that do not have mortality or morbidity risk. Account balances in the accumulation phase are increased by deposits received and interest credited and are reduced by withdrawals and administrative charges. Calculations of contract holder account balances for investment contracts reflect interest crediting rates ranging from 2.75% to 7.25% at December 31, 1999 (1998--3.05% to 7.25%), based on contract provisions, the Company's experience and industry standards. At December 31, 1999, the amount of pension fund reserves related to products in the accumulation phase was $62.5 million (1998--$74.6 million). Upon retirement, individuals can convert their accumulated pension fund account balances into a benefit stream by purchasing a payout annuity from the Company. Single premium life reserves are established for the payout annuities in amounts adequate to meet the estimated future obligations of the policies in force. The calculation of these reserves involves the use of estimates concerning such factors as mortality rates, interest rates averaging 5.82% at December 31, 1999 (1998--5.90%), and future expense levels applicable to the individual policies. Mortality assumptions are based on various actuarial tables. These assumptions consider Company experience and industry standards. To recognize the uncertainty in the reserve calculation, the reserves include reasonable provisions for adverse deviations from those estimates. At December 31, 1999, the amount of pension fund reserves related to payout annuities was $5.4 million (1998--$5.2 million). 3. REINSURANCE AND CLIENT INDEMNIFICATION A. Reinsurance contracts do not relieve the Company from its obligations to policyholders. Failure of reinsurers to honor their obligations could result in losses to the Company and allowances are established for amounts deemed uncollectible. The Company evaluates the financial condition of its reinsurers to minimize its exposure to losses from reinsurer insolvencies. B. At December 31, 1999, Losses recoverable and Prepaid reinsurance of $2,011.0 million (1998--$1,286.1 million) had been ceded to reinsurers other than the IPC Companies. $1,663.2 million of this amount (1998--$1,122.4 million) has been ceded to reinsurers licensed in the United States which are not required to F-8 MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) provide letters of credit or other collateral to secure their obligations. One such U.S. reinsurer accounted for $207.6 million (1998--$191.0 million). The remaining $347.8 million of reinsurance ceded (1998--$163.7 million) was ceded to reinsurers not licensed in the United States, including $25.2 million ceded to companies managed by the Company (1998--$12.4 million). These non-U.S. reinsurers have provided collateral security to the Company in the form of letters of credit and cash at December 31, 1999 of $114.0 million (1998--$42.2 million). Letters of credit held by the Company are issued by and/or confirmed by member banks of the U.S. Federal Reserve. The Company regularly reviews the credit exposure which it has to each bank, together with that bank's financial position and requires replacement of the collateral security in cases where the exposure to the bank exceeds acceptable levels. The Company's largest exposure to an individual bank amounted to $20.1 million at December 31, 1999 (1998--$7.5 million). The IPC Companies have a $350 million (1998--$320 million) Letter of Credit facility pursuant to which letters of credit are issued on their behalf to the Legion Companies and certain other US insurance companies. This facility is fully collateralized by incoming letters of credit and funds on deposit. The facility is guaranteed by the Company. At December 31, 1999 a reserve for uncollectible reinsurance of $.2 million (1998--$.3 million) was outstanding. C. The Company's Reserve for unearned premiums and Reserve for losses and loss expenses exclude reserves related to Premiums ceded to the IPC Companies, where the program holders assume the underwriting risk relating to such premium (see Note 2A(ii)). These reserves are included in Liabilities related to separate accounts and amounted to $495.1 million at December 31, 1999 (1998--$450.3 million). Clients of the Company's IPC Program generally agree, as part of a Shareholder Agreement, to indemnify the Company against certain underwriting losses on the IPC Program. Clients generally provide letters of credit or cash deposits as collateral for this indemnification, either in the full amount of the potential net loss or to the level of expected losses as projected by the Company. These contractual indemnifications from clients, whether fully or partially secured, amounted to approximately $104.7 million at December 31, 1999 (1998--$90.6 million) of which $51.5 million (1998--$36.3 million) is uncollateralized. The uncollateralized amounts will vary based on the underwriting results of the IPC Programs. Management reviews its collateral security position at the inception and renewal of each IPC Program in order to minimize the risk of loss. In order for the Company to sustain a loss on the portion of such indemnity agreement secured by a letter of credit, the Company would have to be unable to collect from both the client and the bank issuing the letter of credit. The Company has a credit exposure in the event that losses exceed their expected level and the client is unable or unwilling to honor its indemnity to the Company or fails to pay the premium due. For these reasons the Company has established provisions for losses on certain of these programs. These provisions are net of a reinsurance recovery of $14.7 million under a contingency excess of loss policy at December 31, 1999. These provisions, which totaled $18.0 million at December 31, 1999 (1998--$7.3 million), reduced the level of Risk management fees by $3.1 million, $.9 million and $1.1 million for the years ended December 31, 1999, 1998 and 1997 respectively. These provisions also adversely impacted the underwriting results for 1999 by $7.6 million (1998--$.8 million; 1997--nil). During 1999, the Company initiated binding arbitration proceedings for the payment of reinsurance recoverables from reinsurers who have withheld payments due to the Company. The amounts due to the Company relate primarily to reinsurance on workers' compensation coverage. While such reinsurance recoverable amounts are material to the Company's results of operations and financial position, Company management believes it will ultimately prevail in such arbitrations and any related actions that may arise. As such, no provision for any adverse determinations in these pending arbitrations has been made in the consolidated financial statements of the Company. The Company is involved in other legal actions, arbitrations and contingencies occurring in the normal course of business. In the opinion of management, the outcome of these matters is not expected to have a material adverse effect on the results of operations or financial position of the Company. F-9 MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) D. Premiums earned are the result of the following:
Year ended December 31, -------------------------------------------------------------- 1999 1998 1997 Premiums Premiums Premiums ---------------------- ------------------ ------------------ Written Earned Written Earned Written Earned ---------- ---------- -------- -------- -------- -------- (In thousands) Direct.................. $1,129,935 $1,018,761 $790,776 $753,463 $642,511 $542,907 Assumed................. 64,099 54,724 59,657 48,291 12,917 15,492 Ceded to IPC Companies(1)........... (257,848) (233,953) (251,443) (248,335) (277,448) (195,665) Ceded to third parties.. (735,669) (657,734) (494,042) (451,506) (281,810) (278,534) ---------- ---------- -------- -------- -------- -------- Net Premiums............ $ 200,517 $ 181,798 $104,948 $101,913 $ 96,170 $ 84,200 ========== ========== ======== ======== ======== ========
- -------- (1) See Note 2A (ii) 4. RESERVE FOR LOSSES AND LOSS EXPENSES The following table sets forth a reconciliation of beginning and ending reserves for losses and loss expenses.
Year ended December 31, -------------------------------- 1999 1998 1997 ---------- ---------- -------- (In thousands) Gross reserves for losses and loss adjustment expenses, beginning of year..... $1,190,426 $ 716,461 $419,737 Recoverable from reinsurers................. 1,079,563 630,697 350,318 ---------- ---------- -------- Net reserves for losses and loss adjustment expenses, beginning of year................ 110,863 85,764 69,419 Provision for losses and loss adjustment expenses for claims occurring in: Current year.............................. 140,574 74,476 50,301 Prior years............................... 7,131 3,782 (444) ---------- ---------- -------- Total losses and loss adjustment expenses incurred...................... 147,705 78,258 49,857 ========== ========== ======== Payments for losses and loss adjustment expenses for claims occurring in: Current year.............................. (61,697) (15,039) (10,850) Prior years............................... (66,687) (38,120) (22,662) ---------- ---------- -------- Total payments.......................... (128,384) (53,159) (33,512) ========== ========== ======== Net reserves for losses and loss adjustment expenses, end of year...................... 130,184 110,863 85,764 Recoverable from reinsurers................. 1,729,936 1,079,563 630,697 ---------- ---------- -------- Gross reserves for losses and loss adjustment expenses, end of year........... $1,860,120 $1,190,426 $716,461 ========== ========== ========
5. INVESTMENTS A. Cash and cash equivalents include amounts invested in commercial paper and discount notes at December 31, 1999 of $64.8 million (1998--$29.1 million). Substantially all of the remaining amount is invested in money market or interest-bearing bank accounts. F-10 MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) B. (i) All Investments are held as available for sale. The amortized cost and fair market value are as follows:
At December 31, 1999 ------------------------------------------- Amortized Unrealized Unrealized Fair Market Cost Gain Loss Value --------- ---------- ---------- ----------- (In thousands) U.S. Treasury Securities and Obligations of U.S. Government Corporations and Agencies......... $180,747 $ 274 $ 3,532 $177,489 Corporate debt securities.......... 182,827 102 9,846 173,083 -------- ------ ------- -------- Total Bonds........................ 363,574 376 13,378 350,572 Redeemable Preferred Shares........ 2,068 -- 377 1,691 -------- ------ ------- -------- 365,642 376 13,755 352,263 Mutual Funds(1).................... 101,215 1,814 3,372 99,657 -------- ------ ------- -------- Total Investments................ $466,857 $2,190 $17,127 $451,920 ======== ====== ======= ======== At December 31, 1998 ------------------------------------------- Amortized Unrealized Unrealized Fair Market Cost Gain Loss Value --------- ---------- ---------- ----------- (In thousands) U.S. Treasury Securities and Obligations of U.S. Government Corporations and Agencies......... $189,236 $4,499 $ 10 $193,725 Corporate debt securities.......... 155,613 2,519 1,457 156,675 -------- ------ ------- -------- Total Bonds........................ 344,849 7,018 1,467 350,400 Redeemable Preferred Shares........ 2,108 46 6 2,148 -------- ------ ------- -------- 346,957 7,064 1,473 352,548 Mutual Funds(1).................... 108,691 2,254 1,059 109,886 -------- ------ ------- -------- Total Investments................ $455,648 $9,318 $ 2,532 $462,434 ======== ====== ======= ========
- -------- (1) The Company invests in Mutual Funds with fair market values of $87 million (1998--$102 million) which are administered by MRM Financial Services Ltd., a wholly-owned subsidiary of the Company. The Company does not have any investment in a single corporate security which exceeds 1.4% of total bonds at December 31, 1999 (1998--1.4%). The following unrealized gains and losses on available for sale investments have been recorded in Accumulated other comprehensive income in Shareholders' equity:
Gross Unrealized Net Unrealized Gains (losses) Tax Gains (losses) ---------------- ------- -------------- (In thousands) January 1, 1997........................ $ 320 $ (272) $ 48 Movement............................... 5,531 (1,544) 3,987 -------- ------- -------- December 31, 1997...................... 5,851 (1,816) 4,035 Movement............................... 935 (514) 421 -------- ------- -------- December 31, 1998...................... 6,786 (2,330) 4,456 Movement............................... (21,723) 2,330 (19,393) -------- ------- -------- December 31, 1999...................... $(14,937) $ -- $(14,937) ======== ======= ========
F-11 MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The following table sets forth certain information regarding the investment ratings of the Company's Bond and Redeemable Preferred Share portfolio.
December 31, 1999 December 31, 1998 -------------------- -------------------- Amortized Amortized Cost Percentage Cost Percentage --------- ---------- --------- ---------- (In thousands) Ratings(1) AAA................................... $173,132 47.35% $202,561 58.39% AA.................................... 46,252 12.65% 46,567 13.42% A..................................... 111,550 30.51% 74,448 21.46% BBB................................... 25,164 6.88% 11,952 3.44% BB.................................... 9,544 2.61% 10,929 3.15% B..................................... 0 0.00% 500 0.14% -------- ------ -------- ------ Total................................. $365,642 100.00% $346,957 100.00% ======== ====== ======== ======
- -------- (1) Ratings as assigned by Standard & Poor's Corporation. The maturity distribution of Investments in Bonds and Redeemable Preferred Shares is as follows:
December 31, 1999 December 31, 1998 --------------------- --------------------- Amortized Fair Market Amortized Fair Market Cost Value Cost Value --------- ----------- --------- ----------- (In thousands) Due in one year or less........... $ 27,139 $ 26,996 $ 23,836 $ 24,035 Due in one year through five years............................ 111,017 109,728 84,372 85,895 Due in five years through ten years............................ 82,191 77,758 76,871 78,331 Due after ten years............... 145,295 137,781 161,878 164,287 -------- -------- -------- -------- Total............................. $365,642 $352,263 $346,957 $352,548 ======== ======== ======== ========
(ii) Realized gains and losses:
Year ended December 31, --------------------------- 1999 1998 1997 ------- -------- -------- (In thousands) Proceeds from sale of Investments --held as available for sale..................... $85,312 $145,745 $209,745 ======= ======== ======== Realized gains on Investments --held as available for sale..................... $ 932 $ 1,703 $ 1,636 Realized losses on Investments --held as available for sale..................... (6,519) (3,201) (3,255) ------- -------- -------- Net realized losses............................... (5,587) (1,498) (1,619) Other gains....................................... 388 495 11 ------- -------- -------- Realized capital losses........................... $(5,199) $ (1,003) $ (1,608) ======= ======== ========
F-12 MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) C. Details of investment income by major categories are presented below:
Year ended December 31, ------------------------- 1999 1998 1997 ------- ------- ------- (In thousands) Cash and cash equivalents............................ $ 5,622 $ 6,054 $ 7,958 Mutual funds......................................... 9,872 9,214 4,729 Preferred stock...................................... 172 79 349 Bonds................................................ 20,502 19,866 16,875 ------- ------- ------- Gross investment income.............................. 36,168 35,213 29,911 Claims deposit liabilities, net...................... (1,552) (4,314) (2,450) Contract expense..................................... (380) (728) (396) Investment expenses.................................. (620) (581) (473) ------- ------- ------- Net investment income................................ $33,616 $29,590 $26,592 ======= ======= =======
Net investment income is reported after deducting investment income earned on assets related to Claims deposit liabilities. Contract expense represents investment income where the Company has contracted to pay this income to the insured. Investment expenses consisting of investment advisory fees and custodian charges have been deducted from Net investment income. D. Legion is required by certain states in which it operates to maintain special deposits or provide letters of credit. This obligation amounted to $166.4 million at December 31, 1999 (1998--$152.2 million) and included deposits of $59.6 million (1998--$60.5 million) and letters of credit of $106.8 million (1998--$91.7 million). 6. ZERO COUPON CONVERTIBLE EXCHANGEABLE SUBORDINATED DEBENTURES On October 30, 1995, the Company issued $324.3 million principal amount of Zero Coupon Convertible Exchangeable Subordinated Debentures ("Debentures") with an aggregate issue price of $115.0 million. The issue price of each Debenture was $354.71 and there will be no periodic payments of interest. The Debentures will mature on October 30, 2015 at $1,000 per Debenture representing a yield to maturity of 5.25% (computed on a semi-annual bond equivalent basis). The Debentures are subordinated to all existing and future senior indebtedness of the Company. Each Debenture is convertible at the option of the holder at any time on or prior to maturity, unless previously redeemed or otherwise purchased by the Company, into Common Shares of the Company at a conversion rate of 21.52 shares per Debenture or an aggregate of 6,978,800 Common Shares. The Debentures may be purchased by the Company, at the option of the holder, as of October 30, 2000, October 30, 2005 and October 30, 2010, at the issue price plus accrued original issue discount. The Company, at its option, may elect to pay such purchase price on any particular purchase date in cash or Common Shares, or any combination thereof. After October 30, 2000, each Debenture is redeemable in cash at the option of the Company for an amount equal to the issue price plus accrued original issue discount. Prior to October 30, 2000 the Debentures will be purchased for cash by the Company, at the option of the holder, in the event of a Fundamental Change (as defined). In addition, the Company will have the right, under certain circumstances, to require the holders to exchange the Debentures for Guaranteed Zero Coupon Exchangeable Subordinated Debentures due 2015 of Mutual Group Ltd. (the "Exchangeable Debentures"), to be guaranteed on a subordinated basis by the Company. The Exchangeable Debentures will be exchangeable for the Company's Common Shares and will otherwise have terms and conditions substantially identical to the Debentures. During the year Debentures representing a principal amount of $34.23 million (1998--$24.1 million) were converted into 736,606 Common Shares (1998--518,503 Common Shares). F-13 MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) During the year Debentures representing a principal amount of $14 million were repurchased in the open market for $6.3 million, resulting in an extraordinary loss of $.18 million, net of tax. 7. BRIDGING LOAN The Company has entered into a $250 million bridging loan agreement with various financial institutions. Interest rates on the facility are based on LIBOR plus .75%. The credit agreement contains certain financial covenants, including the requirement that the Company's total consolidated indebtedness to total capital ratio shall not exceed 0.45:1, and that Shareholders' equity shall be greater than or equal to $341,674,000. For these purposes, Shareholders' equity is to be calculated in accordance with U. S. GAAP, but excludes any unrealized gains or losses and any goodwill in excess of $55 million. At December 31, 1999, the Company had $117 million outstanding under this loan, on which monthly interest payments are made, with the principal sum being repayable on September 6, 2000. Under the terms of the agreement, and if the Company was in compliance with the covenants thereunder, the Company has access to an additional $133 million should the need arise. Under the agreement the Company has access to this facility for a six month period ending June 6, 2000. The Company was in compliance with all the covenants of this bridging loan agreement as of December 31, 1999. Interest payments on the above loan totaled $.4 million for the year ended December 31, 1999. The repayment of the loan has been guaranteed by Mutual Group Ltd., a U.S. subsidiary of the Company. Additionally, the Common Shares of the Company's significant subsidiaries have been pledged as collateral for the repayment of the loan. 8. COMPREHENSIVE INCOME As of January 1, 1998, the Company adopted Statement 130, Reporting Comprehensive Income. Statement 130 establishes new rules for the reporting and display of comprehensive income and its components; however, the adoption of this Statement had no impact on the Company's Net income or Shareholders' equity. Statement 130 requires unrealized gains or losses on the Company's available for sale investments, which prior to adoption were reported separately in Shareholders' equity, to be included in Other comprehensive income.
Year Ended December 31, 1999 ----------------------------- Before Tax Net of Tax Amount Tax Amount ---------- ------ ---------- (In thousands) Net unrealized (losses) gains on available for sale investments arising during the year....... $(27,310) $2,702 $(24,608) Less: reclassification adjustment for losses realized in net income......................... 5,587 (372) 5,215 -------- ------ -------- Other comprehensive income...................... $(21,723) $2,330 $(19,393) ======== ====== ======== Year Ended December 31, 1998 ----------------------------- Amount Tax Amount ---------- ------ ---------- (In thousands) Net unrealized (losses) gains on available for sale investments arising during the year....... $ (563) $ 63 $ (500) Less: reclassification adjustment for losses realized in net income......................... 1,498 (577) 921 -------- ------ -------- Other comprehensive income...................... $ 935 $ (514) $ 421 ======== ====== ========
F-14 MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 9. FAIR VALUE OF FINANCIAL INSTRUMENTS
December 31, 1999 December 31, 1998 ------------------- ------------------- Carrying Carrying Amount Fair Value Amount Fair Value -------- ---------- -------- ---------- (In thousands) Investments............................. $451,920 $451,920 $462,434 $462,434 Other investments....................... $ 28,426 $ 28,426 $ 20,664 $ 20,664 Claims deposit liabilities.............. $ 27,924 $ 23,850 $ 37,448 $ 32,624 Debentures.............................. $110,898 $115,001 $125,485 $144,252 Bridging loan........................... $117,000 $117,000 $ -- $ --
The following methods and assumptions were used to estimate the fair value of specific classes of financial instruments. The carrying values of all other financial instruments, as defined by SFAS 107, approximate their fair values due to their short term nature. Investments: The fair market value of Investments is calculated using quoted market prices. Other investments: Other investments consist primarily of privately held companies that do not have readily ascertainable market values. These investments are initially recorded at cost and are revalued based principally on substantive events or factors which could indicate a diminution or appreciation in value. Claims deposit liabilities: The fair value of Claims deposit liabilities is calculated by discounting the actuarially determined ultimate loss payouts at a rate of 6%. Debentures: The fair value of the Debentures is calculated using discounted cash flow analyses based on current borrowing rates for similar types of borrowing arrangements. Bridging loan: The Bridging loan bears interest at a floating rate and is repayable on September 6, 2000, and as such, the fair value equals the carrying amount. Assets held in separate accounts: (a) Within Assets held in separate accounts are cash and marketable investments with a carrying value and fair value of $471.2 million (1998: $467.3 million). Fair value is calculated using quoted market prices. (b) Within the $222.2 million of other assets (1998: $255.0 million) $70.0 million (1998: $78.5 million) are financial instruments. The fair market value of other assets approximates carrying value due to the short term nature of these items. 10. INCOME TAXES The Company is incorporated under the laws of Bermuda and, under current Bermuda law, is not obligated to pay any taxes in Bermuda based upon income or capital gains. The Company has received an undertaking F-15 MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) from the Minister of Finance in Bermuda pursuant to the provisions of the Exempted Undertakings Tax Protection Act, 1966, which exempts the Company and its shareholders, other than shareholders ordinarily resident in Bermuda, from any Bermuda taxes computed on profits, income or any capital asset, gain or appreciation, or any tax in the nature of estate duty or inheritance tax, at least until the year 2016. Mutual Risk Management Ltd. and its non-U.S. subsidiaries, except as described below, do not consider themselves to be engaged in a trade or business in the United States and accordingly do not expect to be subject to direct United States income taxation. The United States subsidiaries of the Company file a consolidated U.S. federal income tax return. Mutual Indemnity (U.S.) Ltd. and Premium Securities Ltd., Bermuda subsidiaries of the Company, have made irrevocable elections to be taxed as domestic United States corporations. Income tax (benefit) expense consists of:
Current Deferred Total ------- -------- ------- (In thousands) December 31, 1999: U.S. federal....................................... $ (118) $(1,004) $(1,122) U.S. state and local............................... 169 -- 169 Foreign............................................ 588 -- 588 ------- ------- ------- $ 639 $(1,004) $ (365) ======= ======= ======= December 31, 1998: U.S. federal....................................... $ 4,603 $ 3,198 $ 7,801 U.S. state and local............................... 171 (4) 167 Foreign............................................ 568 -- 568 ------- ------- ------- $ 5,342 $ 3,194 $ 8,536 ======= ======= ======= December 31, 1997: U.S. federal....................................... $11,103 $(2,763) $ 8,340 U.S. state and local............................... 1,160 (26) 1,134 Foreign............................................ 1,158 -- 1,158 ------- ------- ------- $13,421 $(2,789) $10,632 ======= ======= =======
The effective total tax rate differed from the statutory U.S. federal tax rate for the following reasons:
Year ended December 31, -------------------------- 1999 1998 1997 ------- ------- ------- Statutory U.S. federal tax rate.................... 35.0 % 35.0% 35.0% Increase (reduction) in income taxes resulting from: U.S. state taxes................................. 0.2 0.2 1.2 Tax-exempt interest income....................... (2.5) (2.1) (3.1) Foreign income not expected to be taxed in the U.S............................................. (29.3) (18.2) (13.7) Foreign taxes.................................... 1.2 0.8 1.9 Options.......................................... (6.2) (4.4) (3.7) Other, net....................................... 0.9 0.4 (0.0) ------- ------- ------- Total............................................ (0.7)% 11.7% 17.6% ======= ======= =======
F-16 MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1999 and 1998 are presented below:
1999 1998 -------- -------- (In thousands) Deferred tax assets: Unearned premiums and fees not deducted for tax........... $ 6,008 $ 7,355 Unpaid losses, discounted for tax......................... 10,164 11,870 Unrealized losses......................................... 3,463 -- Interest rate swap........................................ -- 704 Other..................................................... 120 154 -------- -------- Total gross deferred tax assets......................... 19,755 20,083 ======== ======== Deferred tax liabilities: Deferred acquisition costs................................ (7,090) (5,913) Deferred marketing expenses............................... (2,577) (2,198) Deferred market discount.................................. (1,039) (923) Unrealized gains.......................................... -- (2,330) Other..................................................... (1,353) (7,820) -------- -------- Total gross deferred tax liabilities.................... (12,059) (19,184) ======== ======== Deferred tax benefit...................................... $ 7,696 $ 899 Valuation allowance on unrealized losses.................. (3,463) -- -------- -------- Net deferred tax benefit................................ $ 4,233 $ 899 ======== ========
The valuation allowance of $3.5 million relates to unrealized losses and has been accounted for in Accumulated other comprehensive income. 11. REDEEMABLE PREFERRED AND COMMON SHARES A. Series B Non-Voting Redeemable Preferred Shares--Authorized and issued 2,951,835, par value $1.00 per share. These shares were issued to one of the IPC Companies as the holder of record for the benefit of the IPC Program participants and were entitled to fixed, cumulative, preferential, semi-annual dividends calculated at the six month LIBOR rate based on the redemption price of $2.95 million. The Series B Non-Voting Redeemable Preferred Shares were redeemed for their $1.00 par value or $2.95 million in 1997. The average effective annual interest rate on these shares was 5.0% in 1997. B. Common Shares Subject to Redemption--Issued 937,168 at $1.75 per share. These shares were issued to four executive officers of the Company. The Company had the right to reacquire these shares if the employees defaulted on the loans used for the purchase. Two subsidiaries of the Company made loans to these executive officers during 1990 for the purchase of the Common Shares Subject to Redemption. These loans have been repaid and the Common Shares included in Shareholders' equity. 12. SHAREHOLDERS' EQUITY AND RESTRICTIONS A. The Board of Directors, on October 5, 1999, approved a stock repurchase program to purchase up to three million of its outstanding Common Shares. On October 27, 1999, the Board of Directors authorized the repurchase of an additional two million shares. As of December 31, 1999, a total of 2,636,716 shares had been repurchased at an average price of $11.31. F-17 MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) During the last quarter of 1999, the Company sold 570,000 put options for a total consideration of $339,481 which has been recorded directly in additional paid-in capital. The put options entitle the holders to sell Common Shares to the company if the price of the Company's Common Shares falls below a specified strike price. At December 31, 1999, 250,000 put options were outstanding and no options had been exercised. The options expire at various dates through May 2000 and have an average strike price of $12.83. B. In September 1997 the company announced a two-for-one stock split of its Common Shares. In connection with this split the Company issued an additional 18,741,121 Common Shares and 468,584 Common Shares subject to redemption. C. The Company's ability to pay dividends is subject to certain restrictions including the following: (i) The Company is subject to a 30% U.S. withholding tax on any dividends received from its U.S. subsidiaries and certain of the IPC Companies. (ii) The Company's ability to cause the Legion Companies to pay a dividend is limited by insurance regulation to an annual amount equal to the greater of 10% of the Legion Companies' statutory surplus as regards policyholders, or the Legion Companies' statutory income for the preceding year. The maximum dividend the Legion Companies will be permitted to pay under this restriction in 2000 is $35.0 million based upon 1999 results (1999--$23.6 million based on 1998 results). The Legion Companies' net assets which were restricted by the above were $353.6 million at December 31, 1999 (1998--$236.9 million). Loans and advances by the Legion Companies to the Company or any other subsidiary would require the prior approval of the Pennsylvania insurance department and possibly other states in which they are licensed. D. At December 31, 1999 the Legion Companies' combined risk-based capital was $347.4 million (1998--$225.5 million). Under the risk-based capital tests, the threshold that constitutes the authorized control level, which authorizes the commissioner to take whatever regulatory actions considered necessary to protect the best interest of the policyholders and creditors of the Legion Companies was $121.0 million (1998--$78.5 million). E. Net income and policyholders' surplus of the Legion Companies, as filed with regulatory authorities on the basis of statutory accounting practices, are as follows:
Year ended December 31, -------------------------- 1999 1998 1997 -------- -------- -------- (In thousands) Statutory net income for the year................... $ 11,269 $ 20,238 $ 21,947 Statutory policyholders' surplus at year end........ $349,867 $227,664 $200,249
13. STOCK OPTIONS Employees have been granted options to purchase Common Shares under the Company's Long Term Incentive Plans. In each case, the option price equals the fair market value of the Common Shares on the day of the grant and an option's maximum term is five to ten years. Options granted vest ratably over a four year period. F-18 MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) In accordance with the provisions of SFAS 123, the Company applies APB Opinion 25 and related Interpretations in accounting for its stock option plans and, accordingly, does not recognize compensation cost. If the Company had elected to recognize compensation cost based on the fair value of the options granted at grant date as prescribed by SFAS 123, net income and earnings per share would have been reduced to the pro forma amounts indicated in the table below:
Year ended December 31, ----------------------------------------- 1999 1998 1997 ------------- ------------- ------------- (In thousands except per share amounts) Net income--as reported............. $ 50,438 $ 64,527 $ 49,372 Net income--pro forma............... $ 44,465 $ 60,732 $ 47,192 Basic earnings per share--as reported........................... $1.18 $1.56 $1.25 Basic earnings per share--pro forma.............................. $1.04 $1.47 $1.20 Diluted earnings per share--as reported........................... $1.14 $1.42 $1.15 Diluted earnings per share--pro forma.............................. $1.02 $1.38 $1.13
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions: Expected dividend yield.... 1.5% 0.6% 0.5% Expected stock price volatility................ .329-.398 .307-.330 .283-.329 Risk-free interest rate.... 5.9% 5.3% 5.0% Expected life of options... 4 years-9 years 4 years-9 years 4 years-9 years
The weighted average fair value of options granted during 1999 is $5.74 per share (1998--$11.35 per share, 1997--$7.83 per share). The pro forma effect on net income for 1999, 1998 and 1997 is not representative of the pro forma effect on net income in future years because it does not take into consideration pro forma compensation expense related to grants made prior to 1995. Options issued and outstanding under the plans are as follows: Summary of Employee Stock Option Plan Activity
Year ended December 31, ------------------------------------------- 1999 1998 1997 ------------- ------------- ------------- Number of Options Outstanding, beginning of year... 4,220,580 3,794,925 3,442,322 Granted.......................... 1,586,183 1,010,399 1,015,100 Exercised........................ (744,223) (563,293) (615,189) Cancelled........................ (138,267) (21,451) (47,308) ------------- ------------- ------------- Outstanding and exercisable, end of year......................... 4,924,273 4,220,580 3,794,925 ============= ============= ============= Option Price Per Share Granted.......................... $11.44-$39.63 $26.25-$38.31 $15.00-$28.63 Exercised........................ $ 7.97-$26.25 $ 7.97-$26.25 $ 7.97-$15.14 Cancelled........................ $ 9.52-$39.54 $10.83-$26.25 $ 7.97-$19.38 Outstanding and exercisable, end of year......................... $11.44-$39.63 $ 7.97-$38.31 $ 7.97-$28.63
F-19 MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Summary of Options Outstanding at December 31, 1999
Weighted Year of Number Number of Average Exercise Grant of Shares Shares Vested Exercise Price Price Range Expiration Date Range - ------- --------- ------------- -------------- ------------- -------------------------------------- 1995 316,553 316,553 $15.08 $13.97-$15.14 September 21, 2000 to December 1, 2000 1996 1,211,451 490,032 $15.11 $14.25-$16.78 January 2, 2001 to December 17, 2006 1997 898,625 440,750 $25.55 $15.00-$28.63 January 31, 2002 to December 18, 2002 1998 980,461 217,172 $35.23 $29.94-$38.31 January 2, 2003 to December 21, 2003 1999 1,517,183 -- $17.06 $11.44-$39.63 February 26, 2004 to December 14, 2004 --------- --------- ------ 4,924,273 1,464,507 $21.54 ========= ========= ======
Options generally vest 25% annually commencing one year after issuance, except for 770,000 of the options issued in 1996 at a grant price of $15, which were issued to executives of the Company. These options are for 10 years and 75% have vesting schedules tied to the conversion of the Zero Coupon Convertible Exchangeable Subordinated Debentures (see Note 6) and other performance benchmarks. Options have been granted to each of the outside directors. All options are for five years and become exercisable six months after issuance. Total options granted to directors are as follows:
Number of Shares Year of ------------------- Exercise Grant Granted Outstanding Price Expiration Date - ------- ------- ----------- ------------- -------------------------------- 1995 140,000 140,000 $15.14 December 1, 2000 1996 105,000 105,000 $16.69 December 1, 2001 1997 75,000 75,000 $19.50-$27.81 May 21, 2002 to December 1, 2002 1998 60,000 60,000 $37.25 December 1, 2003 1999 60,000 60,000 $14.75 December 1, 2004 ------- ------- 440,000 440,000 ======= =======
F-20 MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 14. EARNINGS PER COMMON SHARE The following table sets forth the computation of basic and diluted earnings per common share.
1999 1998 1997 ---------- ---------- ---------- (In thousands, except shares and earnings per share) Numerator Income before extraordinary loss.............. $ 50,620 $ 64,527 $ 49,477 Extraordinary loss on extinguishment of debentures, net of tax....................... 182 -- -- ---------- ---------- ---------- Net Income.................................... 50,438 64,527 49,477 Preferred share dividends..................... -- -- 105 Numerator for basic earnings per common share --Net income available to common shareholders................................ 50,438 64,527 49,372 ---------- ---------- ---------- Effect of dilutive securities: Conversion of Zero Coupon Convertible Exchangeable Subordinated Debentures........ 5,997 6,605 6,500 Numerator for diluted earnings per common share --Net income available to common shareholders after assumed conversions................... $ 56,435 $ 71,132 $ 55,872 ========== ========== ========== Denominator Denominator for basic earnings per common share--weighted average shares............... 42,797,133 41,275,156 39,379,122 Effect of dilutive securities: Stock options................................ 991,406 2,223,900 1,565,950 Common shares subject to Redemption.......... -- -- 861,380 Conversion of Zero Coupon Convertible Exchangeable Subordinated Debentures........ 5,818,374 6,734,091 6,978,800 ---------- ---------- ---------- Denominator for diluted earnings per common share--adjusted weighted average shares and assumed conversions.......................... 49,606,913 50,233,147 48,785,252 ========== ========== ========== Basic earnings per common share Income before extraordinary loss............. $ 1.18 $ 1.56 $ 1.25 Extraordinary loss on extinguishment of debentures, net of tax...................... $ 0.00 $ -- $ -- ---------- ---------- ---------- Basic earnings per common share............... $ 1.18 $ 1.56 $ 1.25 ========== ========== ========== Diluted earnings per common share Income before extraordinary loss............. $ 1.14 $ 1.42 $ 1.15 Extraordinary loss on extinguishment of debentures, net of tax...................... $ 0.00 $ -- $ -- ---------- ---------- ---------- Diluted earnings per common share............. $ 1.14 $ 1.42 $ 1.15 ========== ========== ==========
15. DERIVATIVE FINANCIAL INSTRUMENTS The Company has had only limited involvement with derivative financial instruments and does not use them for trading or speculative purposes. They are utilized to manage interest rate risk. In June 1998, the Financial Accounting Standards Board issued Statement 133, "Accounting for Derivative Instruments and Hedging Activities" which was amended by Statement 137 in June 1999. The Statement F-21 MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) requires recording all derivative instruments as assets or liabilities, measured at fair value. The Statement is effective for fiscal years beginning after June 15, 2000. The Company does not expect the Statement to have a material impact on its financial position or results of operations. 16. SEGMENT INFORMATION Selected information by operating segment is summarized in the chart below. Line of Business Financial Information
Year ended December 31, ---------------------------- 1999 1998 1997 -------- -------- -------- (In thousands) Revenue(1) Program Business................................. $ 95,132 $ 82,267 $ 49,363 Corporate Risk Management........................ 49,365 51,640 54,800 Specialty Brokerage.............................. 13,692 9,021 8,351 Financial Services............................... 19,522 14,343 8,744 Underwriting..................................... 181,798 101,913 84,200 Net investment income............................ 28,417 28,587 24,984 Other............................................ (300) 143 56 -------- -------- -------- Total.......................................... $387,626 $287,914 $230,498 ======== ======== ======== Income Before Income Taxes and Minority Interest Program Business................................. $ 26,969 $ 32,620 $ 19,080 Corporate Risk Management........................ 15,694 20,158 20,498 Specialty Brokerage.............................. 5,226 2,264 2,594 Financial Services............................... 1,298 542 2,291 Underwriting..................................... (17,489) (2,406) (1,473) Net investment income............................ 21,610 21,768 18,232 Other............................................ (3,001) (1,976) (1,113) -------- -------- -------- Total.......................................... $ 50,307 $ 72,970 $ 60,109 ======== ======== ========
- -------- (1) Fee income from two clients accounted for 2% and 2% of total Fee income in 1999 (1998--2% and 1%; 1997--2% and 1%). Premiums earned from two clients accounted for 6% and 6% of total Premiums earned during 1999 (1998--4% and 3%; 1997--5% and 4%). The subsidiaries' accounting records do not capture information by reporting segment sufficient to determine identifiable assets by such reporting segments. F-22 MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 17. FOREIGN SALES AND OPERATIONS The Company's non-U.S. operations include Bermuda, Barbados, the Cayman Islands and Europe. Financial Information Relating to Geographic Areas
Year ended December 31, -------------------------------- 1999 1998 1997 ---------- ---------- ---------- (In thousands) Total Revenues U.S. Business................................ $ 291,458 $ 193,653 $ 161,681 Non-U.S. Business............................ 96,168 94,261 68,817 ---------- ---------- ---------- Total...................................... $ 387,626 $ 287,914 $ 230,498 ========== ========== ========== Income Before Income Taxes and Minority Interest U.S. Business................................ $ 15,911 $ 38,285 $ 38,485 Non-U.S. Business............................ 34,396 34,685 21,624 ---------- ---------- ---------- Total...................................... $ 50,307 $ 72,970 $ 60,109 ========== ========== ========== Total Assets U.S. Business................................ $3,078,861 $2,082,077 $1,411,881 Non-U.S. Business(1)......................... 954,313 992,180 794,169 ---------- ---------- ---------- Total...................................... $4,033,174 $3,074,257 $2,206,050 ========== ========== ==========
- -------- (1) Includes Assets held in separate accounts of $693.4 million, $722.3 million and $649.2 million for 1999, 1998 and 1997 respectively. 18. ACQUISITIONS During 1998 the Company acquired several new businesses for a total of $25.6 million (1997--$19.6 million). The excess of the purchase price over net assets acquired was $21.9 million (1997--$18.7 million). These acquisitions were accounted for by the purchase method. The pro forma effect on the Company's revenue, net income and earnings per share is not material. During 1998 the Company acquired CompFirst, Inc. and IAS in a business combination accounted for as a pooling of interests. These companies became wholly owned subsidiaries of the Company through the exchange of 943,821 Common Shares for 100% of each company's outstanding stock. F-23 MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) On March 1, 1999, the Company acquired Captive Resources, Inc. ("CRI") in a business combination accounted for as a pooling of interests. CRI became a wholly owned subsidiary of the Company through the exchange of 1,058,766 Common Shares for 100% of its outstanding stock.
Year ended Year ended December 31, December 31, 1998 1997 ------------ ------------ (In thousands) Revenues MRM(1)................................................ $279,396 $223,826 Captive Resources, Inc................................ 8,518 6,672 -------- -------- As restated......................................... $287,914 $230,498 ======== ======== Net Income MRM(1)................................................ $ 63,632 $ 48,811 Captive Resources, Inc................................ 895 666 -------- -------- As restated......................................... $ 64,527 $ 49,477 ======== ========
- -------- (1) As previously reported Shareholders' equity at January 1, 1997 was restated as follows:
As previously Captive reported Resources, Inc. As restated ------------- --------------- ----------- (In thousands) Common shares....................... $ 381 $ 11 $ 392 Additional paid-in capital.......... 82,059 (10) 82,049 Accumulated other comprehensive income............................. 48 0 48 Retained earnings................... 129,036 (182) 128,854 -------- ----- -------- Total shareholders' equity........ $211,524 $(181) $211,343 ======== ===== ========
19. RELATED PARTY TRANSACTIONS A. $.8 million (1998--$.6 million; 1997--$.9 million) of Fee income and $(.1) million (1998--$1.4 million; 1997--$4.2 million) of premiums were earned from a certain IPC Program participant associated with a director and shareholder of the Company. B. A number of subsidiaries of the Company have written business involving subsidiaries of The Galtney Group, Inc. ("GGI") of which a director of the Company is the principal shareholder. During 1999 the Company paid fees of $3.0 million on such business to GGI (1998--$4.0 million; 1997--$4.3 million). C. The Company and its subsidiaries provide administrative and accounting services to a number of unaffiliated insurance and reinsurance companies. Certain officers, directors and employees of the Company serve as officers and directors of these companies, generally without remuneration. D. In connection with the Company's acquisition of The Hemisphere Group Limited ("Hemisphere") in July 1996, the Company acquired a 40% interest in the Hemisphere Trust Company Limited ("Hemisphere Trust"), a Bermuda "local" trust company, which had formerly been a wholly owned subsidiary of Hemisphere. As a "local" Bermuda company, at least 60% of the shares of Hemisphere Trust must be owned by Bermudians. In compliance with this requirement, Mr. Robert A. Mulderig, Chairman and CEO of the Company, acquired F-24 MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 60% of Hemisphere Trust for $.2 million at the time of the Company's acquisition of Hemisphere. The amount of the purchase price was equal to 60% of the book value of Hemisphere Trust on the date of acquisition. The Company and Mr. Mulderig have entered into a Shareholders' Agreement relating to Hemisphere Trust which provides, amongst other things, that (i) the Company has the option, subject to regulatory approval to acquire Mr. Mulderig's interest in Hemisphere Trust at Mr. Mulderig's cost, plus interest at 6% per annum; (ii) the Company has a pre-emptive right, also subject to regulatory approval, over the shares held by Mr. Mulderig and (iii) no dividends or other distributions can be made by Hemisphere Trust without the prior consent of the Company. 20. QUARTERLY FINANCIAL DATA--(UNAUDITED)
1999--Quarters Ended --------------------------------------- Dec 31 Sept 30 June 30 March 31 -------- --------- --------- ---------- (In thousands, except per share data) Total revenues.......................... $ 89,293 $ 102,623 $ 103,817 $ 91,893 Income before income taxes and minority interest............................... 7,723 2,065 19,713 20,806 Income before minority interest......... 8,417 5,366 18,098 18,791 Income before extraordinary loss........ 8,365 5,361 18,095 18,799 Net income.............................. 8,183 5,361 18,095 18,799 Net income available to common shareholders........................... 8,183 5,361 18,095 18,799 Basic earnings per Common Share: Net income available to common shareholders......................... $ 0.20 $ 0.12 $ 0.42 $ 0.44 1998--Quarters Ended(1) --------------------------------------- Dec 31 Sept 30 June 30 March 31 -------- --------- --------- ---------- (In thousands, except per share data) Total revenues.......................... $ 77,351 $ 72,935 $ 65,154 $ 72,474 Income before income taxes and minority interest............................... 18,070 19,309 18,149 17,442 Income before minority interest......... 16,113 17,054 16,092 15,175 Net income.............................. 16,163 17,097 16,092 15,175 Net income available to common shareholders........................... 16,163 17,097 16,092 15,175 Basic earnings per Common Share: Net income available to common shareholders......................... $ 0.38 $ 0.41 $ 0.39 $ .0.38
- -------- (1) Prior periods have been restated to reflect a pooling of interests following the acquisition of Captive Resources, Inc. 21. SUBSEQUENT EVENTS In January and February 2000, the Company repurchased Convertible Debentures representing a principal amount of $168.1 million in the open market for $76.8 million, resulting in an extraordinary loss of $3.4 million, net of tax. The Company expects to have similar extraordinary losses in the future if it repurchases the remaining $83.9 million principal amount of Convertible Debentures in 2000. In January and February 2000, the Company drew down an additional $76.0 million under the bridging loan facility (see note 7). In February 2000, the Company filed an S-3 Shelf Registration Statement with the U. S. Securities and Exchange Commission, for the future issuance of $500 million of debt and preferred securities. F-25 INDEPENDENT AUDITOR'S REPORT [LOGO OF ERNST & YOUNG APPEARS HERE] To the Board of Directors and Shareholders Mutual Risk Management Ltd. We have audited the accompanying consolidated balance sheets of Mutual Risk Management Ltd. and subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of income and comprehensive income, changes in shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1999. 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 auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. 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 Mutual Risk Management Ltd. and subsidiaries at December 31, 1999 and 1998, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. /S/ ERNST & YOUNG Hamilton, Bermuda February 15, 2000 except for note 21, as to which the date is February 29, 2000 F-26 MUTUAL RISK MANAGEMENT LTD CONDENSED FINANCIAL INFORMATION OF REGISTRANT PARENT COMPANY ONLY BALANCE SHEETS
1999 1998(1) ------------ ------------ ASSETS Cash and cash equivalents............................ $ 6,721,527 $ 689,260 Investments.......................................... 9,664,914 8,594,316 Investments in subsidiaries and affiliates........... 570,072,530 425,013,307 Due from subsidiaries and affiliates................. 542,308 34,455,222 Other Assets......................................... 2,319,150 2,371,905 ------------ ------------ Total Assets......................................... $589,320,429 $471,124,010 ============ ============
LIABILITIES & SHAREHOLDERS' EQUITY
LIABILITIES Accounts payable and accrued expenses............... $ 393,741 $ 926 Other liabilities................................... 2,884,665 2,471,885 Debentures.......................................... 110,898,002 125,485,201 Bridging loan....................................... 117,000,000 -- ------------ ------------ Total Liabilities................................... 231,176,408 127,958,012 ============ ============ SHAREHOLDERS' EQUITY Common Shares--Authorized 180,000,000 (par value $0.01) Issued 41,205,191 (excluding 2,636,716 cumulative shares held in treasury) (1998-- 42,205,596)........................................ 412,052 422,056 Additional paid-in capital.......................... 110,754,754 114,916,045 Accumulated other comprehensive (loss) income....... (14,937,127) 4,456,781 Retained earnings................................... 261,914,342 223,371,116 ------------ ------------ Total Shareholders' Equity.......................... 358,144,021 343,165,998 ------------ ------------ Total Liabilities & Shareholders' Equity............ $589,320,429 $471,124,010 ============ ============
- -------- (1) Prior periods have been restated to reflect a pooling of interests following the acquisition of Captive Resources, Inc. See Notes to Consolidated Financial Statements S-1 MUTUAL RISK MANAGEMENT LTD CONDENSED FINANCIAL INFORMATION OF REGISTRANT PARENT COMPANY ONLY INCOME STATEMENTS
Years Ended December 31, -------------------------------------- 1999 1998(1) 1997(1) ------------ ----------- ----------- NET INVESTMENT INCOME................. 1,008,904 2,171,384 2,928,791 Operating expenses.................... 141,055 141,140 140,943 Interest expense...................... 573,200 -- -- Amortization of debentures............ 5,996,459 6,605,238 6,500,288 ------------ ----------- ----------- LOSS BEFORE EXTRAORDINARY LOSS AND EQUITY IN EARNINGS OF SUBSIDIARIES... (5,701,810) (4,574,994) (3,712,440) Extraordinary loss on extinguishment of debentures, net of tax............ (181,742) -- -- ------------ ----------- ----------- NET LOSS BEFORE EQUITY IN EARNINGS OF SUBSIDIARIES......................... (5,883,552) (4,574,994) (3,712,440) Dividend from subsidiaries............ -- -- 11,922,627 Undistributed equity in earnings of subsidiary........................... 56,321,584 69,102,196 41,266,925 ------------ ----------- ----------- NET INCOME............................ 50,438,032 64,527,202 49,477,112 Preferred share dividends............. -- -- (104,929) ------------ ----------- ----------- NET INCOME AVAILABLE TO COMMON SHAREHOLDERS......................... 50,438,032 64,527,202 49,372,183 OTHER COMPREHENSIVE INCOME, NET OF TAX Unrealized (losses) gains on investments, net of reclassification adjustment........................... (19,393,912) 421,385 3,987,716 ------------ ----------- ----------- COMPREHENSIVE INCOME.................. $ 31,044,120 $64,948,587 $53,359,899 ============ =========== ===========
- -------- (1) Prior periods have been restated to reflect a pooling of interests following the acquisition of Captive Resources, Inc. See Notes to Consolidated Financial Statements S-2 MUTUAL RISK MANAGEMENT LTD CONDENSED FINANCIAL INFORMATION OF REGISTRANT PARENT COMPANY ONLY STATEMENTS OF CASH FLOW
Years Ended December 31, ----------------------------------------- 1999 1998(1) 1997(1) ------------- ------------ ------------ NET CASH FLOW FROM OPERATING ACTIVITIES Net loss before equity in earnings of subsidiaries................... $ (5,883,552) $ (4,574,994) $ (3,712,440) Items not affecting cash Amortization of debentures........ 5,996,459 6,605,238 6,500,288 Amortization of investments....... (1,092,079) (1,188,773) (166,292) Net changes in non-cash balances relating to operations: Other assets...................... 52,755 239,181 5,229,028 Accounts payable and accrued expenses......................... 392,815 (6,592) (1,348,741) Other liabilities................. -- -- (85,145) Due from subsidiaries and affiliates....................... 33,912,914 (11,370,137) (20,698,928) ------------- ------------ ------------ NET CASH FLOW FROM (APPLIED TO) OPERATING ACTIVITIES.............. 33,379,312 (10,296,077) (14,282,230) ------------- ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sale of fixed assets........................... -- -- 1,265,818 Cost of investments............... -- (15,942,997) (18,753,904) Proceeds from sale of investments...................... -- 30,475,717 56,556,009 Cost of investments in affiliates and subsidiaries................. (108,097,564) (2,587,782) (36,397,234) Dividends received from subsidiaries..................... -- -- 11,922,627 ------------- ------------ ------------ NET CASH (APPLIED TO) FROM INVESTING ACTIVITIES.............. (108,097,564) 11,944,938 14,593,316 ------------- ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from shares issued....... 11,209,642 8,055,217 7,297,184 Purchase of Treasury shares....... (29,813,837) -- -- Extinguishment of convertible debentures....................... (6,163,258) -- -- Redemption of preferred shares.... -- -- (2,951,835) Bridging loan received............ 117,000,000 -- -- Subscription loans receivable..... -- 383,761 383,761 Loan interest received............ -- 4,922 34,727 Dividends paid.................... (11,482,028) (10,427,321) (8,301,338) ------------- ------------ ------------ NET CASH FLOWS FROM (APPLIED TO) FINANCING ACTIVITIES.............. 80,750,519 (1,983,421) (3,537,501) ------------- ------------ ------------ Net increase (decrease) in cash and cash equivalents.................. 6,032,267 (334,560) (3,226,415) Cash and cash equivalents at begin- ning of year...................... 689,260 1,023,820 4,250,235 ------------- ------------ ------------ Cash and cash equivalents at end of year.............................. $ 6,721,527 $ 689,260 $ 1,023,820 ============= ============ ============
- -------- (1) Prior periods have been restated to reflect a pooling of interests following the acquisition of Captive Resources, Inc. See Notes to Consolidated Financial Statements S-3 SCHEDULE VI MUTUAL RISK MANAGEMENT LTD. SUPPLEMENTARY INSURANCE INFORMATION (U.S. DOLLARS IN THOUSANDS)
Gross Deferred Reserve for Gross Year Ended Policy Unpaid Claims Discount, Gross Net Net December 31, Acquisition and if any, Unearned Earned Investment Property-Casualty Costs Claims Expenses Deducted(1) Premiums Premiums Income - ----------------- ----------- --------------- ----------- -------- -------- ---------- 1999 20,531 1,860,120 39,538 335,265 181,798 17,466 1998 17,948 1,190,426 36,213 241,893 101,913 16,357 1997 19,204 716,461 28,083 188,389 84,200 16,879
Net Claim and Claims Expenses Incurred Related to (1) --------------------- Amortization Net Paid of Deferred Claims Year Ended Policy and Net Other December 31, Current Prior Acquisition Claims Premiums Operating Property-Casualty Year Year Costs Expenses Written Expenses - ----------------- ----------- --------- ------------ -------- -------- --------- 1999 146,414 1,291 51,582 128,384 200,517 42,857 1998 74,476 3,782 26,061 53,158 104,948 30,164 1997 50,301 (444) 35,816 33,512 96,170 19,559
- -------- (1) Medical malpractice reserves have been discounted at 6% in 1999, 1998 and 1997. Workers' compensation reserves have been discounted at 4% in 1999, 1998 and 1997. S-4 EX-10.12 2 CREDIT AGREEMENT DATED DEC. 6, 1999 Exhibit 10.12 EXECUTION VERSION CREDIT AGREEMENT dated as of December 6, 1999 among MUTUAL RISK MANAGEMENT LTD., as Borrower, MUTUAL GROUP, LTD., as Guarantor, MUTUAL RISK MANAGEMENT LTD., MUTUAL RISK MANAGEMENT (HOLDINGS) LTD., MUTUAL GROUP, LTD. LEGION FINANCIAL CORPORATION, as Pledgors, MUTUAL INDEMNITY (DUBLIN) LTD., MUTUAL RISK MANAGEMENT (HOLDINGS) LTD., MUTUAL HOLDINGS (BERMUDA) LTD., IPC MUTUAL HOLDINGS, LTD., LEGION FINANCIAL CORPORATION, LEGION INSURANCE COMPANY, as Collateral Subsidiaries, THE LENDERS PARTY HERETO and PRUDENTIAL SECURITIES CREDIT CORP., as Agent TABLE OF CONTENTS SECTION 1. DEFINITIONS; RULES OF CONSTRUCTION
Page SECTION 1.1. Definitions................................................................. 1 SECTION 1.2. Rules of Construction....................................................... 19 SECTION 2. AMOUNT AND TERMS OF BRIDGE LOAN COMMITMENT AND LOANS; BRIDGE NOTES SECTION 2.1. Bridge Loan Commitment...................................................... 19 SECTION 2.2. Procedure for Borrowing..................................................... 20 SECTION 2.3. Disbursement of Funds....................................................... 20 SECTION 2.4. Bridge Notes................................................................ 21 SECTION 2.5. Termination of Bridge Loan Commitment....................................... 21 SECTION 2.6. Pro Rata Borrowings......................................................... 21 SECTION 2.7. Interest.................................................................... 21 SECTION 2.8. Making of Payments.......................................................... 22 SECTION 2.9. No Setoff, Counterclaim or Withholding; Gross-Up............................ 22 SECTION 2.10. Increased Costs and Reduction of Return..................................... 23 SECTION 2.11. Illegality.................................................................. 24 SECTION 2.12. Repayment; Prepayments...................................................... 24 SECTION 2.13. Mandatory Offer to Purchase Bridge Notes.................................... 25 SECTION 2.14. Security for the Loan....................................................... 26 SECTION 3. REPRESENTATIONS AND WARRANTIES SECTION 3.1. Good Standing and Authority................................................. 26 SECTION 3.2. Stock Duly Authorized and Issued............................................ 27 SECTION 3.3. Loan Documents Authorized, etc.............................................. 27 SECTION 3.4. No Consents; No Conflicts................................................... 27 SECTION 3.5. Financial Information Complete.............................................. 28 SECTION 3.6. No Material Adverse Change.................................................. 28 SECTION 3.7. Accuracy and Completeness of Information.................................... 28 SECTION 3.8. Internal Accounting......................................................... 29 SECTION 3.9. No Insolvency............................................................... 29 SECTION 3.10. Legal Title................................................................. 29 SECTION 3.11. No Violations............................................................... 29 SECTION 3.12. No Litigation............................................................... 29 SECTION 3.13. Proceeds.................................................................... 29 SECTION 3.14. Margin Stock................................................................ 30 SECTION 3.15. Tax Returns and Payments.................................................... 30 SECTION 3.16. ERISA Compliance............................................................ 30 SECTION 3.17. Compliance With Laws........................................................ 31
i
Page SECTION 3.18. Government Regulation....................................................... 31 SECTION 3.19. Insurance................................................................... 31 SECTION 3.20. Labor....................................................................... 31 SECTION 3.21. Environmental Matters....................................................... 31 SECTION 3.22. Insurance Regulations....................................................... 32 SECTION 3.23. Permits; Licenses........................................................... 32 SECTION 3.24. Year 2000................................................................... 32 SECTION 3.25. Collateral.................................................................. 33 SECTION 3.26. Acknowledgment of Pledge.................................................... 33 SECTION 4. CONDITIONS TO THE OBLIGATIONS OF THE LENDERS SECTION 4.1. Conditions to Closing....................................................... 34 SECTION 4.2. Condition to the Initial Bridge Loan........................................ 36 SECTION 4.3. Conditions to each Bridge Loan.............................................. 36 SECTION 5. AFFIRMATIVE COVENANTS SECTION 5.1. Corporate Existence......................................................... 36 SECTION 5.2. Compliance With Laws........................................................ 37 SECTION 5.3. Maintenance of Property; Insurance.......................................... 37 SECTION 5.4. Payment of Taxes and Other Claims........................................... 37 SECTION 5.5. Investment Company Act...................................................... 38 SECTION 5.6. Payments in U.S. Dollars.................................................... 38 SECTION 5.7. Use of Proceeds............................................................. 38 SECTION 5.8. Refinancing................................................................. 38 SECTION 5.9. Financial Statements........................................................ 38 SECTION 5.10. Notice of Litigation and Other Matters...................................... 40 SECTION 5.11. Collateral.................................................................. 40 SECTION 6. NEGATIVE COVENANTS SECTION 6.1. Consolidated Indebtedness to Consolidated Total Capital Ratio............... 41 SECTION 6.2. Shareholders' Equity........................................................ 41 SECTION 6.3. Negative Pledge............................................................. 42 SECTION 6.4. Limitation on Subsidiary Indebtedness....................................... 42 SECTION 6.5. Limitation on Asset Sales................................................... 42 SECTION 6.6. Merger, Acquisition, Sale of Assets and Liquidation......................... 42 SECTION 6.7. Sale and Leaseback.......................................................... 43 SECTION 6.8. Limitations on Dividends and Other Payment Restrictions Affecting Subsidiaries................................................................ 43 SECTION 6.9. Transactions with Affiliates................................................ 43 SECTION 6.10. Lines of Business........................................................... 44 SECTION 6.11. Amendment to Charter Documents.............................................. 44
ii TABLE OF CONTENTS (continued)
Page SECTION 6.12. Collateral................................................................ 44 SECTION 7. DEFAULTS AND REMEDIES SECTION 7.1. Events of Default......................................................... 44 SECTION 7.2. Default Remedies.......................................................... 46 SECTION 8. THE AGENT SECTION 8.1. Appointment............................................................... 47 SECTION 8.2. Delegation of Duties...................................................... 47 SECTION 8.3. Exculpatory Provisions.................................................... 47 SECTION 8.4. Reliance by Agent......................................................... 48 SECTION 8.5. Notice of Default......................................................... 48 SECTION 8.6. Non-Reliance on Agent and Other Lenders................................... 48 SECTION 8.7. Indemnification........................................................... 49 SECTION 8.8. Agent in Its Individual Capacity.......................................... 49 SECTION 8.9. Resignation of the Agent; Successor Agent................................. 49 SECTION 9. GUARANTEE SECTION 9.1. Unconditional Guarantee................................................... 50 SECTION 9.2. Severability.............................................................. 51 SECTION 9.3. Limitation of Guarantor's Liability....................................... 51 SECTION 9.4. Waiver of Stay, Extension or Usury Laws................................... 51 SECTION 10 PLEDGE; RIGHTS AND REMEDIES SECTION 10.1. Pledge and Charge......................................................... 51 SECTION 10.2. Delivery of Collateral.................................................... 52 SECTION 10.3. Agent Appointed Attorney-in-Fact.......................................... 52 SECTION 10.4. Agent May Perform......................................................... 52 SECTION 10.5. Voting Rights and Dividends............................................... 53 SECTION 10.6. Remedies upon an Event of Default......................................... 54 SECTION 10.7. Application of Proceeds of Sale........................................... 57 SECTION 10.8. Responsibilities of the Agent............................................. 57 SECTION 10.9. Termination; Release Reinstatement........................................ 58 SECTION 10.10 Security Interest Absolute................................................ 58 SECTION 11 MISCELLANEOUS SECTION 11.1. Representation of the Lenders............................................. 59
iii TABLE OF CONTENTS (continued)
Page SECTION 11.2. Participations in and Assignments of Bridge Loans........................ 59 SECTION 11.3. Expenses................................................................. 61 SECTION 11.4. Indemnity................................................................ 61 SECTION 11.5. Setoff................................................................... 62 SECTION 11.6. Amendments and Waivers................................................... 62 SECTION 11.7. Independence of Covenants................................................ 63 SECTION 11.8. Entirety................................................................. 63 SECTION 11.9. Notices.................................................................. 63 SECTION 11.10. Survival of Warranties and Certain Agreements............................ 63 SECTION 11.11. Failure or Indulgence Not Waiver; Remedies Cumulative.................... 64 SECTION 11.12. Severability............................................................. 64 SECTION 11.13. Headings................................................................. 64 SECTION 11.14. Governing Law; Consent to Jurisdiction; Venue; Waiver of Jury Trial...... 64 SECTION 11.15. Successors and Assigns................................................... 65 SECTION 11.16. Counterparts; Effectiveness.............................................. 66 SECTION 11.17. Payments Pro Rata........................................................ 66 SECTION 11.18. Waiver of Stay, Extension or Usury Laws.................................. 66 SECTION 11.19. Confidentiality.......................................................... 66 SECTION 11.20. Compensation............................................................. 67
Exhibits - -------- A Form of Bridge Note B Form of Notice of Borrowing C-1 Form of Legal Opinion of Mayer, Brown & Platt, U.S. Counsel to the Loan Parties C-2 Form of Legal Opinion of Conyers Dill & Pearman, Bermuda Counsel to the Loan Parties incorporated in Bermuda C-3 Form of Legal Opinion of A & L Goodbody, Irish Counsel to Mutual Indemnity (Dublin) Ltd. C-4 Form of Legal Opinion of Lewis, Rice & Fingersh, Missouri Counsel to Legion Financial Corporation C-5 Form of Legal Opinion of Richard O'Brien, Esq., General Counsel to the Borrower C-6 Form of Legal Opinion of Andrew Walsh, Esq., General Counsel to Legion D Form of Assignment and Assumption Agreement E Section 11.2(e)(ii) Certificate
Schedules - --------- Schedule 3.10 List of Subsidiaries Schedule 3.25 Executive Offices and Places of Business of Loan Parties Schedule 6.3 Liens Schedule 10.1-A Legion Pledged Shares Schedule 10.1-B Legion Financial Corporation Pledged Shares Schedule 10.1-C Mutual Holdings Pledged Shares Schedule 10.1-D IPC Pledged Shares iv TABLE OF CONTENTS (continued)
Page Schedule 10.1-E MI Dublin Pledged Shares Schedule 10.1-F Mutual Risk Holdings Pledged Shares Schedule 10.2 Pledged Securities
v This Credit Agreement (this "Agreement") is dated as of December 6, 1999, and entered into by and among Mutual Risk Management Ltd., a company incorporated under the laws of Bermuda, as borrower (in such capacity, the "Borrower"), Mutual Group, Ltd., a Delaware corporation, acting as guarantor (in such capacity, the "Guarantor"), certain subsidiaries of the Borrower acting as Pledgors (as defined below), certain subsidiaries of the Borrower acting as Collateral Subsidiaries (as defined below), Prudential Securities Credit Corp. as Lender (in such capacity, "PSCC"), the other banks and financial institutions from time to time party hereto (each of PSCC and such other banks and financial institutions, collectively the "Lenders" and individually a "Lender") and Prudential Securities Credit Corp., as agent for the Lenders (in such capacity, the "Agent"). RECITALS WHEREAS, the Borrower desires that the Lenders extend a credit facility to the Borrower guaranteed by the Guarantor and secured by the Collateral (as defined below); NOW, THEREFORE, in consideration of the premises and the agreements, provisions and covenants herein contained, the parties hereby agree as follows: SECTION 1. DEFINITIONS; RULES OF CONSTRUCTION SECTION 1.1. Definitions. For all purposes of this Agreement and the ----------- Bridge Notes (as defined below), the following definitions shall apply: "Additional Shares" means all additional shares of Capital Stock of any ----------------- issuer of any Pledged Shares, or any successor in interest thereto, from time to time acquired by any Pledgor in any manner whatsoever. "Affiliate" of any specified Person means any other Person, directly or --------- indirectly, controlling or controlled by or under direct or indirect common control with such specified Person. For the purposes of this definition, "control" (including with correlative meaning, the terms "controlling," "controlled by" and "under common control with"), when used with respect to any Person, means (i) the power to direct or cause the direction of the management or policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise, or (ii) the beneficial ownership of 10% or more of the total voting power of the Voting Stock (on a fully diluted basis) of such Person. "Agent" has the meaning assigned to it in the preamble of this Agreement. ----- "Amount of Unfunded Benefit Liability" means, with respect to any Pension ------------------------------------ Plan, (i) if set forth on the most recent actuarial valuation report with respect to such Pension Plan, the amount of unfunded benefit liabilities (as defined in Section 4001 (a)(18) of ERISA) and (ii) otherwise, the excess of (x) the greater of the current liability (as defined in Section 412(1)(7) of the Code) or the actuarial present value of the accrued benefits with respect to such Pension Plan over (y) the market value of the assets of such Pension Plan. 1 "Annual Statement" means, with respect to any Insurance Company Subsidiary, ---------------- the statutory annual financial statement of such Insurance Company Subsidiary as is required to be filed with the applicable Governmental Authority of its state of domicile, together with all exhibits and schedules filed therewith. "Applicable Interest Rate" means for any Interest Period the sum of LIBOR ------------------------ (Reserve Adjusted) plus 0.75%. "Asset Sale" means any direct or indirect sale, issuance, conveyance, ---------- lease, assignment, transfer or other disposition for value (including, without limitation, pursuant to any amalgamation, merger or consolidation or pursuant to any sale and leaseback transaction) by the Borrower or by any of its Subsidiaries to any Person other than the Borrower or any of its Wholly Owned Subsidiaries (any such transaction, a "disposition") of any asset of the Borrower or any of its Subsidiaries, excluding (i) any disposition of Cash Equivalents in the ordinary course of business, (ii) any disposition of Investment Securities in the ordinary course of business the proceeds of which are used to purchase other Investment Securities or invested in Cash Equivalents pending such purchase and (iii) any disposition of assets the Fair Market Value of which, together with the Fair Market Value of all assets disposed of in the period from the Closing Date to the date of the proposed disposition, does not exceed $10,000,000 in the aggregate. "Bankruptcy Law" means Title 11, United States Code, or any other -------------- applicable federal, state, or foreign bankruptcy, insolvency or similar law as now or hereafter constituted. "Board of Directors" means, in the case of a Person that is a corporation, ------------------ the board of directors of such person or any committee authorized to act therefor and in the case of any other Person, the board of directors, management committee, or similar governing body or any authorized committee thereof responsible for the management and affairs of such Person. "Borrower" has the meaning assigned to it in the preamble of this Agreement -------- "Bridge Loan," with respect to any Lender at any time, means (a) any loan ----------- to be made hereunder by such Lender after such time or (b) any loan made by such Lender hereunder in the principal amount outstanding at such time, and "Bridge ------ Loans," at any time, means the aggregate of the Bridge Loans of all the Lenders - ----- at such time. "Bridge Loan Commitment" has the meaning assigned to it in Section 2.1. ---------------------- "Bridge Note" has the meaning assigned to it in Section 2.4. ----------- "Broker-Dealer" means any broker or dealer (as defined in Sections 3(a)(4) ------------- and 3(a)(5) of the Exchange Act) that is required to be registered under the Exchange Act, or any business entity controlled by a Broker-Dealer (other than a broker or dealer that is not required to be registered under the Exchange Act). "Business Day" means any day excluding Saturday, Sunday and any day on ------------ which banking institutions located in New York, New York are authorized or required by law or other governmental action to close; provided, that when used -------- in connection with an interest rate 2 determination, a notice of borrowing pursuant to Section 2.2 or any payment with respect to the Bridge Loans, the term "Business Day" shall also exclude any day on which banks in London, England are not open for dealings in Dollar deposits in the London interbank market. "Capital Adequacy Regulation" means any guideline, request or directive of --------------------------- any central bank or other Governmental Authority, or any other law, rule or regulation, whether or not having the force of law, in each case, regarding capital adequacy of any bank or of any corporation controlling a bank. "Capital Stock" of any Person means any and all shares, interests, rights ------------- to purchase, warrants, options, participations or other equivalents of or interests in (however designated) equity of such Person, including any Preferred Stock, but excluding any debt securities convertible into such equity. "Capitalized Lease Obligation" means, as to any Person, the obligations of ---------------------------- such Person under a lease that are required to be capitalized and accounted for as capital lease obligations under GAAP and, for purposes of this definition, the amount of such obligations at any date shall be the capitalized amount of such obligations at such date, determined in accordance with GAAP. "Cash Equivalents" means (i) marketable direct obligations issued or ---------------- unconditionally guaranteed by the United States government or issued by any agency thereof and backed by the full faith and credit of the United States, in each case maturing within one year from the date of acquisition thereof; (ii) marketable direct obligations issued by any State of the United States of America or any political subdivision of any such state or any public instrumentality thereof maturing within one year from the date of acquisition thereof and, at the time of acquisition, having the highest rating obtainable from either Standard & Poor's Rating Group ("S&P") or Moody's Investors Service, Inc. ("Moody's"); (iii) commercial paper maturing no more than one year from the date of creation thereof and, at the time of acquisition, having the highest rating obtainable from either S&P's or Moody's; and (iv) certificates of deposit or bankers' acceptances maturing within one year from the date of acquisition thereof issued by any commercial bank organized under the laws of the United States of America or any State thereof or the District of Columbia that (A) is at least "adequately capitalized" (as defined in the regulations of its primary Federal banking regulator) and (B) has Tier 1 capital (as defined in such regulations) of not less than $100,000,000; (v) shares of any money market mutual fund that (a) has its assets invested continuously in the types of investments referred to in clauses (i) and (ii) above, (b) has net assets of not less than $500,000,000, and (c) has the highest rating obtainable from either S&P's or Moody's; and (vi) repurchase agreements with respect to, and which are fully secured by a perfected security interest in, obligations of a type described in clause (i) or clause (ii) above and are with any commercial bank described in clause (iv) above. "Change of Control" means the occurrence of any of the following events: ----------------- (i) any Person or Group (as defined below) becomes the beneficial owner (as defined below), directly or indirectly, in the aggregate of more than 33% of the total voting power of the Voting Stock of the Borrower; or (ii) during any period of two consecutive years, individuals who at the beginning of such period constituted the Board of Directors of the Borrower, together with any new directors whose election by such Board of Directors or whose nomination for election by the shareholders 3 of the Borrower was approved by a vote of a majority of the directors of the Borrower then still in office who were either directors at the beginning of such period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority of the Board of Directors of the Borrower then in office. For purposes of the foregoing definition: (a) "beneficial owner" and "beneficially own" shall have the meaning specified in Rules 13d-3 and 13d-5 under the Exchange Act, except that any Person or Group shall be deemed to have "beneficial ownership" of all securities that such Person or Group has the right to acquire, whether such right is exercisable immediately, only after the passage of time or upon the occurrence of a subsequent condition. (b) "Person" and "Group" shall have the meanings for "person" and "group" as used in Sections 13(d) and 14(d) of the Exchange Act; and (c) any Person or Group shall be deemed to beneficially own any Voting Stock of a corporation held by any other corporation (the "parent corporation") so long as such other Person or Group, as the case may be, beneficially owns, directly or indirectly, in the aggregate more than 33% of the voting power of the Voting Stock of the parent corporation and no other Person or Group beneficially owns an equal or greater amount of the Voting Stock of the parent corporation. "Change of Control Date" has the meaning assigned to it in Section 2.12. ---------------------- "Change of Control Offer" has the meaning assigned to it in Section 2.12. ----------------------- "Closing Date" means the date on which each condition specified in Section ------------ 4.1 shall be satisfied or waived in all respects in the sole discretion of the Agent. "Code" means the Internal Revenue Code of 1986, as amended. ---- "Collateral" means the LFC Collateral, the MG Collateral, the MRM ---------- Collateral and the MRMH Collateral, collectively. "Collateral Subsidiary" means any of the following Subsidiaries of the --------------------- Borrower, all the shares of Capital Stock of which (except the IPC Preferred Shares in the case of IPC Mutual Holdings, Ltd., the MH Preferred Shares in the case of Mutual Holdings (Bermuda) Ltd. and the MIDL Director Share in the case of Mutual Indemnity (Dublin) Ltd.) are pledged to the Agent for the benefit of the Lenders hereunder: (i) IPC Mutual Holdings, Ltd. with respect to the MG Collateral; (ii) Legion with respect to the LFC Collateral; (iii) Legion Financial Corporation with respect to the MG Collateral; (iv) Mutual Holdings (Bermuda) Ltd. with respect to the MRMH Collateral; 4 (v) Mutual Indemnity (Dublin) Ltd. with respect to the MRM Collateral; and (vi) Mutual Risk Management (Holdings) Ltd. with respect to the MRM Collateral. "Consolidated Indebtedness" means, with respect to the Borrower and its ------------------------- Subsidiaries at any date, the Indebtedness of the Borrower and its Subsidiaries, determined on a consolidated basis as of such date, including, without limitation, all Indebtedness outstanding under this Agreement. "Consolidated Total Capital" means, with respect to the Borrower and its -------------------------- Subsidiaries at any date, the sum of Consolidated Indebtedness, Stockholders' Equity and Qualified Indebtedness; provided, that for purposes of this -------- definition only, in determining Qualified Indebtedness, any Qualified Indebtedness which includes any put right or option or other right or option in favor of the holder to cause such Qualified Indebtedness to be redeemed or otherwise paid on a date which is earlier than one (1) year after the Maturity Date shall be disregarded. "Contingent Obligation" means, with respect to the Borrower and its --------------------- Subsidiaries, without duplication, any obligation, contingent or otherwise, of any such Person pursuant to which such Person has directly or indirectly guaranteed any Indebtedness or other obligation of any other Person and, without limiting the generality of the foregoing, any obligation, direct or indirect, contingent or otherwise, of any such Person (a) to purchase or pay (or advance or supply funds for the purchase or payment of) such Indebtedness or other obligation (whether arising by virtue of partnership arrangements, by agreement to keep well, to purchase assets, goods, securities or services, to take-or-pay, or to maintain financial statement condition or otherwise) or (b) entered into for the purpose of assuring in any other manner the obligee of such Indebtedness or other obligation of the payment thereof or to protect such obligee against loss in respect thereof (in whole or in part); provided, that the term -------- Contingent Obligation shall not include (i) obligations under insurance or reinsurance policies or (ii) endorsements for collection or deposit in the ordinary course of business. "Contract" has the meaning assigned to it in Section 3.4. -------- "Convertible Securities" means the Borrower's Zero Coupon Convertible ---------------------- Exchangeable Subordinated Debentures due 2015 issued pursuant to the Indenture dated as of October 30, 1995 by and among the Borrower as Issuer, Mutual Group Ltd., as Guarantor, and State Street Bank and Trust Company as Trustee. "Custodian" means any receiver, interim receiver, receiver and manager, --------- trustee, assignee, liquidator, sequestrator, custodian or similar official charged with maintaining possession or control over property for one or more creditors, whether under any Bankruptcy Law or otherwise. "Default" means any event which is, or after notice or passage of time or ------- both would be, an Event of Default. "Derivative Agreement" means any Interest Rate Protection Agreement or any -------------------- other agreement of the Borrower relating to a rate swap transaction, basis swap, forward rate transaction, commodity swap, commodity option, equity or equity index swap, equity or equity 5 index option, bond option, interest rate option, foreign exchange transaction, cap transaction, floor transaction, collar transaction, currency swap transaction, cross-currency rate swap transaction, currency option or any other similar transaction (including any option with respect to any of the foregoing transactions) or any combination of the foregoing transactions. "Disbursement Date," with respect to any Bridge Loan, means the ----------------- disbursement date for such Bridge Loan designated as such by the Borrower in accordance with Section 2.2. "Dollar" or the sign "$" means the lawful money of the United States of ------ - America. "Eligible Assignee" means (A) (i) a commercial bank organized under the ----------------- laws of the United States of America or any state thereof; (ii) a savings and loan association or savings bank organized under the laws of the United States or any state thereof; (iii) a commercial bank organized under the laws of any other country or a political subdivision thereof; provided, that (x) such bank -------- is acting through a branch or agency located in the United States or (y) such bank is organized under the laws of a country that is a member of the Organization for Economic Cooperation and Development or a political subdivision of such country; provided, further, that, at the time of determination, the -------- ------- Lender making the assignment or transfer to such bank, believes that such bank will be entitled to an exemption from U.S. withholding tax (assuming compliance with the first sentence of Section 11.2(e); and (iv) any other entity which is an "accredited investor" (as defined in Regulation D under the Securities Act of 1933) which extends credit or buys loans as one of its businesses including, but not limited to, insurance companies, mutual funds and lease financing companies (but other than a Broker-Dealer), in each case (under clauses (i) through (iv) above) that is reasonably acceptable to the Agent; and (B) any Lender and any Affiliate of any Lender (other than a Broker-Dealer). "Employee Benefit Plan" means any employee benefit plan within the meaning --------------------- of Section 3(3) of ERISA which (a) is sponsored, maintained or contributed to by the Borrower, any of its Subsidiaries or any of their respective ERISA Affiliates or (b) has at any time within the preceding six years been sponsored, maintained or contributed to by the Borrower, any of its Subsidiaries or any of their respective current or former ERISA Affiliates, or for which the Borrower, its Subsidiaries or their respective current or former ERISA Affiliates retain any liability, whether contingent or otherwise. "Engagement Letter" means the engagement letter agreement, entered into ----------------- prior to or concurrently herewith, between the Borrower and Prudential Securities Incorporated ("PSI") relating to the Refinancing as the same may be amended from time to time. "ERISA" means the Employee Retirement Income Security Act of 1974, and the ----- rules and regulations thereunder, each as amended, supplemented or otherwise modified. "ERISA Affiliate" means any Person who together with the Borrower is --------------- treated as a single employer within the meaning of Section 414(b), (c), (m) or (o) of the Code or Section 4001(b) of ERISA. "ERISA Event" means (i) a "reportable event" within the meaning of Section ----------- 4043 of ERISA and the regulations issued thereunder with respect to any Pension Plan (excluding those for which the provision for 30-day notice to the PBGC has been waived by regulation); (ii) the 6 failure to meet the minimum funding standard of Section 412 of the Internal Revenue Code with respect to any Pension Plan (whether or not waived) or the failure to make any required contribution within 10 days of its due date with respect to any Multiemployer Plan; (iii) the provision by the administrator of any Pension Plan pursuant to Section 4041 (a) (2) of ERISA of a notice of intent to terminate such plan in a distress termination described in Section 4041(c) of ERISA; (iv) the withdrawal by the Borrower or any of its Subsidiaries or any of their respective ERISA Affiliates from any Multiple Employer Plan or the termination of any such Multiple Employer Plan resulting in liability pursuant to Sections 4063 or 4064 of ERISA; (v) the institution by the PBGC of proceedings to terminate any Pension Plan, or the occurrence of any event or condition which might reasonably be expected to constitute grounds under ERISA for the termination of, or the appointment of a trustee to administer, any Pension Plan; (vi) the imposition of liability on the Borrower or any of its Subsidiaries or any of their respective ERISA Affiliates pursuant to Section 4062(e) or 4069 of ERISA or by reason of the application of Section 4212(c) of ERISA; (vii) the withdrawal by the Borrower or any of its Subsidiaries or any of their respective ERISA Affiliates in a complete or partial withdrawal (within the meaning of Sections 4203 and 4205 of ERISA) from any Multiemployer Plan if there is any potential liability therefor, or the receipt by the Borrower or any of its Subsidiaries or any of their respective ERISA Affiliates of notice from any Multiemployer Plan that it is in reorganization or insolvency pursuant to Section 4241 or 4245 of ERISA, or that it intends to terminate or has terminated under Section 4041A or 4042 of ERISA; (viii) the occurrence of an act or omission which could reasonably be expected to give rise to the imposition on the Borrower or any of its Subsidiaries or any of their respective ERISA Affiliates of fines, penalties, taxes or related charges under Chapter 43 of the Internal Revenue Code or under Section 406, 409 or 502(i) or (1) of ERISA in respect of any Employee Benefit Plan; (ix) receipt from the Internal Revenue Service of notice of the failure of any Pension Plan (or any other Employee Benefit Plan intended to be qualified under Section 401(a) of the Internal Revenue Code) to qualify under Section 401(a) of the Internal Revenue Code, or the failure of any trust forming part of any Pension Plan or Employee Benefit Plan to qualify for exemption from taxation under Section 501(a) of the Internal Revenue Code; or (x) the imposition of a Lien pursuant to Section 401(a) (29) or 412(n) of the Internal Revenue Code or pursuant to ERISA with respect to any Pension Plan. "Eurodollar Reserve Percentage" means for any day for any Interest Period ----------------------------- the maximum reserve percentage (expressed as a decimal, rounded upward, if necessary, to an integral multiple of 1/100th of 1%) in effect on such day (whether or not applicable to any Lender) under regulations issued from time to time by the FRB for determining the maximum reserve requirement (including any emergency, supplemental or other marginal reserve requirement) with respect to Eurocurrency funding (currently referred to as "Eurocurrency liabilities"). "Event of Default" has the meaning assigned to it in Section 7.1. ---------------- "Exchange Act" means the Securities Exchange Act of 1934, as amended. ------------ "Fair Market Value" means, with respect to any asset, the price (after ----------------- taking into account any liabilities relating to such assets) which could be negotiated in an arm's-length free market transaction, for cash, between a willing seller and a willing and able buyer, neither of which is under any compulsion to complete the transaction. 7 "FAS 115" means Statement No. 115 ("Accounting for Certain Investments in ------- Indebtedness and Equity Securities") issued by the Financial Accounting Standards Board. "Federal Funds Rate" means, for any day, the rate per annum (rounded ------------------ upward, if necessary, to the nearest 1/100th of 1%) equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published by the Federal Reserve Bank of New York on the Business Day next succeeding such day in Federal Reserve Board Statistical Release H.15(519) or any successor or substitute publication; provided, that (i) if such day is not a -------- Business Day, the Federal Funds Rate for such day shall be such rate on such transactions on the next preceding Business Day as so published on the next succeeding Business Day, and (ii) if no such rate is so published on such next succeeding Business Day, the Federal Funds Rate for such day shall be the average rate quoted to the Agent for such day on such transactions as determined by the Agent. "Foreign Plan" means any employee benefit plan maintained outside the U.S. ------------ by the Borrower, any of its Subsidiaries or any of their respective Affiliates for employees substantially all of whom are non-resident aliens of the U.S. and for which the Borrower or any of its Subsidiaries may be directly or indirectly liable. "FRB" means the Board of Governors of the Federal Reserve System, and any --- Governmental Authority succeeding to any of its principal functions. "GAAP" means generally accepted accounting principles, as recognized by the ---- American Institute of Certified Public Accountants and the Financial Accounting Standards Board, consistently applied and maintained on a consistent basis for the Borrower throughout the period indicated and consistent with the prior financial practice of the Borrower. "Governmental Authority" means any nation, province, state or political ---------------------- subdivision thereof, and any government or any Person exercising executive, legislative, regulatory or administrative functions of or pertaining to government, and any corporation or other entity owned or controlled, through stock or capital ownership or otherwise, by any of the foregoing. "Guarantee" has the meaning assigned to it in Section 9.1. --------- "Guarantor" has the meaning set forth in the preamble of this Agreement. --------- "Indebtedness" means, with respect to the Borrower and its Subsidiaries at ------------ any date and without duplication, the sum of the following calculated in accordance with GAAP: (a) all liabilities, obligations and indebtedness for borrowed money, including but not limited to obligations evidenced by bonds, debentures, notes or other similar instruments of any such Person, (b) all obligations to pay the deferred purchase price of property or services of any such Person (other than trade payables due from such Person and arising in the ordinary course of business for not more than 90 days not subject to (a) below), (c) all Capitalized Lease Obligations of such Person, (d) all Indebtedness of any other Person secured by a Lien on any asset of any such Person, (e) all obligations, contingent or otherwise, of any such Person relating to the face amount of letters of credit, whether or not drawn, and banker's acceptances issued for the account of any such Person, but excluding any obligation relating to an undrawn letter of 8 credit if the undrawn letter of credit is issued in connection with a liability for which a reserve has been established by the Borrower or the applicable Subsidiary in accordance with GAAP, (f) all obligations incurred by any such Person pursuant to Interest Rate Protection Agreements which are due and payable and (g) all Contingent Obligations of any such Person with respect to Indebtedness referred to in clauses (a) through (f) of this definition; provided, that the term Indebtedness shall not include any Qualified - -------- Indebtedness. "Indemnified Liabilities" has the meaning assigned to it in Section 11.4. ----------------------- "Indemnitees" has the meaning assigned to it in Section 11.4. ----------- "Insurance Company Subsidiary" means a Subsidiary of the Borrower which is ---------------------------- a licensed insurance company. "Interest Payment Date" means the last day of each Interest Period. --------------------- "Interest Period" means, with respect to any Bridge Loan and subject to --------------- Section 2.8(a), (a) the period beginning on the Disbursement Date and ending on the day numerically corresponding to the Closing Date in the first month next following such Disbursement Date (or, if such Disbursement Date falls on the Closing Date, the third month next following such Disbursement Date) and (b) each subsequent period beginning on the last day of the next preceding Interest Period and ending on the day numerically corresponding to the first day of such Interest Period in either (i) the third month thereafter, if such last day falls on the day numerically corresponding to the Closing Date in the third or sixth month next following the Closing Date or (ii) the first month thereafter, in any other case. "Interest Rate Determination Date" means, with respect to any Interest -------------------------------- Period, the second Business Day prior to the first Business Day of such Interest Period. "Interest Rate Protection Agreement" of any Person means any interest rate ---------------------------------- protection agreement (including, without limitation, interest rate swaps, caps, floors, collars, derivative instruments and similar agreements), and/or other types of interest hedging agreements in support of the Borrower's business and not of a speculative nature. "Internal Revenue Code" means the Internal Revenue Code of 1986, as amended --------------------- from time to time, and any successor code or statute. "Investment Securities" means "securities" classified as "trading --------------------- securities" or "available-for-sale securities" for purposes of FAS115, in each case within the meaning of FAS115. "IPC Mutual Holdings, Ltd." means IPC Mutual Holdings Ltd., a corporation ------------------------- organized under the laws of Bermuda and a direct Wholly Owned Subsidiary of the Guarantor. "IPC Pledged Shares" means all the shares of Capital Stock (other than the ------------------ IPC Preferred Shares) of IPC Mutual Holdings Ltd., as described in Schedule 10.1-D hereto. 9 "IPC Preferred Shares" means the non-voting redeemable shares of Preferred -------------------- Stock of IPC Mutual Holdings, Ltd. which are issued from time to time solely in connection with insurance and reinsurance programs underwritten by Mutual Indemnity, Ltd, commonly known as the "insurance profit center", and which shares of Preferred Stock serve as a means by which, inter alia, underwriting ---------- and investment gains, determined in accordance with an accompanying preferred shareholders agreement, are distributed to the preferred shareholder. "Laws" has the meaning assigned to it in Section 3.4. ---- "Legion" means Legion Insurance Company, a Pennsylvania corporation and an ------ indirect Wholly Owned Subsidiary of the Borrower. "Legion Financial Corporation" means Legion Financial Corporation, a ---------------------------- Missouri corporation and a direct Wholly Owned Subsidiary of the Guarantor. "Legion Financial Corporation Pledged Shares" means all the shares of ------------------------------------------- Capital Stock of Legion Financial Corporation, as described in Schedule 10.1-B hereto. "Legion Pledged Shares" means all the shares of Capital Stock of Legion, as --------------------- described in Schedule 10.1-A hereto. "Lender" has the meaning assigned to it in the Preamble of this Agreement. ------ "LFC Collateral" means each of the following, whether now owned or -------------- hereafter acquired: (i) The Legion Pledged Shares and the certificates representing the Legion Pledged Shares; (ii) The Additional Shares with respect to Legion and the certificates representing the Additional Shares with respect to Legion; (iii) All dividends, cash, instruments and other property from time to time received, receivable or otherwise distributed in respect of or in exchange for any and all of the Legion Pledged Shares, Additional Shares with respect to Legion and other LFC Collateral; (iv) All other rights and privileges relating to the property described in clauses (i), (ii) and (iii) above (including, without limitation, voting rights); and (v) Cash and noncash proceeds of any and all of the foregoing. "LIBOR" means, with respect to any Bridge Loan for any Interest Period, an ----- interest rate per annum equal to the rate of interest appearing on Telerate Page 3750 (or any successor page) or if no such rate is available, the rate of interest determined by the Agent to be the rate or the arithmetic mean of rates (rounded upward, if necessary, to the nearest 1/32 of one percentage point) at which Dollar deposits in immediately available funds in an amount approximately equal to the aggregate amount of such Bridge Loan, for a period equal to the applicable Interest Period, are offered to first-tier banks in the London interbank Euro-dollar market, at approximately 11:00 a.m., London time, on the Interest Rate Determination Date; provided, however, that for -------- ------- 10 purposes of this definition only any Interest Period of less than one month shall be deemed to be an Interest Period of one month. "LIBOR (Reserve Adjusted)" means, for any Interest Period, the rate of ----------------------- interest per annum (rounded upward to the next 1/100th of 1%) determined by the Agent as follows: LIBOR = LIBOR ---------------------------------------- (Reserve Adjusted) 1.00 minus Eurodollar Reserve Percentage "Lien" has the meaning assigned to it in Section 3.4. ---- "Loan Documents" means this Agreement, the Bridge Notes and the Engagement -------------- Letter. "Loan Party" means any of the Borrower, the Guarantor, each Pledgor and ---------- each Collateral Subsidiary. "Margin Stock" has the meaning specified in Regulation U. ------------ "Material Adverse Effect" means (i) a material adverse effect upon the ----------------------- business, operations, properties, assets, condition (financial or otherwise) or prospects of the Borrower and its Subsidiaries, taken as a whole, or (ii) a material impairment of the ability of the Borrower to perform any material obligations under the Loan Documents or to consummate the Refinancing. "Material Subsidiary" means a Subsidiary of the Borrower which, as of the ------------------- last day of the most recently ended fiscal year, either held five percent (5%) or more of the consolidated total assets, or contributed five percent (5%) or more to the consolidated total revenues, of the Borrower and its consolidated Subsidiaries for the fiscal year ending on such date (or, in the case of any Subsidiary acquired or created during any fiscal year, which would have met either of such tests on a pro forma basis as of the last day of the preceding fiscal year). "Maturity Date" means the day numerically corresponding to the Closing Date ------------- in the ninth month thereafter (or, with respect to any Bridge Loan, such earlier date as the principal thereof shall become due and payable whether by voluntary or mandatory repayment, acceleration or otherwise). "MG Collateral" means each of the following, whether now owned or hereafter ------------- acquired: (A) The MG Collateral with respect to IPC Mutual Holdings, Ltd., which is comprised of: (i) The IPC Pledged Shares and the certificates representing the IPC Pledged Shares; (ii) The Additional Shares with respect to IPC Mutual Holdings, Ltd. and the certificates representing the Additional Shares with respect to IPC Mutual Holdings, Ltd.; (iii) All dividends, cash, instruments and other property from time to time received, receivable or otherwise distributed in respect of or in exchange for any and all 11 of the IPC Pledged Shares, Additional Shares with respect to IPC Mutual Holdings, Ltd. and other MG Collateral with respect to IPC Mutual Holdings, Ltd.; (iv) All other rights and privileges relating to the property described in clauses (i), (ii) and (iii) above (including, without limitation, voting rights); and (v) Cash and noncash proceeds of any and all of the foregoing; and (B) The MG Collateral with respect to Legion Financial Corporation, which is comprised of: (i) The Legion Financial Corporation Pledged Shares and the certificates representing the Legion Financial Corporation Pledged Shares; (ii) The Additional Shares with respect to Legion Financial Corporation and the certificates representing the Additional Shares with respect to Legion Financial Corporation; (iii) All dividends, cash, instruments and other property from time to time received, receivable or otherwise distributed in respect of or in exchange for any and all of the Legion Financial Corporation Pledged Shares, Additional Shares with respect to Legion Financial Corporation and other MG Collateral with respect of Legion Financial Corporation; (iv) All other rights and privileges relating to the property described in clauses (i), (ii) and (iii) above (including, without limitation, voting rights); and (v) Cash and noncash proceeds of any and all of the foregoing. "MH Preferred Shares" means the non-voting redeemable shares of Preferred ------------------- Stock of Mutual Holdings (Bermuda) Ltd. which are issued from time to time solely in connection with insurance and reinsurance programs underwritten by Mutual Indemnity (Bermuda) Ltd. and Mutual Indemnity (Guernsey) Ltd. commonly known as the "insurance profit center", and which shares of Preferred Stock serve as a means by which, inter alia, underwriting and investment gains, ---------- determined in accordance with an accompanying preferred shareholders agreement, are distributed to the preferred shareholder. "MI Dublin Pledged Shares" means all the shares of Capital Stock of Mutual ------------------------ Indemnity (Dublin) Ltd. except the MIDL Director Share, as described in Schedule 10.1-E hereto. "MIDL Director Share" means the one share of Capital Stock of Mutual ------------------- Indemnity (Dublin) Ltd. that is not owned by the Borrower as of the date hereof. "MRM Collateral" means each of the following, whether now owned or -------------- hereafter acquired: (A) The MRM Collateral with respect to Mutual Indemnity (Dublin) Ltd., which is comprised of: 12 (i) The MI Dublin Pledged Shares and the certificates representing the MI Dublin Pledged Shares; (ii) The Additional Shares with respect to Mutual Indemnity (Dublin) Ltd. and the certificates representing the Additional Shares with respect to Mutual Indemnity (Dublin) Ltd.; (iii) All dividends, cash, instruments and other property from time to time received, receivable or otherwise distributed in respect of or in exchange for any and all of the MI Dublin Pledged Shares, Additional Shares with respect to Mutual Indemnity (Dublin) Ltd. and other MRM Collateral with respect to Mutual Indemnity (Dublin) Ltd.; (iv) All other rights and privileges relating to the property described in clauses (i), (ii) and (iii) above (including, without limitation, voting rights); and (v) Cash and noncash proceeds of any and all of the foregoing; and (B) The MRM Collateral with respect to Mutual Risk Management (Holdings) Ltd., which is comprised of: (i) The Mutual Risk Holdings Pledged Shares and the certificates representing the Mutual Risk Holdings Pledged Shares; (ii) The Additional Shares with respect to Mutual Risk Management (Holdings) Ltd. and the certificates representing the Additional Shares with respect to Mutual Risk Management (Holdings) Ltd.; (iii) All dividends, cash, instruments and other property from time to time received, receivable or otherwise distributed in respect of or in exchange for any and all of the Mutual Risk Holdings Pledged Shares, Additional Shares with respect to Mutual Risk Management (Holdings) Ltd. and other MRM Collateral with respect to Mutual Risk Management (Holdings) Ltd.; (iv) All other rights and privileges relating to the property described in clauses (i), (ii) and (iii) above (including, without limitation, voting rights); and (v) Cash and noncash proceeds of any and all of the foregoing. "MRMH Collateral" means each of the following, whether now owned or --------------- hereafter acquired: (i) The Mutual Holdings Pledged Shares and the certificates representing the Mutual Holdings Pledged Shares; (ii) The Additional Shares with respect to Mutual Holdings (Bermuda) Ltd. and the certificates representing the Additional Shares with respect to Mutual Holdings (Bermuda) Ltd.; 13 (iii) All dividends, cash, instruments and other property from time to time received, receivable or otherwise distributed in respect of or in exchange for any and all of the Mutual Holdings Pledged Shares, Additional Shares with respect to Mutual Holdings (Bermuda) Ltd. and other MRMH Collateral; (iv) All other rights and privileges relating to the property described in clauses (i), (ii) and (iii) above (including, without limitation, voting rights); and (v) Cash and noncash proceeds of any and all of the foregoing. "Multiemployer Plan" means a "multiemployer plan" as defined in Section ------------------ 4001(a)(3) of ERISA to which the Borrower, its Subsidiaries or any of their respective ERISA Affiliates is making or is accruing an obligation to make contributions or has within the preceding six years made or accrued an obligation to make contributions. "Multiple Employer Plan" means a "single employer plan" as defined in ---------------------- Section 4001(a)(15) of ERISA that (i) is or was sponsored, maintained or contributed to by the Borrower, its Subsidiaries or any of their respective ERISA Affiliates and at least one Person other than the Borrower, its Subsidiaries or their respective ERISA Affiliates or (ii) was so sponsored, maintained or contributed to and in respect of which the Borrower, its Subsidiaries or such ERISA Affiliates could incur liability under Section 4064 or 4069 of ERISA in the event such plan has been or were to be terminated. "Mutual Holdings (Bermuda) Ltd." means Mutual Holdings (Bermuda) Ltd., a ------------------------------ Bermuda corporation and a direct Wholly Owned Subsidiary of Mutual Risk Management (Holdings) Ltd. "Mutual Holdings Pledged Shares" means all the shares of Capital Stock ------------------------------ (other than the MH Preferred Shares) of Mutual Holdings (Bermuda) Ltd., as described in Schedule 10.1-C hereto. "Mutual Indemnity (Dublin) Ltd." means Mutual Indemnity (Dublin) Ltd., an ------------------------------ Irish corporation and a direct Subsidiary of the Borrower. "Mutual Risk Holdings Pledged Shares" means all the shares of Capital Stock ----------------------------------- of Mutual Risk Management (Holdings) Ltd., as described in Schedule 10.1-F hereto. "Mutual Risk Management (Holdings) Ltd." means Mutual Risk Management -------------------------------------- (Holdings) Ltd., a Bermuda corporation and a direct Wholly Owned Subsidiary of Mutual Risk Management Ltd. "Net Cash Proceeds" means (i) with respect to any issuance or sale of ----------------- Capital Stock or Indebtedness, the proceeds of such issuance or sale in the form of cash or Cash Equivalents net of attorneys' fees, accountants' fees, underwriters' or placement agents' fees, discounts or commissions and brokerage, consultant and other fees actually incurred in connection with such issuance or sale and (ii) with respect to any Asset Sale, the proceeds in the form of cash or Cash Equivalents, including payments in respect of deferred payment obligations when received in the form of cash or Cash Equivalents received by the Borrower or any of its Subsidiaries from such Asset Sale, net of (1) reasonable out-of-pocket expenses and fees relating to such Asset Sale 14 (including, without limitation, legal, accounting and investment banking fees and sales commissions); (2) taxes paid or payable in respect of such Asset Sale after taking into account any reduction in consolidated tax liability due to available tax credits or deductions and any tax sharing arrangements; (3) repayment of Indebtedness secured by a Lien permitted hereunder that is required to be repaid in connection with such Asset Sale; and (4) appropriate amounts to be provided by the Borrower or such Subsidiary, as the case may be, as a reserve, in accordance with GAAP, against any liabilities associated with such Asset Sale and retained by the Borrower or such Subsidiary, as the case may be, after such Asset Sale, including, without limitation, pension and other post- employment benefit liabilities, liabilities related to environmental matters and liabilities under any indemnification obligations associated with such Asset Sale. "Obligations" means all obligations of every nature of the Borrower and the ----------- Guarantor from time to time owed to the Lenders and the Agent under the Loan Documents, whether for principal, reimbursements, interest, fees, expenses, indemnities or otherwise, and whether primary, secondary, direct, indirect, contingent, fixed or otherwise (including obligations of performance). "Offer Payment Date" has the meaning assigned to it in Section 2.12. ------------------ "Officer" means, with respect to any Person, the President, an Executive ------- Vice President, the Chief Operating Officer, a Senior Vice President, the General Manager, the Chief Financial Officer, the Treasurer or the Secretary of such Person (or, in the case of Mutual Indemnity (Dublin) Ltd., a Director). "Officers' Certificate" means a certificate signed by two Officers. --------------------- "PBGC" means the Pension Benefit Guaranty Corporation or any successor ---- agency. "Pension Plan" means a Single Employer Plan or a Multiple Employer Plan. ------------ "Permitted Business" means (i) with respect to the Borrower, the business ------------------ of acting as a holding company the only material assets of which are listed in Schedule 3.10 and (ii) with respect to any of the Borrower's Subsidiaries, the business carried on by such Subsidiary on the Closing Date; it being understood that the term "Permitted Business" shall include the business of any Person acquired by the Borrower or any of its Subsidiaries subsequent to the Closing Date which is engaged in the same or a substantially similar business as the business carried on by the Borrower or such Subsidiary on the Closing Date. "Permitted Liens" means (i) Liens described on Schedule 6.3; (ii) Purchase --------------- Money Liens; (iii) any Lien on any asset securing Indebtedness incurred or assumed for the purpose of financing all or any part of the cost of acquiring such asset, provided, that such Lien attaches only to such asset and that such -------- Lien attaches to such asset concurrently with or within ninety (90) days after the acquisition thereof; (iv) any Lien existing on any asset of any corporation at the time such corporation becomes a Subsidiary of the Borrower and not created in contemplation of such event; (v) any Lien on any asset of any corporation existing at the time such corporation is merged or consolidated with or into the Borrower or a Subsidiary of the Borrower and not created 15 in contemplation of such event; (vi) any Lien existing on any asset prior to the acquisition thereof by the Borrower or a Subsidiary of the Borrower and not created in contemplation of such acquisition; (vii) any Lien arising out of the refinancing, extension, renewal or refunding of any Indebtedness secured by any Lien permitted by any of the foregoing clauses, provided that such Indebtedness is not increased and is not secured by any additional assets; (viii) Liens arising in the ordinary course of business of the Borrower and its Subsidiaries (including Liens arising in the ordinary course of the insurance business of the Borrower and its Subsidiaries) which do not secure Indebtedness and do not in the aggregate materially detract from or impair the use or value of the asset or assets subject thereto; (ix) Liens on cash and cash equivalents securing obligations under Derivative Agreements entered into for bona fide hedging purposes as long as the aggregate amount of cash and Cash Equivalents subject to such Liens does not at any time exceed $10,000,000; (x) any Liens on securities securing repurchase obligations of the Borrower or a Subsidiary relating to those securities as long as such Liens arise in the ordinary course of business and as long as such Liens are in amounts and otherwise are on terms consistent with then existing practices in the repurchase agreement market; (xi) any Liens on securities or cash of any Insurance Company Subsidiary which secure its obligations as a reinsurer; and (xii) any Liens not otherwise permitted by the foregoing clauses securing Indebtedness in an aggregate principal amount at any time outstanding not to exceed $10,000,000. Notwithstanding the foregoing, no Lien on the Collateral other than the security interest created hereunder in favor of the Agent for the benefit of the Lenders shall be a Permitted Lien for purposes hereof. "Person" means any individual, corporation, partnership, joint venture, ------ association, joint-stock company, trust, unincorporated organization, government or any agency or political subdivision thereof or any other entity. "Pledged Securities" has the meaning set forth in Section 10.2. ------------------ "Pledged Shares" means the IPC Pledged Shares, the Legion Pledged Shares, -------------- the Legion Financial Corporation Pledged Shares, the Mutual Indemnity Dublin Pledged Shares, the Mutual Holdings Pledged Shares and the Mutual Risk Holdings Pledged Shares, collectively. "Pledgor" means any of the following: ------- (i) the Borrower with respect to the MRM Collateral; (ii) the Guarantor with respect to the MG Collateral; (iii) Legion Financial Corporation with respect to the LFC Collateral; and (iv) Mutual Risk Management (Holdings) Ltd. with respect to the MRMH Collateral. "Preferred Stock" of any Person means any Capital Stock of such Person that --------------- has preferential rights over any other Capital Stock of such Person with respect to dividends, distributions or redemptions or upon liquidation. "Property" means, with respect to any Person, any interest of such Person -------- in any kind of property or asset, whether real, personal or mixed, tangible or intangible. 16 "Purchase Money Lien" means (i) any mortgage, pledge, hypothecation, lien, ------------------- encumbrance, charge or security interest of any kind upon any capital stock of any Insurance Company Subsidiary of the Borrower acquired after the date hereof, if such purchase money lien is given for the purpose of financing, and does not exceed, the cost to the Borrower or any Subsidiary of acquiring the capital stock or property of the acquired Insurance Company Subsidiary and such financing is effected concurrently with, or within six months after, the date of such acquisition, and (ii) any extension, renewal or refinancing of any such Purchase Money Lien as long as the principal amount of obligations secured thereby does not exceed the principal amount of obligations secured immediately prior to such extension, renewal or refinancing. "Qualified Indebtedness" means, without duplication, (a) securities ---------------------- evidencing Indebtedness of the Borrower, provided that the terms of any such security (i) permit the deferral of principal and interest payments for a period of up to five years (but not beyond the maturity date), as elected by the Borrower, (ii) have a maturity for payment of principal of not less than ten (10) years after the date of issuance, and (iii) include provisions making such security expressly subordinate to all other Indebtedness of the Borrower; (b) preferred securities issued by a Subsidiary of the Borrower, the sole purpose of which is to issue such preferred securities and invest the proceeds thereof in securities of the type described in clause (a) above, and which preferred securities are payable solely out of the proceeds of payments on account of such securities; and (c) the obligations recorded on the consolidated balance sheet of the Borrower and its Subsidiaries with respect to securities of the type described in clause (a) above and preferred securities of the type described in clause (b) above. "Quarterly Statement" means, with respect to any Insurance Company ------------------- Subsidiary, the statutory quarterly financial statement of such Insurance Company Subsidiary as is required to be filed with the applicable Governmental Authority of its state of domicile, with all exhibits and schedules filed therewith. "Refinancing" means the offering and sale by the Borrower or any of its ----------- Subsidiaries of Refinancing Securities pursuant to the Engagement Letter. "Refinancing Fee" means an amount equal to 1.0% of the aggregate amount of --------------- the Bridge Loan Commitment; provided, that, solely for purposes of Section -------- 2.12(d), the term "Refinancing Fee," on any prepayment date pursuant to Section --------------- 2.12(d), shall mean an amount equal to 1.0% of the aggregate amount of the Bridge Loans prepaid on such prepayment date. "Refinancing Securities" means debt securities or Capital Stock issued by ---------------------- the Borrower or any of its Subsidiaries in connection with the Refinancing the proceeds of which are to be used to repay the Bridge Loans in full. "Regulation U" means Regulation U of the FRB, as in effect from time to ------------ time. "Required Lenders" means the Lender or Lenders holding at least 66-2/3% of ---------------- the aggregate outstanding principal amount of all Bridge Loans then outstanding. "SAP" means, with respect to any Insurance Company Subsidiary, the --- accounting practices and procedures required to be complied with by such Insurance Company Subsidiary 17 under the statutes of its state of domicile and under the rules and regulations of the applicable Governmental Authority of that state. "SEC" means the Securities and Exchange Commission. --- "Securities Act" means the Securities Act of 1933, as amended, and the -------------- rules and regulations promulgated thereunder. "Single Employer Plan" means a "single-employer plan," as defined in -------------------- Section 4001(a)(15) of ERISA, that (i) is or was sponsored, maintained or contributed to by the Borrower any of its Subsidiaries or any of their respective ERISA Affiliates and no Person other than the Borrower any of its Subsidiaries or any of their respective ERISA Affiliates or (ii) was so sponsored, maintained or contributed to by and in respect of which such Borrower, its Subsidiaries or their respective ERISA Affiliates could have liability under Section 4069 of ERISA in the event such plan has been or were to be terminated. "Stockholders' Equity" means, with respect to the Borrower and its -------------------- Subsidiaries at any date, the stockholders' equity of the Borrower and its Subsidiaries determined on a consolidated basis in accordance with GAAP; provided, that, for purposes hereof, Stockholders' Equity shall be determined - -------- without regard to the requirements of FAS115; and provided, further, that for --- -------- ------- purposes hereof the amount of goodwill and other intangible assets reflected in determining Stockholders' Equity shall be the lesser of (i) the amount shown as goodwill and other intangible assets on the most recent audited or unaudited consolidated balance sheet of the Borrower and its consolidated Subsidiaries and (ii) $55,000,000. "Subsidiary" means, in respect of any Person, any corporation, association, ---------- partnership or other business entity of which more than 50% of the total voting power of the Voting Stock is at the time owned or controlled, directly or indirectly, by (i) such Person, (ii) such Person and one or more Subsidiaries of such Person or (iii) one or more Subsidiaries of such Person. "Tax Return" means a report, return or other information (including any ---------- amendments) required to be supplied with respect to Taxes including, where permitted or required, combined or consolidated returns for any group of entities that includes the Borrower or any Subsidiary. "Taxes" means any present or future taxes, assessments, fees, levies, ----- imposts, duties, deductions, liabilities, withholdings or other charges of any nature whatsoever, including interest, penalties and additions thereto from time to time or at any time imposed by any Law or any tribunal. "Transactions" means the execution, delivery and performance of the Loan ------------ Documents and the issuance or incurrence of the Bridge Loans, the Bridge Notes and the Guarantee pursuant to the Loan Documents. "UCC" means the Uniform Commercial Code, as in effect from time to time in --- the State of New York. "Voting Stock" of a Person means all classes of Capital Stock or other ------------ interests (including partnership interests) of such Person then outstanding and normally entitled (without 18 regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof. "Wholly Owned Subsidiary" means a Subsidiary, all the Capital Stock of ----------------------- which (other than directors' qualifying shares) is owned by the Borrower or one or more Wholly Owned Subsidiaries. SECTION 1.2. Rules of Construction. Unless the context otherwise --------------------- requires: (i) a term has the meaning assigned to it herein; (ii) an accounting term not otherwise defined has the meaning assigned to it in accordance with GAAP; (iii) the term "principal" with respect to any Bridge Loan or Bridge Note includes any premium payable with respect thereto; (iv) "or" is not exclusive; (v) "including" means including without limitation; (vi) words in the singular include the plural and words in the plural include the singular; (vii) the words "herein", "hereof", and "hereunder" and other words of similar import refer to this Agreement as a whole and not to any particular Section or other subdivision; (viii) section references refer to Sections of this Agreement unless otherwise indicated; (ix) the headings in this Agreement are for purposes of reference only and shall not be considered in construing this Agreement; and (x) any reference to this Agreement hereunder shall mean this Credit Agreement, as the same may be modified, amended or supplemented. SECTION 2. AMOUNT AND TERMS OF BRIDGE LOAN COMMITMENT AND LOANS; BRIDGE NOTES SECTION 2.1. Bridge Loan Commitment. (a) Subject to the terms and ---------------------- conditions of this Agreement and in reliance upon the representations and warranties of the Loan Parties herein set forth, PSCC hereby agrees to make Bridge Loans to the Borrower from time to time in an aggregate principal amount not exceeding $250,000,000 (the "Bridge Loan Commitment"). Following any sale, transfer or negotiation by PSCC pursuant to Section 11.2 hereof of any portion of the Bridge Loan Commitment to one or several new Lenders, the terms "Bridge Loan Commitment," individually, and "Bridge Loan Commitments," collectively, as 19 used herein, shall refer to the commitment of each of PSCC and such new Lender or Lenders to make its pro rata portion of each Bridge Loan to the Borrower pursuant to this Section 2. (b) This Agreement will not be in the nature of a revolving credit facility, and amounts borrowed and repaid hereunder at any time may not be reborrowed. SECTION 2.2. Procedure for Borrowing. (a) The Borrower may request a ----------------------- Bridge Loan hereunder by a notice substantially in the form set forth in Exhibit B, with all blank spaces appropriately completed in compliance with Section 2.2(b), specifying the aggregate principal amount of the Bridge Loan to be made on the applicable Disbursement Date, which shall be $5,000,000 or a whole multiple of $1,000,000 in excess thereof and shall be an amount which, when taken together with all other Bridge Loans made hereunder prior to such Disbursement Date, shall not exceed the Bridge Loan Commitment. The notice must be given to the Agent not later than 11:00 a.m. (New York City time) on the third Business Day before such Disbursement Date. (b) A notice of borrowing pursuant to this Section 2.2 shall specify the Disbursement Date and the account to which the Borrower wishes the proceeds of the Bridge Loan to be credited. The Disbursement Date so specified must be a Business Day on or before the termination of the Bridge Loan Commitment, except any day in the period from December 28, 1999 through January 3, 2000 during which the Borrower may not request a Bridge Loan hereunder. The giving of a notice as provided in this Section 2.2 shall constitute the Borrower's irrevocable commitment to borrow an amount equal to the Bridge Loan specified therein on such Disbursement Date. SECTION 2.3. Disbursement of Funds. No later than 3:00 p.m. (New York --------------------- time) on the relevant Disbursement Date, each Lender will make available its pro rata share of the Bridge Loan requested to be made on such date in the manner provided below. All amounts shall be made available to the Agent in Dollars and immediately available funds by deposit to the Agent's account specified in Section 2.8(b) and the Agent promptly will make available to the Borrower by depositing to its account specified pursuant to Section 2.2(b) the aggregate of the amounts so made available in the type of funds received. Unless the Agent shall have been notified by any Lender prior to such Disbursement Date that such Lender does not intend to make available to the Agent its pro rata share of the Bridge Loan to be made on such date, the Agent may assume that such Lender has made such amount available to the Agent on such date, and the Agent, in reliance upon such assumption, may (in its sole discretion and without any obligation to do so) make available to the Borrower a corresponding amount. If such corresponding amount is not in fact made available to the Agent by such Lender and the Agent has made available same to the Borrower, the Agent shall be entitled to recover such corresponding amount from such Lender. If such Lender does not pay such corresponding amount forthwith upon the Agent's demand therefor, the Agent shall promptly notify the Borrower, and the Borrower shall immediately pay such corresponding amount to the Agent. The Agent shall also be entitled to recover from such Lender or the Borrower, as the case may be, interest on such corresponding amount in respect of each day from the date such corresponding amount was made available by the Agent to the Borrower to the date such corresponding amount is recovered by the Agent, at a rate per annum equal to (x) if paid by such 20 Lender, the overnight Federal Funds Rate or (y) if paid by the Borrower, the then applicable rate of interest on the relevant Bridge Loan. SECTION 2.4. Bridge Notes. The Borrower shall execute and deliver to ------------ each Lender on the Disbursement Date such Lender shall first contribute to a Bridge Loan hereunder a note substantially in the form of Exhibit A and with appropriate insertions, to evidence the date and such Lender's pro rata portion of each Bridge Loan, and each payment of principal, interest or other amounts due under the Loan Documents (a "Bridge Note"). Each Lender is hereby authorized to endorse on the schedule attached to the Bridge Note held by such Lender (or on a continuation of any such schedule attached to any such Bridge Note and made a part thereof) an appropriate notation evidencing the date and its pro rata portion of each Bridge Loan, and each payment of principal, interest or other amounts due under the Loan Documents, in respect thereof. Such schedule shall, absent manifest error, constitute prima facie evidence of the accuracy of the information contained therein. The failure of any Lender to make a notation on the schedule to the Bridge Note held by such Lender as aforesaid or the making of an incorrect notation by any Lender shall not affect the obligations of the Loan Parties hereunder or under any of the Bridge Notes or any other Loan Document in any respect. SECTION 2.5. Termination of Bridge Loan Commitment. The Bridge Loan ------------------------------------- Commitment hereunder shall terminate at 5:00 p.m. (New York City time) on the day numerically corresponding to the Closing Date in the sixth month thereafter. SECTION 2.6. Pro Rata Borrowings. The Bridge Loans made under this ------------------- Agreement shall be made by the Lenders pro rata on the basis of their respective Bridge Loan Commitments. It is understood that no Lender shall be responsible for any default by any other Lender of its obligation to make its portion of any Bridge Loan hereunder and that each Lender shall be obligated to make its portion of any Bridge Loan hereunder, regardless of the failure of any other Lender to fulfill its commitments hereunder. SECTION 2.7. Interest. (a) Each Bridge Loan shall bear interest on -------- the unpaid principal amount thereof during each Interest Period, from and including the first day of that Interest Period to but excluding the last day thereof, at a rate per annum equal to the Applicable Interest Rate for each Interest Period. (b) Any principal payments on any Bridge Loan not paid when due and, to the extent permitted by applicable law, any interest payment on any Bridge Loan not paid when due, in each case whether at stated maturity, by notice of redemption, by acceleration or otherwise, shall thereafter bear interest payable upon demand at a rate which is 2.00% per annum in excess of the rate of interest otherwise payable under this Agreement. (c) Interest on each Bridge Loan shall be computed on the basis of a 360- day year and the actual number of days elapsed in the period during which it accrues. (d) Interest shall be payable with respect to each Bridge Loan, in arrears, on each Interest Payment Date, commencing on the first Interest Payment Date following the Disbursement Date with respect to such Bridge Loan. 21 SECTION 2.8. Making of Payments. (a) Any payment stated to be due in ------------------ respect of any Bridge Loan, and any Interest Period stated to end, on a given day in a specified month shall instead be made or end (as the case may be) (i) if there is no such day in that month, on the last Business Day of that month or (ii) if that day is not a Business Day, on the following Business Day, unless that following Business Day falls in a different calendar month, in which case that payment shall be made or that Interest Period shall end (as the case may be) on the preceding Business Day. (b) Each payment by the Borrower or the Guarantor under this Agreement or the Bridge Notes shall be made in Dollars, by deposit in funds settled through the New York Clearing House Interbank Payments System or such other same-day funds as the Agent may at the time determine to be customary for the settlement in New York City of international banking transactions denominated in Dollars, by 11:00 a.m. New York City time on the date such payment is due, to the Agent's account No. JLA111569PPC (Reference: Mutual Risk Management Ltd.), ABA Number: 02100018, maintained at The Bank of New York, 80 Broadway, New York, New York 10292, or to any other account in New York City designated by the Agent by notice to the Borrower and the Guarantor. SECTION 2.9. No Setoff, Counterclaim or Withholding; Gross-Up. (a) ------------------------------------------------ Each payment by the Borrower or the Guarantor under this Agreement or the Bridge Notes shall be made without setoff or counterclaim and without withholding on account of any present or future Taxes imposed by or within Bermuda or any political subdivision or taxing authority thereof or therein or any other jurisdiction from or through which the Borrower or the Guarantor makes payment hereunder; provided, however, that, if such Taxes are required to be withheld or -------- ------- deducted from any such payment, the Borrower or the Guarantor shall make such withholding or deduction, make payment of the amount withheld or deducted to the appropriate Governmental Authority and forthwith pay such additional amount as may be necessary to ensure that the net amount actually received by each Lender and the Agent free and clear of such Taxes is equal to the amount that such Lender or the Agent (as the case may be) would have received had no such Taxes been withheld or deducted; and provided, further, that no such additional -------- ------- amounts shall be payable in respect of (i) in the case of each Lender and the Agent, any Taxes imposed on its net income and franchise Taxes imposed on it by the jurisdiction under the laws of which such Person is organized (unless such Taxes are imposed solely because the payment was made by a Guarantor and would not have been imposed had such payment instead been made by the Borrower) or (ii) any Taxes imposed on a payee by reason of such payee's failure or inability to comply with the provisions of Section 11.2(e) of this Agreement. All such Taxes shall be paid by the Borrower or the Guarantor prior to the date on which penalties attach thereto or interest accrues thereon; provided, however, that, -------- ------- if any such penalties or interest become due, the Borrower or the Guarantor shall make prompt payment thereof to the appropriate Governmental Authority. If the Agent or any Lender pays any amount in respect of such Taxes, penalties or interest, the Borrower or the Guarantor shall reimburse the Agent or such Lender in Dollars for such payment on demand together with interest thereon from and including the date of payment to but excluding the date of reimbursement at a rate per annum equal to the then applicable rate of interest on the relevant Bridge Loan. If the Borrower or the Guarantor pays any such Taxes, penalties or interest, it shall deliver official tax receipts evidencing such payment or certified copies thereof to the Agent on or before the thirtieth day after payment. 22 (b) The Lender agrees to comply with any certification, identification, information, documentation or other reporting requirement if (i) such compliance is required by law, regulation, administrative practice or an applicable treaty as a precondition to exemption from, or reduction in the rate of, deduction or withholding of any Taxes for which the Borrower is required to pay additional amounts pursuant to Section 2.9(a) hereof and (ii) at least 30 days prior to the first Payment Date with respect to which the Borrower shall apply this clause (b), the Borrower shall have notified the Lender that the Lender will be required to comply with such requirement, provided, however, that the exclusion -------- ------- set forth in this clause (b) shall not apply in respect of any certification, identification, information, documentation or other reporting requirement if such requirement would be materially more onerous, in form, in procedure or in the substance of information disclosed, to the Lender than comparable information or other reporting requirements imposed under U.S. tax law, regulation and administrative practice (such as IRS Forms 1001, W-8 and W-9). (c) The Borrower shall pay any present or future documentary, transfer or stamp Taxes or any other excise or property Taxes, charges or similar levies, and any penalties, additions to Tax or interest that may be due with respect thereto, that may be imposed by any jurisdiction in connection with this Agreement or the Bridge Notes. If the Agent or any Lender pays any amount in respect of any such taxes, duties, levies, penalties or interest, the Borrower shall reimburse the Agent or such Lender for such payment in Dollars on demand, together with interest thereon from and including the date of payment to, but excluding, the date of reimbursement at a rate per annum equal to the then applicable rate of interest on the relevant Bridge Loan. SECTION 2.10. Increased Costs and Reduction of Return. (a) If any --------------------------------------- Lender determines that, due to either (i) the introduction of or any change (other than any change by way of imposition of or increase in reserve requirements included in the calculation of LIBOR (Reserve Adjusted)) in or in the interpretation of any Law or (ii) compliance by such Lender with any guideline or request from any central bank or other Governmental Authority (whether or not having the force of law), there shall be any increase in the cost to such Lender of agreeing to make or making, funding or maintaining Bridge Loans, then the Borrower shall be liable for, and shall from time to time upon demand (with a copy of such demand to be sent to the Agent) pay to the Agent for the account of such Lender, additional amounts as are sufficient to compensate such Lender for such increased cost. (b) If any Lender shall have determined that (i) the introduction of any Capital Adequacy Regulation, (ii) any change in any Capital Adequacy Regulation, (iii) any change in the interpretation or administration of any Capital Adequacy Regulation by any central bank or other Governmental Authority charged with the interpretation or administration thereof, or (iv) compliance by such Lender or any corporation controlling such Lender with any Capital Adequacy Regulation affects or would affect the amount of capital required or expected to be maintained by such Lender or any corporation controlling such Lender and (taking into consideration such Lender's or such corporation's policies with respect to capital adequacy and such Lender's desired return on capital) determines that the amount of such capital is increased as a consequence of its Bridge Loan Commitment or Bridge Loans, then the Borrower shall be liable for, and shall from time to time upon demand (with a copy of such demand to be sent to 23 the Agent) pay to the Agent for the account of such Lender, additional amounts as are sufficient to compensate such Lender for such increase. SECTION 2.11. Illegality. If any Lender determines at any time that ---------- any Law or treaty or any change therein or in the interpretation or application thereof makes or will make it unlawful for such Lender to fulfill its commitment pursuant to Section 2.1 to maintain a Bridge Loan or to claim or receive any amount payable to it hereunder, such Lender shall give notice of such determination to the Borrower, whereupon the obligations of such Lender hereunder shall terminate. If any such notice is given after the disbursement of any Bridge Loans, the Borrower shall prepay the Bridge Loans of such Lender in full on the Interest Payment Date next succeeding the date such notice is given (or on such earlier date as such Lender determines and certifies to be necessary in order to enable it to comply with such Law, treaty or change), without premium or Refinancing Fee but together with interest accrued to the date of prepayment on such Bridge Loans and all other amounts then payable to such Lender by the Borrower hereunder. SECTION 2.12. Repayment; Prepayments. (a) All Bridge Loans shall ---------------------- mature and the Borrower shall pay in full the outstanding principal amount thereof and accrued interest thereon on the Maturity Date; provided, that if the -------- Borrower does not effect such repayment by means of the Refinancing in accordance with the provisions of Section 5.8 hereof, the Borrower shall pay to PSI on the Maturity Date an amount equal to (i) the Refinancing Fee less (ii) the aggregate amount of any Refinancing Fees paid to PSI pursuant to paragraph (d) of this Section 2.12 on or prior to the Maturity Date. (b) The Borrower may at any time and from time to time, upon not less than three Business Days' prior written or telephonic notice confirmed in writing to the Agent, prepay the outstanding principal amount of the Bridge Loans, in whole but not in part. Such notice shall constitute the Borrower's irrevocable commitment to prepay the full outstanding principal amount of the Bridge Loans on that date, together with accrued and unpaid interest on such amount to but excluding such prepayment date; provided, that the Borrower shall pay to PSI on -------- such prepayment date an amount equal to (i) the Refinancing Fee less (ii) the aggregate amount of any Refinancing Fees paid to PSI pursuant to paragraph (d) of this Section 2.12 on or prior to such prepayment date. (c) Concurrently with the receipt by the Borrower or any of its Subsidiaries of any capital contribution or proceeds from any sale or issuance of Capital Stock or Indebtedness by the Borrower or such Subsidiary subsequent to the Closing Date (other than the proceeds of any issuance of Capital Stock pursuant to employee or director stock option plans the aggregate amount of which, together with the aggregate amount of any such issuances subsequent to the Closing Date, does not exceed $5,000,000), the Borrower shall apply, or cause such Subsidiary to apply, the Net Cash Proceeds thereof to prepay Bridge Loans in a principal amount equal to the lesser of such Net Cash Proceeds and the aggregate amount of the Bridge Loans then outstanding, together with any accrued and unpaid interest thereon to but excluding the prepayment date; provided, that if such Capital Stock or Indebtedness does not constitute - -------- Refinancing Securities, the Borrower shall pay to PSI on such prepayment date an amount equal to (i) the Refinancing Fee less (ii) the aggregate amount of any Refinancing Fees paid to PSI pursuant to paragraph (d) of this Section 2.12 on or prior to such prepayment date. 24 (d) Concurrently with the receipt by the Borrower or any of its Subsidiaries of any proceeds from any Asset Sale subsequent to the Closing Date, the Borrower shall, or shall cause such Subsidiary to, apply the Net Cash Proceeds thereof to prepay Bridge Loans in a principal amount equal to the lesser of such Net Cash Proceeds and the aggregate amount of the Bridge Loans then outstanding, together with any accrued and unpaid interest thereon to but excluding such prepayment date; provided, that the Borrower shall pay a -------- Refinancing Fee to PSI on such prepayment date; and provided, further, that the -------- ------- Borrower may defer a mandatory prepayment pursuant to this paragraph until there is an aggregate amount of unapplied Net Cash Proceeds from one or more Asset Sales equal to or in excess of $1,000,000, at which time the entire amount of unapplied Net Cash Proceeds, and not just the amount in excess of $1,000,000, shall be applied pursuant to this paragraph. Concurrently with the consummation of any such Asset Sale, the Borrower shall deliver to the Agent an Officer's Certificate demonstrating the derivation of Net Cash Proceeds from the gross sales price of such Asset Sale. (e) The Borrower shall notify the Agent of any prepayment to be made pursuant to paragraph (c) or (d) of this Section 2.12 at least three Business Days prior to the prepayment date. (f) Any partial prepayment pursuant to paragraph (c) or (d) of this Section 2.12 shall be allocated pro rata among the Bridge Loans at the time outstanding in proportion, subject to such rounding as may be determined by the Agent, to the respective unpaid principal amounts of such Bridge Loans. SECTION 2.13. Mandatory Offer to Purchase Bridge Notes. (a) Upon the ---------------------------------------- occurrence of a Change of Control (the date of such occurrence, the "Change of Control Date"), the Borrower shall, if the Lenders so request, offer to purchase (the "Change of Control Offer") all of the Bridge Notes at a purchase price equal to 101.0% of the aggregate principal amount thereof plus accrued and unpaid interest thereon to the date of purchase (it being understood that no Refinancing Fee shall be payable by the Borrower in connection with such purchase). (b) The notice to the Agent shall contain all instructions and materials necessary to enable the Lenders to tender Bridge Notes. (c) Within 30 days following any Change of Control the Borrower shall mail a notice to the Agent stating: (A) that the Change of Control Offer is being made pursuant to this Section 2.13 and that all Bridge Notes validly tendered will be accepted for payment; (B) the purchase price and the purchase date, which shall be no earlier than 30 days nor later than 40 days from the date such notice is mailed (the "Offer Payment Date"); (C) that any Bridge Note not tendered will continue to accrue interest; (D) that any Bridge Note accepted for payment pursuant to the Change of Control Offer shall cease to accrue interest after the Offer Payment Date unless the Borrower shall default in the payment of the repurchase price of the Bridge Notes; 25 (E) that if a Lender elects to have a Bridge Note purchased pursuant to the Change of Control Offer it will be required to surrender the Bridge Note, with the form entitled "Option of Holder to Elect Purchase" on the reverse of the Bridge Note completed, to the Borrower prior to 5:00 p.m. New York time on the Offer Payment Date; (F) that a Lender will be entitled to withdraw its election if the Borrower receives, not later than 5:00 p.m. New York time on the Business Day preceding the Offer Payment Date, a telegram, telex, facsimile transmission or letter setting forth the principal amount of Bridge Notes such Lender delivered for purchase, and a statement that such Lender is withdrawing its election to have such Bridge Note purchased; and (G) that if Bridge Notes are purchased only in part, new Bridge Notes of the same type will be issued in principal amount equal to the unpurchased portion of the Bridge Notes surrendered. (d) On or before the Offer Payment Date, the Borrower shall (i) accept for payment Bridge Notes or portions thereof which are to be purchased in accordance with the above, and (ii) deposit with the Agent Dollars sufficient to pay the purchase price of all Bridge Notes to be purchased. The Agent shall promptly mail to the Lenders whose Bridge Notes are so accepted payment in an amount equal to the purchase price. (e) The Borrower shall comply with the requirements of Rule 14e-1 under the Exchange Act and any other securities laws and regulations thereunder to the extent such laws and regulations are applicable in connection with the purchase of Bridge Notes pursuant to an offer hereunder. To the extent the provisions of any securities laws or regulations conflict with the provisions under this Section, the Borrower shall comply with the applicable securities laws and regulations and shall not be deemed to have breached its obligations under this Section by virtue thereof. SECTION 2.14. Security for the Loan. The Bridge Notes and the --------------------- Borrower's Obligations shall be secured by first priority Liens on the Collateral in favor of the Agent for the benefit of the Lenders, as provided herein. SECTION 3. REPRESENTATIONS AND WARRANTIES The Loan Parties, jointly and severally, hereby represent and warrant as of the date hereof as follows: SECTION 3.1. Good Standing and Authority. Each of the Borrower and --------------------------- its Subsidiaries is duly organized and validly existing and (other than with respect to Mutual Indemnity (Dublin) Ltd., given the inapplicability thereof under Irish law) in good standing under the laws of its jurisdiction of incorporation. Each of the Borrower and its Subsidiaries has the corporate power and authority to own and operate its properties and to carry on its business as now conducted and as proposed to be conducted following the consummation of the Transactions, and is duly qualified as a foreign corporation and in good standing in all 26 jurisdictions in which it is doing business and is proposed to be doing business following the consummation of the Transactions, except where failure to be so qualified or in good standing, singly or in the aggregate, would not have a Material Adverse Effect. SECTION 3.2. Stock Duly Authorized and Issued. -------------------------------- (a) The Capital Stock of each of the Borrower and its Subsidiaries is duly authorized, validly issued and fully paid and nonassessable. (b) All of the outstanding shares of Capital Stock of the Guarantor and Mutual Holdings (Bermuda) Ltd. (other than the MH Preferred Shares) are beneficially owned directly by Mutual Risk Management (Holdings) Ltd., free and clear of any Liens. All of the outstanding shares of Capital Stock of Mutual Risk Management (Holdings) Ltd. and Mutual Indemnity (Dublin) Ltd. (other than the MIDL Director Share) are beneficially owned directly by the Borrower, free and clear of any Liens. All of the outstanding shares of Capital Stock (other than the IPC Preferred Shares) of IPC Mutual Holdings, Ltd. and Legion Financial Corporation are beneficially owned directly by the Guarantor, free and clear of any Liens. All of the outstanding shares of Capital Stock of Legion are beneficially owned directly by Legion Financial Corporation, free and clear of any Liens. (c) There are no outstanding stock purchase warrants, subscriptions, options, securities, instruments or other rights of any type or nature whatsoever, which are convertible into, exchangeable for or otherwise provide for or permit the issuance of Capital Stock of the Borrower or its Subsidiaries, except as disclosed in the applicable filings of the Borrower with the SEC. SECTION 3.3. Loan Documents Authorized, etc. Each of the Loan ------------------------------- Documents and each other document or instrument to be delivered in connection therewith has been duly authorized by all necessary action of each Loan Party that is a party thereto; each of this Agreement and the other Loan Documents and each other document or instrument to be executed and delivered in connection herewith or therewith on or prior to the date hereof has been duly executed and delivered by each Loan Party that is a party hereto or thereto and constitutes, and each of the Loan Documents and each other document or instrument to be executed and delivered in connection therewith by such Loan Party that is a party thereto after the date hereof will constitute upon its execution and delivery, the legal, valid and binding obligation of such Loan Party, enforceable against such Loan Party in accordance with its terms, except to the extent that the enforceability thereof may be limited by applicable bankruptcy, insolvency, reorganization, fraudulent conveyance or similar laws affecting the enforcement of creditors' rights generally or by general principles of equity. SECTION 3.4. No Consents; No Conflicts. The execution, delivery and ------------------------- performance of the Loan Documents, and the consummation of the transactions contemplated or described therein (including, without limitation, the issuance and performance of the Guarantee by the Guarantor, the creation of the security interests granted by the Pledgors hereunder in favor of the Agent for the benefit of the Lenders and the exercise of any rights or remedies specified in Section 10 with respect thereto and the Refinancing) do not and will not (i) require the consent, approval, authorization, registration or qualification of or with any Governmental Authority 27 (including, without limitation, any insurance authority, commission or other insurance regulatory body), except that (A) the approval of a Form A filing by the Department of Insurance of the State of Pennsylvania shall be required before the Agent or the Lenders can exercise their rights and remedies with respect to the LFC Collateral pursuant to Section 10 hereof upon the occurrence and during the continuance of an Event of Default, and (B) prior to the security interest in the shares of Mutual Indemnity (Dublin) Ltd. being enforced, an application for a clearance from the Irish Minister for Enterprise, Trade and Employment pursuant to the Irish Mergers, Take-Overs and Monopolies (Control) Act, 1978 is likely to have to be made and the consent of the Irish Department of Finance will be required, (ii) violate any statute, law, rule, regulation, order, judgment or decree (singly, "Law" and collectively, "Laws") applicable to the Borrower or any of its Subsidiaries of any court, Governmental Authority, arbitrator or other authority having jurisdiction over the Borrower or such Subsidiary or any of their respective properties, (iii) conflict with, result in a breach or violation of or constitute a default under the certificate of incorporation and by-laws or similar organizational documents of the Borrower or any of its Subsidiaries or any indenture, mortgage, deed of trust, contract, undertaking, loan agreement, lease or other agreement or instrument to which the Borrower or any of its Subsidiaries is a party or by which the Borrower or any of its Subsidiaries or any of their respective properties are bound ("Contracts") or (iv) result in or require the creation or imposition of any mortgage, pledge, assignment, security interest, charge or encumbrance of any kind (including any conditional sale or other title retention agreement, any lease in the nature thereof, and any agreement to give any security interest) and any option, trust or other preferential arrangement having the practical effect of any of the foregoing ("Lien"). SECTION 3.5. Financial Information Complete. The financial statements ------------------------------ delivered pursuant to paragraph (7) of Section 4.1(a), including the related schedules and notes thereto, have been prepared in accordance with GAAP and are complete and correct and fairly present in all material respects the assets, liabilities and financial position of the Borrower and its consolidated Subsidiaries as at such dates, and the results of operations and changes of financial position for the periods then ended. The Borrower and its consolidated Subsidiaries have no debt, obligation or other forward or long-term commitment required to be reflected in the foregoing financial statements or in the notes thereto which is not fairly reflected in all material respects therein. SECTION 3.6. No Material Adverse Change. From and after September 30, -------------------------- 1999, there has been no material adverse change in the business, properties, operations, condition (financial or otherwise), results of operations or prospects, of the Borrower or any of its Subsidiaries and no event has occurred or condition arisen that would have a Material Adverse Effect. SECTION 3.7. Accuracy and Completeness of Information. (a) No written ---------------------------------------- information, written statements, reports and other papers and data produced by or on behalf of the Borrower or any of its Subsidiaries and furnished to the Agent in connection with the Transactions (including, without limitation, any statement or report filed by the Borrower with the SEC under the Exchange Act) taken as a whole contain or will contain any untrue statement of fact material to the creditworthiness of the Borrower or any of its Subsidiaries or omit or will omit to state a material fact necessary in order to make the statements contained therein not misleading in the circumstances in which made. (b) The Borrower is not aware of any fact with respect to the Borrower or any of its Subsidiaries or the Transactions that would have a Material Adverse Effect that has not been previously disclosed to the Lenders. SECTION 3.8. Internal Accounting. Each of the Borrower and its ------------------- Subsidiaries maintains a system of internal accounting controls sufficient to provide reasonable assurance that (i) transactions are executed in accordance with management's general or specific authorizations; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain asset accountability; (iii) access to assets is permitted only in accordance with management's general or specific authorization; and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. SECTION 3.9. No Insolvency. As of the date hereof and after giving ------------- effect to the consummation of the Transactions: (a) The aggregate value of the assets of each of the Borrower and the Guarantor, at fair value and present fair salable value, exceeds (i) its total liabilities (including contingent, subordinated, unmatured and unliquidated liabilities) and (ii) the amount required to pay such liabilities as they become absolute and matured in the normal course of business; (b) Each of the Borrower and the Guarantor has the ability to pay its debts and liabilities (including contingent, subordinated, unmatured and unliquidated liabilities) as they become absolute and matured in the normal course of business; and (c) None of the Borrower or the Guarantor has an unreasonably small amount of capital with which to conduct its business. SECTION 3.10. Legal Title. The Borrower holds no ownership interests ----------- in any Person or any other material assets except as specified in Schedule 3.10 and has good, sufficient and legal title to all ownership interests listed in Schedule 3.10, free and clear of any Liens. SECTION 3.11. No Violations. Each of the Borrower and its Subsidiaries ------------- is not, and after the consummation of the Transactions will not be, in violation of its charter, by-laws or other organizational documents, and no default or event that but for the giving of notice or the lapse of time, or both, would constitute a default on the part of the Borrower or any of its Subsidiaries exists or will exist under any Contracts which would have a Material Adverse Effect. SECTION 3.12. No Litigation. There are no actions, suits or ------------- proceedings pending nor, to the knowledge of the Borrower, threatened against or in any other way relating adversely to or affecting the Borrower or any of its Subsidiaries or any of their respective properties or the Transactions in any court or before any arbitrator of any kind or before or by any Governmental Authority which would have a Material Adverse Effect. SECTION 3.13. Proceeds. The Borrower will apply the net proceeds from -------- the Bridge Loans solely for the purposes specified in Section 5.7 hereof. Neither the incurrence of the Bridge Loans and the application of the proceeds thereof by the Borrower nor the pledge of 29 the Pledged Securities by the Pledgors hereunder will violate Regulations T, U and X of the FRB. SECTION 3.14. Margin Stock. (a) At no time, including following ------------ application of the proceeds of any Bridge Loan, shall more than 25% of the value of the assets (either of the Borrower, the Guarantor or of the Borrower and its Subsidiaries on a consolidated basis) (i) subject to the provisions of Section 6.3 and 6.5 or (ii) subject to any restriction contained in any agreement or instrument between the Borrower and any Lender or any Affiliate of any Lender relating to any Indebtedness and within the scope of Section 7.1(h), consist of Margin Stock. (b) None of the Pledged Securities shall at any time during the term of the Bridge Loans hereunder consist of Margin Stock. SECTION 3.15. Tax Returns and Payments. All Tax Returns, foreign and ------------------------ domestic, required to be filed by or on behalf of the Borrower and each of its Subsidiaries in any jurisdiction have been timely filed, or caused to be filed, and all material Taxes (whether or not actually shown on such tax returns) for which they are directly or indirectly liable or to which any of their respective properties and assets is subject have been paid, or caused to be paid, other than any Tax (i) the validity or amount of which is being contested in good faith, (ii) for which adequate reserve, or other appropriate provision, if any, as required in conformity with GAAP shall have been made, and (iii) with respect to which any right to execute upon or sell any assets of the Borrower or any of the Subsidiaries has not matured or has been and continues to be effectively enjoined, superseded or stayed ("Contested Claims"); all such Tax Returns are true, correct and complete in all material respects. As of the Closing Date, there is no material proposed tax assessment with respect to Taxes due by, or on behalf of, the Borrower or any of its Subsidiaries, and to the best knowledge of the Borrower there is no basis for such assessment, except for Contested Claims. To the best knowledge of the Borrower and the Guarantor, there is no tax, levy, impost, duty, charge, fee, deduction or withholding imposed by (i) Bermuda or any political subdivision or taxing authority thereof or therein or (ii) by any other jurisdiction from or through which the Borrower or the Guarantor makes payment on or by virtue of the execution, delivery, enforcement or performance of the Credit Agreement or in connection with the Bridge Notes. SECTION 3.16. ERISA Compliance. (a) As of the Closing Date, the ---------------- Borrower, its Subsidiaries and any of their respective ERISA Affiliates do not sponsor, maintain or contribute to, or have any obligation under, any Pension Plan or Multiemployer Plan. (b) The Borrower, each of its Subsidiaries and each of their respective ERISA Affiliates is in material compliance with all applicable provisions of ERISA and the regulations material thereunder with respect to all Employee Benefit Plans except for any required amendments for which the remedial amendment period as defined in Section 401(b) of the Code has not yet expired. The Internal Revenue Service has issued a favorable determination letter with respect to the form of the plan document of each Employee Benefit Plan that is intended to be qualified under Section 401(a) of the Code and nothing has occurred, whether by action or failure to act, that could reasonably be expected to cause the loss of such qualification. 30 (c) No ERISA Event has occurred or is reasonably expected to occur which, alone or together with all other ERISA Events, has resulted, or is reasonably expected to result, in any material liability to the Borrower or its Subsidiaries. (d) No proceeding, claim (other than claims for benefits made in the ordinary course of the operation of any Employee Benefit Plan), lawsuit and/or investigation is existing or, to the best knowledge of the Borrower after due inquiry, threatened concerning or involving any Employee Benefit Plan currently sponsored, maintained or contributed to by the Borrower, any of its Subsidiaries or any of their respective ERISA Affiliates. (e) In accordance with the most recent actuarial valuations, the Amount of Unfunded Benefit Liabilities individually or in the aggregate for all Pension Plans (excluding for purposes of such computation any Pension Plans which have a negative Amount of Unfunded Benefit Liabilities), does not exceed $1,000,000. (f) Neither the Borrower nor any of its Subsidiaries has incurred or is reasonably expected to incur any material liability with respect to any Foreign Plan or Foreign Plans. SECTION 3.17. Compliance With Laws. Each of the Borrower and its -------------------- Subsidiaries is in compliance with all Laws, except where the failure to comply, singly or in the aggregate, would not have a Material Adverse Effect. SECTION 3.18. Government Regulation. No Loan Party is subject to --------------------- regulation under the Public Utility Holding Company Act of 1935, as amended, the Federal Power Act, as amended, or other Law which would regulate the incurrence of Indebtedness by the Borrower or the Guarantor or the pledge of Pledged Securities by any of the Pledgors, including, but not limited to, Laws relating to common contract carriers or the sale of electricity, gas, steam, water or other public utility services. No Loan Party is, and after consummation of the Transactions will be, an "investment company" or an entity "controlled" by an "investment company," as such terms are defined in the Investment Company Act of 1940, as amended. SECTION 3.19. Insurance. Each of the Borrower and its Subsidiaries --------- carries or is entitled to the benefits of insurance (including self-insurance) in such amounts and covering such risks as is generally maintained by companies of established repute engaged in the same or similar businesses, and all such insurance is (and will be following consummation of the Transactions) in full force and effect, except where the failure to carry such insurance or be entitled to the benefits of such insurance would not, singly or in the aggregate, have a Material Adverse Effect. SECTION 3.20. Labor. No labor disturbance by the employees of the ----- Borrower or any of its Subsidiaries exists or, to the best knowledge of the Borrower, is threatened and the Borrower is not aware of any existing or imminent labor disturbance by the employees of the principal suppliers, manufacturers or customers of the Borrower or any of its Subsidiaries which would have a Material Adverse Effect. SECTION 3.21. Environmental Matters. Each the Borrower and its --------------------- Subsidiaries have been and are in compliance with all applicable laws, statutes, ordinances, codes, orders, decisions, judgments, permits, approvals, rules, regulations or requirements, including without 31 limitation common law, relating to: (i) protection, preservation or cleanup of the environment or natural resources; (ii) chemical substances or toxic, hazardous or deleterious materials, wastes or agents (hereinafter "Hazardous Substances"), including without limitation petroleum or any fraction thereof, asbestos, and polychlorinated biphenyls; or (iii) health and safety (hereinafter "EHS Laws"), except in each case for such noncompliance which would not have a Material Adverse Effect ; there has been no proceeding, claim, notice or complaint pending or, to the best knowledge of the Borrower, threatened against any of the Borrower or its Subsidiaries relating to: (i) noncompliance with EHS Laws; or (ii) liabilities or obligations arising from Hazardous Substances or pursuant to EHS Laws; and there are no conditions or circumstances, including without limitation the presence or release of any Hazardous Substances (whether or not on the property of the Borrower or its Subsidiaries), reasonably anticipated to result in liabilities or obligations to the Borrower or its Subsidiaries pursuant to EHS Laws. SECTION 3.22. Insurance Regulations. The Borrower is a holding company --------------------- and is not subject to Bermuda insurance regulations. The Borrower and each of its Subsidiaries are in compliance with all other insurance laws and regulations of the jurisdictions that apply to them, including laws that relate to companies that control insurance companies, except where the failure to comply would not have a Material Adverse Effect. Neither the Borrower nor any of its Subsidiaries has received any notification from any Bermuda, U.S. federal, state or foreign insurance authority, commission or other insurance regulatory body to the effect that the Borrower or such Subsidiary is not in compliance with any insurance law or regulation, which notification can reasonably be expected to have a material adverse effect on the business of the Borrower or such Subsidiary. SECTION 3.23. Permits; Licenses. Each of the Borrower and its ----------------- Subsidiaries possesses all certificates, authorizations and permits issued by the appropriate Bermuda, U.S. federal, state or foreign Governmental Authority necessary to conduct their respective businesses, and neither the Borrower nor any of its Subsidiaries has received any notice of proceedings relating to the revocation or modification of any such certificate, authorization or permit which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would result in a Material Adverse Effect. SECTION 3.24. Year 2000. The Borrower has (i) initiated a review and --------- assessment of all areas within its and each of its Subsidiaries' business and operations (including those affected by suppliers, vendors and customers) that could be adversely affected by the risk that computer applications used by the Borrower or any of its Subsidiaries (or suppliers, vendors and customers) may be unable to recognize and perform properly date-sensitive functions involving certain dates prior to and any date after December 31, 1999 (the "Year 2000 Problem"), (ii) developed a plan and timetable for addressing the Year 2000 Problem on a timely basis and (iii) to date, implemented that plan in accordance with such timetable. Based on the foregoing, the Borrower believes that all computer applications (including those of its suppliers, vendors and customers) that are material to its or any of its Subsidiaries' business and operations are reasonably expected on a timely basis to be able to perform properly date- sensitive functions for all dates before and after January 1, 2000 ("Year 2000 Compliant"), except to the extent that a failure to do so would not have a Material Adverse Effect. 32 SECTION 3.25. Collateral. (a) With respect to the Pledged Shares, such ---------- Pledged Shares represent that percentage as set forth on Schedules 10.1-A, 10.1- B, 10.1-C, 10.1-D, 10.1-E or 10.1-F, as applicable, of the issued and outstanding shares of Capital Stock of the applicable Collateral Subsidiary. (b) Except for the security interest granted hereunder to the Agent for the benefit of the Lenders, each Pledgor (i) is the sole owner of the Pledged Securities pledged by it as described on the applicable Schedule hereto, and (ii) holds the same free and clear of all Liens. (c) Each Pledgor has the power and authority to pledge the Collateral in the manner hereby done or contemplated and will defend its title or interest thereto or therein against any and all Liens (other than the Lien created hereby in favor of the Agent for the benefit of the Lenders), however arising, of all Persons whomsoever. (d) By virtue of the execution and delivery by each Pledgor of this Agreement, when the Pledged Securities, certificates or other documents representing or evidencing the Collateral, along with duly executed stock powers endorsed in the name of the Agent or in blank, are delivered to the Agent in accordance with Section 10, the Agent will obtain a valid and perfected first priority security interest in such Pledged Securities for the benefit of the Lenders as security for the payment and performance of the Obligations. (e) All of the Pledged Securities have been duly authorized and validly issued, are fully paid and nonassessable, and are not subject to any options to purchase or other similar rights. (f) All information set forth herein relating to the Pledged Securities is accurate and complete in all material respects. (g) No Loan Party incorporated outside the United States of America has an executive office in the United States of America. The chief executive office and the principal place of business of each Loan Party are as described in Schedule 3.25 hereto. Any certificate signed by any officer of a Loan Party and delivered to the Agent or its counsel pursuant to this Agreement shall be deemed to be a representation and warranty by such Loan Party to the Agent or such Lender as to the matters covered thereby. SECTION 3.26. Acknowledgment of Pledge. Each Collateral Subsidiary ------------------------ hereby (i) acknowledges that all the shares of its Capital Stock (except the MH Preferred Shares in the case of Mutual Holdings (Bermuda) Ltd., the IPC Preferred Shares with respect to IPC Mutual Holdings, Ltd., and the MIDL Director Share in the case of Mutual Indemnity (Dublin) Ltd.) constitute Collateral pledged hereunder to the Agent for the benefit of the Lenders, (ii) confirms that such shares constitute all issued and outstanding shares of its Capital Stock, and (iii) agrees to fully cooperate with the implementation of such pledge (including, without limitation, with any regulatory or other filings or registrations with any insurance authority). SECTION 4. CONDITIONS TO THE OBLIGATIONS OF THE LENDERS 33 SECTION 4.1. Conditions to Closing. The obligations of the Lenders --------------------- to make Bridge Loans hereunder shall be subject to the satisfaction on or before December 15, 1999 of the following conditions precedent: (a) The Agent shall have received on behalf of the Lenders the following items, each of which shall be in form and substance satisfactory to the Agent and, unless otherwise noted, dated the Closing Date: (1) A copy of the following certified by an Officer of the Borrower and the Guarantor: resolutions of the Borrower's and the Guarantor's Board of Directors approving and authorizing the execution, delivery and performance of this Agreement, each of the other Loan Documents and any other documents, instruments and certificates required to be executed by the Borrower or the Guarantor in connection herewith and therewith and approving and authorizing the consummation of the Transactions, each being in full force and effect without modification or amendment; (2) An original counterpart of this Agreement; (3) Originally executed copies of an opinion of (i) Mayer, Brown & Platt, U.S. counsel to the Loan Parties, substantially in the form of Exhibit C-1, (ii) Conyers Dill & Pearman, Bermuda counsel to the Loan Parties incorporated in Bermuda, substantially in the form of Exhibit C-2, (iii) A & L Goodbody, Irish counsel to Mutual Indemnity (Dublin) Ltd., substantially in the form of Exhibit C-3, (iv) Lewis, Rice & Fingersh, Missouri counsel to Legion Financial Corp., substantially in the form of Exhibit C-4, (v) Richard O'Brien, Esq., General Counsel to the Borrower, substantially in the form of Exhibit C-5, and (vi) Andrew Walsh, Esq., General Counsel to Legion Insurance Company, substantially in the form of Exhibit C-6. (4) A certificate, delivered by the Borrower and signed by the Chief Executive Officer or President and the Chief Financial or Accounting Officer of the Borrower stating that, after giving effect to the consummation of the Transactions, the fair saleable value of the assets of each of the Borrower and its Subsidiaries will not be less than the probable liability on their debts, that each of the Borrower and its Subsidiaries will be able to pay its debts as they mature and that each will not have unreasonably small capital to conduct its business, and the Agent shall have received such opinions of value, other appropriate factual information and expert advice supporting the conclusions reached in such letter as the Agent may reasonably request; (5) An Officer's Certificate from each Loan Party, certifying as to (i) (A) the due organization and good standing (other than with respect to Mutual Indemnity (Dublin) Ltd., given the inapplicability thereof under Irish law) of such Loan Party in their respective jurisdictions of organization and (B) the absence of any proceeding for the dissolution or liquidation of such Loan Party; (ii) the completeness and accuracy in all material respects of all of the representations and warranties made by such Loan Party in this Agreement and the other Loan Documents to which it is or is to be a party, before and after giving effect to the Transactions as though made on and as of the Closing Date; (iii) the absence of any Default or Event of Default; (iv) the satisfaction of all conditions 34 precedent by such Loan Party to be satisfied on or prior to the Closing Date; and (v) (solely in the case of each of the Borrower or the Guarantor) to the best of their knowledge, the absence of any existing or threatened event or circumstance relating to the Borrower or any of its Subsidiaries that could reasonably be expected to impair the ability of the Borrower to consummate the Refinancing. (6) A certificate of the Secretary or an Assistant Secretary (or, in the case of Mutual Indemnity (Dublin) Ltd., a Director) of each Loan Party certifying the names and true signatures of the officers of such Loan Party authorized to sign each Loan Document to which such Loan Party is or is to be a party and the other documents to be delivered hereunder and thereunder. (7) The most recent audited and unaudited consolidated financial statements of the Borrower and its consolidated Subsidiaries. (8) An irrevocable acceptance by Corporation Service Company of its appointment as each Loan Party's agent to receive service of process pursuant to Section 11.14 hereof. (9) Such further information, certificates and documents as the Agent may reasonably request. The documents required to be delivered by this Section 4.1(a) will be delivered at the office of Cleary, Gottlieb, Steen & Hamilton, One Liberty Plaza, New York, New York 10006 on the Closing Date. (b) No Default or Event of Default shall have occurred and be continuing, and no default or event of default shall have occurred and be continuing under any material Contract of the Borrower or any of its Subsidiaries. (c) No action, proceeding, investigation, regulation or legislation shall have been instituted, threatened or proposed before any court or other Governmental Authority to enjoin, restrain, or prohibit, or to obtain substantial damages in respect of, or which is related to or arises out of the Transactions, or which, if adversely determined, would have a Material Adverse Effect. There shall be no material pending or threatened litigation, bankruptcy or insolvency, injunction, order, decree or claim with respect to the Borrower or any of its Subsidiaries or the Transactions, which would have a Material Adverse Effect. (d) Each of the Loan Documents to be executed and delivered on or prior to the Closing Date (including any amendments thereto) shall have been duly authorized, executed and delivered by each of the parties thereto, and the Agent shall have received copies of each such document (including any amendments thereto) as so executed and delivered in the form provided to the Agent on or before the Closing Date except for changes approved by the Agent. (e) All consents and approvals of the boards of directors or similar governing bodies, shareholders, members, partners, governmental and regulatory bodies and other applicable third parties (including all required approvals of internal committees of PSCC) necessary or desirable in connection with the Transactions shall have been obtained. 35 (f) The Borrower shall have entered into the Engagement Letter and shall have paid all amounts due and payable to PSI thereunder on or prior to the Closing Date. (g) The Borrower shall have paid all costs and expenses payable hereunder to the extent then due and payable on the Closing Date, including any such costs and expenses arising under or referenced in Section 11.3. (h) There shall not have occurred any material adverse change in the condition of the financial, banking or capital markets the effect of which, in the judgment of the Agent, makes it impractical or inadvisable to proceed with the Refinancing or to sell or syndicate the Bridge Loans or the Bridge Loan Commitment. (i) No event shall have occurred that has had, or would have, a Material Adverse Effect. SECTION 4.2. Condition to the Initial Bridge Loan. The obligations of ------------------------------------ the Lenders to make the initial Bridge Loan on the first Disbursement Date hereunder shall be subject to the satisfaction of all the obligations of the Borrower pursuant to Section 5.11(d) hereof on or prior to the Disbursement Date on which such initial Bridge Loan is scheduled to be made. SECTION 4.3. Conditions to each Bridge Loan. The obligations of the ------------------------------ Lenders to make any Bridge Loan hereunder shall be subject to the satisfaction of the following conditions precedent on or prior to the Disbursement Date on which such Bridge Loan is scheduled to be made: (a) The representations and warranties on the part of the Loan Parties contained herein and in any certificates pursuant to the provisions hereof shall be true and complete on and as of such Disbursement Date as if made on such date, and the Loan Parties shall have performed all of their respective obligations hereunder to be performed on or prior to such date; (b) The Agent on behalf of the Lenders shall have received, in form and substance satisfactory to the Agent, (i) an originally executed notice of borrowing pursuant to Section 2.2 hereof and (ii) one or several Bridge Notes, as applicable, evidencing the Bridge Loan made on such date, duly executed and delivered and drawn to the order of the Lender or Lenders making such Bridge Loan and with appropriate insertions; and (c) No Default or Event of Default shall have occurred and be continuing. SECTION 5. AFFIRMATIVE COVENANTS Until all Obligations shall have been paid in full and no Lender shall have any Bridge Loan Commitment hereunder, each Loan Party, jointly and severally, agrees with the Lenders that: SECTION 5.1. Corporate Existence. Subject to the provisions hereof, ------------------- the Borrower shall do or cause to be done all things necessary to preserve and keep in full force and 36 effect the corporate existence, rights (charter and statutory) and licenses of the Borrower and each of its Subsidiaries; provided, that subject to Section 6.6 -------- hereof the Borrower and any such Subsidiary shall not be required to preserve the corporate existence of any such Subsidiary (other than a Guarantor) or any such right or license if the Board of Directors of the Borrower shall determine that the preservation thereof is no longer desirable in the conduct of the business of the Borrower and that the loss thereof is not disadvantageous in any material respect to the Lenders. SECTION 5.2. Compliance With Laws. The Borrower will, and will cause -------------------- each of its Subsidiaries to, comply with all applicable Laws to the extent noncompliance would have a Material Adverse Effect. SECTION 5.3. Maintenance of Property; Insurance. The Borrower shall ---------------------------------- cause all Property used or useful in the conduct of its business or the business of any of its Subsidiaries to be maintained and kept in good condition, repair and working order and supplied with all necessary equipment and shall cause to be made all necessary repairs, renewals, replacements, betterments and improvements thereof, all as, in the judgment of the Borrower, may be necessary so that the business carried on in connection therewith may be properly and advantageously conducted at all times; provided, that nothing in this Section -------- 5.3 shall prevent the Borrower from discontinuing the operation or maintenance of any of such Property if such discontinuance is, in the judgment of the Borrower, desirable in the conduct of its business or the business of any of its Subsidiaries and not disadvantageous in any material respect to the Lenders. The Borrower will maintain or cause to be maintained, with financially sound and reputable insurers or with self insurance programs, in each case to the extent consistent with prudent business practices and customary in its industry, insurance with respect to its properties and business and the properties and businesses of its Subsidiaries against loss or damage of the kinds (including, in any event, business interruption insurance) and in the amounts customarily carried or maintained under similar circumstances by corporations of established reputation engaged in similar businesses and owning similar properties in the same general respective areas in which the Borrower and its Subsidiaries operate. SECTION 5.4. Payment of Taxes and Other Claims. The Borrower shall --------------------------------- pay or discharge and will cause each of its Subsidiaries to pay or discharge, before the same shall become delinquent, (a) all Taxes, assessments and other governmental charges levied or imposed upon the Borrower or any of its Subsidiaries or upon the income, profits or Property of the Borrower or any of its Subsidiaries and (b) all lawful claims including, without limitation, for labor, services, materials and supplies which have become due and payable and, if unpaid, might by law become a Lien upon the Property of the Borrower or any of its Subsidiaries; provided, that the Borrower shall not be required to pay or -------- discharge, or cause to be paid or discharged, any such Tax, assessment, charge or claim whose amount, applicability or validity is being diligently contested in good faith by appropriate proceedings and for which adequate reserves in accordance with GAAP or other appropriate provision has been made. The Borrower and each of its Subsidiaries, as the case may be, will, promptly upon any of its officers obtaining knowledge that a charge or claim described in the previous sentence has not been paid, other than as permitted by the proviso in the previous sentence, deliver notice to the Agent (which will provide a copy of such notice to each Lender) of such failure to pay. 37 SECTION 5.5. Investment Company Act. No Loan Party shall become an ---------------------- investment company subject to registration under the Investment Company Act of 1940, as amended (without giving effect to any exception based upon the number or status of the holders of its securities). SECTION 5.6. Payments in U.S. Dollars. All payments of principal, ------------------------ premium and interest to be made hereunder or under the Bridge Notes shall be made solely in U.S. Dollars or such other currency as is then legal tender for public and private debts in the United States of America. SECTION 5.7. Use of Proceeds. The Borrower shall use the proceeds of --------------- the Bridge Loans solely as follows: (a) The Borrower shall use up to $115,000,000 of such proceeds to repurchase Convertible Securities in open market or privately negotiated transactions; provided, that any Convertible Securities so repurchased shall be -------- immediately cancelled; (b) The Borrower shall use up to $135,000,000 of such proceeds to make a capital contribution to Legion, directly or through one or several Wholly Owned Subsidiaries of the Borrower; and (c) In the event such proceeds are not utilized in full for the purposes set forth in subsections 5.7(a) and 5.7(b), the Borrower may use the remaining proceeds, but in no event more than $35,000,000, for general corporate purposes; provided, that none of such proceeds shall be used by the Borrower or any of its - -------- Subsidiaries, directly or indirectly, for the purpose, whether immediate, incidental or ultimate, of buying or "carrying" (within the meaning of Regulation U) any Margin Stock. SECTION 5.8. Refinancing. The Borrower shall use its reasonable ----------- commercial efforts to effectuate the Refinancing as soon as practicable after the date of this Agreement for the purpose, among other things, of refinancing the Bridge Loans then outstanding, which Refinancing shall yield an amount sufficient (together with any cash available at such time to the Borrower), and, if consummated, the proceeds of which shall be used, to repay the aggregate unpaid principal amount of the Bridge Loans in full plus accrued interest thereon to the date of repayment and all other amounts payable under the Loan Documents; provided, however, that the Borrower will not be required to -------- ------- consummate the Refinancing unless it can be completed on such terms and conditions as are reasonably satisfactory in all respects to PSI and the Borrower in light of the then prevailing market conditions; provided, further, -------- ------- that if for any reason the Borrower refinances the Bridge Loans by any means other than the Refinancing the Borrower shall pay PSI the Refinancing Fee upon the repayment of the Bridge Loans in connection with such refinancing. SECTION 5.9. Financial Statements. The Borrower will furnish or cause -------------------- to be furnished to the Agent and to each of the Lenders: (a) as soon as available, but in no event more than forty-five (45) days after the end of each of the first three (3) fiscal quarters in each fiscal year, the quarterly report of the Borrower on Form 10-Q (or other applicable form) filed with the SEC, accompanied by a certificate of the 38 Chief Financial Officer of the Borrower stating whether to his best knowledge and belief any Default or Event of Default has occurred or exists hereunder, and, if any such Default or Event of Default has occurred and is continuing or otherwise exists, stating the facts with respect thereto; (b) as soon as available, but in no event more than ninety (90) days after the end of each fiscal year, a copy of the consolidated financial statements and annual audit report of the Borrower and its Subsidiaries in reasonable detail, prepared in accordance with GAAP, and certified without material qualification by Ernst & Young or other independent certified public accountants selected by the Borrower and reasonably satisfactory to the Agent, which report shall include a consolidated balance sheet of the Borrower and its Subsidiaries as of the end of such fiscal year and consolidated statements of earnings, changes in stockholders' equity and cash flows of the Borrower and its Subsidiaries for such fiscal year and a copy of the annual report of the Borrower on Form 10-K (or other applicable form) filed with the SEC, accompanied by a certificate of the Chief Financial Officer of the Borrower stating whether to his best knowledge and belief any Default or Event of Default has occurred or exists hereunder, and, if any such Default or Event of Default has occurred and is continuing or otherwise exists, stating the facts with respect thereto; (c) as soon as available, but in no event more than one hundred and twenty (120) days after the end of each fiscal year of each unconsolidated Subsidiary or Affiliate of the Borrower (whose operations are accounted for in the consolidated financial statements of the Borrower on the equity method), if any, a copy of the annual audit report of such corporation and its subsidiaries, if any, in reasonable detail, prepared in accordance with GAAP (or SAP in the case of a regulated insurance company) and certified by independent certified public accountants of recognized standing, which report shall include a consolidated balance sheet of each such Subsidiary or Affiliate and its Subsidiaries, if any, as of the end of such fiscal year and consolidated statements of income, retained earnings, and cash flows for each such Subsidiary or Affiliate and its Subsidiaries, if any, for such fiscal year; (d) promptly upon their becoming available but in no event (i) more than ninety (90) days after the end of each calendar year in the case of the Annual Statements or (ii) more than forty-five (45) days after the end of each calendar quarter in the case of the Quarterly Statements, a copy of each Annual Statement and Quarterly Statement of each Insurance Company Subsidiary prepared in accordance with SAP, and a copy of each externally-prepared actuarial analysis of each Insurance Company Subsidiary obtained by the Borrower or any of its Subsidiaries; (e) promptly upon their becoming available, copies of all financial statements, reports, notices as to material matters, and proxy statements sent by the Borrower or any of its Subsidiaries (which is not a Wholly Owned Subsidiary) to public stockholders and of all regular, periodic and special reports filed by the Borrower or any of its Subsidiaries with any securities exchange or with the SEC; (f) together with the items described in clauses (a) and (b) above, written calculations in form reasonably satisfactory to the Agent demonstrating compliance by the Borrower with the covenants contained in Sections 6.1 and 6.2; and 39 (g) such additional information, reports or statements (financial or otherwise) as the Agent or any Lender may from time to time reasonably request. SECTION 5.10. Notice of Litigation and Other Matters. The -------------------------------------- Borrower will furnish or cause to be furnished to the Agent and to each of the Lenders promptly (but in no event later than ten (10) days after an Officer of the Borrower obtains knowledge thereof) telephonic and written notice of: (a) the commencement of all proceedings and investigations by or before any Governmental Authority and all actions and proceedings in any court or before any arbitrator against or involving the Borrower or any Subsidiary or any of their respective properties, assets or businesses which in any given case or in the aggregate would have a Material Adverse Effect; (b) any notice of any violation received by the Borrower or any Subsidiary from any Governmental Authority, including, without limitation, any notice of violation of environmental laws, which in any such case would have a Material Adverse Effect; (c) any attachment, judgment, lien, levy or order exceeding $5,000,000 that may be assessed against or threatened against the Borrower or any Subsidiary other than normal insurance claims adjustment matters involving Insurance Company Subsidiaries; (d) any Default or Event of Default, or any other event which constitutes or which with the passage of time or giving of notice or both would constitute a default or event of default under any Contract to which the Borrower or any of its Subsidiaries is a party or by which the Borrower or any Subsidiary or any of their respective properties may be bound, which default or event of default would have a Material Adverse Effect; (e) any unfavorable determination letter from the Internal Revenue Service regarding the qualification of an Employee Benefit Plan under Section 401(a) of the Code (along with a copy thereof), (ii) any fact or circumstance that has resulted, or could reasonably be expected to result, in an ERISA Event, (iii) the Amount of Unfunded Benefit Liabilities exceeds $1,000,000, and (iv) any event or events in respect of any Foreign Plan or Foreign Plans occur that, or are reasonably expected to occur which, individually or together with all other similar events, result or would reasonably be expected to result in an aggregate liability to the Borrower or its Subsidiaries in excess of $1,000,000; and (f) any event which makes any of the representations set forth in Section 3 inaccurate in any material respect. SECTION 5.11. Collateral. (a) Each Pledgor shall at any time ---------- and from time to time, at its own expense, promptly execute and deliver all further instruments and documents, and take all further action, that may be necessary or desirable, or that the Agent may reasonably request, in order to perfect and protect any security interest granted or purported to be granted hereby or to enable the Lenders and the Agent to exercise and enforce their rights and remedies hereunder with respect to the Collateral or any part thereof (including, without limitation, the execution and filing of any UCC financing or continuation statements deemed necessary or appropriate by the Agent or its counsel). 40 (b) Except for the security interest granted hereunder to the Agent for the benefit of the Lenders, each Pledgor will at all times continue to (i) be the sole owner of the Pledged Securities indicated on Schedule 10.1, (ii) hold the same free and clear of all Liens, and (iii) subject to Section 10.5, cause any and all Collateral to be forthwith delivered to the Agent and pledged and assigned hereunder. (c) Each delivery of any Additional Shares or other Collateral shall constitute a representation and warranty that, as of the date thereof, Sections 3.14(b) and 3.25 are true and correct as to the Pledged Securities. (d) The Borrower shall take, or cause to be taken, all actions deemed necessary or appropriate by the Agent or its counsel (including, without limitation, filing of UCC financing statements) under applicable Law to perfect each security interest and register each charge in favor of the Agent for the benefit of the Lenders under Section 10 hereof within five days of the Closing Date (and which actions shall be taken or caused to be taken prior to the Lenders making the initial Bridge Loan on the first Disbursement Date). (e) Each Collateral Subsidiary shall at all times use its commercially reasonable efforts to assist and cooperate with the Pledgor and the Agent and take such actions (including, without limitation, the making of any regulatory filings or registrations with any insurance authority) as may be required from it under applicable Law or reasonably requested by the Pledgor or the Agent to maintain a first priority security interest in the Collateral in favor of the Agent for the benefit of the Lenders, or to exercise the rights and remedies of the Agent for the benefit of the Lenders in connection therewith. (f) On and at any time after the Closing Date, each Pledgor shall use its commercially reasonable efforts to assist and cooperate with the Agent in obtaining any consent, approval, authorization, registration or qualification of or with any Governmental Authority (including, without limitation, any insurance authority, commission or other insurance regulatory body) necessary for the exercise by the Agent or any Lender of the rights and remedies set forth in Section 10 hereof, including, without limitation, the approval of a Form A filing by the Department of Insurance of the Commonwealth of Pennsylvania upon the occurrence and during the continuance of an Event of Default. SECTION 6. NEGATIVE COVENANTS Until all Obligations shall have been paid in full and no Lender shall have any Bridge Loan Commitment hereunder, each Loan Party, jointly and severally, agrees with the Lenders that: SECTION 6.1. Consolidated Indebtedness to Consolidated Total Capital ------------------------------------------------------- Ratio . The Borrower shall not permit the ratio of Consolidated Indebtedness to - ------ Consolidated Total Capital to exceed 0.45 to 1 at any time. SECTION 6.2. Shareholders' Equity. The Borrower shall maintain a -------------------- Shareholders' Equity which is not less than $341,674,000 at any time. 41 SECTION 6.3. Negative Pledge. The Borrower shall not create, incur, --------------- assume or suffer to exist any Lien upon any of its assets or properties (including, without limitation, the Capital Stock of any Subsidiary, whether such Capital Stock is owned on the date of this Agreement or hereafter acquired), or permit any of its Subsidiaries to create, incur, assume or suffer to exist any Lien upon any of its assets or properties (including, without limitation, the Capital Stock of any Subsidiary, whether such Capital Stock is owned on the date of this Agreement or hereafter acquired), except for Permitted Liens. SECTION 6.4. Limitation on Subsidiary Indebtedness. The Borrower ------------------------------------- shall not permit any of its Subsidiaries to create, incur, assume or suffer to exist in any manner any Indebtedness other than that outstanding on the date of this Agreement; provided, that nothing contained in this Section 6.4 shall -------- prohibit (i) any Indebtedness of any Subsidiary of the Borrower outstanding at the time such Subsidiary becomes a Subsidiary of the Borrower and not incurred in contemplation thereof, as long as the outstanding amount of the Indebtedness remains the sole obligation of such Subsidiary and as long as the outstanding amount of such Indebtedness is not voluntarily increased by such Subsidiary after the date such Subsidiary becomes a Subsidiary of the Borrower, (ii) any Indebtedness of any Subsidiary of the Borrower permitted under Section 6.7 hereof, (iii) any Indebtedness of any Subsidiary secured by a Permitted Lien, provided that such Indebtedness does not exceed the value of the assets or - -------- property subject to such Permitted Lien, (iv) any Indebtedness owing directly or indirectly to the Borrower or a Collateral Subsidiary by a Subsidiary of the Borrower, and (v) any Indebtedness not otherwise permitted by the foregoing clauses, provided that the aggregate amount at any time outstanding for all Subsidiaries of the Borrower of (A) such Indebtedness and (B) the Indebtedness incurred under the preceding clause (iii) shall not exceed $10,000,000. SECTION 6.5. Limitation on Asset Sales. The Borrower will not, and ------------------------- will not permit any of its Subsidiaries to, consummate an Asset Sale unless (a) the Borrower or the applicable Subsidiary, as the case may be, receives consideration at the time of such Asset Sale at least equal to the Fair Market Value of the assets sold or otherwise disposed of, and (b) the consideration received for the assets sold by the Borrower or such Subsidiary, as the case may be, in such Asset Sale are in the form of cash or Cash Equivalents, in each case received at the time of such Asset Sale. SECTION 6.6. Merger, Acquisition, Sale of Assets and Liquidation. --------------------------------------------------- The Borrower shall not enter into any merger or consolidation with any Person, or sell, lease, assign, distribute or otherwise dispose of all or any material portion of its assets or liquidate in whole or in part, or permit any Subsidiary to enter into any merger or consolidation with any Person, or sell, lease, assign, distribute or dispose of all or any material portion of its assets or liquidate in whole or in part, except that (i) the Borrower may merge or consolidate with any Subsidiary or other Person incorporated under the laws of Bermuda or a State of the United States, if the Borrower is the surviving corporation and immediately after giving effect thereto no Default or Event of Default shall have occurred and be continuing, and (ii) any Subsidiary may be merged or consolidated into, or may be liquidated into, or may sell, lease or transfer assets to, the Borrower or a Wholly Owned Subsidiary, if, in the case of a merger or consolidation, (x) the Borrower or such Wholly Owned Subsidiary is the surviving corporation, (y) in the event such Subsidiary is a Collateral Subsidiary, a security agreement in a form satisfactory to the Agent is executed and delivered to the Agent pursuant to which all the shares of Capital Stock (other than, 42 if applicable, any share issued to the holder of the MIDL Director Share or any preferred shares issued to the holders of MH Preferred Shares and IPC Preferred Shares in connection with such merger or consolidation, provided that such -------- preferred shares have terms substantially similar to the terms of the MH Preferred Shares and the IPC Preferred Shares, respectively) of such surviving corporation is pledged to the Agent for the benefit of the Lenders, and (z) immediately after giving effect thereto no Default or Event of Default shall have occurred and be continuing. SECTION 6.7. Sale and Leaseback. The Borrower shall not enter into, ------------------ or permit any of its Subsidiaries to enter into, directly or indirectly, any arrangement under which the Borrower or such Subsidiary, as the case may be, sells or transfers any of the fixed assets then owed by it and thereupon or within one year thereafter rents or leases the assets so sold or transferred; provided, that nothing contained in this Section 6.6 shall prohibit (i) a Subsidiary of the Borrower from entering into a sale-leaseback transaction involving any real estate currently owned by such Subsidiary, or (ii) the Borrower or any Subsidiary of the Borrower from entering into any other sale- leaseback transaction as long as such other sale-leaseback transaction, together with all other such sale-leaseback transactions and any Asset Sales of the Borrower and its Subsidiaries made in the period from the Closing Date to the date of such other sale-leaseback transaction, does not involve assets having a value of more than $10,000,000 in the aggregate. SECTION 6.8. Limitations on Dividends and Other Payment Restrictions ------------------------------------------------------- Affecting Subsidiaries. The Borrower will not, and will not permit any of its - ---------------------- Subsidiaries to, directly or indirectly, create or otherwise cause or suffer to exist or become effective any consensual encumbrance or restriction of any kind on the ability of any of its Subsidiaries to (a) pay dividends, in cash or otherwise, or make any other distributions on or in respect of its Capital Stock, (b) pay any Indebtedness owed to the Borrower or any other Subsidiary, (c) make loans or advances to the Borrower or any other Subsidiary or (d) transfer any of its properties or assets to the Borrower or any other Subsidiary, except for such encumbrances or restrictions existing under or by reason of any of the following: (i) This Agreement and any agreement in effect on the Closing Date; (ii) Customary non-assignment provisions of any lease governing a leasehold interest of the Borrower or any of its Subsidiaries; (iii) Any agreement or other instrument of a Person acquired by the Borrower or any of its Subsidiaries in existence at the time of such acquisition (but not created in contemplation thereof), which encumbrance or restriction is not applicable to any person, or properties or assets of any Person, other than the Person, or the property or assets of the Person, so acquired; and (iv) Any limitations under applicable Laws as to dividends payable by Insurance Company Subsidiaries. SECTION 6.9. Transactions with Affiliates. The Borrower shall not ---------------------------- enter into or be a party to, or permit any Subsidiary to enter into or be a party to, any transaction with any Affiliate, except pursuant to the reasonable requirements of its business and upon fair and 43 reasonable terms that are no less favorable to it than it would obtain in a comparable arm's length transaction with an unrelated Person. SECTION 6.10. Lines of Business. The Borrower will not, nor will it ----------------- permit any Subsidiary to, engage in any business other than a Permitted Business. SECTION 6.11. Amendment to Charter Documents. The Borrower shall ------------------------------ not, and shall not cause or permit any of its Subsidiaries to, amend its certificate of incorporation, by-laws or other organizational documents in any respect which could be materially adverse to the interests of the Lenders. SECTION 6.12. Collateral. (a) Each Pledgor shall not (i) make any ---------- assignment, pledge, hypothecation or transfer of, or create or permit to exist any Lien on, the Collateral, other than pursuant hereto. (b) Each Pledgor shall not change its name, identity or corporate structure in any manner or its jurisdiction of organization or the location of its chief executive office unless it shall have given the Lenders and the Agent not less than 30 days' prior notice thereof. (c) Each Collateral Subsidiary shall not take any action that could adversely affect the first priority security interest in the shares of its Capital Stock granted hereunder in favor of the Agent for the benefit of the Lenders. (d) Each Collateral Subsidiary shall not issue any additional Capital Stock except for MH Preferred Shares in the case of Mutual Holdings (Bermuda) Ltd. and IPC Preferred Shares in the case of IPC Mutual Holdings, Ltd. SECTION 7. DEFAULTS AND REMEDIES SECTION 7.1. Events of Default. The term "Event of Default," ----------------- wherever used herein with respect to the Bridge Loans, means any one of the following events (whatever the reason for such event, and whether it shall be voluntary or involuntary, or be effected by operation of law, pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body): (a) The Borrower (i) defaults in the payment of the principal of any Bridge Loan when the same becomes due and payable whether at the stated maturity thereof, upon voluntary or mandatory repayment, upon acceleration or otherwise or (ii) fails to offer to repurchase or repurchase Bridge Notes to the extent required herein. (b) The Borrower defaults in any payment of interest on any Bridge Loan within two (2) Business Days after the same becomes due and payable. (c) Any Loan Party fails to observe or perform any covenant, condition or agreement on the part of such Loan Party to be observed or performed pursuant to Sections 5.7, 5.11, 6.1, 6.2, 6.3, 6.8 and 6.12 hereof. 44 (d) Any Loan Party fails to comply with any of its other agreements or covenants hereunder and such failure continues for 30 days. (e) The Guarantee or any provision thereof ceases to be in full force and effect (other than in accordance with its express terms and the terms of this Agreement), or (ii) the Guarantor or any Person acting by or on behalf of the Guarantor denies or disaffirms the Guarantor's obligations under its Guarantee, or (iii) the Guarantor defaults in the due performance or observance of any term, covenant or agreement on its part to be performed or observed, after giving effect to any applicable grace periods, pursuant to its Guarantee. (f) Any representation or warranty of any Loan Party made in this Agreement or in any other Loan Document proves to have been inaccurate, incomplete or misleading in any material respect at the time it was made. (g) (i) Any ERISA Event occurs or is reasonably expected to occur with respect to any Employee Benefit Plan, including, without limitation, any Pension Plan or Multiemployer Plan, (ii) the Amount of Unfunded Benefit Liabilities, when added to the aggregate Amount of Unfunded Benefit Liabilities with respect to all other Pension Plans, exceeds the aggregate Amount of Unfunded Benefit Liabilities that existed on the Closing Date by $1,000,000, and (iii) any event shall have occurred with respect to any Foreign Plan which results in a liability to the Borrower or any of its Subsidiaries which, individually or together with any similar events, exceeds $1,000,000. (h) The Borrower or any of its Subsidiaries (i) fails to pay any of its Indebtedness in excess of $5,000,000 as and when such Indebtedness becomes payable or (ii) fails to perform or observe any covenant or agreement to be performed or observed by it contained in any other agreement or in any instrument evidencing any of its Indebtedness in excess of $5,000,000 if, as a result of such failure, any other party to such agreement or instrument is entitled to exercise, and has not irrevocably waived, the right to accelerate the maturity of any amount owing thereunder. (i) A court having jurisdiction in the premises enters (i) a decree or order for relief in respect of any Loan Party or any of the Borrower's Material Subsidiaries in an involuntary case or proceeding under any Bankruptcy Law or (ii) a decree or order (A) adjudging any Loan Party or any of the Borrower's Material Subsidiaries bankrupt or insolvent, or (B) approving as properly filed a petition seeking reorganization, arrangement, adjustment or composition of, or in respect of, any Loan Party or any of the Borrower's Material Subsidiaries under any Bankruptcy Law, or (C) appointing a Custodian of any Loan Party or any of the Borrower's Material Subsidiaries or of any substantial part of the Property of such Loan Party or such Material Subsidiary or (D) ordering the winding-up or liquidation of the affairs of any Loan Party or any of the Borrower's Material Subsidiaries, and in each case, the continuance of any such decree or order for relief or any such other decree or order unstayed and in effect for a period of thirty (30) consecutive calendar days. (j) (i) Any Loan Party or any of the Borrower's Material Subsidiaries commences a voluntary case or proceeding under any Bankruptcy Law or of any other case or proceeding to be adjudicated a bankrupt or insolvent; or (ii) any Loan Party or any of the Borrower's Material 45 Subsidiaries consents to the entry of a decree or order for relief in respect of such Loan Party or such Material Subsidiary in an involuntary case or proceeding under any Bankruptcy Law or to the commencement of any bankruptcy or insolvency case or proceeding against such Loan Party or such Material Subsidiary; or (iii) any Loan Party or any of the Borrower's Material Subsidiaries files a petition or answer or consent seeking reorganization or relief under any Bankruptcy Law; or (iv) any Loan Party or any of the Borrower's Material Subsidiaries consents to the filing of such petition or to the appointment of or taking possession by a Custodian of such Loan Party or such Material Subsidiary or of any substantial part of the Property of such Loan Party or such Material Subsidiary, or (v) any Loan Party or any of the Borrower's Material Subsidiaries makes an assignment for the benefit of creditors; or (vi) any Loan Party or any of the Borrower's Material Subsidiaries admits in writing its inability to pay its debts generally as they become due; or (vii) the stockholders of any Loan Party or any of the Borrower's Material Subsidiaries approve any plan or proposal for the liquidation or dissolution of such Loan Party or such Material Subsidiary; or (viii) any Loan Party or any of the Borrower's Material Subsidiaries takes corporate action in furtherance of any such action. (k) Any judgment or decree for the payment of money involving a liability (to the extent not covered by independent third-party insurance as to which the insurer has not denied coverage) in excess of $5,000,000 or its foreign currency equivalent at the time is entered against the Borrower or any of its Subsidiaries and is not discharged, waived or the execution thereof stayed within thirty (30) days after such entry. (l) Any insurance license or other authorization or permit necessary for the conduct by any Insurance Company Subsidiary of its business is revoked or withdrawn or otherwise fails to be in full force and effect, which failure, revocation or withdrawal, in the judgment of the Agent, has a Material Adverse Effect. (m) The Borrower fails to be the beneficial owner at all times, directly or indirectly, of all of the outstanding Capital Stock of the Guarantor or any other Loan Party, except for (i) the MIDL Director Share, (ii) the IPC Preferred Shares and (iii) the MH Preferred Shares. SECTION 7.2. Default Remedies. (a) If any Event of Default ---------------- shall occur and be continuing, the Agent shall, upon the request of Required Lenders, by notice to the Borrower, (a) declare the obligations of each Lender hereunder to be terminated, whereupon such obligations shall terminate, and (b) declare all amounts payable hereunder by the Borrower that would otherwise be due after the date of such termination to be immediately due and payable, whereupon all such amounts shall become immediately due and payable, all without diligence, presentment, demand of payment, protest or notice of any kind, which are expressly waived by the Borrower and the Guarantor; provided, however, that if any event of any kind referred to in paragraphs (i) or (j) of Section 7.1 occurs with respect to the Borrower or the Guarantor, the obligations of each Lender hereunder shall immediately terminate, and all amounts payable hereunder by the Borrower that would otherwise be due after the occurrence of such event shall become immediately due and payable without any such notice or other preliminary waived by the Borrower and the Guarantor in this Section 7.2. (b) The rights provided for herein are cumulative and are not exclusive of any other rights, powers, privileges or remedies provided by law. 46 SECTION 8. THE AGENT SECTION 8.1. Appointment. Each Lender hereby irrevocably designates ----------- and appoints Prudential Securities Credit Corp. as Agent of such Lender to act as specified herein and in the other Loan Documents, and each Lender hereby irrevocably authorizes Prudential Securities Credit Corp. as the Agent to take such action on its behalf under the provisions of this Agreement and the other Loan Documents and to exercise such powers and perform such duties as are expressly delegated to the Agent by the terms of this Agreement and the other Loan Documents, together with such other powers as are reasonably incidental thereto. The Agent agrees to act as such upon the express conditions contained in this Section 8. Without limitation to the foregoing, the Agent shall take, or refrain from taking, such action hereunder as shall be reasonably directed by the Required Lenders; provided, that, as between the Agent and the Lenders unless and until the Agent shall have received such directions, the Agent may (but shall not be obligated to) take such action, or refrain from taking such action, as it shall deem advisable in the best interests of the Lenders. Notwithstanding any provision to the contrary elsewhere in this Agreement or in any other Loan Document, the Agent shall not have any duties or responsibilities, except those expressly set forth herein or in the other Loan Documents, or any fiduciary relationship with any Lender, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into this Agreement or otherwise exist against the Agent. The provisions of this Section 8 are solely for the benefit of the Agent and the Lenders, and neither of the Borrower nor any of its Subsidiaries shall have any rights as a third party beneficiary of any of the provisions hereof. In performing its functions and duties under this Agreement, the Agent shall act solely as agent of the Lenders and the Agent does not assume and shall not be deemed to have assumed any obligation or relationship of agent or trust with or for the Borrower or any of its Subsidiaries. SECTION 8.2. Delegation of Duties. The Agent may execute any of its -------------------- duties under this Agreement or any other Loan Document by or through agents or attorneys-in-fact and shall be entitled to advice of counsel concerning all matters pertaining to such duties. The Agent shall not be responsible for the negligence or misconduct of any agents or attorneys-in-fact selected by it with reasonable care except to the extent otherwise required by Section 8.3. SECTION 8.3. Exculpatory Provisions. Neither the Agent nor any of ---------------------- its officers, directors, employees, agents, attorneys-in-fact or affiliates shall be (i) liable for any action lawfully taken or omitted to be taken by it or such Person under or in connection with this Agreement or the other Loan Documents (except for its or such Person's own gross negligence or willful misconduct) or (ii) responsible in any manner to any of the Lenders for any recitals, statements, representations or warranties made by the Borrower, any of its Subsidiaries or any of their respective officers contained in this Agreement, any other Loan Documents, or in any certificate, report, statement or other document referred to or provided for in, or received by the Agent under or in connection with, this Agreement or any other Loan Document or for any failure of the Borrower, any of its Subsidiaries or any of their respective officers to perform its or their obligations hereunder or thereunder. The Agent shall not be under any obligation to any Lender to ascertain or to inquire as to the observance or performance of any of the agreements contained in, or conditions of, this Agreement or the other Loan Documents, or to inspect the 47 properties, books or records of the Borrower or any of its Subsidiaries. The Agent shall not be responsible to any Lender for the effectiveness, genuineness, validity, enforceability, collectibility or sufficiency of this Agreement or any other Loan Document or for any representations, warranties, recitals or statements made herein or therein or made in any written or oral statement or in any financial or other statements, instruments, reports, certificates or any other documents in connection herewith or therewith furnished or made by the Agent to the Lenders or by or on behalf of the Borrower or any of its Subsidiaries to the Agent or any Lender or be required to ascertain or inquire as to the performance or observance of any of the terms, conditions, provisions, covenants or agreements contained herein or therein or as to the use of the proceeds of the Bridge Loans or of the existence or possible existence of any Default or Event of Default. SECTION 8.4. Reliance by Agent. The Agent shall be entitled to ----------------- rely, and shall be fully protected in relying, upon any note, writing, resolution, notice, consent, certificate, affidavit, letter, cablegram, telegram, facsimile, telex or teletype message, statement, order or other document or conversation believed by them to be genuine and correct and to have been signed, sent or made by the proper Person or Persons, and upon advice and statements of legal counsel (including, without limitation, counsel to the Borrower or any of its Subsidiaries), independent accountants and other experts selected by the Agent. The Agent shall be fully justified in failing or refusing to take any action under this Agreement or any other Loan Document unless they shall first receive such advice as they deem appropriate or they shall first be indemnified to their satisfaction by the Lenders against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action. As between the Agent and the Lenders, the Agent shall in all cases be fully protected in acting, or in refraining from acting, under this Agreement and the other Loan Documents in accordance with a request of the Required Lenders, and such request and any action taken or failure to act pursuant thereto shall be binding upon all the Lenders. SECTION 8.5. Notice of Default. The Agent shall not be deemed to ----------------- have knowledge or notice of the occurrence of any Default or Event of Default hereunder unless the Agent has actually received notice from a Lender or the Borrower referring to this Agreement, describing such Default or Event of Default and stating that such notice is a "notice of default." In the event that the Agent receives such a notice, the Agent shall give prompt notice thereof to the Lenders. SECTION 8.6. Non-Reliance on Agent and Other Lenders. Each Lender --------------------------------------- expressly acknowledges that neither the Agent nor any of its respective officers, directors, employees, agents, attorneys-in-fact or affiliates have made any representations or warranties to it and that no act by the Agent hereinafter taken, including any review of the affairs of the Borrower or any of its Subsidiaries, shall be deemed to constitute any representation or warranty by the Agent to any Lender. Each Lender represents to the Agent that it has, independently and without reliance upon the Agent or any other Lender, and based on such documents and information as it has deemed appropriate, made its own appraisal of and investigation into the business, assets, operations, property, financial and other condition, prospects and creditworthiness of the Borrower and its Subsidiaries and made its own decision to make Bridge Loans hereunder and enter into this Agreement. Each Lender also represents that it will, independently and without reliance upon the Agent or any other Lender, and based on such 48 documents and information as it shall deem appropriate at the time, continue to make its own credit analysis, appraisals and decisions in taking or not taking action under this Agreement, and to make such investigation as it deems necessary to inform itself as to the business, assets, operations, property, financial and other condition, prospects and creditworthiness of the Borrower and its Subsidiaries. The Agent shall not have any duty or responsibility to provide any Lender with any credit or other information concerning the business, operations, assets, property, financial and other condition, prospects or creditworthiness of the Borrower or any of its Subsidiaries which may come into the possession of the Agent or any of its officers, directors, employees, agents, attorneys-in-fact or affiliates. SECTION 8.7. Indemnification. The Lenders agree to indemnify the --------------- Agent in their capacity as such ratably according to their respective "percentages" as used in determining the Required Lenders at such time, from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, reasonable expenses or disbursements of any kind whatsoever which may at any time (including, without limitation, at any time following the payment in full of the Obligations) be imposed on, incurred by or asserted against the Agent in its capacity as such in any way relating to or arising out of this Agreement or any other Loan Document, or any documents contemplated by or referred to herein or the transactions contemplated hereby or any action taken or omitted to be taken by the Agent under or in connection with any of the foregoing, but only to the extent that any of the foregoing is not paid by the Borrower or any of its Subsidiaries; provided, that no Lender shall be liable to the Agent for the payment of any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting solely from the gross negligence or willful misconduct of the Agent. If any indemnity furnished to the Agent for any purpose shall, in the opinion of the Agent, be insufficient or become impaired, the Agent may call for additional indemnity and cease, or not commence, to do the acts indemnified against until such additional indemnity is furnished. The agreements in this Section 8.7 shall survive the payment in full of all Obligations. SECTION 8.8. Agent in Its Individual Capacity. The Agent and its -------------------------------- affiliates may make loans to, accept deposits from and generally engage in any kind of business with the Borrower and its Subsidiaries, including, without limitation, in connection with the Refinancing as though the Agent were not the Agent hereunder. With respect to the Bridge Loans to be made by it and all Obligations owing to it, the Agent shall have the same rights and powers under this Agreement as any Lender and may exercise the same as though it were not the Agent and the terms "Lender" and "Lenders" shall include the Agent in its individual capacity as Lender. SECTION 8.9. Resignation of the Agent; Successor Agent. The Agent ----------------------------------------- may resign as Agent upon 20 days' notice to the Lenders and the Borrower. Upon the resignation of the Agent, the Required Lenders shall appoint from among the Lenders a successor Agent which is a bank or a trust company for the Lenders subject to prior approval by the Borrower (such approval not to be unreasonably withheld or delayed), whereupon such successor agent shall succeed to the rights, powers and duties of such Agent, and the term "Agent" shall include such successor agent effective upon its appointment, and the resigning Agent's rights, powers and duties as an Agent shall be terminated, without any other or further act or deed on the part of such former Agent or any of the parties to this Agreement. If the Required Lenders fail to appoint a successor Agent pursuant to the provisions of the preceding sentence, the resigning 49 Agent shall designate one of the Lenders as successor Agent. After the resignation of an Agent hereunder, the provisions of this Section 8 shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent under this Agreement. SECTION 9. GUARANTEE SECTION 9.1. Unconditional Guarantee. The Guarantor hereby ----------------------- unconditionally guarantees (such guarantee to be referred to herein as the "Guarantee") to each of the Lenders and to the Agent and their respective successors and assigns that (i) the principal of and interest on each Bridge Loan will be promptly paid in full when due, subject to any applicable grace period, whether at the Maturity Date, by acceleration or otherwise and interest on the overdue principal, if any, and interest on any interest, to the extent lawful, of each Bridge Loan and all other obligations of the Borrower to the Lenders or the Agent hereunder or under the Bridge Notes (including, without limitation, for any reimbursements, fees, expenses, indemnities or otherwise) will be promptly paid in full or performed, all in accordance with the terms hereof and thereof; and (ii) in case of any extension of time of payment or renewal of any Bridge Loan or of any such other obligations, the same will be promptly paid in full when due or performed in accordance with the terms of the extension or renewal, subject to any applicable grace period, whether at stated maturity, by acceleration or otherwise. The Guarantor hereby guarantees that the Obligations will be paid or performed, as applicable, strictly in accordance with the terms of the Credit Agreement governing them or any other agreement relating thereto, regardless of the value, genuineness, validity, regularity or enforceability of the Obligations, and of any Law now or hereafter in effect in any jurisdiction affecting any of such terms or the rights of the Lenders with respect thereto. The liability of the Guarantor to the extent herein set forth shall be absolute and unconditional, not subject to any reduction, limitation, impairment, termination, defense, offset, counterclaim or recoupment whatsoever (all of which are hereby expressly waived by the Guarantor) whether by reason of any claim of any character whatsoever, including, without limitation, any claim of waiver, release, surrender, alteration or compromise, or by reason of any liability at any time to the Guarantor or otherwise, whether based upon any obligations or any other agreement or otherwise, and howsoever arising, whether out of action or inaction or otherwise and whether resulting from default, willful misconduct, negligence or otherwise, and, without limiting the foregoing, irrespective of : any lack of validity, legality or enforceability of any agreement or instrument relating to the Obligations; any change in the time, manner or place of payment of, or in any other term in respect of, all or any of the Obligations, or any other amendment to or waiver of or consent to any departure from any other agreement relating to any Obligations; any release or amendment or waiver of or consent to any departure from or failure to enforce any other guarantee, for all or any of the Indebtedness; any other circumstance which might otherwise constitute a defense available to, or a discharge of, the Borrower or the Guarantor in respect of the Obligations; the absence of any action on the part of the Lenders to obtain payment of the Obligations from the Borrower; any insolvency, bankruptcy, reorganization or dissolution, or any similar proceeding of the Borrower, including, without limitation, rejection of the Obligations in such bankruptcy; the assignment of the Credit Agreement by the Lenders or the Borrower; or the absence of notice or any delay in any action to enforce any Obligations or to exercise any right or remedy against the Guarantor, whether hereunder, under any Obligations or any agreement or any indulgence, compromise or extension 50 granted. The Guarantor hereby waives diligence, presentment, demand of payment, filing of claims with a court in the event of insolvency or bankruptcy of the Borrower, any right to require a proceeding first against the Borrower, protest, notice and all demands whatsoever and covenants that this Guarantee will not be discharged except by complete performance of the obligations contained in each Bridge Note, this Agreement and in this Guarantee. If any Lender or the Agent are required by any court or otherwise to return to the Borrower, the Guarantor, or any custodian, trustee, liquidator or other similar official acting in relation to the Borrower or the Guarantor, any amount paid by the Borrower or the Guarantor to the Agent or such Lender, this Guarantee, to the extent theretofore discharged, shall be reinstated in full force and effect. The Guarantor further agrees that, as between the Guarantor, on the one hand, and the Lenders and the Agent, on the other hand, (x) the maturity of the obligations guaranteed hereby may be accelerated as provided in Section 7 for the purposes of this Guarantee, notwithstanding any stay, injunction or other prohibition preventing such acceleration in respect of the obligations guaranteed hereby, and (y) in the event of any acceleration of such obligations as provided in Section 7, such obligations (whether or not due and payable) shall forthwith become due and payable by the Guarantor for the purpose of this Guarantee. SECTION 9.2. Severability. In case any provision of this Guarantee ------------ shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. SECTION 9.3. Limitation of Guarantor's Liability. The Guarantor and ----------------------------------- by its acceptance hereof each of the Lenders hereby confirms that it is the intention of all such parties that the guarantee by the Guarantor pursuant to its Guarantee not constitute a fraudulent transfer or conveyance for purposes of any Bankruptcy Law, the Uniform Fraudulent Conveyance Act, the Uniform Fraudulent Transfer Act or any similar Federal or state law. To effectuate the foregoing intention, the Lenders and the Guarantor hereby irrevocably agree that the obligations of the Guarantor under the Guarantee shall be limited to the maximum amount as will result in the obligations of the Guarantor under the Guarantee not constituting such fraudulent transfer or conveyance. SECTION 9.4. Waiver of Stay, Extension or Usury Laws. The Guarantor --------------------------------------- covenants that it will not at any time insist upon, plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay or extension law or any usury law or other law that would prohibit or forgive the Guarantor from performing the Guarantee as contemplated herein, wherever enacted, now or at any time hereafter in force, or which may affect the covenants or the performance of this Agreement; and the Guarantor hereby expressly waives all benefit or advantage of any such law, and covenants that it will not hinder, delay or impede the execution of any power herein granted to the Agent, but will suffer and permit the execution of every such power as though no such law had been enacted. SECTION 10. PLEDGE; RIGHTS AND REMEDIES SECTION 10.1. Pledge and Charge. As security for the payment and ----------------- performance, as the case may be, in full of the Obligations, each Pledgor hereby grants to the 51 Agent for the benefit of the Lenders and their successors and assigns a first priority security interest in all of such Pledgor's right, title and interest in, to and under the Collateral; provided, that with respect to the -------- shares of Capital Stock of Mutual Indemnity (Dublin) Ltd., as security for the payment and performance in full of the Obligations, the Borrower as record and beneficial owner hereby mortgages and charges all the shares of Capital Stock of Mutual Indemnity (Dublin) Ltd. (other than the MIDL Director Share) by way of a first fixed mortgage and charge (it being understood that all the obligations of each Pledgor hereunder shall, to the fullest extent permitted by applicable Laws, apply to the Borrower as mortgagor and chargor, and with respect to such shares of Capital Stock only, any reference to a "pledge" herein shall be deemed to be a reference to such first fixed mortgage and charge). SECTION 10.2. Delivery of Collateral. Each Pledgor agrees promptly ---------------------- to deliver or cause to be delivered to the Agent any and all Pledged Shares, Additional Shares and other securities now or hereafter included in the Collateral pledged by it (the "Pledged Securities"), and any and all certificates or other instruments or documents representing the Collateral. In addition, each Pledgor agrees that: (a) Each delivery of Pledged Securities shall be accompanied by a schedule describing the securities theretofore and then being pledged hereunder, a form of which is attached hereto as Schedule 10.2. Each schedule so delivered shall supersede any prior schedules so delivered; (b) Any Pledged Securities shall be accompanied by stock powers duly executed in the name of the Agent or in blank or other instruments of transfer satisfactory to the Agent and by such other instruments and documents as the Agent may reasonably request; and (c) All other property comprising part of the Collateral shall be accompanied by proper instruments of assignment duly executed by such Pledgor and such other instruments or documents as the Agent may reasonably request. SECTION 10.3. Agent Appointed Attorney-in-Fact. Each Pledgor hereby -------------------------------- appoints the Agent as such Pledgor's attorney-in-fact, with full authority in the place and stead of such Pledgor and in the name of such Pledgor or otherwise, from time to time in the Agent's discretion, after the occurrence and during the continuation of an Event of Default, to take any action and to execute, deliver and complete any instrument or deed which the Agent may deem necessary or advisable to accomplish the purposes of this Section, including, without limitation, to complete any stock or bond power, to sign, deliver and complete an Irish stock transfer form and to apply for registration of the Agent and/or its nominee as the holder of any shares of Capital Stock of Mutual Indemnity (Dublin) Ltd. pledged hereunder, to receive, endorse and collect all instruments made payable to such Pledgor representing any dividend or other distribution in respect of the Pledged Securities or any part thereof and to give full discharge for the same. This appointment is irrevocable and is coupled with an interest. The Agent is authorized to prepare and file financing statements with respect to the Collateral without the signature of each Pledgor, at such Pledgor's expense. SECTION 10.4. Agent May Perform. If any Pledgor fails to perform any ----------------- act required by this Section, the Agent may (in such Pledgor's name or otherwise) perform, or cause 52 performance of, such act, and the expenses the Agent incurred in connection therewith shall be payable by such Pledgor under Section 11.3. SECTION 10.5. Voting Rights and Dividends. (a) Unless and until an --------------------------- Event of Default shall have occurred and be continuing: (i) each Pledgor shall be entitled to exercise any and all voting rights and/or other consensual rights and powers inuring to an owner of Pledged Securities or any part thereof for any purpose consistent with the terms of this Section; provided, however, that such Pledgor will not be entitled to exercise any such right if the result thereof would materially and adversely affect the rights inuring to a holder of the Pledged Securities or the rights and remedies of the Agent or the Lenders under this Section; and provided, further, that such Pledgor shall give the Agent at least five days' prior written notice of the manner in which it intends to exercise, or the reasons for refraining from exercising, any such right; (ii) each Pledgor as to the Pledged Securities pledged by it shall be entitled to receive and retain any and all cash dividends (except cash dividends paid or payable in respect of the total or partial liquidation of an issuer) paid on the Pledged Securities pledged by it; provided, however, that until actually paid, all rights to such dividends shall remain subject to the security interest of this Section. All dividends (other than those cash dividends which each Pledgor may retain pursuant to the immediately preceding sentence) and all other distributions in respect of, or in exchange for, any of the Pledged Securities, shall forthwith be paid or delivered to the Agent and held by the Agent subject to the security interest of this Section and, if received by any Pledgor, shall, until paid or delivered to the Agent, be segregated from the other funds and property of such Pledgor and held in trust for the Agent for the benefit of the Lenders subject to the security interest of this Section; and (iii) the Agent shall execute and deliver to each Pledgor, or cause to be executed and delivered to each Pledgor, all such proxies, powers of attorney and other instruments as such Pledgor may reasonably request for the purpose of enabling such Pledgor to exercise the voting and/or consensual rights and powers it is entitled to exercise pursuant to paragraph (a)(i) above and to receive the cash dividends it is entitled to receive pursuant to paragraph (a)(ii) above, as soon as reasonably practicable after receipt of a written request from such Pledgor together with a certificate by an Officer of such Pledgor stating that no Default or Event of Default has occurred and is continuing. (b) Upon the occurrence and during the continuance of an Event of Default: (i) All rights of each Pledgor to exercise the voting and consensual rights and powers it is entitled to exercise pursuant to paragraph (a)(i) above, and the obligations of the Agent under paragraph (a)(iii) above, shall cease, and all such rights shall thereon become vested in the Agent, which shall have sole and exclusive right and authority to exercise such voting and consensual rights and powers. The Agent shall also have the right (in its sole and absolute discretion) to hold the Pledged Securities in its own name as Agent, in the name of its nominee or in the name of each Pledgor, endorsed or assigned 53 in blank or in favor of the Agent. With respect to the shares of Capital Stock of Mutual Indemnity (Dublin) Ltd. pledged hereunder, the Agent and/or its nominee shall have the right (in its sole and absolute discretion) to apply for registration as the holder of such shares of Capital Stock and to become the registered holder thereof. Each Pledgor will promptly give the Agent copies of any notices or other communications received by it with respect to the Pledged Securities registered in the name of such Pledgor; and (ii) All rights of each Pledgor to dividends or other payments pursuant to paragraph (a)(ii) above shall cease, and all such rights shall thereupon become vested in the Agent, which shall have the sole and exclusive right and authority to receive and retain such dividends or other payments. All dividends or other payments received by each Pledgor contrary to the provisions of this Section 10.5 shall be held in trust for the Agent for the benefit of the Lenders, shall be segregated from other property or funds of such Pledgor and shall be forthwith delivered to the Agent upon demand in the same form as so received (with any necessary endorsement). Any and all money and other property paid over to or received by the Agent pursuant to this paragraph (b)(ii) shall be retained by the Agent for the benefit of the Lenders as additional Collateral hereunder and applied in accordance with the provisions hereof. SECTION 10.6. Remedies upon an Event of Default. (i) Upon the --------------------------------- occurrence and during the continuance of an Event of Default, in addition to the rights and remedies of a secured party under the UCC, the Agent may: (i) to the fullest extent permitted by applicable law, without notice, advertisement, hearing or process of law of any kind, sell any or all of the Collateral, free of all rights and claims of each Pledgor therein and thereto, at any public or private sale or at any broker's board or on any securities exchange, for cash, upon credit or for future delivery as the Agent shall deem appropriate; (ii) bid for and purchase any or all of the Collateral at any such public (or, to the extent permitted by applicable law, private) sale and make payment in account thereof by using any claim then due and payable to it from each Pledgor as a credit against the purchase price, and it may, upon compliance with the terms of the sale, hold, retain and dispose of such property without further accountability to such Pledgor therefor; (iii) as an alternative to exercising the power of sale herein conferred upon it, proceed by a suit or suits at law or in equity to foreclose upon the Collateral and to sell the Collateral or any portion thereof pursuant to a judgment or decree of a court or courts having competent jurisdiction; and (iv) otherwise act with respect to the Collateral or the proceeds thereof as though the Agent was the outright owner thereof. (b) The Agent shall be authorized at any sale (if it deems it advisable to do so) to restrict the prospective bidders or purchasers to persons who will represent and agree that they are purchasing the Collateral for their own account for investment and not with a view to the distribution or sale thereof. Upon consummation of any such sale, the Agent shall have the right 54 to assign, transfer and deliver to the purchaser or purchasers thereof the Collateral so sold. Each such purchaser at any such sale shall hold the property sold absolutely free from any claim or right on the part of each Pledgor. (c) The Agent shall give each Pledgor not less than ten days' prior notice of the time and place of any sale or other intended disposition of any of the Collateral, except that with respect to any Collateral that is perishable, threatens to decline speedily in value or is of a type customarily sold on a recognized market, no notice shall be necessary. Each Pledgor agrees that such notice, where required, constitutes "reasonable notification" within the meaning of Section 9-504(3) of the UCC. (d) The Agent shall not be obligated to make any sale of any Collateral if it shall determine not to do so, regardless of the fact that notice of sale of such Collateral shall have been given. The Agent may, without notice or publication, adjourn any public or private sale or cause the same to be adjourned from time to time by announcement at the time and place fixed for sale, and such sale may, without further notice, be made at the time and place to which the same was so adjourned. (e) In case any sale of all or part of the Collateral is made on credit or for future delivery, the Collateral so sold may be retained by the Agent until the sale price is paid in full by the purchaser or purchasers thereof, but the Agent shall not incur any liability in case any such purchaser or purchasers shall fail to pay for the Collateral so sold and, in case of any such failure, such Collateral may be sold again upon like notice. (f) For purposes hereof, (i) a written agreement to purchase the Collateral or any portion thereof shall be treated as a sale thereof, (ii) the Agent shall be free to carry out such sale pursuant to such agreement and (iii) each Pledgor shall not be entitled to the return of the Collateral or any portion thereof, notwithstanding the fact all Events of Default shall have been remedied and all Obligations paid in full. (g) Each Pledgor shall be liable for the deficiency if, after applying the Collateral or net proceeds thereof as set forth in Section 10.7 below, the Lenders have not received all amounts to which they are entitled pursuant to this Agreement. (h) The Agent is hereby authorized to comply with any limitation or restriction in connection with any sale of Collateral as it may be advised by counsel is necessary in order to (i) avoid any violation of applicable law or (ii) obtain any required approval of the sale or of the purchase by any Governmental Authority, and each Pledgor agrees that such compliance shall not result in such sale being considered or deemed not to have been made in a commercially reasonable manner and that the Agent shall not be liable or accountable to such Pledgor for any discount allowed by reason of the fact that such Collateral is sold in compliance with any such limitation or restriction. (i) (I) If the Agent wishes to sell all or any Pledged Securities pursuant to this Section 10.6, and determines, in its sole and absolute discretion, that it is necessary or advisable to effect a public registration of all or any of the Pledged Securities pursuant to the Securities Act (or any similar statutes then in effect), then each Pledgor will, at its own expense: 55 (A) execute and deliver, and use its best efforts to cause the issuer thereof (and such issuer's directors and officers) to execute and deliver, all such instruments and documents, and do or cause to be done all such other acts and things (including, without limitation, removing any legends affixed to the certificates evidencing the Pledged Securities pledged by such Pledgor) as may, in the reasonable judgment of the Agent, be necessary or advisable to register and sell such Pledged Securities under the Securities Act and to cause the related registration statement to become effective and to remain effective for such period as may be required by law, and to make all amendments thereto and/or to the related prospectus that, in the reasonable judgment of the Agent, are necessary or advisable, all in conformity with the Securities Act; (B) use its best efforts to (1) qualify the Pledged Securities pledged by such Pledgor under, and cause such issuer to comply with, the provisions of the securities or "blue sky" laws of any jurisdiction designated by the Agent and (2) cause such issuer to make available to its security holders, as soon as practicable, an earnings statement that will satisfy the provisions of Section 11(a) of the Securities Act; and (C) take such action as the Agent shall request to enable the Agent to exercise the rights of such Pledgor under any registration rights agreement. (II) Notwithstanding anything in paragraph (I) of this Section 10.6(i) to the contrary, the Agent may (subject only to applicable requirements of Law and the other requirements of this Section 10) sell all or any of the Pledged Securities by private sale in such manner and under such circumstances as the Agent may deem necessary or advisable and notwithstanding that a registration statement for all or any of such Pledged Securities could be or shall have been filed under the Securities Act. Without limitation on the foregoing, the Agent may approach and negotiate with a single possible purchaser to effect such sale and/or require that any such sale (including one held by auction) be subject to restrictions as to (A) the financial sophistication and ability of any person permitted to bid or purchase at such sale, (B) the content of legends to be placed upon any certificates representing the Pledged Securities sold in such sale, including restrictions on future transfer thereof, (C) the representations to be made by each person bidding or purchasing at such sale relating to that person's access to financial information about each Pledgor, the relevant issuer or the Lenders, and such person's intentions as to the holding of the Pledged Securities so sold for investment, for its own account, and not with a view to the distribution thereof, and (D) such other matters as the Agent may deem necessary or advisable in order that such sale, notwithstanding any failure so to register, may be effected in compliance with the Uniform Commercial Code as in effect in any relevant jurisdiction and other laws affecting the enforcement of creditors' rights, the Securities Act and all applicable state securities laws. (j) If the Agent shall determine to exercise its right to sell or cause the sale of any or all of the Collateral pursuant to this Section 10, each Pledgor will do or cause to be done all such other acts and things as may be necessary to make such sale or sales of any portion or all of the Collateral valid and binding and in compliance with any and all applicable Law. (k) Each Pledgor acknowledges that (i) any sale in accordance with this Section 10 shall be deemed to have been held in a commercially reasonable manner; (ii) notwithstanding the legal 56 availability of a private sale or a sale subject to restrictions as described above, the Agent may, in its sole and absolute discretion, elect to seek registration of the Pledged Securities under the Securities Act or any applicable state securities laws in accordance with this Section 10; (iii) the Agent shall incur no responsibility or liability for selling all or any of the Pledged Securities under this Section 10 at a price which the Agent may deem reasonable under the circumstances, notwithstanding the possibility that a substantially higher price might be realized if such sale were deferred until after registration as aforesaid; and (iv) any sale of all or any of the Pledged Securities which has not been registered as aforesaid may be for a price less than that which might have been obtained had the Pledged Securities been so registered. (l) Each Pledgor agrees that it will not at any time plead, claim or take the benefit of any appraisal, valuation, stay, extension, moratorium or redemption law now or hereafter in effect in order to prevent or delay the enforcement of this Section, or the absolute sale of the whole or any part of the Collateral or the possession thereof by any purchaser at any sale hereunder, and such Pledgor waives the benefit of all such Laws to the extent it lawfully may do so. Each Pledgor agrees that it will not interfere with any right, power and remedy of the Lenders or the Agent provided for in this Section or now or hereafter existing at law or in equity or by statute or otherwise, or the exercise or beginning of the exercise by the Lenders or the Agent of any one or more such rights, powers or remedies. SECTION 10.7. Application of Proceeds of Sale. Subject to the terms ------------------------------- of this Agreement, the proceeds of any sale of Collateral pursuant to Section 10, as well as any Collateral consisting of cash, shall be applied by the Agent as follows: FIRST, to the payment of all reasonable costs and expenses incurred by the Lenders and the Agent in connection with such sale or otherwise in connection with this Agreement, including all court costs and the reasonable fees and expenses of their agents and legal counsel, the repayment of all advances made by the Lenders hereunder on behalf of each Pledgor and any other reasonable costs or expenses incurred in connection with the exercise of any right or remedy hereunder; SECOND, to the payment in full of the Obligations; and THIRD, to each Pledgor in proportion to its right, title and interest in, to and under the Collateral, its successors or assigns, or as a court of competent jurisdiction may otherwise direct. SECTION 10.8. Responsibilities of the Agent. (a) Other than the ----------------------------- exercise of reasonable care in the custody of the Collateral, the Agent shall have no responsibility for or duty with respect to any Collateral or any matter or proceedings arising out of or relating thereto. The Agent shall be deemed to have exercised reasonable care in the custody and preservation of the Collateral in its possession if the Collateral is accorded treatment substantially equal to that which it accords its own property. (b) In exercising or refraining from exercising its rights hereunder, the Agent shall not be liable or responsible for any loss or damage to any of the Collateral, or for any diminution in the 57 value thereof, by reason of the act or omission of any agent or bailee selected by the Agent in good faith. (c) The Agent may consult with legal counsel, and shall be fully protected in taking, or omitting to take, any action in good faith reliance thereon. (d) Neither the Agent nor any of its directors, officers, employees, agents or counsel shall be liable for any action lawfully taken or omitted to be taken by it hereunder or in connection herewith, except for its own gross negligence or willful misconduct, and the Agent shall not be liable for any error of judgment made by it in good faith. SECTION 10.9. Termination; Release Reinstatement. (a) The security ---------------------------------- interest granted hereby shall terminate when all the Obligations have been indefeasibly paid in full and the Lenders have no further commitment to lend under this Agreement. (b) Upon any sale or other transfer by any Pledgor of any Collateral that is permitted under this Agreement, or, upon the effectiveness of any written consent to the release of the security interest granted hereby in any Collateral pursuant to this Agreement, the security interest in such Collateral shall be automatically released. (c) This Agreement shall remain in full force and effect and continue to be effective should any petition be filed by or against each Pledgor for liquidation or reorganization, should such Pledgor become insolvent or make an assignment for the benefit of creditors or should a receiver or trustee be appointed for all or any significant part of such Pledgor's assets. This Section shall continue to be effective or be reinstated, as the case may be, if at any time payment and performance of the Obligations, or any part thereof, is, pursuant to applicable Law, rescinded or reduced in amount, or must otherwise be restored or returned by any obligee of the Obligations, whether as a voidable preference, fraudulent conveyance, or otherwise, all as though such payment or performance had not been made. In the event that any payment, or any part thereof, is rescinded, reduced, restored or returned, the Obligations shall be reinstated and deemed reduced only by such amount paid and not so rescinded, reduced, restored or returned. (d) In connection with any termination or release pursuant to this Section 10.9, the Agent shall execute and deliver to each Pledgor, at such Pledgor's sole expense, all documents that such Pledgor shall reasonably request to evidence such termination or release, in each case without recourse, representations or warranties of any kind. SECTION 10.10. Security Interest Absolute. All rights of the Agent and -------------------------- the Lenders hereunder, the grant of a security interest in the Collateral and all obligations of each Pledgor hereunder, shall be absolute and unconditional irrespective of: (a) Any claim as to the validity, regularity or enforceability of this Agreement or any other Loan Document, any agreement with respect to any of the Obligations or any other agreement or instrument relating to any of the foregoing; (b) Any change in the time, manner or place of payment of, or in any other term of, all of or any of the Obligations, or any other amendment or waiver of or any consent to any departure 58 from this Agreement, any other Loan Document or any other agreement or instrument relating to any of the foregoing; (c) Any change in the corporate existence, structure or ownership of any issuer of Pledged Securities, or any liquidation, dissolution, insolvency, reorganization or other similar proceeding affecting any such issuer or its assets; (d) Any change in the Laws of any jurisdiction; (e) The occurrence of any Default or Event of Default; (f) Any exchange, release or non-perfection of the Lenders' security interest in any other Collateral, or any release or amendment or waiver of or consent to or departure from any guaranty, for all or any of the Obligations; or (g) Any other circumstance that might otherwise constitute a defense available to, or a discharge of, such Pledgor in respect of the Obligations or in respect of this Agreement (other than the indefeasible payment in full of all Obligations). SECTION 11. MISCELLANEOUS SECTION 11.1. Representation of the Lenders. Each Lender hereby ----------------------------- represents that it is a commercial lender which makes loans in the ordinary course of its business and that it will make Bridge Loans hereunder for its own account or the account of its Affiliates in the ordinary course of such business. SECTION 11.2. Participations in and Assignments of Bridge Loans. (a) ------------------------------------------------- Each Lender shall have the right at any time to sell, assign, transfer or negotiate all or any portion of its Bridge Loans or its Bridge Loan Commitment in an aggregate amount of not less than $5,000,000 to any Eligible Assignee. In the case of any sale, transfer or negotiation of all or part of any Bridge Loan or any Bridge Loan Commitment authorized under this Section 11.2(a), the assignee, transferee or recipient shall become a party to this Agreement as a Lender by execution of an assignment and assumption agreement substantially in the form of Exhibit D hereto; provided, that (i) at such time Section 2.1 shall -------- be deemed modified to reflect the Bridge Loan Commitment of such new Lender and of the existing Lenders, (ii) upon surrender of the Bridge Notes evidencing all or any portion of any Bridge Loan so sold, transferred, assigned or negotiated, new Bridge Notes will be issued, at the Borrower's expense to such new Lender and to the assigning Lender, such new Bridge Notes to be in conformity with the requirements of Section 2.4 (with appropriate modifications), and (iii) PSCC shall receive at the time of each such assignment, from the assigning or assignee Lender, the payment of a non-refundable assignment fee of $3,500. To the extent of any assignment pursuant to this Section 11.2(a), the assigning Lender shall be relieved of its obligations hereunder with respect to its assigned Bridge Loan or Bridge Loan Commitment, and the assignee, transferee or recipient shall have, to the extent of such sale, assignment, transfer or negotiation, the same rights, benefits and obligations as it would if it were a Lender with respect to such Bridge Loan or Bridge Loan Commitment, including, without limitation, the right to approve or disapprove actions which, in accordance 59 with the terms hereof, require the approval of a Lender. At the time of each assignment pursuant to this Section 11.2(a) to an Eligible Assignee which is not already a Lender hereunder and which is not a United States Person (as such term is defined in Section 7701 (a) (30) of the Internal Revenue Code) for Federal income tax purposes, the respective Eligible Assignee shall provide to the Borrower and the Agent the appropriate Internal Revenue Service Forms (and, if applicable a Section 11.2(e)(ii) Certificate) described in Section 11.2(e). (b) Each Lender may grant participations in all or any part of its Bridge Loans or its Bridge Loan Commitment in an aggregate amount of not less than $5,000,000 to any Eligible Assignee. (c) The Borrower shall, at its own cost and expense, provide such certificates, acknowledgments and further assurances in respect of this Agreement and the Bridge Loans as any Lender may reasonably require in connection with any participation, transfer or assignment pursuant to this Section 11.2. (d) Nothing in this Agreement shall prevent or prohibit any Lender from pledging its Bridge Notes hereunder to a Federal Reserve Bank in support of borrowings made by such Lender from such Federal Reserve Bank. (e) Each Lender that is an assignee or transferee of an interest under this Agreement pursuant to Section 11.2(a) (unless the respective Lender was already a Lender hereunder immediately prior to such assignment or transfer) and that is not a United States Person (as such term is defined in Section 7701 (a) (30) of the Internal Revenue Code) agrees to deliver to the Borrower and the Agent, on the date of such assignment or transfer to such Lender, (i) two accurate and complete original signed copies of Internal Revenue Service Form W- 8ECI or W-8BEN Parts I and II including such Lender's U.S. taxpayer identification number (or successor forms) certifying to such Lender's entitlement to a complete exemption from United States withholding tax with respect to payments to be made under this Agreement and under any Bridge Note, or (ii) if the Lender is not a "bank" within the meaning of Section 881(c) (3) (A) of the Internal Revenue Code and cannot deliver either Internal Revenue Service Form W-8ECI or W-8BEN Parts I and II (or successor forms) pursuant to clause (i) above, (X) a certificate substantially in the form of Exhibit E hereto (a "Section 11.2(e)(ii) Certificate") stating that such Lender is not a "bank" within the meaning of Section 881(c)(3)(A) of the Code and (Y) two accurate and complete original signed copies of Internal Revenue Service Form W- 8BEN Part I only (or successor form) certifying to such Lender's entitlement to a complete exemption from United States withholding tax with respect to payments of interest to be made under this Agreement and under any Bridge Note. In addition, each Lender agrees that, when a lapse in time or change in circumstances renders the previous certification obsolete or inaccurate in any material respect, it will deliver to the Borrower and the Agent two new accurate and complete original signed copies of Internal Revenue Service Form W-8ECI or W-8BEN (or successor forms), or a Section 11.2(e)(ii) Certificate and Form W- 8BEN Part I only (or successor form), as the case may be, and such other forms as may be required in order to confirm or establish the entitlement of such Lender to a continued exemption from or reduction in United States withholding tax with respect to payments under this Agreement and any Bridge Note, or it shall immediately notify the Borrower and the Agent of its inability to deliver any such form or certificate; provided, however, that the Lender shall not be -------- ------- obligated to complete and deliver any 60 form requiring disclosure of information or statements that it considers to be confidential or otherwise disadvantageous to disclose. Subject to the immediately succeeding sentence, and notwithstanding Section 2.9, the Borrower shall be entitled, to the extent they are required to do so by law, to deduct or withhold income or similar taxes imposed by the United States (or any political subdivision or taxing authority thereof or therein) from interest, fees or other amounts payable hereunder or made on any other Loan Document for the account of any Lender which is not a United States Person (as such term is defined in Section 7701 (a) (30) of the Internal Revenue Code) for U.S. Federal income tax purposes to the extent that such Lender has not provided to the Borrower U.S. Internal Revenue Service Forms that establish a complete exemption from such deduction or withholding. Notwithstanding anything to the contrary contained in the preceding sentence or elsewhere in this Section 11.2(e), the Borrower agrees to pay additional amounts and to indemnify and hold harmless each Lender (without regard to the identity of the jurisdiction requiring the deduction or withholding), and reimburse such Lender upon its written request, in respect of any amounts deducted or withheld by it as described in the immediately preceding sentence as a result of any changes after the date of any assignment or transfer in any applicable Law or treaty, or in the interpretation thereof, relating to the deducting or withholding of income or similar taxes. SECTION 11.3. Expenses. Whether or not the transactions contemplated -------- hereby shall be consummated, the Borrower and the Guarantor, jointly and severally, agree to pay on demand (i) all reasonable costs and expenses of preparation of the Loan Documents and all the costs of furnishing all opinions by counsel for the Loan Parties (including without limitation any opinions requested by the Lenders as to any legal matters arising hereunder), and of the Loan Parties' performance of and compliance with all agreements and conditions contained herein on their part to be performed or complied with; (ii) the reasonable fees, expenses and disbursements of Cleary, Gottlieb, Steen & Hamilton in connection with the negotiation, preparation, execution and administration of the Loan Documents, and any amendments, modifications and waivers thereto and consents to departures from the terms thereof; (iii) all costs and expenses incurred by the Lenders or the Agent in connection with the custody or preservation of any of the Collateral in accordance with the terms hereof; and (iv) after the occurrence of an Event of Default, all costs and expenses (including reasonable attorneys' fees, including allocated costs of internal counsel, and costs of settlement) incurred by the Lenders or the Agent in enforcing any Obligations of or in collecting any payments due from the Loan Parties hereunder or under the Bridge Notes by reason of such Event of Default (including, without limitation, in connection with the sale of, collection from, or other realization upon, any of the Collateral in accordance with the terms hereof or the exercise or enforcement of any of the rights of the pledgees hereunder) or in connection with any refinancing or restructuring of the credit arrangements provided under this Agreement in the nature of a "work-out" or of any insolvency or bankruptcy proceedings. SECTION 11.4. Indemnity. In addition to the payment of expenses --------- pursuant to Section 11.3, whether or not the transactions contemplated hereby shall be consummated, the Borrower and the Guarantor, jointly and severally, agree to indemnify, pay and hold each of the Lenders and the Agent, and each of their respective officers, directors, employees, agents, representatives and affiliates (collectively called the "Indemnitees"), harmless from and against any and all other liabilities, obligations, losses, damages, penalties, actions, judgments, suits, claims, costs, expenses and disbursements of any kind or nature whatsoever (including, without 61 limitation, the reasonable fees and disbursements of counsel for such Indemnitees in connection with any investigative, administrative or judicial proceeding commenced or threatened, whether or not such Indemnitee shall be designated as a party thereto), which may be suffered by, imposed on, incurred by, or asserted against that Indemnitee, in any manner resulting from, connected with, in respect of, relating to or arising out of this Agreement, the other Loan Documents or the Lenders' agreements to make Bridge Loans or the use or intended use of any of the proceeds of the Bridge Loans hereunder or the issuance of the Refinancing Securities or the breach of any representation, warranty or covenant in this Agreement (the "Indemnified Liabilities"); provided, that the Loan Parties shall have no obligation to an Indemnitee - -------- hereunder with respect to Indemnified Liabilities to the extent such liabilities are determined by a court of competent jurisdiction by final and nonappealable judgment to have resulted primarily from the gross negligence or willful misconduct of that Indemnitee. To the extent that the undertaking to indemnify, pay and hold harmless set forth in the preceding sentence may be unenforceable because it is violative of any law or public policy, the Loan Parties shall contribute the maximum portion which they are permitted to pay and satisfy under applicable law to the payment and satisfaction of all Indemnified Liabilities incurred by the Indemnitees or any of them. SECTION 11.5. Setoff. In addition to any rights now or hereafter ------ granted under applicable law and not by way of limitation of any such rights, upon the occurrence and during the continuance of any Event of Default, each Lender and the Agent is hereby authorized by any Loan Parties at any time or from time to time, without notice to such Loan Party or to any other Person, any such notice being hereby expressly waived, to set off and to appropriate and to apply any and all deposits (general or special, including, but not limited to, Indebtedness evidenced by certificates of deposit, whether matured or unmatured but not including trust accounts or any other accounts held for the benefit of another Person) and any other Indebtedness at any time held or owing by such Person to or for the credit or the account of such Loan Party against and on account of the obligations and liabilities of such Loan Party to such Person under this Agreement and the Bridge Notes, including, but not limited to, all claims of any nature or description arising out of or connected with this Agreement or the Bridge Notes, irrespective of whether or not (a) such Person shall have made any demand hereunder or (b) such Person shall have declared the principal of or the interest on its portion of any Bridge Loan to be immediately due and payable and although said obligations and liabilities, or any of them, may be contingent or unmatured. SECTION 11.6. Amendments and Waivers. No amendment, modification, ---------------------- termination or waiver of any term or provision of this Agreement, of the Bridge Notes or any Guarantee or consent to any departure by any Loan Party therefrom, shall in any event be effective without the prior written concurrence of such Loan Party and the Agent and the Required Lenders, and, upon the request of any Lender, the receipt of a written opinion of counsel of such Loan Party addressed to the Lenders to the effect that such amendment, modification, termination, waiver or consent does not violate or conflict with any of the terms and provisions of any Contract of such Loan Party in respect of Indebtedness for money borrowed or other material agreement of such Loan Party otherwise known to such counsel after reasonable inquiry; provided, that, notwithstanding the third -------- sentence of Section 11.15, without the prior written consent of each Lender and the acknowledgement of the Agent, an amendment, modification, termination or waiver of this Agreement, any Bridge Notes or any Guarantee or consent to departure from a term or provision hereof or thereof may not: (i) increase or extend 62 the Bridge Loan Commitment; (ii) reduce the principal amount of any Bridge Loan; (iii) reduce the rate of or extend the time for payment of principal or interest on any Bridge Loan; (iv) reduce the principal amount of any Bridge Loan; (v) make any Bridge Loan payable in money other than that stated herein; (vi) make any change to this Section 11.6; (vii) reduce the rate or extend the time of payment of fees or other compensation payable to the Lenders hereunder; and provided, further, that without the consent of the Agent, no such amendment, - -------- ------- modification, termination or waiver may amend, modify, terminate or waive any provision of Section 8 as the same applies to the Agent or any other provision of this Agreement as it relates to the rights or obligations of the Agent. Any waiver or consent shall be effective only in the specific instance and for the specific purpose for which it was given. No notice to or demand on any Loan Party in any case shall entitle such Loan Party to any further notice or demand in similar or other circumstances. SECTION 11.7. Independence of Covenants. All covenants hereunder ------------------------- shall be given independent effect so that if a particular action or condition is not permitted by any of such covenants, the fact that it would be permitted by an exception to, or be otherwise within the limitation of, another covenant shall not avoid the occurrence of an Event of Default or Default if such action is taken or condition exists. SECTION 11.8. Entirety. The Loan Documents embody the entire -------- agreement of the parties and supersede all prior agreements and understandings, if any, relating to the subject matter hereof and thereof. SECTION 11.9. Notices. Unless otherwise provided herein, any notice ------- or other communications herein required or permitted to be given shall be in writing and may be personally served, telecopied, telexed or sent by mail and shall be deemed to have been given when delivered in person, upon receipt of telecopy or telex against receipt of answer back or four Business Days after depositing it in the mail, registered or certified, with postage prepaid and properly addressed; provided, that notices shall not be effective until -------- received. For the purposes hereof, the addresses of the parties hereto (until notice of a change thereof is delivered as provided in this Section 11.9) shall be set forth under each party's name on the signature pages hereto. SECTION 11.10. Survival of Warranties and Certain Agreements. (a) All --------------------------------------------- agreements, representations and warranties made herein shall survive the execution and delivery of this Agreement, the making of the Bridge Loans hereunder and the execution and delivery of the Bridge Notes and, notwithstanding the making of the Bridge Loans, the execution and delivery of the Bridge Notes or any investigation made by or on behalf of any party, shall continue in full force and effect. The closing of the transactions herein contemplated shall not prejudice any right of one party against any other party in respect of anything done or omitted hereunder or in respect of any right to damages or other remedies. (b) Notwithstanding anything in this Agreement or implied by law to the contrary, the agreements of any Loan Party set forth in Sections 2.9, 2.10, 11.3, 11.4, 11.11, 11.15, 11.18, 11.19, and 11.20 shall survive the payment of and the termination of this Agreement. 63 SECTION 11.11. Failure or Indulgence Not Waiver; Remedies Cumulative. ----------------------------------------------------- No failure or delay on the part of the Agent or any Lender in the exercise of any power, right or privilege hereunder, under a Guarantee or under the Bridge Notes shall impair such power, right or privilege or be construed to be a waiver of any default or acquiescence therein, nor shall any single or partial exercise of any such power, right or privilege preclude other or further exercise thereof or of any other right, power or privilege. All rights and remedies existing under this Agreement, under a Guarantee or the Bridge Notes are cumulative to and not exclusive of any rights or remedies otherwise available. SECTION 11.12. Severability. In case any provision in or obligation ------------ under this Agreement, under a Guarantee or the Bridge Notes shall be invalid, illegal or unenforceable in any jurisdiction, then, to the fullest extent permitted by law, the other provisions hereof shall remain in full force and effect in such jurisdiction and shall be liberally construed in favor of the Lenders in order to carry out intentions of the parties hereto as nearly as may be possible. The invalidity, illegality or unenforceability of any provision hereof in any jurisdiction shall not affect the validity or enforceability of such provision in any other jurisdiction. SECTION 11.13. Headings. Section and Sub-section headings in this -------- Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose or be given any substantive effect. SECTION 11.14. Governing Law; Consent to Jurisdiction; Venue; Waiver ----------------------------------------------------- of Jury Trial. (a) THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED AND - ------------- INTERPRETED IN ACCORDANCE WITH THE LAW OF THE STATE OF NEW YORK. (a) Any legal action or proceeding with respect to the Bridge Notes, this Agreement or the other Loan Documents may be brought in the courts of the State of New York or of the United States for the Southern District of New York, and each of the parties to this Agreement hereby irrevocably accepts for itself and in respect of its respective Property, generally and unconditionally, the jurisdiction of the aforesaid courts. Each Loan Party irrevocably appoints Corporation Service Company, 80 State Street, Albany, New York, 12207-2543, as its agent to receive service of process or other legal summons for purposes of any such action or proceeding. So long as any Loan Party has any obligation under this Agreement, the Bridge Notes or the Guarantee, it will maintain a duly appointed agent in the State of New York for the service of such process or summons, and if such Loan Party fails to maintain such an agent, any such process or summons may be served by mailing a copy thereof by registered mail, or a form of mail substantially equivalent thereto, addressed to it at its address as provided for notices hereunder. Each of the parties to this Agreement hereby further irrevocably waives any claim that any such courts lack jurisdiction over such party, and agrees not to plead or claim, in any legal action, or proceeding with respect to this Agreement brought in any of the aforesaid courts, that any such court lacks jurisdiction over such party. Each of the parties to this Agreement irrevocably consents to the service of process in any such action or proceeding by the mailing of copies thereof by registered or certified mail, postage prepaid, to such party, at its respective address for notices pursuant to Section 11.9, such service to become effective 30 days after such mailing. To the extent permitted by law, each of the parties to this Agreement hereby irrevocably waives any objection to such service of process and further irrevocably waives and agrees not to plead or claim in any action or proceeding commenced hereunder that service of 64 process was in any way invalid or ineffective. Nothing herein shall affect the right of any party to this Agreement to serve process in any other manner permitted by law or to commence legal proceedings or otherwise proceed against any party in any other jurisdiction. (b) Any such action or proceeding may be brought and enforced in the courts of Bermuda, Ireland, the Commonwealth of Pennsylvania, the State of Missouri or any other jurisdiction where any Loan Party or any of its property may be found, and each such Loan Party irrevocably submits to the jurisdiction of each such court in respect of any such action or proceeding. (c) Each Loan Party irrevocably waives all immunity (whether on the basis of sovereignty or otherwise) from jurisdiction, attachment (both before and after judgment) and execution to which it might otherwise be entitled in any action or proceeding relating in any way to this Agreement, the Bridge Notes or the Guarantee in the courts of Bermuda, of Ireland, of the States of New York, Pennsylvania or Missouri, of the United States or of any other country or jurisdiction, and each Loan Party shall not raise or claim or cause to be pleaded any such immunity at or in respect of any such action or proceeding. (d) Each of the parties to this Agreement hereby irrevocably waives any objection which it may now or hereafter have to the laying of venue of any of the aforesaid actions or proceedings arising out of or in connection with this Agreement brought in the courts referred to in clause (b) or (c) above and hereby further irrevocably waives and agrees not to plead or claim in any such court that any such action or proceeding brought in any such court has been brought in an inconvenient forum. (e) TO THE EXTENT PERMITTED BY LAW, EACH OF THE PARTIES TO THIS AGREEMENT HEREBY IRREVOCABLY WAIVES SUCH PARTY'S RESPECTIVE RIGHTS TO A JURY TRIAL WITH RESPECT TO ANY ACTION, CLAIM OR OTHER PROCEEDING ARISING OUT OF ANY DISPUTE IN CONNECTION WITH THIS AGREEMENT, ANY RIGHTS OR OBLIGATIONS HEREUNDER OR THE PERFORMANCE OF SUCH RIGHTS AND OBLIGATIONS. SECTION 11.15. Successors and Assigns. This Agreement shall be binding ---------------------- upon the parties hereto and their respective successors and assigns and shall inure to the benefit of the parties hereto and the successors and assigns of the Lenders. The terms and provisions of this Agreement and each Guarantee shall inure to the benefit of any assignee or transferee of the Bridge Loans pursuant to Section 11.2(a), and in the event of such transfer or assignment, the rights and privileges herein conferred upon the Lenders shall automatically extend to and be vested in such transferee or assignee which becomes a Lender pursuant to Section 11.2(a), all subject to the terms and conditions hereof. Except as provided in Section 11.6, in determining whether the holders of a sufficient aggregate principal amount of the Bridge Loans shall have consented to any action under this Agreement, any amount of the Bridge Loans owned or held by the Borrower, the Pledgors and the Guarantor or any of their respective Affiliates shall be disregarded. The Loan Parties' rights or interest therein hereunder may not be assigned without the prior express written consent of each of the Lenders. 65 SECTION 11.16. Counterparts; Effectiveness. This Agreement and any --------------------------- amendments, waivers, consents or supplements hereto may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument. SECTION 11.17. Payments Pro Rata. (a) The Agent agrees that promptly ----------------- after its receipt of each payment of any interest or principal of the Bridge Loans from or on behalf of the Borrower or the Guarantor, it shall, except as otherwise provided in this Agreement, distribute such payment to the Lenders (other than any Lender that has consented in writing to waive its pro rata share of such payment) pro rata based upon their respective pro rata shares, if any, of such payment. (b) Each of the Lenders agrees that, if it should receive any amount hereunder (whether by voluntary payment, by realization upon security, by the exercise of the right of set-off or banker's lien, by counterclaim or cross action, by the enforcement of any right under the Loan Documents, or otherwise) which is applicable to the payment of the principal of, or interest on, any Bridge Loan of a sum which with respect to the related sum or sums received by other Lenders is in a greater proportion than the total of such Obligation then owed and due to such Lender bears to the total of such Obligation then owed and due to all of the Lenders immediately prior to such receipt, then such Lender receiving such excess payment shall purchase for cash without recourse or warranty from the other Lenders an interest in the Obligations of the Borrower to such Lenders in such amount as shall result in a proportional participation by all of the Lenders in such amount; provided, that, if all or any portion of -------- such excess amount is thereafter recovered from such Lender, such purchase shall be rescinded and the purchase price restored to the extent of such recovery, but without interest. SECTION 11.18. Waiver of Stay, Extension or Usury Laws. The Loan --------------------------------------- Parties covenant (to the extent that they may lawfully do so) that they will not at any time insist upon, plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay or extension law or any usury law or other law that would prohibit or forgive the Loan Parties from paying all or any portion of the principal of or interest on the Bridge Loans as contemplated herein, wherever enacted, now or at any time hereafter in force, or which may affect the covenants or the performance of this Agreement; and (to the extent that it may lawfully do so) the Loan Parties hereby expressly waive all benefit or advantage of any such law, and covenants that it will not hinder, delay or impede the execution of any power herein granted to the Agent, but will suffer and permit the execution of every such power as though no such law had been enacted. SECTION 11.19. Confidentiality. Each Lender shall hold all non-public --------------- information obtained pursuant to the requirements of or in connection with this Agreement which has been identified as confidential by the Borrower in accordance with such Lender's customary procedures for handling confidential information of this nature, it being understood and agreed by the Borrower that (i) in any event a Lender may make disclosures reasonably required by any bona fide assignee, transferee or participant in connection with the contemplated assignment or transfer by such Lender of any Bridge Loan or any participation therein or as required or requested by any governmental agency or representative thereof or pursuant to legal 66 process; provided, that unless specifically prohibited by applicable law or - -------- court order, each Lender shall notify the Borrower of any request by any governmental agency or representative thereof (other than any such request in connection with any examination of the financial condition of such Lender by such governmental agency) for disclosure of any such non-public information prior to disclosure of such information and (ii) a Lender may share with any of its Affiliates, and such Affiliates may share with any Lender, any information related to the Borrower or any of its Affiliates (including information relating to creditworthiness); and provided, further, that in no event shall any Lender -------- ------- be obligated or required to return any materials furnished by the Borrower or any of its Subsidiaries. In connection with any sales, assignments or transfers referred to in Section 11.2(a), a Lender shall obtain agreements from the purchasers, assignees or transferees, as the case may be, reasonably satisfactory to the Borrower, that such parties will comply with this Section 11.19. SECTION 11.20. Compensation. The Borrower shall compensate each ------------ Lender, upon its written request (which request shall set forth the basis for requesting such compensation), for all reasonable losses, expenses and liabilities (including, without limitation, any loss, expense or liability incurred by reason of the liquidation or reemployment of deposits or other funds required by such Lender to fund its Bridge Loan but excluding loss of anticipated profit with respect to any Bridge Loan) which such Lender may sustain: (i) if for any reason (other than a default by such Lender or the Agent) a borrowing under any Bridge Loan does not occur on a date specified therefor in the notice of borrowing (whether or not withdrawn by the Borrower); (ii) if any repayment of any Bridge Loan occurs on a date which is not the last day of an Interest Period applicable thereto; (iii) if any prepayment of any Bridge Loan is not made on any date specified in a notice of prepayment given by the Borrower; or (iv) as a consequence of any other default by the Borrower to repay any Bridge Loan when required by the terms of this Agreement. Calculation of all amounts payable to a Lender under this Section 11.20 shall be made as though that Lender had actually funded the relevant Bridge Loan utilizing the Applicable Interest Rate, through the purchase of a LIBOR rate deposit bearing interest at the Applicable Interest Rate in an amount equal to the amount of that Bridge Loan, having a maturity comparable to the relevant Interest Period. 67 WITNESS the due execution hereof by the respective duly authorized officers of the undersigned as of the date first written above. BORROWER: MUTUAL RISK MANAGEMENT LTD. By:__________________________________ Name: Title: Notice Address: -------------- 44 Church Street P.O. Box HM 2064 Hamilton, HM HX, Bermuda Attention: Richard O'Brien --------- Telephone: (441) 295-5688 Telecopy: (441) 292-1867 GUARANTOR: MUTUAL GROUP, LTD. By:__________________________________ Name: Title: Notice Address: -------------- One Logan Square Suite 1400 P.O. Box 59239 Philadelphia, PA 19103 Attention: Andrew Walsh --------- Telephone: (215) 963-1240 Telecopy: (215) 963-1210 PLEDGORS: MUTUAL RISK MANAGEMENT LTD. By:__________________________________ Name: Title: Notice Address: -------------- 44 Church Street P.O. Box HM 2064 Hamilton, HM HX, Bermuda Attention: Richard O'Brien --------- Telephone: (441) 295-5688 Telecopy: (441) 292-1867 MUTUAL RISK MANAGEMENT (HOLDINGS) LTD. By:__________________________________ Name: Title: Notice Address: -------------- 44 Church Street P.O. Box HM 2064 Hamilton, HM HX, Bermuda Attention: Richard O'Brien --------- Telephone: (441) 295-5688 Telecopy: (441) 292-1867 MUTUAL GROUP, LTD. By:__________________________________ Name: Title: Notice Address: -------------- One Logan Square Suite 1400 P.O. Box 59239 Philadelphia, PA 19103 Attention: Andrew Walsh --------- Telephone: (215) 963-1240 Telecopy: (215) 963-1210 LEGION FINANCIAL CORPORATION By:__________________________________ Name: Title: Notice Address: -------------- One Logan Square Suite 1400 P.O. Box 59239 Philadelphia, PA 19103 Attention: Andrew Walsh --------- Telephone: (215) 963-1240 Telecopy: (215) 963-1210 LENDERS: PRUDENTIAL SECURITIES CREDIT CORP. By:__________________________________ Name: Title: Notice Address: -------------- One New York Plaza, 14/th/ floor New York, NY 10292 Attention: Fred Angelo --------- Telephone: (212) 214-7365 Telecopy: (212) 214-7678 AGENT: PRUDENTIAL SECURITIES CREDIT CORP. as Agent By:__________________________________ Name: Title: Notice Address: -------------- One New York Plaza, 14/th/ floor New York, NY 10292 Attention: Fred Angelo --------- Telephone: (212) 214-7365 Telecopy: (212) 214-7678 COLLATERAL SUBSIDIARIES: MUTUAL RISK MANAGEMENT (HOLDINGS) LTD. By:__________________________________ Name: Title: Notice Address: -------------- 44 Church Street P.O. Box HM 2064 Hamilton, HM HX, Bermuda Attention: Richard O'Brien --------- Telephone: (441) 295-5688 Telecopy: (441) 292-1867 MUTUAL INDEMNITY (DUBLIN) LTD. By:__________________________________ Name: Title: Notice Address: -------------- 44 Church Street P.O. Box HM 2064 Hamilton, HM HX, Bermuda Attention: Richard O'Brien --------- Telephone: (441) 295-5688 Telecopy: (441) 292-1867 MUTUAL HOLDINGS (BERMUDA) LTD. By:__________________________________ Name: Title: Notice Address: -------------- 44 Church Street P.O. Box HM 2064 Hamilton, HM HX, Bermuda Attention: Richard O'Brien --------- Telephone: (441) 295-5688 Telecopy: (441) 292-1867 IPC MUTUAL HOLDINGS, LTD. By:__________________________________ Name: Title: Notice Address: -------------- 44 Church Street P.O. Box HM 2064 Hamilton, HM HX, Bermuda Attention: Richard O'Brien --------- Telephone: (441) 295-5688 Telecopy: (441) 292-1867 LEGION FINANCIAL CORPORATION By:__________________________________ Name: Title: Notice Address: -------------- One Logan Square Suite 1400 P.O. Box 59239 Philadelphia, PA 19103 Attention: Andrew Walsh --------- Telephone: (215) 963-1240 Telecopy: (215) 963-1210 LEGION INSURANCE COMPANY By:__________________________________ Name: Title: Notice Address: -------------- One Logan Square Suite 1400 P.O. Box 59239 Philadelphia, PA 19103 Attention: Andrew Walsh --------- Telephone: (215) 963-1240 Telecopy: (215) 963-1210 Schedule 3.10 ------------- LIST OF SUBSIDIARIES/1/ SUBSIDIARY JURISDICTION OF ORGANIZATION - ------------------------------------------------------------------------------ Alpine Meadows Bermuda Capital Management of Bermuda Ltd. Bermuda Captive Resources, Inc. Delaware CFM Insurance Managers Ltd. Bermuda Commonwealth Risk Services, LP Delaware Commonwealth Risk Services (Europe) Limited United Kingdom CompFirst, Inc. Georgia Continental Benefit Company Bermuda Genesis Holdings Cayman H&H Reinsurance Brokers, Ltd. Bermuda Hamilton Management Ltd. Wisconsin Hemisphere Financial Services, LLC Delaware Hemisphere Management Ltd. Bermuda Hugo Trust Company United Kingdom Hurst Holme Insurance Company Ltd. Bermuda International Advisory Services, Ltd. Bermuda IPC Mutual Holdings Ltd. (Bermuda) Bermuda Kensington Management Group, Ltd. Cayman Legion Insurance Company Pennsylvania Legion Financial Corporation Missouri Legion Management Corporation Oklahoma Legion Indemnity Company Illinois Livery Management, Inc. Delaware M&A Holdings Ltd. Bermuda Market Reinsurance Intermediaries, Inc. California MG Financial Ltd. Delaware MGL Investments, Ltd. Delaware MRM Reinsurance Brokers Bermuda MRM Financial Services Limited Bermuda MRM Hancock Limited United Kingdom MRM Life Ltd. Bermuda Mutual Finance Ltd. Bermuda Mutual Group Ltd. Delaware Mutual Holdings (Bermuda) Ltd. Bermuda _____________________ /1/ The above list is all of the subsidiaries of the Borrower except for various subsidiaries and investments that would not in the aggregate represent a material subsidiary. For this purpose a "material subsidiary" means a subsidiary that would represent more than 10% of the total assets or net income of the Borrower. S-1-1 Mutual Holdings Ltd. Delaware Mutual Holdings (U.S.) Ltd. Delaware Mutual Indemnity (U.S.) Ltd. Bermuda Mutual Indemnity (Dublin) Ltd. Ireland Mutual Indemnity (Barbados) Ltd. Barbados Mutual Indemnity (Bermuda) Ltd. Bermuda Mutual Indemnity Ltd. Bermuda Mutual Risk Captive Group Bermuda Mutual Risk Management (Cayman) Ltd. Cayman Mutual Risk Management (Barbados) Ltd. Barbados Mutual Risk Management (Holdings) Ltd. Bermuda Park International Limited Bermuda Premium Securities Bermuda Premium Securities (Bermuda) Ltd. Bermuda Professional Underwriters Corp Delaware PUC Midwest Acquisition Corp Delaware Renaissance Underwriting Managers, Inc. Georgia SBU Southeast, Inc. Delaware Shoreline Mutual Management (Bermuda) Ltd. Bermuda Tremont International Insurance Ltd. Cayman SPDA Bermuda Utility Management Insurance Services, Inc. Delaware Villanova Insurance Company Pennsylvania Worksafe, Inc. Delaware S-1-2 Schedule 3.25 ------------- EXECUTIVE OFFICES AND PLACES OF BUSINESS OF LOAN PARTIES - -------------------------------------------------------------------------------- Loan Party Chief Executive Office/Place of Business - ---------- ---------------------------------------- - -------------------------------------------------------------------------------- Mutual Risk Management, Ltd. 44 Church Street Hamilton HM HX, Bermuda - -------------------------------------------------------------------------------- Mutual Group, Ltd. One Logan Square, Suite 1400 Philadelphia, PA 19103 - -------------------------------------------------------------------------------- Mutual Risk Management (Holdings) Ltd. 44 Church Street Hamilton HM HX, Bermuda - -------------------------------------------------------------------------------- Legion Financial Corporation One Logan Square, Suite 1400 Philadelphia, PA 19103 - -------------------------------------------------------------------------------- Legion Insurance Company One Logan Square, Suite 1400 Philadelphia, PA 19103 - -------------------------------------------------------------------------------- Mutual Indemnity (Dublin) Ltd. Frederick House South Frederick Street Dublin 2, Ireland - -------------------------------------------------------------------------------- Mutual Holdings (Bermuda) Ltd. 44 Church Street Hamilton HM HX, Bermuda - -------------------------------------------------------------------------------- IPC Mutual Holdings, Ltd. 44 Church Street Hamilton HM HX, Bermuda - -------------------------------------------------------------------------------- S-2 Schedule 6.3 ------------ LIENS Charges against Mutual Indemnity (Dublin) Ltd.: - --------------------------------------------- 1. Charge over Deposits in favor or The Bank of N.T. Butterfield & Son Limited, dated February 26, 1993. 2. Custodian Accounts Charge in favor of The Bank of N.T. Butterfield & Son Limited as fiscal and collateral agent etc., dated November 1, 1996. S-3 Schedule 10.1-A --------------- LEGION PLEDGED SHARES
- ----------------------------------------------------------------------------------------------- Owner Certificate # Number and Type of Percentage of ----- ------------- ------------------ ------------- Shares Shares Outstanding ------ ------------------ - ----------------------------------------------------------------------------------------------- Legion Financial Corporation 58 39,992 100% Common Shares Par Value: $65 per Share - -----------------------------------------------------------------------------------------------
S-4-1 Schedule 10.1-B --------------- LEGION FINANCIAL CORPORATION PLEDGED SHARES - -------------------------------------------------------------------------------- Owner Certificate # Number and Type of Percentage of ----- ------------- ------------------ ------------- Shares Shares Outstanding ------ ------------------ - -------------------------------------------------------------------------------- Mutual Group, Ltd. 1 19,619 100% Common Shares - -------------------------------------------------------------------------------- S-4-2 Schedule 10.1-C --------------- MUTUAL HOLDINGS PLEDGED SHARES - -------------------------------------------------------------------------------- Owner Certificate # Number and Type of Percentage of Shares ----- ------------- ------------------ -------------------- Shares Outstanding/1/ ------ ------------- - -------------------------------------------------------------------------------- Mutual Risk Management 5 12,000 100% (Holdings) Ltd. Common Shares Par Value: US$1.0000 - -------------------------------------------------------------------------------- ________________ /1/ Not taking into account the MH Preferred Shares. S-4-3 Schedule 10.1-D --------------- IPC PLEDGED SHARES - -------------------------------------------------------------------------------- Owner Certificate # Number and Type of Percentage of ----- ------------- ------------------ ------------- Shares Shares Outstanding/1/ ------ --------------------- - -------------------------------------------------------------------------------- Mutual Group, Ltd. 9 11,995 Common Shares Par Value: US$1.0000 100% - ---------------------------------------------------------- Mutual Group, Ltd. 10 5 Common Shares Par Value: US$1.0000 - -------------------------------------------------------------------------------- ______________ /1/ Not taking into account the IPC Preferred Shares. S-4-4 Schedule 10.1-E --------------- MI DUBLIN PLEDGED SHARES
- ------------------------------------------------------------------------------------------------- Owner Certificate # Number and Type of Percentage of Shares ----- ------------- ------------------ -------------------- Shares Outstanding/1/ ------ -------------- - ------------------------------------------------------------------------------------------------- Mutual Risk Management, Ltd. 4 4,999,999 100% Ordinary Shares Par Value: US$1 - -------------------------------------------------------------------------------------------------
_______________ /1/ Not taking into account the MIDL Director Share. S-4-5 Schedule 10.1-F --------------- MUTUAL RISK HOLDINGS PLEDGED SHARES - -------------------------------------------------------------------------------- Owner Certificate # Number and Type Percentage of ----- ------------- --------------- ------------- of Shares Shares Outstanding --------- ------------------ - -------------------------------------------------------------------------------- Mutual Risk Management, Ltd. 1 12,000 100% Common Shares Par Value: US$1.0000 - -------------------------------------------------------------------------------- S-4-6 Schedule 10.2 ------------- PLEDGED SECURITIES Date: - ---- Collateral Subsidiary: - ---------------------- Pledgor: - ------- Pledged Shares - -------------- - -------------------------------------------------------------------------------- Owner Certificate # Number and Type of Shares; Percentage of Shares ----- ------------- -------------------------- -------------------- Par Value Outstanding --------- ----------- - -------------------------------------------------------------------------------- Pledgor ___% - -------------------------------------------------------------------------------- Additional Shares - ----------------- - -------------------------------------------------------------------------------- Owner Certificate # Number and Type of Shares; Percentage of Shares ----- ------------- -------------------------- -------------------- Par Value Outstanding --------- ----------- - -------------------------------------------------------------------------------- Pledgor ____% - -------------------------------------------------------------------------------- Other Securities, if any: - ------------------------- - -------------------------------------------------------------------------------- Owner Certificate # Number and Type of Shares; Percentage of Shares ----- ------------- -------------------------- -------------------- Par Value Outstanding --------- ----------- - -------------------------------------------------------------------------------- Pledgor ____% - -------------------------------------------------------------------------------- Pledged Securities: - ------------------- - ---------------------------------------------------------- Total Number of Shares; Percentage of Shares ----------------------- -------------------- Outstanding/1/ -------------- - ---------------------------------------------------------- 100% - ---------------------------------------------------------- _______________ /1/ Not taking into account (i) the MIDL Director Share in the case of Mutual Indemnity (Dublin) Ltd., (ii) the MH Preferred Shares in the case of Mutual Holdings (Bermuda) Ltd., and (iii) the IPC Preferred Shares in the case of IPC Mutual Holdings, Ltd. S-5-1 This Schedule is true and complete and is delivered to the Agent pursuant to Section 10.2 of the Credit Agreement. [PLEDGOR] By:_______________________ S-5-2 EXHIBIT A FORM OF BRIDGE NOTE ------------------- MUTUAL RISK MANAGEMENT LTD. PROMISSORY NOTE New York, New York $__________ [DATE] FOR VALUE RECEIVED, MUTUAL RISK MANAGEMENT LTD., a company incorporated under the laws of Bermuda (the "Company"), promises to pay to the order of __________ (the "Lender"), on the Maturity Date, the principal amount of __________ Dollars ($__________). The Company also promises to pay interest on the unpaid principal amount hereof from the date hereof until paid in full at the rates and at the times which shall be determined in accordance with the provisions of the Credit Agreement dated as of December 6, 1999, as the same may at any time be amended, modified or supplemented and in effect (the "Credit Agreement"), among the Company, the Guarantor, the Pledgors and Collateral Subsidiaries named therein, the Lenders from time to time party thereto and Prudential Securities Credit Corp., as Agent. This Note is issued pursuant to and entitled to the benefits of the Credit Agreement, to which reference is hereby made for a more complete statement of the terms and conditions under which the Bridge Loan evidenced hereby was made and is to be repaid. Capitalized terms used herein without definition shall have the meanings set forth in the Credit Agreement. The Payee is hereby authorized to endorse on the schedule attached to this Note (or on a continuation of any such schedule attached to this Note and made a part hereof) an appropriate notation evidencing the date and amount of each Bridge Loan, and each payment of principal made hereon, which schedule shall constitute prima facie evidence of the accuracy of the information ----- ----- contained therein. The failure of the Payee to make a notation on the schedule to this Note as aforesaid or the making of an incorrect notation by the Payee shall not affect the obligations of the Loan Parties hereunder or under the Credit Agreement or any other Loan Document in any respect. This Note is subject to mandatory prepayment as provided in subsections 2.12(c) and 2.12(d) of the Credit Agreement and prepayment at the option of the Company as provided in subsection 2.12(b) of the Credit Agreement. This Note is also subject to a mandatory offer to purchase upon the occurrence of a Change of Control, in accordance with Section 2.13 of the Credit Agreement. The full payment of this Note shall be (i) guaranteed by the Guarantor pursuant to Section 9 of the Credit Agreement and (ii) secured by the Collateral pursuant to Section 10 of the Credit Agreement. A-1 THIS NOTE SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. Upon the occurrence of an Event of Default, the unpaid balance of the principal amount of this Note, together with all accrued but unpaid interest thereon, may become, or may be declared to be, due and payable in the manner, upon the conditions and with the effect provided in the Credit Agreement. The terms of this Note are subject to amendment only in the manner provided in the Credit Agreement. No reference herein to the Credit Agreement and no provision of this Note or the Credit Agreement shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of and interest on this Note at the place, at the respective times, and in the currency herein prescribed. Pursuant to the provisions of the Credit Agreement, the Company promises to pay, after the occurrence of an Event of Default, all costs and expenses incurred by the Lenders or the Agent in enforcing any Obligations of or in collecting any payments due from the Company hereunder or under the Bridge Notes by reason of such Event of Default (including with respect to the sale of, collection from, or other realization upon, any of the Collateral) or in connection with any refinancing or restructuring of the credit arrangements provided in the Credit Agreement in the nature of a "work-out" or of any insolvency or bankruptcy proceedings. The Company and the other Loan Parties hereby consent to renewals and extensions of time at or after the maturity hereof, without notice, and hereby waive diligence, presentment, protest, demand and notice of every kind and, to the full extent permitted by law, the right to plead any statute of limitations as a defense to any demand hereunder. A-2 IN WITNESS WHEREOF, the Company has caused this Note to be executed and delivered by its duly authorized officer, as of the day and year and at the place first above written. MUTUAL RISK MANAGEMENT LTD. By: ___________________________ Name: A-3 TRANSACTIONS ON BRIDGE NOTE - ------------------------------------------------------------------------------- Amount of Amount of Interest Amount of Principal Paid Through This Date Bridge Loan Paid This Date Date Notation Made By - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- A-4 OPTION OF HOLDER TO ELECT PURCHASE (check as appropriate) In connection with the Change of Control Offer made pursuant to Section 2.12 of the Credit Agreement, the undersigned hereby elects to have [ ] the entire principal amount [ ] $________________ ($1,000,000 in principal amount or an integral multiple thereof) of this Note repurchased by the Company. The undersigned hereby directs the Agent to pay it or __________________________ an amount in cash equal to 101.0% of the principal amount indicated in the preceding sentence plus accrued and unpaid interest thereon, if any, to the Offer Payment Date. Dated: _______________________ _____________________________ Signature of Holder NOTICE: The signature to the foregoing must correspond to the Name as written upon the face of this Note in every particular, without alteration or any change whatsoever. A-5 EXHIBIT B FORM OF NOTICE OF BORROWING --------------------------- Prudential Securities Credit Corp., as Agent One New York Plaza, 14/th/ floor New York, NY 10292 Attention: Fred Angelo Ladies and Gentlemen: The undersigned, Mutual Risk Management Ltd. (the "Borrower"), refers to the Credit Agreement dated as of December 6, 1999, as amended, supplemented or restated from time to time (the "Credit Agreement," the terms defined therein being used herein as therein defined) among the Borrower, the Guarantor, the Pledgors and Collateral Subsidiaries named therein, the Lenders from time to time party thereto and Prudential Securities Credit Corp., as Agent, and hereby gives you notice pursuant to Section 2.2(a) of the Credit Agreement that the Borrower wishes to borrow under Section 2.1 of the Credit Agreement and, in that connection, sets forth below the information relating to such borrowing (the "Proposed Borrowing") as required by Section 2.2(a) of the Credit Agreement: (a) The date of the Proposed Borrowing, being a Business Day, is ______. (ii) The aggregate amount of the Proposed Borrowing is $__________. (iii) The Borrower wishes the proceeds of the Proposed Borrowing to be credit to the following account: Bank:_______________________________ Account Number:_____________________ Yours truly, MUTUAL RISK MANAGEMENT LTD. By:__________________________________ Name: Title: B-1 EXHIBIT C-1 FORM OF LEGAL OPINION OF MAYER, BROWN & PLATT, ---------------------------------------------- U.S. COUNSEL TO THE LOAN PARTIES -------------------------------- [Distributed separately] C-1-1 EXHIBIT C-2 FORM OF LEGAL OPINION OF CONYERS DILL & PEARMAN, ------------------------------------------------ BERMUDA COUNSEL --------------- TO THE BORROWER AND THE LOAN PARTIES ------------------------------------ [Distributed separately] C-2-1 EXHIBIT C-3 FORM OF LEGAL OPINION OF A & L GOODBODY, --------------------------------------- IRISH COUNSEL TO MUTUAL INDEMNITY (DUBLIN) LTD. ----------------------------------------------- [Distributed separately] C-3-1 EXHIBIT C-4 FORM OF LEGAL OPINION OF LEWIS, RICE & FINGERSH, ----------------------------------------------- MISSOURI COUNSEL TO LEGION FINANCIAL CORP. ------------------------------------------ [Distributed separately] C-4-1 EXHIBIT C-5 FORM OF LEGAL OPINION OF RICHARD O'BRIEN, ESQ. ---------------------------------------------- GENERAL COUNSEL TO THE BORROWER ------------------------------- [Distributed separately] C-5-1 EXHIBIT C-6 FORM OF LEGAL OPINION OF ANDREW WALSH, ESQ. ------------------------------------------- COUNSEL TO LEGION INSURANCE COMPANY ----------------------------------- [Distributed separately] C-6-1 EXHIBIT D FORM OF ASSIGNMENT AND ASSUMPTION AGREEMENT ------------------------------------------- Reference is made to the Agreement described in Item 2 of Annex I annexed hereto (the "Credit Agreement"). Terms defined in the Credit Agreement ---------------- are used herein as defined therein. ______________ (the "Assignor") and ________________ (the "Assignee") -------- -------- agree as follows: The Assignor hereby sells and assigns to the Assignee without recourse and without representation or warranty except as expressly set forth herein, and the Assignee hereby purchases and assumes from the Assignor, that interest in and to all of the Assignor's rights and obligations under the Credit Agreement and the other Loan Documents as of the date hereof which represents the percentage interest specified in Item 4 of Annex I of all outstanding rights and obligations under the Credit Agreement and the other Loan Documents. After giving effect to such sale and assignment the Assignee's Bridge Loan Commitment and the amount of the outstanding Bridge Loans owing to the Assignee under the Credit Agreement will be as set forth in Item 4 of Annex I hereto. The Assignor (i) represents and warrants that it is the legal and beneficial owner of the interest being assigned by it hereunder and that such interest is free and clear of any adverse claim created by the Assignor; (ii) makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with the Loan Documents or the execution, legality, validity, enforceability, genuineness, sufficiency or value of the Loan Documents or any other instrument or document furnished pursuant thereto; and (iii) makes no representation or warranty and assumes no responsibility with respect to the financial condition of any Loan Party or the performance or observance by any Loan Party of any of its obligations under the Loan Documents or any other instrument or document furnished pursuant thereto. The Assignee (i) confirms that it has received a copy of the Credit Agreement, together with copies of the financial statements referred to therein and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into the Assignment Agreement; (ii) agrees that it will, independently and without reliance upon the Assignor, the Agent or any other Lender, as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Credit Agreement; (iii) confirms that it is an Eligible Assignee under the terms of the Credit Agreement; (iv) appoints and authorizes the Agent to take such action as agent on its behalf and to exercise such powers under the Credit Agreement as are delegated to the Agent by the terms thereof, together with such powers as are reasonably incidental thereto; (v) agrees that it will perform in accordance with their terms all of the obligations which by the terms of the Credit Agreement are required to be performed by it as a Lender[; and (vi) attaches the forms prescribed by the Internal Revenue Service of the United States certifying as to the purchasing Lender's status for purposes of determining exemption from United States withholding taxes with respect to all payments to be D-1 made to the Assignee under the Credit Agreement or such other documents as are necessary to indicate that all such payments are subject to such rates at a rate reduced by an applicable tax treaty]/1/. Following the execution of this Assignment and Assumption Agreement by the Assignor and the Assignee, this Assignment and Assumption Agreement will be delivered to the Agent for acceptance and recording by the Agent together with the fee specified in Section 11.2 of the Credit Agreement. The effective date of this Assignment and Assumption Agreement shall be the date of acceptance hereof by the Agent, unless otherwise specified in Item 5 of Annex I hereto (the "Settlement Date"). --------------- Upon such acceptance and recording by the Agent, as of the Settlement Date, (i) the Assignee shall be a party to the Credit Agreement and, to the extent provided in this Assignment and Assumption Agreement, shall have the rights and obligations of a Lender thereunder and (ii) the Assignor shall, to the extent provided in this Assignment and Assumption Agreement, relinquish its rights and be released from its obligations under the Credit Agreement. Upon such acceptance and recording by the Agent, from and after the Settlement Date, the Agent shall make all payments under the Credit Agreement and the Bridge Notes in receipt of the interest assigned hereby (including, without limitation, all payments of principal, interest and commitment fees (if applicable) with respect thereto) to the Assignee. On the Settlement Date, the Assignee shall pay to the Assignor the principal amount of any outstanding Bridge Loans owing to the Assignor under the Credit Agreement and the Bridge Notes and assigned to the Assignee hereunder. The Assignor and Assignee shall make all appropriate adjustments in payments under the Credit Agreement and the Bridge Notes for periods prior to the Settlement Date directly between themselves. THE VALIDITY, CONSTRUCTION AND ENFORCEABILITY OF THIS ASSIGNMENT AND ASSUMPTION AGREEMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF NEW YORK. ____________________ /1/ Insert bracketed language if the Assignee is organized under the laws of a jurisdiction outside the United States. D-2 IN WITNESS WHEREOF, the parties hereto have caused this Assignment and Assumption Agreement to be executed by their respective officers thereunto duly authorized, as of the date first above written, such execution being made on Annex I hereto. [Name of Assignor], as Assignor By:_________________________________ Name: Title: [Name of Assignee], as Assignee By:_________________________________ Name: Title: Acknowledged and Agreed: Prudential Securities Credit Corp. By:________________________________ Name: Title: D-3 ANNEX I SCHEDULE OF TERMS 1 Borrower: 2. Name and Date of Credit Agreement: Credit Agreement dated as of December 6, 1999 by and among Mutual Risk Management Ltd., as Borrower, the Guarantor, the Pledgors and Collateral Subsidiaries named therein, the Lenders from time to time party thereto and Prudential Securities Credit Corp., as Agent. 3. Date of Assignment Agreement: 4. Amounts (as of Date of Item #3 above): (b) Percentage Interest Assigned: ______ % (c) Assignee's Bridge Loan Commitment: $______ (d) Aggregate Amount of Bridge Loan Commitment Assigned: $______ (e) Aggregate Outstanding Principal Amount of Bridge Loan Assigned: $______ 5. Settlement Date: /1/ 6. Payment Instructions: ASSIGNEE: ASSIGNOR: ___________________________ _____________________________ ___________________________ _____________________________ ___________________________ _____________________________ ___________________________ _____________________________ ___________________________ _____________________________ 7. Notice Instructions: __________________________________________________________________________ __________________________________________________________________________ __________________________________________________________________________ __________________________________________________________________________ __________________________________________________________________________ __________________________________________________________________________ 8. Agreed & Accepted: Name of Assignor Name of Assignee _________________________________ /1/ Should be no earlier than the date of acceptance by the Agent. D-4 EXHIBIT E SECTION 11.2(e)(ii) CERTIFICATE ------------------------------- Reference is hereby made to the Credit Agreement, dated as of December 6, 1999, among Mutual Risk Management Ltd., as Borrower, the Guarantor, the Pledgors and Collateral Subsidiaries named therein, the Lenders from time to time party thereto and Prudential Securities Credit Corp., as Agent (as amended from time to time, the "Credit Agreement"). Pursuant to the provisions of Section 11.2e(ii) of the Credit Agreement, the undersigned hereby certifies that it is not a "bank" as such term is used in Section 881(c)(34)(A) of the Internal Revenue Code of 1986, as amended. [NAME OF LENDER] By:______________________ Name: Title: Date:________________________ E-1 EX-12 3 CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES EXHIBIT 12 MUTUAL RISK MANAGEMENT LTD. CONSOLDIATED RATIO OF EARNINGS TO FIXED CHARGES
Year Ended December 31, ----------------------- 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- Ratio of earnings to fixed charges 6.6 9.6 8.4 7.1 13.9 ===== ==== ==== ==== ====
For purposes of computing the consolidated ratio of earnings to fixed charges, "earnings" represent income before income taxes, minority interest, extraordinary item and fixed charges. "Fixed charges" include gross interest expense, the proportion deemed representative of the interest factor of rent expense and preferred share dividend requirements of consolidated subsidiary companies. EX-21 4 SUBSIDIARIES OF THE REGISTRANT Exhibit 21 Subsidiaries of the Registrant Capital Management of Bermuda Captive Resources, Inc Commonwealth Risk Holdings (Europe) Ltd Commonwealth Risk Services Inc. Commonwealth Risk Services LLP CompFirst LLC Genesis Holdings H&H Park International Hamilton Management Ltd Hemisphere Holdings Ltd Hemisphere Management Ltd Hemisphere Trust (Jersey) Ltd Hemisphere Trust Company Ltd Hurst Holme Insurance Co IAS (Holdings) Ltd. International Advisory Services Ltd IPC Mutual Holdings, Ltd Kensington Management Group Ltd Legion Financial Corp Legion Indemnity Co Legion Insurance Company Legion Management Corp MG Financial Ltd MGL Investments Ltd MRM Financial Services Ltd MRM Life Ltd. MRM Securities Ltd MRM Specialty Brokerage Ltd Mutual Finance Ltd Mutual Group Ltd Mutual Holdings (Bermuda) Ltd Mutual Holdings (US) Ltd Mutual Indemnity (Barbados) Ltd Mutual Indemnity (Bermuda) Ltd Mutual Indemnity (Dublin) Ltd Mutual Indemnity (US) Ltd Mutual Indemnity Ltd Mutual Risk Captive Group Ltd Mutual Risk Management (Cayman) Ltd Mutual Risk Management (Holdings) Ltd Shoreline Mutual Management (Bermuda) Ltd Tremont International Insurance Ltd Villanova Insurance Company Worksafe, Inc EX-23.1 5 CONSENT OF INDEPENDENT AUDITORS EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS TO THE BOARD OF DIRECTORS AND SHAREHOLDERS MUTUAL RISK MANAGEMENT LTD. We consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 33-44124, 33-55282, 333-05008, 333-77359 and 333-80741) and Form S-3 (Nos. 333-64419, 333-11053, 333-75505 and 333-96425) of Mutual Risk Management Ltd. of our report dated February 15, 2000 (except for note 21, as to which the date is February 29, 2000), with respect to the consolidated financial statements and schedules of Mutual Risk Management Ltd. included in this Annual Report (Form 10-K) for the year ended December 31, 1999. /s/ Ernst & Young Hamilton, Bermuda March 30, 2000 INDEPENDENT AUDITOR'S REPORT To The Board of Directors and Shareholders Mutual Risk Management Ltd. We have audited the accompanying consolidated balance sheets of Mutual Risk Management Ltd. and subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of income and comprehensive income, changes in shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1999. Our audits also included the financial statement schedules listed in the Index at Item 14(B). These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. 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 Mutual Risk Management Ltd. and subsidiaries at December 31, 1999 and 1998, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. Hamilton, Bermuda February 15, 2000 except for note 21, as to which the date is February 29, 2000 /s/ Ernst & Young EX-24 6 POWER OF ATTORNEY Exhibit 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned Director and/or Officer of Mutual Risk Management Ltd., a company organized under the laws of Bermuda (the "Company"), hereby appoints Robert A. Mulderig, James C. Kelly and Richard E. O'Brien and each of them, his attorneys and agents to execute on his behalf and in his name and in the capacity set forth below, an Annual Report of the Company for the fiscal year ended December 31, 1999 on Form 10-K, and any amendment or amendments thereto, for filing with the United States Securities and Exchange Commission under the Securities Exchange Act of 1934 (the "Act"), and to do or cause to be done such other acts and to execute such other documents which said attorneys and agents may deem necessary or advisable to enable the Company to comply with the Act and any rules, regulations or requirements of the Securities and Exchange Commission in respect thereof. /s/ Arthur E. Engel ------------------- January 28, 2000 Arthur E. Engel Director POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned Director and/or Officer of Mutual Risk Management Ltd., a company organized under the laws of Bermuda (the "Company"), hereby appoints Robert A. Mulderig, James C. Kelly and Richard E. O'Brien and each of them, his attorneys and agents to execute on his behalf and in his name and in the capacity set forth below, an Annual Report of the Company for the fiscal year ended December 31, 1999 on Form 10-K, and any amendment or amendments thereto, for filing with the United States Securities and Exchange Commission under the Securities Exchange Act of 1934 (the "Act"), and to do or cause to be done such other acts and to execute such other documents which said attorneys and agents may deem necessary or advisable to enable the Company to comply with the Act and any rules, regulations or requirements of the Securities and Exchange Commission in respect thereof. /s/ Roger E. Dailey ------------------- January 28, 2000 Roger E. Dailey Director POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned Director and/or Officer of Mutual Risk Management Ltd., a company organized under the laws of Bermuda (the "Company"), hereby appoints Robert A. Mulderig, James C. Kelly and Richard E. O'Brien and each of them, his attorneys and agents to execute on his behalf and in his name and in the capacity set forth below, an Annual Report of the Company for the fiscal year ended December 31, 1999 on Form 10-K, and any amendment or amendments thereto, for filing with the United States Securities and Exchange Commission under the Securities Exchange Act of 1934 (the "Act"), and to do or cause to be done such other acts and to execute such other documents which said attorneys and agents may deem necessary or advisable to enable the Company to comply with the Act and any rules, regulations or requirements of the Securities and Exchange Commission in respect thereof. /s/ David J. Doyle ------------------ January 28, 2000 David J. Doyle, J.P. Director POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned Director and/or Officer of Mutual Risk Management Ltd., a company organized under the laws of Bermuda (the "Company"), hereby appoints Robert A. Mulderig, James C. Kelly and Richard E. O'Brien and each of them, his attorneys and agents to execute on his behalf and in his name and in the capacity set forth below, an Annual Report of the Company for the fiscal year ended December 31, 1999 on Form 10-K, and any amendment or amendments thereto, for filing with the United States Securities and Exchange Commission under the Securities Exchange Act of 1934 (the "Act"), and to do or cause to be done such other acts and to execute such other documents which said attorneys and agents may deem necessary or advisable to enable the Company to comply with the Act and any rules, regulations or requirements of the Securities and Exchange Commission in respect thereof. /s/ Allan W. Fulkerson ---------------------- January 25, 2000 Allan W. Fulkerson Director POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned Director and/or Officer of Mutual Risk Management Ltd., a company organized under the laws of Bermuda (the "Company"), hereby appoints Robert A. Mulderig, James C. Kelly and Richard E. O'Brien and each of them, his attorneys and agents to execute on his behalf and in his name and in the capacity set forth below, an Annual Report of the Company for the fiscal year ended December 31, 1999 on Form 10-K, and any amendment or amendments thereto, for filing with the United States Securities and Exchange Commission under the Securities Exchange Act of 1934 (the "Act"), and to do or cause to be done such other acts and to execute such other documents which said attorneys and agents may deem necessary or advisable to enable the Company to comply with the Act and any rules, regulations or requirements of the Securities and Exchange Commission in respect thereof. /s/ Glenn R. Partridge ---------------------- January 25, 2000 Glenn R. Partridge Director POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned Director and/or Officer of Mutual Risk Management Ltd., a company organized under the laws of Bermuda (the "Company"), hereby appoints Robert A. Mulderig, James C. Kelly and Richard E. O'Brien and each of them, his attorneys and agents to execute on his behalf and in his name and in the capacity set forth below, an Annual Report of the Company for the fiscal year ended December 31, 1999 on Form 10-K, and any amendment or amendments thereto, for filing with the United States Securities and Exchange Commission under the Securities Exchange Act of 1934 (the "Act"), and to do or cause to be done such other acts and to execute such other documents which said attorneys and agents may deem necessary or advisable to enable the Company to comply with the Act and any rules, regulations or requirements of the Securities and Exchange Commission in respect thereof. /s/ Norman L. Rosenthal ----------------------- January 24, 2000 Norman L. Rosenthal Director POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned Director and/or Officer of Mutual Risk Management Ltd., a company organized under the laws of Bermuda (the "Company"), hereby appoints Robert A. Mulderig, James C. Kelly and Richard E. O'Brien and each of them, his attorneys and agents to execute on his behalf and in his name and in the capacity set forth below, an Annual Report of the Company for the fiscal year ended December 31, 1999 on Form 10-K, and any amendment or amendments thereto, for filing with the United States Securities and Exchange Commission under the Securities Exchange Act of 1934 (the "Act"), and to do or cause to be done such other acts and to execute such other documents which said attorneys and agents may deem necessary or advisable to enable the Company to comply with the Act and any rules, regulations or requirements of the Securities and Exchange Commission in respect thereof. /s/ Joseph D. Sargent --------------------- January 24, 2000 Joseph D. Sargent Director POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned Director and/or Officer of Mutual Risk Management Ltd., a company organized under the laws of Bermuda (the "Company"), hereby appoints Robert A. Mulderig, James C. Kelly and Richard E. O'Brien and each of them, his attorneys and agents to execute on his behalf and in his name and in the capacity set forth below, an Annual Report of the Company for the fiscal year ended December 31, 1999 on Form 10-K, and any amendment or amendments thereto, for filing with the United States Securities and Exchange Commission under the Securities Exchange Act of 1934 (the "Act"), and to do or cause to be done such other acts and to execute such other documents which said attorneys and agents may deem necessary or advisable to enable the Company to comply with the Act and any rules, regulations or requirements of the Securities and Exchange Commission in respect thereof. /s/ Jerry S. Rosenbloom ----------------------- January 28, 2000 Jerry S. Rosenbloom Director POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned Director and/or Officer of Mutual Risk Management Ltd., a company organized under the laws of Bermuda (the "Company"), hereby appoints Robert A. Mulderig, James C. Kelly and Richard E. O'Brien and each of them, his attorneys and agents to execute on his behalf and in his name and in the capacity set forth below, an Annual Report of the Company for the fiscal year ended December 31, 1999 on Form 10-K, and any amendment or amendments thereto, for filing with the United States Securities and Exchange Commission under the Securities Exchange Act of 1934 (the "Act"), and to do or cause to be done such other acts and to execute such other documents which said attorneys and agents may deem necessary or advisable to enable the Company to comply with the Act and any rules, regulations or requirements of the Securities and Exchange Commission in respect thereof. /s/ William F. Galtney, Jr. --------------------------- January 27, 2000 William F. Galtney, Jr. Director POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned Director and/or Officer of Mutual Risk Management Ltd., a company organized under the laws of Bermuda (the "Company"), hereby appoints Robert A. Mulderig, James C. Kelly and Richard E. O'Brien and each of them, his attorneys and agents to execute on his behalf and in his name and in the capacity set forth below, an Annual Report of the Company for the fiscal year ended December 31, 1999 on Form 10-K, and any amendment or amendments thereto, for filing with the United States Securities and Exchange Commission under the Securities Exchange Act of 1934 (the "Act"), and to do or cause to be done such other acts and to execute such other documents which said attorneys and agents may deem necessary or advisable to enable the Company to comply with the Act and any rules, regulations or requirements of the Securities and Exchange Commission in respect thereof. /s/ John Kessock, Jr. --------------------- January 27, 2000 John Kessock, Jr. Director POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned Director and/or Officer of Mutual Risk Management Ltd., a company organized under the laws of Bermuda (the "Company"), hereby appoints James C. Kelly and Richard E. O'Brien and each of them, his attorneys and agents to execute on his behalf and in his name and in the capacity set forth below, an Annual Report of the Company for the fiscal year ended December 31, 1999 on Form 10-K, and any amendment or amendments thereto, for filing with the United States Securities and Exchange Commission under the Securities Exchange Act of 1934 (the "Act"), and to do or cause to be done such other acts and to execute such other documents which said attorneys and agents may deem necessary or advisable to enable the Company to comply with the Act and any rules, regulations or requirements of the Securities and Exchange Commission in respect thereof. /s/ Robert A. Mulderig ---------------------- January 28, 2000 Robert A. Mulderig Director POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned Director and/or Officer of Mutual Risk Management Ltd., a company organized under the laws of Bermuda (the "Company"), hereby appoints Robert A. Mulderig, James C. Kelly and Richard E. O'Brien and each of them, his attorneys and agents to execute on his behalf and in his name and in the capacity set forth below, an Annual Report of the Company for the fiscal year ended December 31, 1999 on Form 10-K, and any amendment or amendments thereto, for filing with the United States Securities and Exchange Commission under the Securities Exchange Act of 1934 (the "Act"), and to do or cause to be done such other acts and to execute such other documents which said attorneys and agents may deem necessary or advisable to enable the Company to comply with the Act and any rules, regulations or requirements of the Securities and Exchange Commission in respect thereof. /s/ Richard G. Turner --------------------- January 28, 2000 Richard G. Turner Director EX-27.1 7 FINANCIAL DATA SCHEDULE
7 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MUTUAL RISK MANAGEMENT LTD.'S FINANCIAL STATEMENTS AS OF DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000826918 MUTUAL RISK MANAGEMENT LTD. 1,000 U.S. DOLLARS 12-MOS DEC-31-1999 JAN-01-1999 DEC-31-1999 1 451,921 0 0 0 0 0 451,921 155,387 1,729,936 30,406 4,033,174 1,860,120 335,265 67,981 27,924 231,947 0 0 412 357,732 4,033,174 181,798 33,616 (5,199) 177,411 147,705 51,582 138,032 50,307 (365) 50,672 0 182 0 50,438 1.18 1.14 110,863 146,414 1,291 61,697 66,687 130,184 0
EX-27.2 8 FINANCIAL DATA SCHEDULE
7 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MUTUAL RISK MANAGEMENT LTD.'S FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000826918 MUTUAL RISK MANAGEMENT LTD. 1,000 U.S. DOLLARS 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 1 430,504 0 0 0 0 0 430,504 108,188 1,460,879 34,313 3,604,591 1,587,371 317,745 69,797 30,626 119,703 0 0 437 385,963 3,604,591 139,570 25,219 (3,224) 136,768 115,924 40,240 99,585 42,584 329 42,255 0 0 0 42,255 0.98 0.93 0 0 0 0 0 0 0
EX-27.3 9 FINANCIAL DATA SCHEDULE
7 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MUTUAL RISK MANAGEMENT LTD.'S FINANCIAL STATEMENTS AS OF JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000826918 MUTUAL RISK MANAGEMENT LTD. 1,000 U.S. DOLLARS 6-MOS DEC-31-1999 JAN-01-1999 JUN-30-1999 1 451,889 0 0 0 0 0 451,889 76,652 1,219,961 35,892 3,370,075 1,342,605 309,100 70,125 33,292 117,617 0 0 435 385,287 3,370,075 89,018 16,663 (1,030) 91,058 67,793 23,414 63,983 40,519 3,630 36,889 0 0 0 36,894 0.86 0.79 0 0 0 0 0 0 0
EX-27.4 10 FINANCIAL DATA SCHEDULE
7 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MUTUAL RISK MANAGEMENT LTD.'S FINANCIAL STATEMENTS AS OF MARCH, 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000826918 MUTUAL RISK MANAGEMENT LTD. 1,000 U.S. DOLLARS 3-MOS DEC-31-1999 JAN-01-1999 MAR-31-1999 1 473,806 0 0 0 0 0 473,806 82,988 1,162,045 31,477 3,184,564 1,267,338 248,983 77,933 42,248 116,749 0 0 433 373,900 3,184,564 38,785 7,221 502 45,385 26,229 13,495 31,363 20,806 2,014 18,791 0 0 0 18,799 0.44 0.40 0 0 0 0 0 0 0
EX-27.5 11 FINANCIAL DATA SCHEDULE
7 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MUTUAL RISK MANAGEMENT LTD.'S FINANCIAL STATEMENTS AS OF DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000826918 MUTUAL RISK MANAGEMENT LTD. 1,000 U.S. DOLLARS 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 1 462,434 0 0 0 0 0 462,434 117,423 1,079,563 27,215 3,074,257 1,190,426 241,893 79,753 37,448 129,023 0 0 422 342,744 3,074,257 101,913 29,590 (1,003) 157,414 78,258 26,061 110,625 72,970 8,536 64,434 0 0 0 64,527 1.56 1.42 85,764 74,476 3,782 15,039 38,120 110,863 0
EX-27.6 12 FINANCIAL DATA SCHEDULE
7 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MUTUAL RISK MANAGEMENT LTD.'S FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000826918 MUTUAL RISK MANAGEMENT LTD. 1,000 U.S. DOLLARS 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 1 487,797 0 0 0 0 0 487,797 92,813 758,154 29,315 2,654,300 854,169 234,222 87,908 37,524 129,722 0 0 420 325,571 2,654,300 73,993 21,802 (1,099) 115,866 51,637 24,042 79,984 54,900 6,579 48,321 0 0 0 48,363 1.18 1.06 0 0 0 0 0 0 0
EX-27.7 13 FINANCIAL DATA SCHEDULE
7 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MUTUAL RISK MANAGEMENT LTD.'S FINANCIAL STATEMENTS AS OF JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000826918 MUTUAL RISK MANAGEMENT LTD. 1,000 U.S. DOLLARS 9-MOS DEC-31-1998 JAN-01-1998 JUN-30-1998 1 393,671 0 0 0 0 0 393,671 75,345 717,409 26,541 2,498,650 805,381 240,845 0 43,420 128,356 0 0 418 306,375 2,498,650 49,806 15,223 (1,157) 73,755 33,877 16,892 51,268 35,590 4,324 31,266 0 0 0 31,266 0.77 0.69 0 0 0 0 0 0 0
EX-27.8 14 FINANCIAL DATA SCHEDULE
7 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MUTUAL RISK MANAGEMENT LTD.'S FINANCIAL STATEMENTS AS OF MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000826918 MUTUAL RISK MANAGEMENT LTD. 1,000 U.S. DOLLARS 3-MOS DEC-31-1998 JAN-01-1998 MAR-31-1998 1 404,088 0 0 0 0 0 404,088 80,052 697,459 26,486 2,356,572 796,103 198,395 0 42,145 132,860 0 0 412 280,728 2,356,572 28,929 8,064 (213) 35,694 21,499 8,095 25,438 17,442 2,267 15,175 0 0 0 15,175 0.38 0.34 0 0 0 0 0 0 0
EX-27.9 15 FINANCIAL DATA SCHEDULE
7 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MUTUAL RISK MANAGEMENT LTD.'S FINANCIAL STATEMENTS AS OF DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000826918 MUTUAL RISK MANAGEMENT LTD. 1,000 U.S. DOLLARS 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 1 395,143 0 0 0 0 0 395,143 82,706 630,697 29,992 2,206,050 716,461 188,389 0 42,445 130,890 0 0 399 263,175 2,206,050 84,200 26,592 (1,608) 121,314 49,857 35,816 84,716 60,109 10,632 49,477 0 0 0 49,372 1.25 1.15 69,419 50,301 (444) (10,850) (22,662) 85,764 0
EX-27.10 16 FINANCIAL DATA SCHEDULE
7 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MUTUAL RISK MANAGEMENT LTD.'S FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000826918 MUTUAL RISK MANAGEMENT LTD. 1,000 U.S. DOLLARS 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 1 384,844 0 0 0 0 0 384,844 90,997 453,556 22,908 1,977,610 538,575 166,763 0 37,925 129,586 0 0 396 247,048 1,977,610 62,530 19,759 (1,083) 88,268 37,125 26,412 61,496 44,441 8,003 36,438 0 0 0 36,333 0.92 0.85 0 0 0 0 0 0 0
EX-27.11 17 FINANCIAL DATA SCHEDULE
7 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MUTUAL RISK MANAGEMENT LTD.'S FINANCIAL STATEMENTS AS OF JUNE 30 , 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000826918 MUTUAL RISK MANAGEMENT LTD. 1,000 U.S. DOLLARS 6-MOS DEC-31-1997 JAN-01-1997 JUN-30-1997 1 399,151 0 0 0 0 0 399,151 66,394 401,463 21,019 1,866,919 481,295 151,259 0 40,552 127,910 2,952 0 395 233,226 1,866,919 35,183 13,138 (1,471) 56,434 19,216 16,688 39,590 27,790 4,928 22,862 0 0 0 22,779 0.58 0.54 0 0 0 0 0 0 0
EX-27.12 18 FINANCIAL DATA SCHEDULE
7 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MUTUAL RISK MANAGEMENT LTD.'S FINANCIAL STATEMENTS AS OF MARCH 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000826918 MUTUAL RISK MANAGEMENT LTD. 1,000 U.S. DOLLARS 3-MOS DEC-31-1997 JAN-01-1997 MAR-31-1997 1 332,853 0 0 0 0 0 332,853 121,005 380,766 25,151 1,785,466 456,224 118,219 0 44,070 126,645 2,952 0 394 216,912 1,785,466 17,953 6,067 (774) 27,471 7,663 10,605 19,320 13,129 2,284 10,844 0 0 0 10,803 0.28 0.26 0 0 0 0 0 0 0
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