-----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, QUPzw4h/GsIwROhkMVc4M+EJ4BFQkJzvl/ugE+E+W6/8N+JUJMa6oP0C2+jL1j+B D0PYUPuBy7ueRc2OOYdINQ== 0000897430-97-000005.txt : 19971117 0000897430-97-000005.hdr.sgml : 19971117 ACCESSION NUMBER: 0000897430-97-000005 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971114 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: TIG HOLDINGS INC CENTRAL INDEX KEY: 0000897430 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 943172455 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-11856 FILM NUMBER: 97719183 BUSINESS ADDRESS: STREET 1: 65 EAST 55TH STREET 28TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10022 BUSINESS PHONE: 9728315393 MAIL ADDRESS: STREET 1: 65 EAST 55TH STREET 28TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10022 10-Q 1 FORM 10-Q REPORT FOR TIG HOLDINGS, INC. ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 --------------- FORM 10-Q (X) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarterly Period Ended September 30, 1997 OR ( )TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period from to Commission File Number 1-11856 ================================================================================ TIG HOLDINGS, INC. (Exact name of registrant as specified in its charter) Delaware 94-3172455 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 65 East 55th Street, 28th Floor New York, New York 10022 (Address of principal executive offices) (212) 446-2700 (Registrant's telephone number, including area code) ================================================================================ 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 _____ Number of shares of Common Stock, $0.01 par value per share, outstanding as of close of business on September 30, 1997: 51,386,296 excluding 14,937,627 treasury shares. ================================================================================ TIG HOLDINGS, INC. INDEX TO FORM 10-Q PART I. FINANCIAL INFORMATION Page Item 1. Financial Statements Condensed consolidated balance sheets as of September 30, 1997 (unaudited) and December 31, 1996 ..............3 Condensed consolidated statements of income for the three and nine months ended September 30, 1997 (unaudited) and September 30, 1996 (unaudited).....................4 Condensed consolidated statement of changes in shareholders' equity for the nine months ended September 30, 1997 (unaudited).....................................5 Condensed consolidated statements of cash flow for the nine months ended September 30, 1997 (unaudited) and September 30, 1996 (unaudited).....................6 Notes to condensed consolidated financial statements (unaudited).............................................7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations......................11 2.1 Consolidated Results...............................................11 2.2 Reinsurance........................................................13 2.3 Commercial Specialty...............................................15 2.4 Retail.............................................................16 2.5 Other Lines........................................................18 2.6 Investments........................................................18 2.7 Reserves...........................................................21 2.8 Liquidity and Capital Resources....................................22 2.9 Forward-Looking Statements.........................................24 2.10 Glossary...........................................................25 PART II. OTHER INFORMATION Item 1. Legal Proceedings..................................................27 Item 6. Exhibits and Reports on Form 8-K...................................28 Exhibit 11 - Computation of Earnings Per Share (unaudited)...................29 SIGNATURES...................................................................30 TIG HOLDINGS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, December 31, (In millions, except share data) 1997 1996 - --------------------------------------------------------------------------- ---------------- ----------------- Assets (unaudited) Investments: Fixed maturities at market (cost: $4,086 in 1997 and $3,976 in 1996) $4,218 $4,057 Short-term and other investments (cost: $184 in 1997 and $176 in 1996) 187 176 - --------------------------------------------------------------------------- ---------------- ----------------- Total investments 4,405 4,233 Cash 5 19 Accrued investment income 59 57 Premium receivable (net of allowance of: $4 in 1997 and 1996) 480 420 Reinsurance recoverable (net of allowance of: $9 in 1997 and 1996) 1,334 1,264 Deferred policy acquisition costs 171 144 Prepaid reinsurance premium 92 105 Income taxes 46 102 Other assets 240 132 - --------------------------------------------------------------------------- ---------------- ----------------- Total assets $6,832 $6,476 - --------------------------------------------------------------------------- ---------------- ----------------- Liabilities Reserves for: Losses $3,238 $3,215 Loss adjustment expenses 453 545 Unearned premium 759 696 - --------------------------------------------------------------------------- ---------------- ----------------- Total reserves 4,450 4,456 Reinsurance premium payable 98 88 Funds withheld under reinsurance agreements 353 255 Notes payable 124 123 Other liabilities 438 322 - --------------------------------------------------------------------------- ---------------- ----------------- Total liabilities 5,463 5,244 - --------------------------------------------------------------------------- ---------------- ----------------- Mandatory redeemable 8.597% capital securities of subsidiary trust 125 - - --------------------------------------------------------------------------- ---------------- ----------------- Mandatory redeemable preferred stock 25 25 - --------------------------------------------------------------------------- ---------------- ----------------- Shareholders' Equity Common stock - par value $0.01 per share (authorized: 180,000,000 shares; issued and outstanding: 66,323,923 shares in 1997 and 64,610,109 shares in 1996) 1,230 1,198 Retained earnings 323 234 Net unrealized gain on fixed maturity investments, net of taxes 88 52 Net unrealized loss on foreign currency, net of taxes (1) (1) - --------------------------------------------------------------------------- ---------------- ----------------- 1,640 1,483 Treasury stock (14,937,627 shares in 1997 and 10,306,000 shares in 1996) (421) (276) - --------------------------------------------------------------------------- ---------------- ----------------- Total shareholders' equity 1,219 1,207 - --------------------------------------------------------------------------- ---------------- ----------------- Total liabilities and shareholders' equity $6,832 $6,476 - --------------------------------------------------------------------------- ---------------- ----------------- See Notes to Condensed Consolidated Financial Statements.
TIG HOLDINGS, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three Months Nine Months Ended September 30, Ended September 30, ----------------------------- ---------------------------- (In millions, except per share data) 1997 1996 1997 1996 - ---------------------------------------------------------- -------------- -------------- -------------- ------------- Revenues Net premium earned $380 $387 $1,091 $1,162 Net investment income 71 74 219 216 Net realized investment gain (loss) 1 (1) 6 (6) - ---------------------------------------------------------- -------------- -------------- -------------- ------------- Total revenues 452 460 1,316 1,372 - ---------------------------------------------------------- -------------- -------------- -------------- ------------- Losses and expenses Net losses and loss adjustment expenses incurred 259 283 761 870 Commissions and premium related expenses 93 88 251 265 Other underwriting expenses 29 23 93 83 Corporate expenses 11 10 30 28 Interest expense 5 3 15 7 Restructuring charges - - - 100 - ---------------------------------------------------------- -------------- -------------- -------------- ------------- Total losses and expenses 397 407 1,150 1,353 - ---------------------------------------------------------- -------------- -------------- -------------- ------------- Income before income tax (expense) benefit 55 53 166 19 Income tax (expense) benefit (15) (16) (51) 21 - ---------------------------------------------------------- -------------- -------------- -------------- ------------- Net income $40 $37 $115 $40 - ---------------------------------------------------------- -------------- -------------- -------------- ------------- Net income per common share $0.73 $0.64 $2.07 $0.65 - ---------------------------------------------------------- -------------- -------------- -------------- ------------- Dividend per common share $0.15 $0.05 $0.45 $0.15 - ---------------------------------------------------------- -------------- -------------- -------------- ------------- See Notes to Condensed Consolidated Financial Statements.
TIG HOLDINGS, INC. CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (Unaudited)
Foreign Total Unrealized Currency Share- Common Retained Investment Translation Treasury holders' (In millions) Stock Earnings Gain Adjustment Stock Equity - ----------------------------------- ------------- ------------- ------------- ------------- -------------- ------------- Balance at December 31, 1996 $1,198 $234 $52 $(1) $(276) $1,207 Net income 115 115 Common and preferred stock dividends (26) (26) Common stock issued 29 29 Amortization of unearned compensation 3 3 Treasury stock purchased (145) (145) Change in net unrealized gain on fixed maturity investments 36 36 - ----------------------------------- ------------- ------------- ------------- ------------- -------------- ------------- Balance at September 30, 1997 $1,230 $323 $88 $(1) $(421) $1,219 - ----------------------------------- ------------- ------------- ------------- ------------- -------------- ------------- See Notes to Condensed Consolidated Financial Statements.
TIG HOLDINGS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW (Unaudited)
Nine Months Ended September 30, ------------------------------------ (In millions) 1997 1996 ------------------------------------------------------------- ----------------- ------------------ Operating Activities Net income $115 $40 Adjustments to reconcile net income to cash provided by operating activities: Changes in: Accrued investment income (2) (6) Premium receivable (60) (18) Reinsurance recoverable (70) (55) Deferred policy acquisition costs (27) (8) Prepaid reinsurance premium 13 12 Income taxes 37 (23) Loss reserves 23 (31) Loss adjustment expenses reserves (92) (31) Unearned premium reserves 63 10 Reinsurance premium payable 10 5 Funds withheld under reinsurance agreements 98 75 Other assets, other liabilities and other (83) 69 ------------------------------------------------------------- ----------------- ------------------ Net cash provided by operating activities 25 39 ------------------------------------------------------------- ----------------- ------------------ Investing Activities Purchases of fixed maturity investments (2,071) (1,448) Sales of fixed maturity investments 1,896 1,318 Maturities and calls of fixed maturity investments 180 207 Net (decrease) increase in short-term investments (20) 47 Other (14) (4) ------------------------------------------------------------- ----------------- ------------------ Net cash (used in) provided by investing activities (29) 120 ------------------------------------------------------------- ----------------- ------------------ Financing Activities Common stock issued 29 7 Mandatory redeemable capital securities issued 125 - Treasury stock purchased (140) (151) Common stock and preferred stock dividends (26) (10) Other 2 3 ------------------------------------------------------------- ----------------- ------------------ Net cash used in financing activities (10) (151) ------------------------------------------------------------- ----------------- ------------------ Increase (decrease) in cash (14) 8 Cash at beginning of period 19 4 ------------------------------------------------------------- ----------------- ------------------ Cash at end of period $5 $12 ------------------------------------------------------------- ----------------- ------------------ See Notes to Condensed Consolidated Financial Statements.
TIG HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS For the Nine Months Ended September 30, 1997 (Unaudited) - -------------------------------------------------------------------------------- NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - -------------------------------------------------------------------------------- Basis of Presentation. TIG Holdings, Inc. ("TIG Holdings") is primarily engaged in the business of property/casualty insurance and reinsurance through its 15 domestic subsidiaries (collectively "TIG" or the "Company"). The accompanying unaudited condensed consolidated financial statements include the accounts of TIG Holdings and its subsidiaries and have been prepared in accordance with generally accepted accounting principles ("GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. Financial statements prepared in accordance with GAAP require the use of management estimates. In the opinion of management, all adjustments, including normal recurring accruals, considered necessary for a fair presentation have been included. Certain reclassifications of prior year amounts have been made to conform with the 1997 presentation. Operating results for the nine months ended September 30, 1997 are not necessarily indicative of the results to be expected for the full year. For further information, refer to the consolidated financial statements and footnotes thereto included in TIG's annual report on Form 10-K for the year ended December 31, 1996. Earnings per Share ("EPS"). Primary EPS is calculated based upon the weighted average common shares outstanding ("average shares") during the period. In order to calculate average shares, unallocated ESOP shares and treasury shares are deducted from outstanding common shares. Common stock options are considered common stock equivalents and are included in average share calculations if dilutive. To obtain net income attributable to common shareholders for EPS computations, preferred stock dividends are deducted from net income. Refer also to Exhibit 11 and Note E. Investments. Fixed maturities are classified as available for sale, as TIG has no intent to hold such securities until maturity, and are carried at market value. Short-term investments are carried at cost, which approximates market value. Market value is principally based upon quoted market prices. Quoted market prices are available for substantially all securities held by the Company. The difference between the aggregate market value and amortized cost of securities, after deferred income tax effect, is reported as unrealized gain or loss directly in shareholders' equity and, accordingly, has no effect on net income. Loss and Loss Adjustment Expense Reserves. The liability for unpaid losses and loss adjustment expense ("LAE") is based on an evaluation of reported losses and on estimates of incurred but unreported losses. The reserve liabilities are determined using adjusters' individual case estimates and statistical projections. The liability is reported net of estimated salvage and subrogation recoverable. Adjustments to the liability resulting from subsequent developments or revisions to the estimates are reflected in results of operations in the period in which such adjustments become known. While there can be no assurance that the reserves at any given date are adequate to meet TIG's obligations, the amounts reported on the balance sheet are management's best estimate of that amount. Treasury Stock. At September 30, 1997, the Board of Directors had authorized the repurchase of up to 18.75 million shares of TIG Holdings common stock. The Company uses the cost method to record the purchase of treasury shares. TIG HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS For the Nine Months Ended September 30, 1997 (Unaudited) - -------------------------------------------------------------------------------- NOTE B. MANDATORY REDEEMABLE 8.597% CAPITAL SECURITIES OF SUBSIDIARY TRUST - -------------------------------------------------------------------------------- In January 1997, TIG Capital Trust I ("TIG Capital" or the "Trust"), a statutory business trust under Delaware law and a trust subsidiary of TIG Holdings, completed a private offering for $125 million of 8.597% capital securities. TIG Holdings is the initial holder of 100% of the common securities of TIG Capital. Holders of the capital securities of the Trust will have a preference under certain circumstances over the holders of common securities of the Trust with respect to cash distributions and amounts payable on liquidation, redemption, or otherwise. Interest on the 8.597% capital securities is payable semi-annually. TIG Holdings issued $128.75 million in 8.597% Junior Subordinated Debentures to TIG Capital Trust I (including approximately $3.75 million with respect to the capital contributed to the Trust by TIG Holdings). TIG Holdings guaranteed the payment of distributions and payments on liquidation or redemption of the capital securities but only in each case, to the extent of funds held by the Trust. The guarantee does not cover payment of distributions when the Trust does not have sufficient funds to pay such distributions. All of the net proceeds received by TIG Holdings from the issuance of the debentures are being used for general corporate purposes which includes repurchases of TIG Holding's common stock. - -------------------------------------------------------------------------------- NOTE C. 1996 ACTIONS - -------------------------------------------------------------------------------- Restructuring charges. In February 1996, TIG announced the reorganization of its commercial operations and plans to exit certain lines of business that failed to meet profitability standards. As a result of this reorganization, TIG took the following actions: 1) combined its Specialty Commercial and Workers' Compensation divisions to form a new division called Commercial Specialty, 2) identified field offices for consolidation and closure, 3) identified lines of business for non-renewal or cancellation for which 1995 net premium written was approximately $190 million, 4) formed a run-off division to administer contractually required policy renewals for run-off lines of business, and 5) notified approximately 600 employees that their positions would be eliminated. Net premium written for Other Lines has been reduced to $2 million for the first nine months of 1997, and management estimates that the last renewals for remaining policies in force will be processed by late 1997. TIG recorded a $100 million accrual in first quarter 1996 for estimated restructuring charges comprised of severance of $17 million; contractual policy obligations of $37 million; office lease terminations of $18 million; furniture, equipment and capitalized software write-downs of $12 million; and a reserve for litigation and credit issues related to terminated producers of $16 million. TIG re-evaluated the $100 million restructuring charge as of June 30, 1997. Although the total amount of the restructuring charge remained unchanged, the components were revised to the following: severance of $13 million; contractual policy obligations of $43 million; office lease terminations of $16 million; furniture, equipment and capitalized software write-downs of $10 million; and a reserve for litigation and credit issues related to terminated producers of $18 million. Severance costs were less than originally estimated due to the employment of certain TIG associates by third party service providers. The reduction in severance was effectively offset by increased costs for contractual policy obligations associated with outsourcing contracts. The revised estimates for leases, asset write-downs, and producer credit issues reflect minor adjustments to original assumptions based on activity through June 30, 1997. Charges against the restructure accrual of $70 million have been recorded since March 1996 and are comprised of $11 million in severance, $39 million in contractual policy obligations, $13 million in lease termination costs, and $7 million in asset write-downs TIG HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS For the Nine Months Ended September 30, 1997 (unaudited) - -------------------------------------------------------------------------------- Loss Reserves. In connection with the February 1996 restructuring, TIG completed a re-evaluation of loss and LAE reserves related to run-off lines using additional loss development data received during first quarter 1996. This data confirmed adverse loss development trends observed in the second half of 1995 and was a consideration in the decision to exit certain lines of business as previously discussed. As a result of this re-evaluation and management's belief that the restructuring decision will make the claims settlement process for run-off lines less consistent and more volatile, TIG increased loss and LAE reserves by $31 million in the first quarter of 1996 for run-off lines, principally for the Transportation and Large Programs units. Income Taxes. In March 1996, TIG entered into settlement agreements with the IRS on several outstanding audit assessments, which resulted in a redetermination of certain tax liabilities related to tax years prior to TIG's initial public offering (IPO) of April 27, 1993. As a result of the redetermination, a $20 million deferred tax benefit was recognized in first quarter 1996. - -------------------------------------------------------------------------------- NOTE D. CONTINGENCIES - -------------------------------------------------------------------------------- TIG's insurance subsidiaries are routinely engaged in litigation in the normal course of their business. As a liability insurer, the Company defends third-party claims brought against its insureds. As an insurer, the Company defends against coverage claims. On January 11, 1994, a Los Angeles County Superior Court jury returned a verdict of $28 million for punitive damages against TIG Insurance Company ("TIC") in Talbot Partners v. Cates Construction, Inc. and TIC (the "Talbot Case"). The award arose out of TIC's handling of a surety bond claim on a construction project. On March 28, 1997, the California Court of Appeal reduced the trial court's punitive damage award to $15 million. On July 23, 1997, the California Supreme Court granted TIC's petition to review the Court of Appeal's decision. Management believes that the ultimate liability arising from the Talbot Case will not materially impact consolidated operating results. TIG's Federal income tax returns are routinely audited by the Internal Revenue Service (IRS) and provisions are made in the financial statements in anticipation of the results of these audits. Following a routine federal income tax audit by the IRS, in September 1997 the IRS issued a Statutory Notice of Deficiency for the tax year 1993 and a Revenue Agent's Report for 1994 asserting a tax liability of approximately $170 million excluding interest. The IRS's asserted tax adjustments principally relate to the acquisition made by TIG under the Section 338(h)(10) election of April 27, 1993 in conjunction with TIG's IPO and primarily generate temporary differences by creating income in 1993 with corresponding deductions in 1993 and future years. TIG strongly disagrees with the IRS's position and intends to file a Tax Court Petition challenging it in the fourth quarter of 1997. While the timing of cash tax payments may be impacted, management believes that revisions to TIG's recorded tax liability, if any, arising from the IRS's audit will not materially impact consolidated net income or the financial condition of the Company. TIG HOLDINGS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- NOTE E. STATEMENT OF FINANCIAL ACCOUNTING STANDARDS 128 "EARNINGS PER SHARE" - -------------------------------------------------------------------------------- In February 1997, the Financial Accounting Standards Board issued Statement 128 "Earnings per Share" ("Statement 128"), which established a new calculation for earnings per share showing both the "Basic" and "Diluted" earnings per share effective for periods ending after December 15, 1997. Basic earnings per share will be calculated using only weighted average shares outstanding with no dilutive impact from common stock equivalents while the diluted earnings per share calculation is similar to the current fully diluted earnings per share calculation. All prior period earnings per share will be restated to be consistent with the new requirements. If earnings per share had been calculated in accordance with Statement 128, management estimates that the basic earnings per share for third quarter 1997 and 1996 would have been $0.77 and $0.67, respectively, and the first nine months of 1997 and 1996 would have been $2.18 and $0.68, respectively. Management estimates that the diluted earnings per share according to Statement 128 for third quarter 1997 and 1996 would have been $0.74 and $0.65, respectively, and for the first nine months of 1997 and 1996 would have been $2.10 and $0.66, respectively. - -------------------------------------------------------------------------------- NOTE F. PENDING SALE OF INDEPENDENT AGENCY INSURANCE OPERATIONS - -------------------------------------------------------------------------------- On September 30, 1997, TIG entered into a definitive agreement to sell the Independent Agents unit of its Retail Division, based in Battle Creek, Michigan, for $65 million in cash to Nationwide Mutual Insurance Company ("Nationwide"). The purchase price will be adjusted by the surplus of TIG Countrywide Insurance Company ("CIC"), which is included in the sale, after giving effect to certain transactions. TIG estimates that there will be no significant capital gain or loss recognized on the sale. Assuming required regulatory approvals are obtained, the sale is expected to be effective December 31, 1997. At closing, TIG will enter into several reinsurance arrangements with CIC and cede all outstanding loss and LAE reserves, unearned premium reserves and premium receivables. To allow CIC and Nationwide time to make appropriate regulatory filings, TIG will continue to write Independent Agents business and cede such business 100% to CIC for up to two years, or longer, if needed. TIG has also agreed to provide information system services to Nationwide for the processing of this business for a period of up to two years. Independent Agents gross premium written for the first nine months of 1997 and the year ended December 31, 1996 totaled $226 million and $300 million, respectively. TIG HOLDINGS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- The following discussion provides management's assessment of financial results for the three and nine months ended September 30, 1997 as compared to the three and nine months ended September 30, 1996 and material changes in financial position from December 31, 1996 to September 30, 1997 for TIG Holdings, Inc. ("TIG Holdings") and its subsidiaries (collectively "TIG" or the "Company"). The analysis focuses on the performance of TIG's three major operating divisions, Reinsurance, Commercial Specialty and Retail, and its investment portfolio and presents management's expectations for the near future. Lines of business that have been de-emphasized ("Other Lines") are discussed at Item 2.5. This discussion updates the "Management's Discussion and Analysis" in the 1996 Annual Report to Shareholders and should be read in conjunction therewith. Key industry terms that appear in the Management's Discussion and Analysis and elsewhere in this document are defined at Item 2.10 - Glossary. Certain reclassifications of prior years' amounts have been made to conform with the 1997 presentation. Statements contained in the Management's Discussion and Analysis, and elsewhere in this document which are based on management's projections, estimates and assumptions are forward-looking statements. Management would like to caution readers regarding its forward-looking statements (see Item 2.9 - Forward-Looking Statements). - -------------------------------------------------------------------------------- 2.1 CONSOLIDATED RESULTS - -------------------------------------------------------------------------------- Overview. Results of operations for the three and nine months ended September 30, 1997 and 1996 are presented below:
Three Months Nine Months Ended September 30, Ended September 30, --------------------------- --- -- --------------------------- (In millions) 1997 1996 1997 1996 - ------------------------------------------------- ------------- ------------- ------ ------------- ------------- Gross premium written $533 $496 $1,467 $1,472 - ------------------------------------------------- ------------- ------------- ------ ------------- ------------- Net premium written $410 $396 $1,179 $1,183 - ------------------------------------------------- ------------- ------------- ------ ------------- ------------- Net premium earned $380 $387 $1,091 $1,162 Less: Net loss and LAE incurred 259 283 761 870 Commission expense 82 77 219 226 Premium related expense 11 11 32 39 Other underwriting expense 29 23 93 83 - ------------------------------------------------- ------------- ------------- ------ ------------- ------------- Underwriting loss (1) (7) (14) (56) Net investment income 71 74 219 216 Net realized investment gain (loss) 1 (1) 6 (6) Corporate expenses 11 10 30 28 Interest expense 5 3 15 7 Restructuring charges - - - 100 - ------------------------------------------------- ------------- ------------- ------ ------------- ------------- Income before tax (expense) benefit 55 53 166 19 Income tax (expense) benefit (15) (16) (51) 21 - ------------------------------------------------- ------------- ------------- ------ ------------- ------------- Net income $40 $37 $115 $40 - ------------------------------------------------- ------------- ------------- ------ ------------- ------------- Income excluding investment gains (losses) and restructuring charges $39 $38 $111 $109 - ------------------------------------------------- ------------- ------------- ------ ------------- -------------
TIG HOLDINGS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- Net income of $40 million for third quarter 1997 increased 8.1% over 1996 primarily due to improvements in underwriting results, offset in part by a slight decline in investment income and increased interest expense. In January 1997, $125 million of mandatory redeemable capital securities were issued (see Note B to the Condensed Consolidated Financial Statements), the proceeds of which are being used for general corporate purposes, which includes repurchases of TIG Holding's common stock. Net income for the first nine months of 1997 increased by $75 million over 1996 due to restructuring charges of $100 million ($65 million after tax) recorded in 1996 in connection with the reorganization of commercial operations and the decision to exit certain underperforming programs. Income excluding restructuring charges and investment gains and losses increased slightly. Underwriting loss decreased by $42 million in the first nine months of 1997 as compared to 1996 due to reserve strengthening of $31 million recorded in Other Lines in first quarter 1996 and decreased property and catastrophe losses in 1997 compared to 1996. The impact of reserve strengthening on 1996 results was offset by a deferred tax benefit also recorded in first quarter 1996. For additional information regarding first quarter 1996 restructuring charges, reserve strengthening and income tax benefit, see Note C to the Condensed Consolidated Financial Statements. Interest expense increased due to the aforementioned issuance of $125 million in mandatory redeemable capital securities in January 1997. Since mid-1993, TIG has sought to reduce operating expenses and improve profitability by eliminating lines of business requiring high cost processing on a policy by policy basis. On September 30, 1997 TIG entered into a definitive agreement to sell the Independent Agents unit of its Retail Division, based in Battle Creek, Michigan, to Nationwide Mutual Insurance Company. The business to be sold consists of individually underwritten personal lines products produced through a network of independent agents. In conjunction with the sale, TIG anticipates that the employees that support this unit will be offered employment with Nationwide Mutual Insurance Company. Upon completion of this sale, which is expected to be effective December 31, 1997, TIG will have taken another step in its ongoing efforts to exit administratively intensive businesses in order to focus on underwriting intensive Specialty business. See Note F for additional information regarding the pending sale of Independent Agents business. Premium. Overall market conditions remain extremely competitive in 1997. Oversupply of capital in the insurance industry has resulted in significant downward pricing pressure, making it increasingly difficult for TIG to write business which meets its profitability standards. TIG's marketing focus for all divisions is to develop program business which caters to market niches. The following table summarizes net premium written ("NPW") by division:
Three Months Nine Months Ended September 30, Ended September 30, ------------------------------------- -------------------------------------- 1997 1996 1997 1996 ------------------ ------------------ ------------------- ------------------ (In millions) NPW % NPW % NPW % NPW % --------------------------- -------- --------- -------- --------- --------- --------- --------- -------- Reinsurance $124 30% $139 35% $408 35% $421 35% Commercial Specialty 179 44% 125 32% 451 38% 340 29% Retail 108 26% 91 23% 318 27% 270 23% Other Lines (1) - % 41 10% 2 - % 152 13% --------------------------- -------- --------- -------- --------- --------- --------- --------- -------- Net premium written $410 100% $396 100% $1,179 100% $1,183 100% --------------------------- -------- --------- -------- --------- --------- --------- --------- --------
Third quarter 1997 premium increased $14 million, or 3.5% over third quarter 1996; however, the Company's on-going operating divisions had premium growth of $56 million, or 15.8%. Growth in Commercial Specialty premium resulted from new business in the Workers' Compensation and Primary Casualty units as discussed at Item 2.3. Growth in Retail premium was driven by the Non-standard Auto unit as well as production from the new Alternative Distribution unit as discussed at Item 2.4. The premium growth in on-going operating divisions was partially offset by a $42 million decline in Other Lines premium as a result of the Company's efforts to non-renew Other Lines business. TIG HOLDINGS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- Underwriting Results. The following table presents the components of the Company's statutory combined ratio:
Three Months Nine Months Ended September 30, Ended September 30, ---------------------------------- ---------------------------------- Statutory ratios 1997 1996 1997 1996 -------------------------------- ----------------- ---------------- ----------------- ---------------- Loss and LAE 68.1 73.0 69.8 74.8 -------------------------------- ----------------- ---------------- ----------------- ---------------- Commission expense 21.3 19.9 19.9 19.8 Premium related expense 2.9 3.0 2.8 3.2 Other underwriting expense 8.2 6.3 8.4 6.8 -------------------------------- ----------------- ---------------- ----------------- ---------------- Total underwriting expense 32.4 29.2 31.1 29.8 Policyholder dividends ratio 0.7 0.8 0.9 1.0 -------------------------------- ----------------- ---------------- ----------------- ---------------- Combined ratio 101.2 103.0 101.8 105.6 -------------------------------- ----------------- ---------------- ----------------- ----------------
The combined ratio for both the third quarter and first nine months of 1997 improved over 1996. Factors impacting 1997 were lower catastrophe and property loss activity, and premium tax refunds off-set in part by an increased commission ratio as a result of higher commission structures on new program business. The other underwriting expense ratio also increased as a result of start up costs incurred by all ongoing operating divisions for program development. For the nine months ended September 30, 1996, the consolidated loss and LAE ratios were increased by 2.7 percentage points due to reserve strengthening of $31 million recorded in first quarter 1996 for Other Lines. - -------------------------------------------------------------------------------- 2.2 REINSURANCE - -------------------------------------------------------------------------------- TIG's reinsurance operations are conducted through TIG Reinsurance Company ("TIG Re") which is based in Stamford, Connecticut. TIG Re operates through eight business units which employ similar underwriting principles but serve differing market needs: Specialty Casualty, Traditional Treaty, London Branch, a Lloyd's Syndicate, Reverse Flow, Specialty Property, Finite Reinsurance and Facultative. Specialty Casualty emphasizes general liability and professional liability lines. TIG Re is often a lead underwriter in these transactions which are usually structured on an excess-of-loss basis. Traditional Treaty reinsures "standard" property/casualty business. The London Branch focuses on worldwide property exposures, with casualty underwriting having been introduced in late 1996, while a fully integrated Lloyd's vehicle (underwriting syndicate) was introduced in December 1996. Reverse Flow is an alternative distribution mechanism whereby general agents submit program business to TIG Re through an intermediary, who then works with select reinsurance intermediaries to provide a primary insurer to issue the policy and then cede a significant portion of the risk to TIG Re. Specialty Property covers both domestic and international exposures. Finite Reinsurance provides clients with integrated underwriting approaches to control the volatility of financial results over time. In late 1996, TIG Re opened nine facultative offices which currently offer casualty risks, writing both single risk and automatic facility business. Premium. The following table summarizes TIG Re's premium production:
Three Months Nine Months Ended September 30, Ended September 30, -------------------------------------- -------------------------------------- 1997 1996 1997 1996 ------------------- ------------------ ------------------- ------------------ (In millions) NPW % NPW % NPW % NPW % ---------------------------- --------- --------- -------- --------- --------- --------- -------- --------- Specialty Casualty $38 31% $72 52% $150 37% $257 61% Traditional Treaty 35 28% 29 21% 75 18% 52 12% London Branch & Lloyd's 15 12% 7 5% 57 14% 21 5% Reverse Flow 21 17% 20 14% 50 12% 40 10% Specialty Property 7 6% 6 4% 33 8% 34 8% Finite 3 2% 5 4% 27 7% 17 4% Facultative 5 4% - - % 16 4% - - % ---------------------------- --------- --------- -------- --------- --------- --------- -------- --------- Net premium written $124 100% $139 100% $408 100% $421 100% ---------------------------- --------- --------- -------- --------- --------- --------- -------- --------- Gross premium written $147 $151 $459 $446 ---------------------------- --------- --------- -------- --------- --------- --------- -------- ---------
TIG HOLDINGS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- Gross premium written declined slightly in third quarter 1997 as compared to 1996 as new business written was not sufficient to offset the non-renewal of several significant treaties. The slight increase in gross written premium for the first nine months of 1997 is primarily derived from new business initiatives. The majority of new business is attributable to production in marketing segments established during the past two years such as the London Branch, a Lloyd's syndicate, Reverse Flow, Finite and Facultative. In response to highly competitive market conditions in its core Specialty Casualty market, TIG Re has focused on the development of new distribution channels. Increases in aggregate reinsurance cessions resulted in decreased premium retention. Net premium written declined by 11% and 3%, respectively, for the third quarter and the first nine months of 1997. Approximately 74% of business eligible for renewal for the first nine months of 1997 was retained as compared to 84% for 1996. The decline is primarily attributable to the non-renewal of two significant Specialty Casualty programs as a result of re-underwriting initiatives instituted by TIG Re in response to soft market conditions and re-evaluations of current treaty profitability. Furthermore, one other Specialty Casualty program was renewed at a reduced participation in 1997, and one Reverse Flow program has been canceled with an effective date of January 1, 1998. Net premium related to these four programs was $13 million and $26 million for the third quarter and the first nine months of 1997, respectively, as compared to $23 million and $81 million for the corresponding 1996 periods. Underwriting Results. The following table summarizes TIG Re's underwriting results:
Three Months Nine Months Ended September 30, Ended September 30, --------------------------- --------------------------- (In millions) 1997 1996 1997 1996 ---------------------------------------------- ------------- ------------- ------------- ------------- Net premium earned $146 $136 $393 $401 Less: Net loss and LAE incurred 101 98 281 289 Commission expense 40 34 97 100 Other underwriting expense 9 6 28 18 ---------------------------------------------- ------------- ------------- ------------- ------------- Underwriting loss $(4) $(2) $(13) $(6) ---------------------------------------------- ------------- ------------- ------------- ------------- Statutory ratios ---------------------------------------------- ------------- ------------- ------------- ------------- Loss and LAE 69.4 72.5 71.3 72.0 Commission 27.2 25.0 24.2 25.3 Other underwriting 9.1 4.5 7.7 4.5 ---------------------------------------------- ------------- ------------- ------------- ------------- Combined ratio 105.7 102.0 103.2 101.8 ---------------------------------------------- ------------- ------------- ------------- -------------
Start up costs for TIG Re's facultative reinsurance unit and the Lloyd's syndicate, both established in late 1996, are principally responsible for the increase in other underwriting expense and underwriting loss for both third quarter 1997 and the first nine months of 1997 as compared to 1996. In addition, soft market conditions produced slower premium growth than anticipated, resulting in an increase in the underwriting expense ratio for both the quarter and year to date over prior year amounts. TIG HOLDINGS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- 2.3 COMMERCIAL SPECIALTY - -------------------------------------------------------------------------------- Commercial Specialty, based in Irving, Texas, provides specialized insurance products through five main business units: Sports and Leisure, Workers' Compensation, Lloyd's Syndicates, Primary Casualty and Excess Casualty. The Sports and Leisure unit offers coverages for professional and amateur sports events. Coverages include spectator liability and participant legal liability, including property and liability packages for a variety of entertainment and leisure activities. Workers' Compensation provides benefits to employees as mandated by state laws for employment-related accidents, injuries or illnesses. Commercial Specialty participates in three Lloyd's syndicates which principally write marine, U.K. property and aviation business. The Primary Casualty unit focuses on commercial auto, professional liability, construction and marine programs. These programs generally offer a customized package of coverages designed for a specific "niche" market and are produced through a limited number of general agents. The Excess Casualty unit offers lead umbrella and excess umbrella policies. Lead umbrella policies provide liability protection for manufacturing, financial, and service related business above the limits of the primary coverage. Excess umbrella policies provide similar coverage above the lead excess limits. Premium. Net premium written increased by 43% for the third quarter of 1997 and 33% for the first nine months of 1997 as compared to the corresponding 1996 periods. This growth was derived primarily from Workers' Compensation, the new Lloyd's Syndicates and the Primary Casualty units. Third quarter 1997 Workers' Compensation premium benefited from the assumption of an existing book of program business produced by an agency which will also provide loss management services. Primary Casualty premium growth was attributable to new construction and professional liability business. In December 1996, TIG acquired a majority interest in a Lloyd's agency which manages three syndicates and established a corporate name with an approximate 20% share of the managed syndicates' stamp capacity. As the majority of syndicate business renews in the first quarter, syndicate premium will not significantly impact the remainder of 1997. The following table summarizes Commercial Specialty net premium written by business unit:
Three Months Nine Months Ended September 30, Ended September 30, -------------------------------------- -------------------------------------- 1997 1996 1997 1996 ------------------- ------------------ ------------------- ------------------ (In millions) NPW % NPW % NPW % NPW % ---------------------------- --------- --------- -------- --------- --------- --------- -------- --------- Workers' Compensation $80 45% $46 37% $188 42% $142 42% Sports and Leisure 56 31% 53 42% 142 31% 133 39% Primary Casualty 29 16% 17 14% 69 15% 46 13% Lloyd's Syndicates 3 2% - - % 27 6% - - % Excess Casualty & Other 11 6% 9 7% 25 6% 19 6% ---------------------------- --------- --------- -------- --------- --------- --------- -------- --------- Net premium written $179 100% $125 100% $451 100% $340 100% ---------------------------- --------- --------- -------- --------- --------- --------- -------- --------- Gross premium written $245 $168 $594 $448 ---------------------------- --------- --------- -------- --------- --------- --------- -------- ---------
TIG HOLDINGS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- Underwriting Results. Underwriting results for Commercial Specialty are presented below:
Three Months Nine Months Ended September 30, Ended September 30, --------------------------- --------------------------- (In millions) 1997 1996 1997 1996 ---------------------------------------------- ------------- ------------- ------------- ------------- Net premium earned $129 $112 $353 $305 Less: Net loss and LAE incurred 87 79 241 214 Commission expense 27 22 67 57 Premium related expense 4 4 13 14 Other underwriting expense 9 8 33 23 Policyholder dividends incurred 2 1 5 4 ---------------------------------------------- ------------- ------------- ------------- ------------- Underwriting loss $ - $(2) $(6) $(7) ---------------------------------------------- ------------- ------------- ------------- ------------- Statutory ratios ---------------------------------------------- ------------- ------------- ------------- ------------- Loss and LAE 67.0 70.4 68.4 70.3 Commission 20.9 19.1 19.3 18.6 Premium related 2.6 3.3 3.3 4.2 Other underwriting 6.6 6.7 8.0 6.9 Policyholder dividends 1.9 2.6 2.6 3.6 ---------------------------------------------- ------------- ------------- ------------- ------------- Combined ratio 99.0 102.1 101.6 103.6 ---------------------------------------------- ------------- ------------- ------------- -------------
Commercial Specialty's underwriting loss declined by $2 million in third quarter 1997 as compared to third quarter 1996 and declined by $1 million for the first nine months of 1997 as compared to the first nine months of 1996. The improvement in underwriting results is primarily attributable to decreased property losses and improvements in Workers' Compensation results as a consequence of focusing on more profitable states. These trends were reflected in an improved combined ratio for both third quarter 1997 and first nine months of 1997 compared to prior year results. - -------------------------------------------------------------------------------- 2.4 RETAIL - -------------------------------------------------------------------------------- The Retail division provides personal lines and small business insurance products through four main business units: Independent Agents (see Item 2.1 and Note F for information regarding the pending sale of the Independent Agents unit), Non-standard Auto, Alternative Distribution and Small Business. Independent Agents, based in Battle Creek, Michigan, markets principally standard personal auto and homeowners coverages through approximately 400 active independent agents focused in ten core states. Non-standard Auto provides auto physical damage and liability coverages to higher risk insureds principally through managing general agents. Alternative Distribution markets personal lines insurance through non-traditional channels, such as direct marketing, group and affiliation marketing, and electronic commerce. Small Business provides commercial property, liability, and auto coverages to small business owners through independent agents, primarily in Hawaii, Arizona and California. TIG HOLDINGS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- Premium. Retail net premium written increased by approximately 19% and 18% for the third quarter and first nine months of 1997, respectively, as compared to the corresponding 1996 periods. Premium growth for third quarter 1997 was driven by the Non-standard Auto unit and resulted primarily from increased production in California and Texas. The Alternative Distribution unit recently commenced operations, generating $9 million and $16 million of production in the third quarter and first nine months of 1997, respectively. The increasing production is attributable to additional sales staff and licensing in additional states. The decrease in Independent Agents net premium written during the third quarter of 1997 is primarily the of result the Company having re-evaluated its relationship with certain agents and having identified under-performing business which had net written premium of approximately $21 million and $73 million for the third quarter and first nine months of 1997, respectively, as compared to $28 million and $86 million for the corresponding 1996 periods. TIG does not intend to renew this under-performing business over the next several years (see Item 2.1 and Note F - for information regarding the pending sale of the Independent Agents unit).
Three Months Nine Months Ended September 30, Ended September 30, -------------------------------------- -------------------------------------- 1997 1996 1997 1996 ------------------- ------------------ ------------------- ------------------ (In millions) NPW % NPW % NPW % NPW % ---------------------------- --------- --------- -------- --------- --------- --------- -------- --------- Independent Agents $59 55% $67 74% $200 63% $197 73% Non-standard Auto 26 24% 9 10% 55 17% 27 10% Alternative Distributions 9 8% - - % 16 5% - - % Small Business 14 13% 15 16% 47 15% 46 17% ---------------------------- --------- --------- -------- --------- --------- --------- -------- --------- Net premium written $108 100% $91 100% $318 100% $270 100% ---------------------------- --------- --------- -------- --------- --------- --------- -------- --------- Gross premium written $131 $102 $360 $304 ---------------------------- --------- --------- -------- --------- --------- --------- -------- ---------
Underwriting Results. Underwriting results for Retail are presented below:
Three Months Nine Months Ended September 30, Ended September 30, --------------------------- --------------------------- (In millions) 1997 1996 1997 1996 ---------------------------------------------- ------------- ------------- ------------- ------------- Net premium earned $101 $89 $307 $261 Less: Net loss and LAE incurred 67 66 213 188 Commission expense 17 14 49 41 Premium related expense 4 3 13 12 Other underwriting expense 9 7 26 22 ---------------------------------------------- ------------- ------------- ------------- ------------- Underwriting gain (loss) $4 $(1) $6 $(2) ---------------------------------------------- ------------- ------------- ------------- ------------- Statutory ratios ---------------------------------------------- ------------- ------------- ------------- ------------- Loss and LAE 66.9 73.6 69.4 71.9 Commission 16.9 15.4 15.8 15.9 Premium related 4.4 4.1 4.1 4.5 Other underwriting 9.3 8.6 9.3 8.8 ---------------------------------------------- ------------- ------------- ------------- ------------- Combined ratio 97.5 101.7 98.6 101.1 ---------------------------------------------- ------------- ------------- ------ ------------- -------------
The improvement in Retail's underwriting results for the third quarter and the first nine months of 1997 as compared to 1996 is primarily due to decreased property and catastrophe losses incurred during 1997. Catastrophe losses contributed a 1.3 and 1.6 percentage point improvement in Retail's loss and LAE ratio for the third quarter and first nine months of 1997 as compared to the respective 1996 periods. The improving trends in property losses were reflected in an improved combined ratio. TIG HOLDINGS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- 2.5 OTHER LINES - -------------------------------------------------------------------------------- Other Lines principally includes commercial products which have been placed in run-off due to the failure to meet profitability standards. Approximately 95% of this business was placed in run-off in the first quarter of 1996. Most premium written in run-off programs after the "exit date" represents contractually required renewals. Net premium written in the third quarter of 1997 was negative due to audits, write-offs and retro adjustments on certain policies. Non-renewal of Other Lines business has generally progressed at a faster rate than originally expected by management. Costs to administer required renewals were accrued through a $100 million restructure charge and loss and LAE reserves for Other Lines were increased by $31 million during first quarter 1996 (see Note C to Condensed Consolidated Financial Statements). Underwriting results for Other Lines are presented below:
Three Months Nine Months Ended September 30, Ended September 30, --------------------------- --------------------------- (In millions) 1997 1996 1997 1996 ---------------------------------------------- ------------- ------------- ------------- ------------- Gross premium written $10 $75 $54 $274 ---------------------------------------------- ------------- ------------- ------------- ------------- Net premium written $ (1) $41 $2 $152 ---------------------------------------------- ------------- ------------- ------------- ------------- Net premium earned $ 4 $50 $38 $195 Less: Net loss and LAE incurred 4 40 26 179 Commission expense (2) 7 6 28 Premium related expense 2 3 4 12 Other underwriting expense 1 2 3 17 ---------------------------------------------- ------------- ------------- ------------- ------------- Underwriting loss $(1) $(2) $(1) $(41) ---------------------------------------------- ------------- ------------- ------------- -------------
- -------------------------------------------------------------------------------- 2.6 INVESTMENTS - -------------------------------------------------------------------------------- Investment Mix. TIG's ongoing investment strategies strive to provide the Company with a balance of liquidity and return, within corporate credit guidelines and regulatory restrictions. The following chart summarizes TIG's investment portfolio by investment type:
September 30, 1997 December 31, 1996 ----------------------------- ----------------------------- Market % of Market Market % of Market (In millions) Value Portfolio Value Portfolio ------------------------------------- -------------- -------------- --------------- --------------- Corporate and other bonds $1,271 29% $1,242 29% U.S. government bonds 1,179 27% 1,070 25% Mortgage-backed securities 1,033 23% 1,210 29% Municipal bonds 735 17% 535 13% ------------------------------------- -------------- -------------- --------------- --------------- Total fixed maturity investments $4,218 96% $4,057 96% Short-term investments 159 4% 139 3% Other investments 28 -% 37 1% ------------------------------------- -------------- -------------- --------------- --------------- Total invested assets $4,405 100% $4,233 100% ------------------------------------- -------------- -------------- --------------- ---------------
The portfolio gross book yield at September 30, 1997 was 7.3%, as compared to 7.5% at December 31, 1996, primarily as a result of an increase in tax preferred bonds. TIG HOLDINGS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- Approximately one-fourth of TIG's portfolio consists of mortgage-backed securities ("MBS"). AAA rated United States federal government agency mortgages now represent approximately 91% of TIG's exposure to MBS. A risk inherent in MBS is prepayment risk related to interest rate volatility. The underlying mortgages may be repaid earlier or later than originally anticipated, depending on the repayment and refinancing activity of the underlying homeowners. Should this occur, TIG would receive paydowns on the principal amount which may have been purchased at a premium or discount and TIG's investment income would be affected by any adjustments to amortization resulting from the prepayments. TIG's consolidated financial results have not been materially impacted by prepayments of MBS. Additionally, interest rate volatility can affect the market value of MBS. All MBS held in the portfolio can be traded in the public market. Derivatives/Hedges. In the normal course of business, TIG may choose to hedge some of its interest rate risk with futures contracts and/or interest rate swaps. Alternatively, derivative financial instruments may also be utilized to enhance prospective returns. TIG's interest rate swap arrangements generally provide that one party pays interest at a floating rate in relation to movements in an underlying index, and the other party pays interest at a fixed rate. While TIG is exposed to credit risk in the event of nonperformance by the other party, nonperformance is not anticipated due to the credit rating of the counterparties. No futures contracts positions were open at September 30, 1997, or December 31, 1996. There were $14 million notional face amount of interest rate swaps at September 30, 1997, unchanged from December 31, 1996. Total fair value of derivative positions were approximately $77 million, representing 1.76% of the total investment asset holdings at September 30, 1997 as compared to $85 million at December 31, 1996. All TIG derivative financial instruments were with financial institutions rated "A" or better by one or more of the major credit rating agencies. Investment Life and Duration. TIG's objective is to maintain the weighted average life of its investment portfolio between 8 and 11 years and the weighted average duration between 4 and 7 years. At September 30, 1997, the weighted average life of TIG's investment portfolio was 9.9 years compared to 10.3 years at December 31, 1996. At September 30, 1997, the weighted average duration of TIG's investment portfolio was 5.3 years compared to 5.6 years at December 31, 1996. Investments in TBA's. TIG routinely enters into commitments to purchase securities on a "To Be Announced" ("TBA") basis for which the interest rate risk remains with TIG until the date of delivery and payment. Delivery and payment of securities purchased on a TBA basis can take place a month or more after the date of the transaction. These securities are subject to market fluctuations during this period and it is the Company's policy to recognize any gains and losses only when they are realized. TIG currently maintains cash and short-term investments with a fair value exceeding the amount of its TBA purchase commitments. At September 30, 1997, the net TBA purchase commitments amounted to $96 million and had a fair value of $99 million compared to TBA commitments of $46 million and a fair value of $46 million at December 31, 1996. Unrealized gains. Net pre-tax unrealized gains increased by $54 million during the first nine months of 1997 due to overall market value increases. As of September 30, 1997, the aggregate net unrealized gain on TIG's investment portfolio was $135 million. The following is a summary of net unrealized gains (losses) by type of security:
(In millions) September 30, 1997 December 31, 1996 Change -------------------------------------------- --------------------- --------------------- -------------- Municipal bonds $38 $33 $5 Mortgage-backed securities 8 (9) 17 US government bonds 51 32 19 Corporate and other bonds 35 25 10 Other investments 3 - 3 -------------------------------------------- --------------------- --------------------- -------------- Net unrealized gains $135 $81 $54 -------------------------------------------- --------------------- --------------------- --------------
TIG HOLDINGS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- Investment Income. The following table displays the components of TIG's investment income and mean after-tax investment yields. The yields include interest earned and exclude realized investment gains and losses. These yields are computed using the average of the end of the month asset balances during the period.
Three Months Nine Months Ended September 30, Ended September 30, --------------------------- --------------------------- (In millions) 1997 1996 1997 1996 ----------------------------------------- ------------- ------------- ------------- ------------- Fixed maturity investments: Taxable $66 $67 $203 $195 Tax-exempt 8 8 23 27 Short-term and other investments 1 1 4 5 ----------------------------------------- ------------- ------------- ------------- ------------- Total gross investment income 75 76 230 227 Investment expenses, interest and other (4) (2) (11) (11) ----------------------------------------- ------------- ------------- ------------- ------------- Total net investment income $71 $74 $219 $216 ----------------------------------------- ------------- ------------- ------------- ------------- After-tax net investment yield 4.43% 4.69% 4.62% 4.54% ----------------------------------------- ------------- ------------- ------------- -------------
Investment Quality. The table below shows the rating distribution of TIG's fixed maturity portfolio:
September 30, 1997 December 31, 1996 --------------------------- --------------------------- Market % of Market % of Standard & Poor's/Moody's Value Portfolio Value Portfolio ------------------------------------------ ------------- ------------- ------------- ------------- (In millions) AAA/Aaa $2,933 69.5% $2,787 68.7% AA/Aa 263 6.3% 194 4.8% A/A 248 5.9% 329 8.1% BBB/Baa 270 6.4% 232 5.7% Below BBB/Baa 504 11.9% 515 12.7% ------------------------------------------ ------------- ------------- ------------- ------------- Total fixed maturity investments $4,218 100.0% $4,057 100.0% ------------------------------------------ ------------- ------------- ------------- -------------
TIG minimizes the credit risk of its fixed maturity portfolio by investing primarily in investment grade securities; however, management has authorized the purchase of up to $700 million in high yield, less than investment grade securities. The Company's high yield portfolio is comprised of bonds whose issuers are subjected to rigorous credit analysis, including tests of prospective profitability, liquidity, leverage, and interest coverage. This analysis is updated regularly as financial results are released, and bonds are constantly evaluated for their value. The information on credit quality in the preceding table is based upon the higher of the rating assigned to each issue of fixed income securities by either Standard & Poor's Rating Service or Moody's Investor Services, Inc. Where neither Standard & Poor's nor Moody's has assigned a rating to a particular fixed maturity issue, classification is based on 1) ratings available from other recognized rating services, 2) ratings assigned by the National Association of Insurance Commissioners Securities Valuation Office (the "SVO"), or 3) an internal assessment of the characteristics of the individual security, if no other rating is available. The SVO assigns bond ratings for most publicly held bonds. The SVO ratings are used by insurers when preparing their annual statutory financial statements. State departments of insurance use the bond rating data when attempting to determine whether an insurer's holdings are sound. Investments must fit within certain regulatory guidelines of an insurer's domicilary state in order for an insurer to be licensed to do business in that state. The SVO ratings range from "1" to "6", with "1" and "2" being the higher quality, "3" being medium grade, and "4" through "6" being lower grade obligations. As of September 30, 1997 and December 31, 1996, approximately 90% and 87%, respectively, of TIG's portfolio, measured on a statutory carrying value basis, was invested in securities rated as "1" or "2". TIG HOLDINGS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- 2.7 RESERVES - -------------------------------------------------------------------------------- TIG maintains reserves to cover its estimated ultimate liability for losses and loss adjustment expenses ("LAE") with respect to reported and unreported claims. TIG's reserves for losses and LAE totaled $3,691 million and $3,760 million at September 30, 1997 and December 31, 1996, respectively. The process of estimating loss and LAE reserves involves the active participation of an experienced actuarial staff with input from underwriting, claims, reinsurance, financial and legal departments. Management, using the advice of loss reserve specialists, makes a judgment as to the appropriate amount to record in the financial statements. Because reserves are estimates of ultimate losses and LAE, management monitors reserve adequacy over time, evaluating new information as it becomes known and adjusting reserves, as necessary. Such adjustments are reflected in current operations. The inherent uncertainty in estimating reserves is increased when significant changes occur. Examples of such changes include: (1) changes in production sources for existing lines of business; (2) writings of significant blocks of new business; (3) changes in economic conditions; and (4) changes in state or federal laws and regulations, particularly insurance reform measures. TIG has experienced significant changes in each of these areas during the past several years. The inherent uncertainties in estimating reserves are greater with respect to reinsurance than for primary insurance due to the diversity of the development patterns among different types of reinsurance contracts, the necessary reliance on ceding companies for information regarding reported claims and differing reserving practices among ceding companies. TIG's reserves include an estimate of TIG's ultimate liability for asbestos-related matters, environmental pollution, toxic tort and other non-sudden and accidental claims for which ultimate values cannot be estimated using traditional reserving techniques. TIG's "environmental" loss and LAE reserves totaled $37 million and $39 million at September 30, 1997 and December 31, 1996, respectively. TIG's environmental claims activity is predominately from hazardous waste and pollution-related claims rising from commercial insurance policies written prior to 1985. In connection with TIG's IPO in April 1993, an affiliate of TIG's former parent, Transamerica Corporation, agreed to pay 75% of up to $119 million of reserve development and newly reported claims, up to a maximum reimbursement of $89 million, on policies written prior to January 1, 1993, with respect to certain environmental claims involving paid losses and certain LAE in excess of TIG's environmental loss and LAE reserves at December 31, 1992. At September 30, 1997, the Transamerica affiliate had incurred no liability under this agreement. During second quarter 1997, TIG completed a study of Company-wide loss reserves based on year-end 1996 data. The study indicated that the Company's reserve position net of available reinsurance coverage continues to be adequate. TIG will continue to monitor its reserve position and periodically conduct thorough loss reserve reviews. Management considers many factors when setting reserves, including: (i) current legal interpretations of coverage and liability; (ii) economic conditions; and (iii) internal methodologies which analyze TIG's experience with similar cases, information from ceding companies and historical trends, such as reserving patterns, loss payments, pending levels of unpaid claims and product mix. Based on these considerations, management believes that adequate provision has been made for TIG's loss and LAE reserves. Actual losses and LAE paid may deviate, perhaps substantially, from such reserves. TIG HOLDINGS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- 2.8 LIQUIDITY AND CAPITAL RESOURCES - -------------------------------------------------------------------------------- Liquidity is a measure of an entity's ability to secure enough cash to meet its contractual obligations and operating needs. TIG requires cash primarily to pay policyholders' claims, operating expenses, policyholder dividends and interest expenses. Generally, premium is collected months or years before claims are paid under the policies purchased by the premium. These funds are used first to pay current claims and expenses. The balance is invested in securities to augment the investment income generated by the existing portfolio. Historically, TIG has had, and expects to continue to have, more than sufficient funds to pay claims, operating expenses, policyholder dividends and interest expenses. Cash Flow From Operating Activities. The following table summarizes the significant components of cash flow from operations:
Three Months Nine Months Ended September 30, Ended September 30, ---------------------------- --------------------------- (In millions) 1997 1996 1997 1996 ------------------------------------- ------------- -------------- ------------- ------------- Reinsurance operations $21 $52 $91 $140 Primary operations and corporate 28 45 63 29 ------------------------------------- ------------- -------------- ------------- ------------- On-going operations 49 97 154 169 Run-off (Other Lines operations) (11) (58) (129) (130) ------------------------------------- ------------- -------------- ------------- ------------- Total $38 $39 $25 $39 ------------------------------------- ------------- -------------- ------------- -------------
The decrease in On-going operations cash flow for third quarter 1997 compared to 1996 is primarily attributable to a decline in overall premiums collected as a result of a decline in net premium written in Reinsurance operations and due to the timing of premiums collected in Primary operations. Run-off cash outflow has declined significantly for the quarter due primarily to a decrease in losses paid, net of reinsurance recoveries. Planned declines in Run-off premium production partially offset the reduced paid loss trends. The decline in on-going operations cash flow for the first nine months 1997 as compared to 1996 is primarily attributable to an increase in paid losses in Reinsurance due to a shift in business to shorter tail lines and an increase in operating expenses paid in the company. Partially off-setting the increase in paid items were increased premium receipts in the Primary operations as a result of increasing production, and a decline in paid losses in Primary operations due primarily to the timing of loss payments and reinsurance recoverables in 1996. Run-off cash outflow was relatively flat for the nine months, however a significant planned decline in run-off premium production off-set slowing paid loss trends. Net premium written for run-off lines was $2 million for the first nine months of 1997 as compared to $152 million for the 1996 period. As of September 30, 1997, loss and LAE reserves for run-off business, net of reinsurance, were approximately $387 million, 90% of which are expected to be paid within the next 5 years. Restrictions on Dividends from Insurance Subsidiaries. The maximum amount of shareholders dividends which the insurance subsidiaries can pay to TIG Holdings is limited to the greater of (i) 10% of statutory surplus as of the end of the preceding year or (ii) the statutory net income for the preceding year except that such amount may not exceed earned surplus. Accordingly, the maximum dividend payout to TIG Holdings from its subsidiaries that can be made without regulatory approval during 1997 is $155 million. TIG Holdings received $95 million in dividends from its insurance subsidiaries in the first nine months of 1997, as compared to $75 million for the first nine months of 1996. Aggregate investments and cash at TIG Holdings were $59 million at September 30, 1997, compared to $40 million at December 31, 1996. TIG HOLDINGS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- Notes Payable. In December 1995, TIG Holdings established an unsecured revolving line of credit with maximum borrowings of $250 million. At September 30, 1997, TIG had no outstanding borrowings under this facility. In 1995, TIG Insurance Company entered into a five-year $50 million credit facility of which approximately $26 million was outstanding as of September 30, 1997 and $25 million was outstanding as of December 31, 1996. The facility is a direct financing arrangement with a third-party related to the sale leaseback of certain fixed assets. In addition, TIG Holdings had $98 million of 8.125% notes payable maturing in 2005 outstanding at September 30, 1997 and December 31, 1996. In January 1997, TIG Capital Trust I, a statutory business trust created under Delaware law as a trust subsidiary of TIG Holdings, completed a private offering of $125 million of 8.597% capital securities. TIG Holdings issued $128.75 million in 8.597% Junior Subordinated Debentures to TIG Capital Trust I (including approximately $3.75 million with respect to the capital contributed to the Trust by TIG Holdings). All of the net proceeds received by TIG Holdings from the issuance of the debentures are being used for general corporate purposes which includes repurchases of TIG Holding's common stock. Shareholders' Equity. Shareholders' equity increased by $12 million during the first nine months of 1997, primarily due to $115 million in net income, $36 million increase in unrealized gain on fixed maturities and $29 million in common stock issues partially offset by $145 million of common stock repurchases and $26 million of common and preferred stock dividends. Book value per share increased to $23.91 at September 30, 1997 from $22.41 at December 31, 1996. Excluding the impact of unrealized investment gains, the book value per share would have been $22.20 at September 30, 1997 and $21.45 at December 31, 1996. As of September 30, 1997, the Board of Directors has authorized common stock repurchases of up to 18.75 million shares of TIG Holdings common stock. Under the repurchase plan, repurchases may be made from time to time on the open market at prevailing market prices or in privately negotiated transactions. Through September 30, 1997, 14.9 million shares have been repurchased (22.5% of total issued and outstanding including treasury shares at September 30, 1997) at an average cost per share of $28.21, for an aggregate cost of $421 million. In January, April and July 1997, TIG Holdings declared quarterly common stock dividends of $.15 per share. The quarterly dividend rate for 1996 was $.05 per share. TIG HOLDINGS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- 2.9 FORWARD-LOOKING STATEMENTS - -------------------------------------------------------------------------------- TIG Holdings would like to caution readers regarding certain forward-looking statements in the Management's Discussion and Analysis and elsewhere in this Form 10-Q. Statements which are based on management's projections, estimates and assumptions are forward-looking statements. The words "believe", "expect", "anticipate" and similar expressions generally identify forward-looking statements. While TIG Holdings believes in the veracity of all statements made herein, forward-looking statements are necessarily based upon a number of estimates and assumptions that, while considered reasonable by TIG Holdings, are inherently subject to significant business, economic and competitive uncertainties and contingencies, including without limitation: * changes in interest rates which could impact investment yields, the market value of invested assets and ultimately product pricing * changes in the frequency and severity of catastrophes which could impact net income, reinsurance costs and cash flow * increased competition (on the basis of price, services, or other factors) which could generally reduce operating margins * regulatory and legislative changes which could increase the Company's overhead costs, increase federal and state tax assessments, restrict access to profitable markets or force participation in unprofitable markets * changes in loss payment patterns which could impact cash flow and net investment income * changes in estimated overall adequacy of loss and LAE reserves which could impact net income, statutory surplus adequacy and management's decision to continue certain product lines * changes in general market or economic conditions which could impact the demand for the Company's products and loss frequency and severity for certain lines of business * loss of key management personnel which could impact the development and execution of the Company's business strategy and impact key customer and vendor relationships. Many of these uncertainties and contingencies can affect TIG Holdings' actual results and could cause its actual results to differ materially from those expressed in any forward-looking statements made by, or on behalf of, TIG Holdings. TIG HOLDINGS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- 2.10 GLOSSARY - -------------------------------------------------------------------------------- Catastrophe: An event that is designated to be a "catastrophe" by the Property Claim Service Division of American Services Group, an industry body. It generally defines events which are estimated to cause more that $5 million in insured property damage and which affect a significant number of insureds and insurers. Combined ratio: A combination of the underwriting expense ratio, the loss and LAE ratio, and the policyholder dividends ratio, determined in accordance with statutory accounting practices. A combined ratio below 100% generally indicates profitable underwriting results. A combined ratio over 100% generally indicates unprofitable underwriting results. Facultative reinsurance: The reinsurance of all or a portion of the insurance coverage provided by a single policy. Each policy reinsured is separately negotiated. Finite reinsurance: Reinsurance that contains an ultimate negotiated limit of risk to the reinsurer with respect to minimum and maximum exposure. Gross premium written: Total premium for direct insurance written and reinsurance assumed during a given period. Incurred but not reported ("IBNR") reserves: Reserves for estimated losses and LAE which have been incurred but not reported to the insurer (including future developments on losses that are known to the insurer). Incurred losses: The total losses sustained by an insurance company under a policy or policies, whether paid or unpaid. Incurred losses include a provision for claims that have occurred but have not yet been reported to the insurer. Loss adjustment expenses ("LAE"): The expenses of settling claims, including legal and other fees, and the portion of general expenses allocated to claim settlement costs. Loss development: The emergence of actual loss data as compared to estimate for specific accident years and for specific lines of business. Loss and LAE ratio: The ratio of incurred losses and LAE to earned premium, determined in accordance with statutory accounting practices. Loss and LAE reserves: Liabilities established by insurers and reinsurers to reflect the estimated cost of claims payments that the insurer will ultimately be required to pay in respect to insurance or reinsurance it has written. Reserves are established for losses and for LAE, and consist of case reserves and IBNR reserves. Net premium earned: The portion of net premium written in a particular period that is recognized for accounting purposes as income during that period. Net premium written: Direct premium written plus premium on assumed reinsurance less premium on ceded business for a given period. Policyholder dividend ratio: The ratio of dividends paid to policyholders to earned premium determined in accordance with statutory accounting practices. TIG HOLDINGS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- Program business: Tailored products developed for a particular industry segment (i.e., sporting events, railroads) or distribution system (i.e., trade associations, affinity groups). Programs are often developed and controlled by managing general agents. Reinsurance: The practice whereby one party, called the reinsurer, in consideration of a premium paid to it agrees to indemnify another party, called the reinsured, for part or all of the liability assumed by the reinsured under a policy or policies of insurance which it has issued. The reinsured may be referred to as the original or primary insurer, the direct writing company, or the ceding company. Reinsurance does not legally discharge the primary insurer from its liability to the insured. Retention; Retention level: The amount or portion of risk which an insurer or reinsurer retains for its own account. Losses in excess of the retention level are paid by the reinsurer or retrocessionaire. In pro rata treaties, the retention may be a percentage of the original policy's limit. In excess of loss reinsurance, the retention is a dollar amount of loss, a loss ratio, or a percentage of loss. Reverse flow business: Alternative distribution mechanism whereby general agents submit program business to a reinsurer. The reinsurer then works with a reinsurance intermediary to provide a primary insurer to the transaction who will issue the primary policy and then cede a significant portion of the risk to the reinsurer. Treaty reinsurance: The reinsurance of a specified type or category of risks defined in a reinsurance agreement (a "treaty") between a primary insurer or other reinsured and a reinsurer. Typically, in treaty reinsurance, the primary insurer or reinsured is obligated to offer and the reinsurer is obligated to accept a specified portion of all such type or category of risks originally underwritten by the primary insurer or reinsured. Underwriting: The insurer's process of reviewing applications submitted for insurance coverage, deciding whether to accept all or part of the coverage requested and determining the applicable premium. Underwriting expense ratio: The ratio of underwriting expenses to net premium written, determined in accordance with statutory accounting practices. Underwriting expenses: The aggregate of policy acquisition costs, including commissions, and the portion of administrative, general, and other expenses attributable to underwriting operations. Underwriting results: The measure of profitability of the insurance operations of an insurer, calculated as the result of earned premium, less losses, loss expenses, and underwriting expenses. Underwriting results is an indicator of a company's underwriting success. Workers' compensation insurance: Insurance that covers medical care, rehabilitation, and lost wages of employees who suffer work-related injuries, and provides death benefits for dependents of employees killed in work-related accidents. TIG HOLDINGS, INC. PART II. OTHER INFORMATION - -------------------------------------------------------------------------------- ITEM 1. LEGAL PROCEEDINGS - -------------------------------------------------------------------------------- TIG's insurance subsidiaries are routinely engaged in litigation in the normal course of their business. As a liability insurer, the Company defends third-party claims brought against its insureds. As an insurer, the Company defends against coverage claims. On January 11, 1994, a Los Angeles County Superior Court jury returned a verdict of $28 million for punitive damages against TIG Insurance Company ("TIC") in Talbot Partners v. Cates Construction, Inc. and TIC (the "Talbot Case"). The award arose out of TIC's handling of a surety bond claim on a construction project. On March 28, 1997, the California Court of Appeal reduced the trial court's punitive damage award to $15 million. On July 23, 1997, the California Supreme Court granted TIC's petition to review the Court of Appeal's decision. Management believes that the ultimate liability arising from the Talbot Case will not materially impact consolidated operating results. TIG's Federal income tax returns are routinely audited by the Internal Revenue Service (IRS) and provisions are made in the financial statements in anticipation of the results of these audits. Following a routine federal income tax audit by the IRS, in September 1997 the IRS issued a Statutory Notice of Deficiency for the tax year 1993 and a Revenue Agent's Report for 1994 asserting a tax liability of approximately $170 million excluding interest. The IRS's asserted tax adjustments principally relate to the acquisition made by TIG under the Section 338(h)(10) election of April 27, 1993 in conjunction with TIG's IPO, and primarily generate temporary differences by creating income in 1993 with corresponding deductions in 1993 and future years. TIG strongly disagrees with the IRS's position and intends to file a Tax Court Petition challenging it in the fourth quarter of 1997. While the timing of cash tax payments may be impacted, management believes that revisions to TIG's recorded tax liability, if any, arising from the IRS's audit will not materially impact consolidated net income or the financial condition of the Company. TIG HOLDINGS, INC. PART II. OTHER INFORMATION - -------------------------------------------------------------------------------- ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K - -------------------------------------------------------------------------------- (a) Exhibits: Exhibit 3.1: Amended and Restated Certificates of Incorporation of TIG Holdings as filed with the Delaware Secretary of State on April 16, 1993 (incorporated by reference to Exhibit 3.1 to TIG Holdings' Quarterly Report on Form 10-Q for the quarter ended March 31, 1993, Commission File No. 1-11856). Exhibit 3.2: Amended and Restated Bylaws of TIG Holdings as adopted by TIG Holdings' Board of Directors on May 18, 1993 (incorporated by reference to Exhibit 3.2 to TIG Holdings' Registration Statement on Form S-8, File No. 33-63148). Exhibit 4.1: Certificate of Designation of TIG Holdings relating to the $7.75 Cumulative Preferred Stock of TIG Holdings as filed with the Delaware Secretary of State on April 16, 1993 (incorporated by reference to Exhibit 4.1 to TIG Holdings' Quarterly Report on Form 10-Q for the quarter ended March 31, 1993, Commission File No. 1-11856). Exhibit 4.2: Indenture dated as of April 1, 1995 between TIG Holdings and the First National Bank of Chicago, as Trustee (incorporated by reference to Exhibit 4.2 to Registration Statement No. 33-90594, filed March 24, 1995). Exhibit 4.3: Junior Subordinated Indenture, dated January 30, 1997, between TIG Holdings, Inc. and The Chase Manhattan Bank, as Trustee (incorporated by reference to Exhibit 4.3 to TIG Holdings' Quarterly Report on Form 10-Q for the quarter ended March 31, 1997). Exhibit 4.4: Certificate of Trust of TIG Capital Trust I, dated January 24, 1997 between TIG Holdings, Inc. and The Chase Manhattan Bank, Chase Manhattan Bank Delaware, as Trustees (incorporated by reference to Exhibit 4.4 to TIG Holdings' Quarterly Report on Form 10-Q for the quarter ended March 31, 1997). Exhibit 4.5: Capital Securities Guarantee Agreement, dated January 30, 1997, between TIG Holdings, Inc. and The Chase Manhattan Bank, as Trustee (incorporated by reference to Exhibit 4.5 to TIG Holdings' Quarterly Report on Form 10-Q for the quarter ended March 31, 1997). Exhibit 4.6: Trust Agreement, dated January 24, 1997, between TIG Holdings, Inc. and The Chase Manhattan Bank, Chase Manhattan Bank Delaware, as Trustees (incorporated by reference to Exhibit 4.6 to TIG Holdings' Quarterly Report on Form 10-Q for the quarter ended March 31, 1997). Exhibit 4.7: Amended and Restated Trust Agreement, dated January 30, 1997, between TIG Holdings, Inc., the Administrators named therein and The Chase Manhattan Bank, Chase Manhattan Bank Delaware, as Trustees (incorporated by reference to Exhibit 4.7 to TIG Holdings' Quarterly Report on Form 10-Q for the quarter ended March 31, 1997). Exhibit 4.8: Form of Capital Securities Certificate of TIG Capital Trust I,(included as Exhibit E to Exhibit 4.7) Exhibit 10.1: TIG Holdings, Inc. 1996 Long-Term Incentive Plan Restricted Share Award Agreement. Exhibit 10.2: Tax Reimbursement Agreement dated November 11, 1996, between TIG Holdings, Inc. and Mary R. Hennessy. Exhibit 10.3: Purchase and Sale Agreement dated as of September 30, 1997, by and between TIG Insurance Company and Nationwide Mutual Insurance Company. Exhibit 11: Computation of Earnings Per Share. (b) The Company did not file any reports on Form 8-K during the three months ended September 30, 1997. EX-10 2 EXHIBIT 10.1 TIG HOLDINGS, INC. 65 EAST 55TH STREET 28TH FLOOR NEW YORK, NEW YORK 10022 TIG HOLDINGS, INC. 1996 LONG-TERM INCENTIVE PLAN Restricted Share Award Agreement ("Agreement") With FIRSTNAME MI LASTNAME Residing at ADDRESS CSZ Agreement dated as of January 16, 1997 1. Incorporation By Reference; Document Receipt. This Agreement is subject in all respects to the terms and provisions of the TIG Holdings, Inc. 1996 Long-Term Incentive Plan (the "Plan"), including, without limitation, any amendments thereto adopted at any time and from time to time and which are intended to apply to the grant of Restricted Shares hereunder, all of which terms and provisions are made a part of and incorporated in this Agreement as if they were expressly set forth herein. Any capitalized term not defined in this Agreement shall have the same meaning as is ascribed thereto under the Plan. You hereby acknowledge receipt of a true copy of the Plan and that you have read the Plan carefully and fully understand its contents. In the event of a conflict between the terms of this Agreement and the terms of the Plan, the terms of the Plan shall control. 2. Grant and Vesting of Restricted Shares. You have been selected to receive a grant of the number of Restricted Shares set forth below as an Award under Section 8 of the Plan. Number of Restricted Shares ............................SHARES The Restricted Shares shall be uncertificated and, except as provided in paragraph 4 of this Agreement, shall vest as follows, provided you are employed by the Company or one of its Related Companies on the applicable vesting date: o T1shares................................on January 16, 1998 o T2shares................................on January 16, 1999 o T3shares................................on January 16, 2000 3. Delivery of Certificate. After the vesting of your Restricted Shares, you shall be entitled, in accordance with the terms and provisions of the Plan, to receive, upon your request, a stock certificate (registered in your name) for and representing the number of shares of Common Stock underlying the vested Restricted Shares. No fractional shares shall be issued under this Agreement. Any fractional shares to which you would otherwise be entitled shall be repurchased by the Company for cash. 4. Termination of Employment. If your employment with the Company and the Related Companies is terminated due to death, Disability, or Retirement, all then unvested Restricted Shares covered by this Agreement as of the date of any such termination shall become 100% vested as of such date. Upon the occurrence of both (a) a Change in Control and (b) an Adverse Employment Action before the expiration of one year after the Change in Control, all then unvested Restricted Shares shall become 100% vested in accordance with the provisions of Section 17 of the Plan. Except as otherwise provided herein, if your employment with the Company and the Related Companies is terminated for any reason other than death, Disability, or Retirement at any time, any Restricted Shares that have not yet vested as of the date of any such termination shall be immediately forfeited by you and canceled. 5. Rights of Stockholder. Subject to the provisions of the Plan and this Agreement, you shall have all of the powers, preferences, and rights of a holder of Common Stock with respect to the shares of Common Stock comprising this Restricted Share grant. You agree and understand that nothing contained in this Agreement provides, or is intended to provide, you any protection against potential future dilution of your stockholder interest in the Company for any reason, except as stated in Section 16.2 of the Plan. Any stock dividends paid in respect of unvested Restricted Shares shall be treated as additional Restricted Shares and shall be subject to the same restrictions and other terms and conditions that apply to the unvested Restricted Shares with respect to which such stock dividends are paid. 6. Non-transferability. Unvested Restricted Shares (i) shall not be sold, exchanged, assigned, transferred, or otherwise disposed of in any way at any time by you (or your beneficiary(ies)), other than by testamentary disposition by you or the laws of descent and distribution and (ii) shall not be pledged, encumbered, or otherwise hypothecated in any way at any time by you (or your beneficiary(ies)) and shall not be subject to execution, attachment, or similar legal process. Any attempt to sell, transfer, pledge, encumber, hypothecate, or otherwise dispose of any unvested Restricted Shares, contrary to the terms and provisions of this Agreement and/or the Plan, shall be null and void and without legal force or effect. 7. Withholding. The Company shall have the right to deduct from any shares or amount due you under this Agreement or otherwise, any federal, state, local, or other taxes of any kind that the Company, in its sole discretion, deems necessary to be withheld to comply with the Internal Revenue Code of 1986, as amended (the "Code"), and/or any other applicable law, rule, or regulation. When the Restricted Shares become vested (or if you make an election under Section 83(b) of the Code at the time of such election), you shall, if requested by the Company, promptly pay to the Company in cash an amount equal to the applicable withholding taxes determined by the Company as being required to be withheld or collected under applicable federal, state, or local laws or regulations. Furthermore, the Company shall have the right to deduct and withhold any such applicable taxes from, or in respect of, any dividends or other distributions paid on or in respect of the Common Stock comprising this Restricted Share grant. All taxes, if any, in respect of the grant of the Restricted Shares or any payments to you hereunder shall be solely your responsibility and shall be paid by you. You will notify the Company of your intention to make an election under Section 83(b) of the Code at least five (5) business days before making such election. 8. Compliance with Laws. The resale of the shares of Common Stock issued pursuant to this Agreement shall be subject to, and shall comply with, any applicable requirements of federal and state securities laws, rules, and regulations (including, without limitation, the provisions of the Securities Act of 1933, the Exchange Act and the respective rules and regulations promulgated thereunder) and any other law, rule, or regulation applicable thereto, as such laws, rules, and regulations may be amended from time to time. The Company shall not be obligated to permit the resale of any shares of Common Stock pursuant to this Agreement if such resale would violate any such requirements. 9. Cancellation and Rescission of Awards. Notwithstanding anything in this Agreement to the contrary, the Committee may cancel any unexpired, unpaid, unvested, or deferred Awards (and an Award that has already been paid, vested, or delivered may be rescinded) in accordance with this paragraph 9 at any time if you are not in compliance with all other applicable provisions of this Agreement, the Plan and with the following conditions: (a) Without the prior written consent of the Company which expressly waives this provision, you shall not render services for any organization or engage directly or indirectly in any business which, in the judgment of the Chief Executive Officer of the Company or other senior officer designated by the Chief Executive Officer for this purpose, or in the judgment of the Committee, is or becomes competitive with the Company or a Related Company, or which organization or business, or the rendering of services to such organization or business, is or becomes otherwise prejudicial to or in conflict with the interests of the Company or a Related Company. If your employment has terminated, the judgment of the Chief Executive Officer, other designated senior officer or the Committee shall be based on your position and responsibilities while employed by the Company or a Related Company, your post-employment responsibilities and position with the other organization or business, the extent of past, current and potential competition or conflict between the Company or a Related Company and the other organization or business, the effect of your assumption of the post-employment position on the customers, suppliers, producers, and competitors of the Company and the Related Companies, the guidelines and policies established by the Company and the Related Companies relating to business conduct ethics, and such other considerations as are deemed relevant given the applicable facts and circumstances. (b) You shall not, without prior written authorization from the Company, disclose to anyone outside the Company and the Related Companies, or use in other than the business of the Company and the Related Companies, any confidential information or material, relating to the business of the Company and the Related Companies, acquired by you either during or after employment with the Company or a Related Company. (c) Upon payment, vesting, or delivery pursuant to an Award, you shall certify on a form acceptable to the Company that you are in compliance with the terms and conditions of the Plan and this Agreement. Failure to comply with any of the applicable provisions of the Plan and this Agreement, including without limitation the non-compete and confidentiality provisions of subparagraphs (a) and (b) above prior to, or during the six months after, any payment, vesting, or delivery (including delivery of stock certificates by book-entry) pursuant to an Award, shall cause such payment, vesting, or delivery to be rescinded. The Company shall notify you in writing of any such rescission within two years after such payment, vesting or delivery. Within ten days after receiving such a notice from the Company, you shall pay to the Company the amount of any gain realized or payment received as a result of the rescinded payment, vesting, or delivery pursuant to an Award. Such payment shall be made either in cash or by returning to the Company the number of shares of Common Stock that you received in connection with the rescinded payment, vesting, or delivery. 10. Notices. Any notice hereunder shall be in writing and shall be delivered in person, or via facsimile transmission, overnight courier service, or certified mail, return receipt requested, postage prepaid, properly addressed to you or the Company, as the case may be, at the applicable address specified in the heading on the first page of this Agreement, or at such other address as you or the Company, as the case may be, may designate to the other party from time to time in a notice that satisfies the conditions of this paragraph. 11. Governing Law; Entire Agreement. This Agreement shall be governed by and shall be construed in accordance with the laws of the State of Delaware, without reference to the principles of conflict of laws thereof. This Agreement contains the entire agreement between you and the Company with respect to the subject matter contained herein, and supersedes all prior agreements or prior understandings, whether oral or written, between such parties relating to such subject matter. 12. Severability. The invalidity or unenforceability of any provision of this Agreement in any jurisdiction shall not affect the validity, legality, or enforceability of the remainder of this Agreement in such jurisdiction or the validity, legality, or enforceability of any provision of this Agreement in any other jurisdiction, it being intended that all rights and obligations of the parties hereunder shall be enforceable to the fullest extent permitted by law. IN WITNESS WHEREOF, the parties hereto have executed this Agreement in one or more counterparts, each of which shall be deemed to be the original, as of the date first set forth above. TIG HOLDINGS, INC. Agreed to and accepted by: By: /s/LON P. MCCLIMON ------------------- ------------------------ ------------- Lon P. McClimon Recipient Signature Date EX-10 3 EXHIBIT 10.2 November 11, 1996 Ms. Mary R. Hennessy 1 Nostrand Road Cranbury, New Jersey 08512 Re: Tax Reimbursement Dear Mary: In connection with your becoming an employee of TIG Holdings, Inc. ("TIG"), we have discussed TIG's willingness to indemnify you against certain potential tax liability that you may incur arising out of your termination of employment with American Re Corporation ("American Re"). The purpose of this letter is to confirm those arrangements. In agreeing to provide the indemnity described herein, we have relied upon the information that you have furnished us concerning the payments and benefits that have or will accrue to you in connection with your termination of employment with American Re. If you owe any excise tax pursuant to Section 4999 of the Internal Revenue Code of 1986, as amended, as a result of any severance payments, or the acceleration of any stock options, paid or provided to you in connection with the acquisition of American Re by Munchener Ruckversicherung-Gesellschaft Aktiengesellschaft (the "Excise Tax"), TIG will promptly pay you an amount (the "Reimbursement Payment") such that, after the payment by you of any federal, state and local income taxes, and any Medicare tax portion of the Federal Insurance Contributions Act tax, attributable to the Reimbursement Payment, you will retain an amount of the Reimbursement Payment equal to the Excise Tax. You agree that (i) if you file any tax return reporting any Excise Tax, and/or (ii) promptly after any determination, claim or assertion is made by the Internal Revenue Service ("IRS") that the Excise Tax is due, you will notify TIG of such filing, or of such determination, claim or assertion. You further agree that TIG will be allowed a reasonable period of time to review with you whether the Excise Tax is owed or is required to be reported to the IRS. If TIG obtains (at TIG's sole expense) an opinion of legal counsel that it is more likely than not that (a) the Excise Tax is not owed by you or is not required to be reported to the IRS, or (b) that you would succeed in disputing such determination, claim or assertion of the IRS, you will (upon request and at the sole expense of TIG) make a good faith effort to file a claim for a refund and/or to contest such IRS determination, claim or assertion, or refund denial, in all administrative proceedings with the IRS and in any related judicial proceedings. In conducting any such contest, you will make a good faith effort to keep TIG advised on all relevant matters and correspondence with the IRS and will permit TIG to control any administrative or judicial proceedings. TIG will bear all expenses of any such proceedings and will pay any penalties and interest imposed on you (and not subsequently waived) by the IRS as a result of any such proceeding. If you are in agreement with the foregoing, please so indicate in the space provided below. Very truly yours, TIG HOLDINGS, INC. By: /s/ Peter M. Acton ------------------- Name: Peter M. Acton Title: Senior Vice President and General Counsel Acknowledged and agreed to: /s/ Mary R. Hennessy - -------------------- Mary R. Hennessy EX-10 4 EXHIBIT 10.3 PURCHASE AND SALE AGREEMENT This Purchase and Sale Agreement (the "Agreement"), is made and entered into as of September 30, 1997, by and between TIG Insurance Company, a corporation organized under the laws of the State of California (the "Seller"), and Nationwide Mutual Insurance Company, a mutual insurance company organized under the laws of the State of Ohio ("Purchaser" and, together with Seller, the "Parties"). Certain capitalized terms used herein are defined in Section 1 hereof. WITNESSETH WHEREAS, Seller owns all of the issued and outstanding shares of capital stock of TIG Countrywide Insurance Company, a corporation organized under the laws of the State of California ("Target"); WHEREAS, Seller, among other things, conducts a business which markets personal automobile and homeowners' insurance through Independent Agents (the "Business"); and WHEREAS, on the terms and subject to the conditions contained in this Agreement, Purchaser desires to purchase, and Seller desires to sell, all of the issued and outstanding shares of capital stock of Target and the Business and certain assets of the Seller and its Subsidiaries relating to the Business, and the Purchaser desires to assume, and the Seller desires to transfer, the Assumed Liabilities. NOW, THEREFORE, in consideration of the premises and of the mutual covenants and agreements contained in this Agreement, the parties, intending to be legally bound, do hereby represent, warrant, covenant and agree as follows: Section 1. Definitions. ----------------------- "Acquired Assets" means all right, title, and interest in and to the assets of Seller listed in Exhibit A hereto, provided, however, that the Acquired Assets shall not include (i) any of the rights of Seller or any of its Affiliates under this Agreement (or under any collateral agreement between Seller or any of its Affiliates on the one hand and Purchaser on the other hand entered into on or after the date of this Agreement) or (ii) any rights in and with respect to the assets associated with its Employee Benefit Plans or other assets not specifically listed in Exhibit A or described herein. "Adverse Consequences" means all claims, damages, penalties, fines, costs, reasonable amounts paid in settlement, liabilities, losses, expenses, and fees, including court costs and reasonable attorneys' fees and expenses. "Affiliate" has the meaning set forth in Rule 12b-2 of the regulations promulgated under the Securities Exchange Act of 1934, as amended. "Affiliated Group" means any affiliated group within the meaning of Code Section 1504 (a) or any similar group defined under a similar provision of state law. "Assumed Liabilities" means all debts, obligations and other Liabilities of Seller or its Affiliates under, or arising out of the agreements, contracts, leases, licenses, and other arrangements referred to in the definitions of Acquired Assets and Business through and including the time of Closing; provided, however, that the Assumed Liabilities shall not include (i) any Liability of Seller for the unpaid Taxes of any Person under Treas. Reg. Section 1.1502-6 (or any similar provision of state or local law), as a transferee or successor, by contract, or otherwise, except to the extent required by law, (ii) any liability of Seller for costs and expenses incurred in connection with this Agreement and the transactions contemplated hereby, (iii) any liability or obligation of Seller under this Agreement (or under any collateral agreement between Seller or any of its Affiliates on the one hand and Purchaser on the other hand entered into on or after the date of this Agreement) or (iv) any liabilities of Seller for payment of any accrued but not taken vacation and any accrued salaries, wages and bonuses with respect to the Personal Lines Employees as of the close of business on the Closing Date. "Basis" means any past or present fact, situation, circumstance, status, condition, activity, practice, plan, occurrence, event, incident, action, failure to act, or transaction that forms the basis for any specified consequence. "Business" has the meaning set forth in the recitals of this Agreement. "California Insurance Department" has the meaning set forth in Section 6(d) below. "Closing" has the meaning set forth in Section 3 below. "Closing Balance Sheet" has the meaning set forth in Section 4(i) below. "Closing Date" has the meaning set forth in Section 3 below. "Closing Date Total Surplus" means the pro forma total surplus of Target as of the Closing Date, calculated on a basis consistent with the Latest Balance Sheet and giving effect to the transactions contemplated by the Target Quota Share Reinsurance Agreement, the Seller Quota Share Reinsurance Agreement and the Loss Portfolio Transfer Agreement. "Closing Financial Data" has the meaning set forth in Section 4(i) below. "Code" means the Internal Revenue Code of 1986, as amended. "Controlled Group of Corporations" has the meaning set forth in Section 1563 of the Code. "Disclosure Schedule" has the meaning set forth in Section 6 below. "Employee Benefit Plan" means any (a) nonqualified deferred compensation or retirement plan or arrangement which is an Employee Pension Benefit Plan, (b) qualified defined contribution retirement plan or arrangement which is an Employee Pension Benefit Plan, (c) qualified defined benefit retirement plan or arrangement which is an Employee Pension Benefit Plan (including any Multiemployer Plan), or (d) Employee Welfare Benefit Plan or material fringe benefit plan or program. "Employee Pension Benefit Plan" has the meaning set forth in ERISA Section 3(2). "Employee Welfare Benefit Plan" has the meaning set forth in ERISA Section 3(1). "Environmental Damages" means all claims, judgments, losses, penalties, fines, liabilities, encumbrances, liens, costs and reasonable expenses of investigation, defense or good faith settlement resulting from violations of Environmental Laws, and including, without limitation: (i) damages for personal injury and injury to property or natural resources; (ii) reasonable fees and disbursements of attorneys, consultants, contractors, experts and laboratories; and (iii) costs of any cleanup, removal, response, abatement, containment, closure, restoration or monitoring work required by any Environmental Law. "Environmental, Health and Safety Laws" means the Comprehensive Environmental Response, Compensation and Liability Act of 1980, the Resource Conservation and Recovery Act of 1976, and the Occupational Safety and Health Act of 1970, together with all other laws (including rules, regulations and codes of federal, state and local governments, and all agencies thereof) concerning pollution or protection of the environment, public health and safety, or employee health and safety, including laws relating to emissions, discharges, releases, or threatened releases of pollutants, contaminants, or chemical, industrial, hazardous, or toxic materials or wastes into ambient air, surface water, ground water, or lands. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. "ERISA Affiliate" means an entity which, together with Target, would be treated as a single employer under Section 414 of the Code. "Extremely Hazardous Substance" has the meaning set forth in Section 302 of the Emergency Planning and Community Right-to-Know Act of 1986, as amended. "Fiduciary" has the meaning set forth in ERISA Section 3 (21). "Hazardous Materials" include substances (i) which are or become defined as a "hazardous waste," "hazardous substance," or "pollutant or contaminant" under any Environmental Laws; or (ii) which are toxic, explosive, corrosive, flammable, infectious, radioactive, carcinogenic or mutagenic; or (iii) which contain petroleum hydrocarbons, polychlorinated biphenyls, asbestos, asbestos containing materials or urea formaldehyde. "Indemnified Party" has the meaning set forth in Section 16(b) below. "Indemnifying Party" has the meaning set forth in Section 16(b) below. "Independent Agent" means those persons, firms or corporations listed on Exhibit B. "Knowledge of Seller" or words of similar import, means the actual knowledge of William Huff, Michael Casey, Louis Paglia, Harry Cotter, Richard Gibson, Mark Jorgensen, David Rowlands, Jr., Ranelle Smith or Wilson Wheeler. "Latest Balance Sheet" has the meaning set forth in Section 7(b) below. "Liability" means any liability (whether known or unknown, whether asserted or unasserted, whether absolute or contingent, whether accrued or unaccrued, whether liquidated or unliquidated, and whether due or to become due). "Licenses" has the meaning set forth in Section 6(h) below. "LossPortfolio Transfer Agreement" means the reinsurance agreement described in Section 14(e) below. "Material Adverse Effect" means any material adverse effect on the business, financial condition, results of operations or properties of the Target and the Business, considered as a whole. "Material Agreement" has the meaning set forth in Section 7(k). "Multiemployer Plan" has the meaning set forth in ERISA Section 3(37). "Neutral Auditors" has the meaning set forth in Section 4(iv) below. "Ordinary Course of Business" means the ordinary course of business consistent with past practice and custom. "Parties" has the meaning set forth in the preface of this Agreement. "Person" means an individual, a partnership, a corporation, an association, a joint stock company, a trust, a joint venture, an unincorporated organization, or a governmental entity (or any department, agency, or political subdivision thereof). "Personal Lines Employees" means all of the employees of Seller who as of the date of this Agreement performed services for the Business and who are named in Exhibit C hereto (which Exhibit also sets forth the title, bonus paid (if any), years of service and current rate of compensation for each such employee), except any such employees who, prior to the Closing Date, become qualified for long-term disability benefits under Seller's long-term disability plan, or any such employees who are on short-term disability and who the Seller reasonably determines, not later than December 1, 1997, are likely to become qualified for long-term disability benefits. "Prohibited Transaction" has the meaning set forth in ERISA Section 406 and Section 4975 of the Code. "Purchase Price" has the meaning set forth in Section 2 below. "Purchaser" has the meaning set forth in the recitals of this Agreement. "Purchaser Disclosure Schedule" has the meaning set forth in Section 8 below. "Reportable Event" has the meaning set forth in ERISA Section 4043. "Reserves" has the meaning set forth in Section 6(m) below. "Resolution Period" has the meaning set forth in Section 4(iii) below. "Restricted Business" has the meaning set forth in Section 12(b) below. "Security Interest" means any mortgage, pledge, lien, encumbrance, charge, or other security interest, other than (a) mechanic's, materialmen's, and similar liens, (b) liens for taxes not yet due and payable or for taxes that the taxpayer is contesting in good faith through appropriate proceedings, (c) purchase money liens and liens securing rental payments under capital lease arrangements, and (d) other liens arising in the Ordinary Course of Business and not incurred in connection with the borrowing of money. "Seller" has the meaning set forth in the preface above. "Seller Quota Share Reinsurance Agreement" means the reinsurance contract between Target and Seller referred to in Section 13(e) below. "Statements" has the meaning set forth in Section 6(d) below. "Straddle Period" shall mean any taxable period that includes (but does not end on) the Closing Date. "Straddle Tax Return" shall mean any Tax Return required to be filed by Target covering a taxable period commencing prior to the Closing Date and ending after the Closing Date. "Subsidiary" means any corporation with respect to which a specified Person (or a Subsidiary thereof) owns a majority of the common stock or has the power to vote or direct the voting of sufficient securities to elect a majority of the directors. "Target" has the meaning set forth in the preface above. "Target Quota Share Reinsurance Agreement" means the reinsurance contract between Target, Seller and certain Affiliates of Seller referred to in Section 12(d) below. "Tax" means any federal, state, foreign or local income, gross receipts, license, payroll, employment, excise, severance, stamp, occupation, premium, windfall profits, environmental (including taxes under Section 59A of the Code), customs duties, capital stock, franchise, profits, withholding, social security (or similar), unemployment, disability, real property, personal property, sales, use, transfer, registration, value added, alternative or add-on minimum, estimated, or other tax of any kind whatsoever, including any interest, penalty, or addition thereto. "Tax Return" means any return, declaration, report, claim for refund, or information return or statement relating to Taxes, including any schedule or attachment thereto, and including any amendment thereof. "TIG Holdings" means TIG Holdings, Inc., a Delaware corporation. "Third Party Claim" has the meaning set forth in Section 16(b) below. "Unresolved Changes" has the meaning set forth in Section 4(iv) of this Agreement. Section 2. Purchase and Sale. (a) Upon the terms and subject to the conditions of this Agreement, at the Closing (as such term is defined below), (i) Seller agrees to sell, transfer, assign, convey and deliver to Purchaser, and Purchaser agrees to purchase, accept and acquire from Seller, 12,500 shares of common stock, par value of $270 per share, of Target (the "Shares"), which Shares shall constitute all of the issued and outstanding capital stock of Target, and (ii) Purchaser shall pay to Seller $65 million plus Closing Date Total Surplus (which may be negative) in cash by wire transfer in immediately available funds (the "Purchase Price") in accordance with Section 5(b) below (subject to adjustment as provided in Section 4 below), which price includes consideration for certain transition and support services to be provided by Seller to Purchaser as contemplated by Sections 11 and 14 hereof commencing after the date hereof. (b) No later than 10 days prior to the date that the Seller reasonably believes will be the Closing Date, Seller shall deliver to Purchaser an estimated pro forma balance sheet of Target as of the Closing (the "Estimated Closing Balance Sheet") containing an estimate of Closing Date Total Surplus ("Estimated Closing Date Total Surplus"). The Estimated Closing Balance Sheet shall be prepared on a basis consistent with the methods, principles, practices and policies employed in the preparation and presentation of the Latest Balance Sheet. The Purchase Price payable at Closing shall be adjusted by an amount equal to Estimated Closing Date Surplus as set forth in such statement. Section 3. The Closing. The closing of the sale and purchase of the Shares and the Acquired Assets (the "Closing") shall take place at 10:00 a.m. on the third business day following the satisfaction or waiver of all conditions to the obligations of the Parties to consummate the actions contemplated hereby (other than conditions with respect to actions the respective Parties will take at the Closing itself) at the offices of Willkie Farr & Gallagher, One Citicorp Center, 153 East 53rd Street, New York, NY 10022 or at the offices, or at such other date, time or place as the parties may mutually agree (the "Closing Date"). Section 4. Purchase Price Adjustment. (i) As soon as practicable, but in no event later than 60 days following the Closing Date, Seller shall prepare a pro forma balance sheet of Target as of the Closing (the "Closing Balance Sheet") and a calculation of Closing Date Total Surplus as of the Closing based on the Closing Balance Sheet (collectively, the "Closing Financial Data"). The Closing Balance Sheet and the calculation of Closing Date Total Surplus shall be prepared on a basis consistent with the methods, principles, practices and policies employed in the preparation and presentation of the Latest Balance Sheet. (ii) During the preparation of the Closing Balance Sheet and the calculation of Closing Date Total Surplus as of the Closing, and the period of any review or dispute within the contemplation of this Section 4, Purchaser shall (A) provide Seller and Seller's authorized representatives with full access to all relevant books, records, workpapers and employees of Target and the Business, and (B) cooperate fully with Seller and Seller's authorized representatives, including the provision on a timely basis of all information necessary or useful in the preparation of the Closing Balance Sheet. (iii) Seller shall deliver a copy of the Closing Financial Data to Purchaser promptly after it has been prepared. After receipt of the Closing Financial Data, Purchaser shall have forty-five (45) days to review the Closing Financial Data, together with the workpapers used in the preparation thereof. Unless Purchaser delivers written notice to Seller on or prior to the 45th day after Purchaser's receipt of the Closing Financial Data stating that Purchaser has objections to the Closing Financial Data, or methods, principles, practices or policies employed in the preparation thereof, Purchaser shall be deemed to have accepted and agreed to the Closing Financial Data. If Purchaser so notifies Seller of its objections to the Closing Financial Data, the Parties shall, within twenty (20) days (or such longer period as the Parties may agree) following such notice (the "Resolution Period"), attempt to resolve their differences arising from such objections and any resolution by them as to any disputed amounts or methods, principles, practices or policies employed in the preparation thereof shall be final, binding and conclusive. Purchaser acknowledges and agrees that it shall not, under any circumstances, have the ability to raise objections relating to the adequacy of the amounts recorded for Loss Reserves, ALAE Reserves or ULAE (the "Reserve Accounts") on the Latest Balance Sheet, Closing Date Balance Sheet, the methods, principles, practices or policies employed in the preparation thereof, or the impact thereof on Closing Date Total Surplus; provided, however, that with respect to any development in the Reserve Accounts between the date of the Latest Balance Sheet and the Closing Date, Purchaser may raise objections to the method used in preparing the amounts recorded in the Reserve Accounts solely on the basis that such method was inconsistent with the past practice of the Seller. (iv) Any amounts or methods, principles, practices or policies employed in the preparation thereof, remaining in dispute at the conclusion of the Resolution Period ("Unresolved Changes") shall be submitted to such firm of United States independent certified public accountants as Seller and Purchaser may agree, such firm to be a "Big 6 Firm". If they cannot so agree within five (5) days after the end of the Resolution Period, they shall each select one such firm within ten (10) days after the end of the Resolution Period and the two (2) firms so chosen shall select a third firm of United States independent certified public accountants, such firm to be a "Big 6 Firm" to which such dispute shall be submitted (the firm ultimately selected pursuant to this Section being the "Neutral Auditors"). All Unresolved Changes shall be submitted to the Neutral Auditors no later than ten (10) days after the same is designated. Each Party agrees to execute, if requested by the Neutral Auditors, a reasonable engagement letter. All fees and expenses relating to the work, if any, to be performed by the Neutral Auditors shall be borne pro rata by Seller and Purchaser in proportion to the allocation of the dollar amount of the Unresolved Changes between Seller and Purchaser made by the Neutral Auditors such that the prevailing party pays a lesser proportion of the fees and expenses. The Neutral Auditors shall act as an arbitrator to determine, based on the provisions of this Section 4, only the Unresolved Changes. The Neutral Auditors' determination of the Unresolved Changes shall be made within forty-five (45) days of the submission of the Unresolved Changes thereto, shall be set forth in a written statement delivered to Seller and Purchaser and shall be final, binding and conclusive. The term "Adjusted Closing Balance Sheet," as used in this Agreement, shall mean the definitive Closing Balance Sheet agreed to by Seller and Purchaser under Section 4(iii) or, if submitted to the Neutral Auditors, this Section 4(iv) (in such case giving effect to those items theretofore agreed to by Seller and Purchaser). It is understood by the Parties that to the extent Purchaser's objections to the Closing Financial Data are correct, adjustments will be made in such items of the Latest Balance Sheet so that such items are so provided for or reflected therein in a manner consistent with the methods, principles, practices or policies employed in the preparation of the Closing Financial Data. Similar adjustments shall be made, if applicable, in Adjusted Total Shareholders Equity. (v) The purchase price paid by Purchaser at the Closing shall be (A) increased dollar for dollar by the amount and to the extent Closing Date Total Surplus as of the Closing based upon the Closing Balance Sheet or the Adjusted Closing Balance Sheet, as the case may be, exceeds Estimated Closing Date Total Surplus, or (B) decreased dollar for dollar by the amount and to the extent Closing Date Total Surplus as of the Closing based upon the Closing Balance Sheet or the Adjusted Closing Balance Sheet, as the case may be, is less than Estimated Closing Date Total Surplus. Any adjustments to the purchase price made pursuant to this Section 4(a)(v) shall be paid by wire transfer of immediately available funds to the account specified by the Party to which such payment is owed. In the event that the amount of Closing Date Total Surplus as of the Closing is agreed to by Purchaser and Seller during (or before) the Resolution Period, such payment shall be made within five (5) business days after the date such agreement is reached. In the event that there are Unresolved Changes at the end of the Resolution Period, then (A) if the Purchaser and Seller agree that a purchase price adjustment is owed to one Party regardless of the ultimate resolution of any Unresolved Changes, then the minimum amount which the Purchaser and the Seller agree is owed to such Party shall be paid within five (5) business days after the end of the Resolution Period and any additional amounts owing to such Party with respect to the Unresolved Changes shall be paid within five (5) business days after resolution thereof by the Neutral Auditors or (B) in all other cases, any and all payments shall be made within five (5) business days after resolution of the Unresolved Changes by the Neutral Auditors. (vi) Purchaser and Seller shall make good faith efforts to comply with the timing and response requirements set forth in this Section 4, but in the absence of bad faith, neither Party shall be deemed to have waived its rights under the purchase price adjustment provisions as contemplated herein on the basis of technical violations of timing and response requirements. Section 5. Actions at Closing; Further Assurances. (a) Actions by Seller. At the Closing, Seller shall deliver to Purchaser: (i) stock certificates representing the Shares, duly endorsed in blank; (ii) the various certificates, instruments and documents referred to in Section 14 hereof; (iii) an opinion, dated the Closing Date, of Peter Acton, General Counsel of TIG Holdings, in the form of Exhibit D hereto; and (iv) resignations, dated as of the Closing Date, of the directors and officers of Target. (b) Actions by Purchaser. At the Closing, Purchaser shall: (i) wire transfer the Purchase Price in immediately available funds to an account of Seller, as designated in writing by Seller prior to the Closing Date; (ii) deliver to Seller the various certificates, instruments and documents referred to in Section 13 hereof; and (iii) deliver to Seller an opinion, dated the Closing Date, of W. Sidney Druen, Senior Vice President and General Counsel and Assistant Secretary, in the form of Exhibit E hereto. Section 6. Representations and Warranties of Seller With Respect to Target. Except as set forth in the disclosure schedule of the Seller accompanying this Agreement (the "Disclosure Schedule"), Seller hereby represents and warrants to the Purchaser as follows: (a) Organization and Standing. Target is an insurance corporation duly organized, validly existing, and in good standing under the laws of the State of California, is duly authorized under California law to carry on its business as a property and casualty insurance company, has all requisite corporate power and authority to own, lease, and operate its assets, properties and business and to carry on its business as now being and heretofore conducted. Target is duly qualified to do business in each other state or jurisdiction in which such qualification is required, except where the failure to be so qualified would not have a Material Adverse Effect. (b) Capital Structure. The authorized capital stock of Target consists of 30,000 shares of common stock, par value of $270 per share. As of the date hereof, 12,500 Shares are outstanding and issued to Seller, all of which are free and clear of any Security Interest. All of such presently outstanding Shares are duly authorized, validly issued, fully paid, non-assessable and free of preemptive rights. Upon delivery to Purchaser on the Closing Date of the stock certificates provided for in Section 5(a)(i) hereof, Purchaser will acquire good title to all of the Shares, free and clear of any Security Interest, other than those created by or through Purchaser, or as a result of Purchaser's application for acquisition of control of Target. (c) Subsidiaries. Target does not have any Subsidiaries. (d) Financial Statements. Seller has made available to Purchaser for inspection complete copies of (i) the Annual Statements of Target as filed with the Insurance Department of the State of California (the "California Insurance Department") for the years ended December 31, 1994, 1995 and 1996 and (ii) the Quarterly Statement of Target as filed with the California Insurance Department for the quarter ended June 30, 1997 (the "Statements"). The Statements have been prepared in a manner permitted under statutory authority of the California Insurance Department, on a consistent basis, during the periods covered by each such Statement, except as disclosed in the auditor's report and notes to such Statements. All Statements fairly present the financial position and results of operations of Target as of the dates and for the periods covered by such statements. (e) Options or Other Rights. There is no outstanding right, subscription, warrant, call, unsatisfied preemptive right, option or other agreement of any kind to purchase or otherwise to receive from Target, any of the outstanding, authorized but unissued, unauthorized or treasury shares of the capital stock or any other security of Target and there is no outstanding security of any kind convertible for or exchangeable into any such capital stock. Except for powers of attorney with respect to the consolidated federal income Tax Returns that include the Target for periods ending on or before the Closing Date,Target has no powers of attorney outstanding. (f) Certificate of Incorporation, By-laws, Etc. The copies of the Certificate of Incorporation and Bylaws and the stock books of Target made available to Purchaser for inspection are true and complete as in effect on the date hereof. The minute books of Target have been made available to the Purchaser for its inspection and the originals thereof will be delivered to Purchaser at Closing. The minute books of Target contain true and complete recordings of all meetings and consents in lieu of meetings of the board of directors or any committee thereof of Target since April 23, 1993, except where the absence of any such recordings of meetings or consents in lieu of meetings would not have a Material Adverse Effect or the consummation of the transactions contemplated by this Agreement. (g) Compliance with Laws. To the Knowledge of Seller, Target is not in violation of any federal, state or local law, ordinance, statute, rule, regulation, order, judgment, injunction, award, decree or requirement of any governmental or regulatory body, court or arbitrator applicable to Target, which violation individually or in the aggregate would have a Material Adverse Effect and Target has not received any written notice that any such violation is being or may be alleged. (h) Licenses. Target has such licenses, permits, orders or approvals of, and have made all required registrations with, any federal or state governmental or regulatory body that are necessary to the conduct of the business of Target as of the date hereof (collectively, "Licenses") and all such Licenses are in full force and effect, subject to such exceptions as would not have a Material Adverse Effect. Seller has not received any written notice of any violation in respect of any such License and no proceeding is pending or, to the Knowledge of Seller, threatened to suspend, revoke or limit any such License which would have a Material Adverse Effect. (i) No Breach. Assuming compliance with the requirements referred to in Section 7(g) below, neither the execution and the delivery of this Agreement by Seller, nor the consummation of the transactions contemplated hereby, will (i) violate any statute, regulation, rule, injunction, judgment, order, decree, ruling, charge, or other restriction of any government, governmental agency, or court to which Target is subject or any provision of the charter or bylaws of Target or (ii) conflict with, result in a breach of, constitute a default under, result in the acceleration of, create in any party the right to accelerate, terminate, modify, or cancel, or require any notice under any Material Agreement or License to which Target is a party or by which it is bound or to which any of its assets is subject (or result in the imposition of any Security Interest upon any of its assets), except where the violation, conflict, breach, default, acceleration, termination, modification, cancellation, failure to give notice, or creation of Security Interest would not have a Material Adverse Effect or materially impair the ability of the Parties to consummate the transactions contemplated by this Agreement. (j) Finders Fees. TIG Holdings has retained Goldman, Sachs & Co. as its financial advisor in connection with this Agreement. TIG Holdings (excluding Target) is solely liable for the payment of any and all fees or commission in connection therewith and Seller will indemnify Purchaser for any misrepresentation contained in this Section 6(j). (k) Authority. Seller has all requisite corporate power and authority to execute and deliver this Agreement and to carry out its obligations hereunder. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of Seller and this Agreement has been duly executed and delivered by Seller and constitutes the valid and legally binding obligation of Seller, enforceable against it in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, rehabilitation, or similar laws affecting the enforcement of creditors' rights generally. (l) No Improper Payments. To the Knowledge of Seller, during the ownership of Target by TIG Holdings, neither Target nor any of its officers and directors have at any time: (i) made any payment to any state, federal or foreign governmental officer or official, or other person charged with similar public or quasi-public duties, other than payments required or allowed by applicable law; or (ii) made any payment outside the Ordinary Course of Business to any purchasing or selling agent, or person charged with similar duties, of any entity to which Target sells or has sold, or from which Target buys or has bought, products or services, for the purpose of illegally influencing such agent or person to buy products or services from, or sell products or services to, Target, where either (i) or (ii) would have a Material Adverse Effect. (m) No Representation With Respect to Reserves. Notwithstanding any other provision of this Agreement, Seller makes no representation or warranty that the reserves of Target or the Business for unpaid claims and claims expenses, whether reported or incurred but not reported (the "Reserves"), or the amounts recorded in the Reserve Accounts, are adequate or sufficient. Purchaser agrees that it shall not affect a claim against Seller under any provision of this Agreement, the Target Quota Share Reinsurance Agreement, the Seller Quota Share Reinsurance Agreement or the Loss Portfolio Transfer Agreement or for Adverse Consequences suffered by it or any of its Affiliates arising out of the inadequacy or insufficiency of the Reserves or the amounts recorded in the Reserve Accounts. Section 7. Representations and Warranties of the Seller With Respect to the Business and the Acquired Assets. Except as set forth in the Disclosure Schedule, Seller hereby represents and warrants to the Purchaser as follows: (a) Acquired Assets. Upon consummation of the transactions contemplated by this Agreement and the Purchaser obtaining the consents referred to in the Disclosure Schedule, the Seller will have assigned, transferred and conveyed to the Target, directly or indirectly, all of the Acquired Assets free and clear of all Security Interests except for such as would not have a Material Adverse Effect. Each tangible asset has been maintained in accordance with normal industry practice, is in good operating condition and repair (subject to normal wear and tear) and is suitable for the purposes for which it is presently used in the Business except for such that would not have a Material Adverse Effect. (b) Financial Information. Seller has furnished to Purchaser the pro forma consolidated balance sheet of the Business as of August 31, 1997 (the "Latest Balance Sheet"). The Latest Balance Sheet presents fairly the financial condition of the Business as of August 31, 1997 on the pro forma basis described in the notes thereto. (c) Events Subsequent to the Date of the Latest Balance Sheet. Except as contemplated by this Agreement, since the date of the Latest Balance Sheet, there has not been any material adverse change in the business, financial condition, results of operations, or properties of the Business and Target taken as a whole. Without limiting the generality of the foregoing, since that date: (i) neither Seller nor Target has entered into any Material Agreement outside the Ordinary Course of Business that is an Assumed Liability and that relates to any of the Acquired Assets; (ii) no party (including Seller) has accelerated, terminated, modified, or canceled any Material Agreement relating to any of the Acquired Assets outside the Ordinary Course of Business; (iii) Seller has not imposed any Security Interest upon any of the Acquired Assets, the imposition of which, individually or in the aggregate, would have a Material Adverse Effect; (iv) Seller has not issued any note, bond, or other debt security or created, incurred, assumed, or guaranteed any indebtedness for borrowed money or capitalized lease obligation that is an Assumed Liability; (v) Seller has not entered into any employment or collective bargaining agreement or modified the terms of any existing such agreement with respect to the Personal Lines Employees; (vi) Seller has not granted any increase in the base compensation of any of the Personal Lines Employees outside the Ordinary Course of Business; (vii) Seller has not adopted, amended, modified or terminated any bonus, profit-sharing, incentive, severance, or other plan, contract, or commitment for the benefit of any of the Personal Lines Employees (or taken any such action with respect to any other Employee Benefit Plan) that is an Assumed Liability outside the Ordinary Course of Business; and (viii) Seller has not entered into any amendment, modification, termination, alteration, sublease agreements or assignments regarding or affecting any lease dealing with real estate which are Assumed Liabilities and relate to Acquired Assets. Nothing in this Section 7(c) or elsewhere in this Agreement shall prohibit Seller from causing Target to assume the Assumed Liabilities prior to the Closing. (d) Litigation. Section 7(d) of the Disclosure Schedule sets forth each instance, with respect to the Personal Lines Employees, the Acquired Assets and the Business, in which Seller or Target (i) is subject to any outstanding injunction, judgment, order, decree or ruling, or (ii) is a party to any material action, suit, proceeding, hearing, or investigation of, in, or before any court or quasi-judicial or administrative agency of any federal, state or local jurisdiction or before any arbitrator. Except as set forth in Section 7(d) of the Disclosure Schedule: (i) to the Knowledge of the Seller, there are no actions, suits, hearings, arbitrations, proceedings (public or private) or governmental investigations that have been brought by or against any governmental authority or any other Person (collectively, "Proceedings") pending or threatened in writing against or affecting the Seller, the Business or any of the Acquired Assets as to which there is a substantial likelihood of a determination or resolution adverse to the Business and which, if so adversely determined or resolved, would have a Material Adverse Effect; and (ii) there are no existing or threatened in writing orders, judgments or decrees (other than those of general application) of any governmental authority affecting any of the Acquired Assets or the Business which would have a Material Adverse Effect. (e) Forms of Policy. Except for such forms which are not material to the Business, each form of insurance policy, policy endorsement or amendment, reinsurance treaties and contracts, certificate of insurance, application form, and sales material used by Seller in connection with the Business in any jurisdiction has, where required, been approved by the appropriate insurance or other regulatory authorities of such jurisdiction, except where the failure to obtain such approval would not have a Material Adverse Effect, and has been furnished to Purchaser. (f) No Breach. Assuming compliance with the requirements referred to in Section 7(g) below, neither the execution and the delivery of this Agreement nor the consummation of the transactions contemplated thereby, will (i) violate any statute, regulation, rule, injunction, judgment, order, decree, ruling, charge, or other restriction of any government, governmental agency, or court to which Seller is subject or any provision of the charter or bylaws of Seller or (ii) conflict with, result in a breach of, constitute a default under, result in the acceleration of, create in any party the right to accelerate, terminate, modify, or cancel, or require any notice under any Material Agreement or License to which any of the Acquired Assets or the Business are subject (or result in the imposition of any Security Interest upon any of the Acquired Assets or the Business), except where the violation, conflict, breach, default, acceleration, termination, modification, cancellation, failure to give notice, or creation of Security Interest would not have a Material Adverse Effect or materially impair the ability of the Parties to consummate the transactions contemplated by this Agreement. (g) Consents and Approvals. The execution and delivery by the Seller of this Agreement, the performance by the Seller of its obligations hereunder, and the consummation by the Seller of the transactions contemplated hereby do not require the Seller or Target to obtain any consent, approval or action of, or make any filing with or give any notice to, any governmental or regulatory body, except for (i) any filings, notices and/or approvals under the insurance laws of the states identified in Section 7(g) of the Disclosure Schedule, (ii) the expiration or early termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 ("the H-S-R Act") or (iii) other notices, filings, authorizations, consents and approvals which if not obtained or made would not have a Material Adverse Effect or materially impair the ability of the Parties to consummate the transactions contemplated by this Agreement. (h) Employees. (i) To the Knowledge of Seller, as of the date hereof, there is no Personal Lines Employee at the level of Assistant Vice President or above who plans to terminate employment with Seller, nor are there any other Personal Lines Employees who plan to so terminate which would result in a Material Adverse Effect. Seller is not a party to or bound by any collective bargaining agreement with respect to Personal Lines Employees, nor has it experienced any strikes, grievances, claims of unfair labor practices, or other collective bargaining disputes with respect to Personal Lines Employees. Neither Seller nor any of the directors and officers (and employees with responsibility for employment matters) of Seller has any Knowledge of any organizational effort presently being made or threatened by or on behalf of any labor union with respect to the Personal Lines Employees. (ii) Seller has not, except to the extent any of the following would not have a Material Adverse Effect: (A) made any commitments, oral or in writing or otherwise, to any Personal Lines Employee regarding lifetime employment or employment for any specified time period or retention as a consultant; (B) been advised by or have any Knowledge that any Personal Lines Employee is, will be, or is likely to be, asserting a claim relating to such person's employment or termination from employment with Seller for breach of contract, breach of implied covenant of good faith and fair dealing, wrongful termination, violation of public policy, negligent termination or other claim based in tort or contract; (C) been advised or have Knowledge that, with respect to any Personal Lines Employee, Seller has been charged with, or deemed to be in violation of, or is likely to be charged with or deemed to be in violation of, any federal, state, or local law that prohibits discrimination on the basis of sex, race, color, religion, national origin, status as a handicapped individual, disability, marital status, status as a Vietnam era veteran or a disabled veteran, or sexual preference; or (D) taken any action to create enhanced rights or benefits for all or some of the Personal Lines Employees based in whole or in part on a change of control or change of ownership of Target or the other transactions contemplated by this Agreement, which action would result in liability to Purchaser or Target. (i) Employee Benefit Plans. (i) There are no Employee Benefit Plans which are sponsored by Target or with respect to which Target has any liability to contribute. (ii) There are no Employee Benefit Plans in which any ERISA Affiliate participates which are subject to Title IV of ERISA. No ERISA Affiliate has any material liability with respect to any Multiemployer Plan. (iii) Each Employee Pension Benefit Plan maintained by Seller which is intended to satisfy the requirements of Section 401(a) of the Code is qualified in form and operation under that section and the trust of each such plan is exempt from tax under Section 501(a) of the Code. Seller has provided to Purchaser a copy of the most recent determination letter issued by the Internal Revenue Service with respect to each such plan. None of such plans has been amended since the date of such determination letters in a manner which would cause such plans to fail to so qualify. (j) Real Property. Section 7(j) of the Disclosure Schedule lists real property leased or subleased to Seller that is an Acquired Asset. Seller has made available to Purchaser correct and complete copies of the leases and subleases listed in Section 7(j) of the Disclosure Schedule together with any amendments thereto through the date of this Agreement. With respect to each lease and sublease listed in Section 7(j) of the Disclosure Schedule: (i) the lease or sublease is legal, valid, binding, and in full force and effect; (ii) Neither Seller nor any Affiliate, and to the Knowledge of Seller, no other party to the lease or sublease is in material breach or material default, and no event has occurred which, with notice or lapse of time, would constitute a material breach or material default or permit termination, modification, or acceleration thereunder which would have a Material Adverse Effect; (iii) Seller has not assigned, transferred, conveyed, mortgaged, deeded in trust, or encumbered any interest in the leasehold or subleasehold; (iv) all facilities leased or subleased thereunder have received all approvals of governmental authorities required in connection with the operation thereof and have been operated and maintained in accordance with applicable laws, rules and regulations and are supplied with utilities and other services necessary for the operation of said facilities as operated which if not received or operated and maintained or supplied would have a Material Adverse Effect or materially impair the ability of the Parties to consummate the transactions contemplated by this Agreement; (v) Except as would not have a Material Adverse Effect, Seller and its Affiliates have (A) complied with all Environmental, Health, and Safety Laws; (B) not caused or permitted any Hazardous Materials to be treated, stored, disposed of, generated, or used in any leased premises which are the subject of this Agreement, except that Seller may have stored, used or disposed of products customarily found in office buildings and used in connection with operation and maintenance of property but such use was in compliance with all Environmental, Health, and Safety Laws; and (C) have not received any notice concerning any past or present, actual or potential violation of Environmental Laws or liability for Environmental Damages; and (vi) Seller shall deliver to Purchaser as promptly as practicable, with respect to the 12-month period preceding the date hereof, true and complete copies of all accounting information for transactions valued at greater than $10,000 dollars in Seller's possession regarding operating expenses, real estate taxes, and common area charges for the leases and subleases listed on Schedule 7(j). (k) Material Agreements. Section 7(k) of the Disclosure Schedule sets forth a true and complete list of each of the following contracts that are currently in effect and to which Target is a party, or by which any of the Acquired Assets is bound: (i) each agency or consultation contract that is not terminable without penalty or other liability (other than liabilities previously accrued thereunder) upon 90 days or less notice, except for such as are not material to the Business; (ii) each contract which restricts or contains limitations on the ability of Target to conduct the Business that are Assumed Liabilities, which contract would have a Material Adverse Effect; (iii) each contract under which Target has incurred, assumed or guaranteed indebtedness for borrowed money in excess of $250,000; (iv) each lease or sublease of real property used in the Business, and each lease, sublease or rental or use contract for which Target is liable, in each case, that (i) is not terminable by Target without penalty or other liability (other than liabilities previously accrued thereunder or on the Latest Balance Sheet) upon 90 days or less notice and (ii) requires annual payments by Target of more than $250,000; (v) each assumption reinsurance (as the ceding or assuming company), reinsurance, coinsurance or other similar contract providing for the transfer or sharing of liabilities with respect to the Business that are material thereto, and each trust agreement or other security agreement related thereto that are material to the Business; (vi) each contract or arrangement pursuant to which any person guarantees an obligation of Target in excess of $250,000, or, except for insurance policies and similar contracts issued by Target and other contracts entered into in the Ordinary Course of Business, pursuant to which Target guarantees any obligation of or agrees to indemnify another person which could reasonably be expected to result in aggregate future payments by Target of $250,000 or more; (vii) each contract not disclosed pursuant to the foregoing clauses (i) through (vi) that are expected to involve the payment, pursuant to the terms of such contract, by or to Target of more than $250,000, or that is otherwise material to the Business and Target considered as a whole, other than insurance policies, reinsurance arrangements, annuity and other contracts entered into in the Ordinary Course of Business; (viii) any agreement (or group of related agreements) under which Seller or Target has created, incurred, assumed, or guaranteed any indebtedness for borrowed money, or any capitalized lease obligation, and under which Seller or Target has imposed a Security Interest on any of the Acquired Assets; (ix) any agreement involving Target and one or more of its Affiliates concerning the Business or the Acquired Assets, the Independent Agents or the Personal Lines Employees; and (x) any employment or collective bargaining agreement with respect to the Personal Lines Employees. Seller has delivered, or will deliver within two weeks of the date hereof, to Purchaser a correct and complete copy of each agreement listed in Section 7(k) of the Disclosure Schedule and neither Target nor the Acquired Assets is bound by any oral agreement which if written would be required to be disclosed under this Section 7(k). Except (i) as to matters which on a cumulative basis cannot reasonably be expected to have a Material Adverse Effect or (ii) as contemplated by this Agreement, with respect to each agreement referred to in clauses (i) through (x) above (the "Material Agreements"): (A) the Material Agreement is legal, valid, binding, enforceable against the Affiliates of TIG Holdings party thereto, and, to the Seller's Knowledge, each other party thereto; and (B) to the Knowledge of Seller, no party is in material breach or material default, and no event has occurred which with notice or lapse of time would constitute a material breach or material default, or permit termination, modification, or acceleration, under the Agreement. Section 8. Representations and Warranties of Purchaser. Except as set forth in the disclosure schedule of the Purchaser accompanying this Agreement (the "Purchaser Disclosure Schedule"), Purchaser hereby represents and warrants to the Seller as follows: (a) Organization. Purchaser is duly organized and validly existing as a mutual insurance company and in good standing under the laws of Ohio. (b) Authority. Purchaser has all requisite corporate power and authority to execute and deliver this Agreement and to carry out its obligations hereunder. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of Purchaser and this Agreement has been duly executed and delivered by Purchaser and constitutes the valid and legally binding obligation of Purchaser, enforceable against it in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, rehabilitation, or similar laws affecting the enforcement of creditors' rights generally. (c) Finders Fees. Purchaser has no liability or obligation to pay any fees or commissions to any broker, finder, or agent with respect to the transactions contemplated by this Agreement for which the Seller or any of its Affiliates could become liable or obligated. (d) No Breach. Assuming compliance with the requirements referred to in Section 8(e) below, neither the execution and the delivery of this Agreement, nor the consummation of the transactions contemplated thereby, will (i) violate any statute, regulation, rule, injunction, judgment, order, decree, ruling, charge, or other restriction of any government, governmental agency, or court to which Purchaser is subject or any provision of the charter or bylaws of Purchaser or (ii) conflict with, result in a breach of, constitute a default under, result in the acceleration of, create in any party the right to accelerate, terminate, modify, or cancel, or require any notice under any material agreement, contract, lease, License or instrument to which Purchaser or any of its material properties or assets are subject (or result in the imposition of any Security Interest upon any of its assets), except where the violation, conflict, breach, default, acceleration, termination, modification, cancellation, failure to give notice or creation of a Security Interest would not materially impair the ability of the Parties to consummate the transactions contemplated by this Agreement. (e) Consents and Approvals. The execution and delivery by the Purchaser of this Agreement, the performance by the Purchaser of its obligations hereunder, and the consummation by the Purchaser of the transactions contemplated hereby do not require the Purchaser to obtain any consent, approval or action of, or make any filing with or give any notice to, any person or any governmental or regulatory body, except for (i) any filings, notices and/or approvals under the insurance laws of the states identified in Section 8(e) of the Purchaser Disclosure Schedule, (ii) the expiration or early termination of the applicable waiting period under the H-S-R Act or (iii) other notices, filings, authorizations, consents and approvals which if not obtained or made would not materially impair the ability of the Parties to consummate the transactions contemplated by this Agreement. Section 9. Tax Matters. (a) Prior Period Tax Returns. For the calendar years ended December 31, 1996, 1995, and 1994, Seller shall deliver to Purchaser prior to Closing complete copies of the separate company federal and state income Tax Returns of Target included in the preparation of consolidated or combined federal or state income Tax Returns that include Target prepared by, or on behalf of, Target, and Seller shall deliver to Purchaser, prior to Closing, complete copies of all other Tax Returns filed in any jurisdiction by Target as reasonably requested by Purchaser. Seller shall provide to Purchaser at Closing (i) a list of all Tax Returns of Target required to be filed after the Closing Date for periods ending on or prior to the Closing Date (including the due dates of such returns) and (ii) a breakdown of the amounts accrued for federal and all other Taxes on the Statements of Target on the Closing Date. (b) Audits; Post-Closing Tax Returns. Except as disclosed in Schedule 9(b), (i) Target (or Seller or its affiliates on behalf of Target) has timely filed all Tax Returns that have become due and has paid all Taxes shown as due thereon; (ii) Target has accrued all Taxes on its financial statements, whether or not due and payable, imposed on or with respect to the operations or assets of Target for all periods (or portions thereof) ending on or before the date hereof in accordance with GAAP; and (iii) there are no audits or investigations relating to, and no claims, demands or assessments of, Taxes, pending or threatened against Target. Purchaser shall cause Target to timely file all Tax Returns for which Target bears primary filing responsibility that Target is required to file after the Closing Date for periods ending on or prior to the Closing Date and to pay Taxes relating to such Tax Returns to the extent accrued on the Closing Balance Sheet. The preparation and filing of federal income Tax Returns or any other Tax Return of Target for any period beginning after the Closing Date and the payment of and liability for Taxes relating thereto shall be the sole obligation of Purchaser. (c) Seller's Consolidated Federal Income Tax Return. On the Closing Date, Purchaser shall pay Seller an amount equal to the Seller's estimate of the amount due but unpaid under that certain tax sharing agreement dated January 28, 1993 (the "Tax Sharing Agreement") but in no event more than the amount accrued for such purpose on the Closing Balance Sheet. The obligations of Target under the Tax Sharing Agreement shall be terminated on the Closing Date, and Target shall have no further liability under such Tax Sharing Agreement after the payment provided for in the preceding sentence. With respect to Seller's consolidated federal income tax return for the calendar year ending during the taxable period that includes the Closing Date, Seller shall include therein the income and expense of Target for such period through the Closing Date (determined consistent with prior practice). In connection with filing its federal income and other Tax Returns, Seller and Purchaser agree to report (and cause their respective affiliates to report) the acquisition of Target in such returns in a manner consistent with the structure of the transactions contemplated hereby. (d) Straddle Tax Returns. Purchaser shall prepare and file, or cause to be prepared and filed, all Straddle Tax Returns required to be filed by Target and shall cause Target to pay the Taxes shown to be due thereon. Seller will furnish to Purchaser all information and records reasonably requested by Purchaser for use in preparation of any Straddle Tax Returns. Within a reasonable period of time prior to the due date thereof, Purchaser shall allow Seller to review, comment upon and reasonably approve any Straddle Tax Return prior to the filing of such return with the relevant tax authority. Purchaser and Seller agree to cause Target to file all Tax Returns for any Straddle Period in a manner consistent with the filing of such Tax Returns for prior taxable periods and on the basis that the relevant taxable period ended as of the close of business on the Closing Date, unless the relevant Tax authority will not accept a Tax Return filed on that basis. (e) Responsibility for Taxes. Except to the extent accrued on the Closing Balance Sheet or as otherwise provided under Section 9(i) hereof, Seller shall pay and be responsible for any and all Taxes imposed on or with respect to the operations or assets of Target for all periods (or portions thereof) ending on or prior to the Closing Date (including any and all Taxes attributable to or resulting from Target having been affiliated with Seller and a portion of any Taxes reflected on Straddle Tax Returns computed as if the taxable period with respect to such Straddle Tax Return ended as of the close of business on the Closing Date). Seller shall hold Purchaser harmless from loss in respect of any liability for the aforementioned Taxes incurred by Target, Purchaser and its affiliates in connection therewith (determined without regard to any deduction, credit or exclusion of Purchaser and its affiliates other than such items of Target which accrued prior to the Closing Date and as to which Target has received a benefit). Notwithstanding anything else contained in this Section 9(e), Seller shall be entitled to receive and retain any refunds of Taxes attributable to operations of Target for periods ending on or prior to the Closing Date, except for any such refunds accrued on the Closing Balance Sheet or arising from the carryback of any deduction or credit attributable to operations after the Closing Date. Purchaser shall cause Target to pay any refunds to which Seller is entitled to Seller within fifteen (15) days of its receipt of any refund. Seller shall pay to Target any refunds it receives and to which Target is entitled within fifteen (15) days of its receipt of any such refund. (f) Books and Records. Purchaser and Seller shall furnish or cause to be furnished to the other Party upon request as promptly as practicable such information (including access to personnel) and books and records pertaining to the Target and assistance relating to the Target as is reasonably necessary for the preparation, review, audit and filing of any Tax Return required to be filed under this Agreement, the preparation for any Tax audit or the defense of any assessment or other similar claim. Each Party shall reimburse the other Party for the outside nonemployee costs of providing such information. Neither Party shall dispose of any books and records of Target until six months after the expiration of the applicable statute of limitations (including any extension thereof); provided, however, that in the event a proceeding has been instituted for which the books and records may be required prior to the expiration of the applicable statute of limitations, the information shall be retained until six months after there is a final determination with respect to such proceeding and each Party shall provide notice to the other Party of its intention to dispose of such books and records at least one month prior to disposing of such books and records. (g) Procedures Relating to Tax Claims. If a claim is made or asserted, either orally or in writing, by any Tax authority which, if successful, may result in an indemnity payment to Purchaser or any of its affiliates pursuant to this Section 9, Purchaser shall notify Seller of such claim (a "Tax Claim"), stating the nature and basis of such claim and the amount thereof, to the extent known. Seller will have the right, at its option, upon timely notice to Purchaser, to assume control of any defense of any Tax Claim (other than a Tax Claim relating solely to Taxes of Target for a Straddle Period) with its own counsel. Costs of such Tax Claims are to be borne by Seller unless the Tax Claim relates to taxable periods ending after the Closing Date, in which event such costs will be fairly apportioned. Purchaser and Target shall cooperate with Seller in contesting any Tax Claim, which cooperation shall include the retention and, upon Seller's request, the provision of records and information which are reasonably relevant to such Tax Claim and making employees available on a mutually convenient basis to provide additional information or explanation of any material provided hereunder. In the case of any Tax Claim relating to Taxes of Target for a Straddle Period, the Party which is responsible under this Agreement for the larger portion of the total Tax Claim shall have the right to control any proceedings related thereto. Purchaser shall take all actions necessary to authorize Seller and its affiliates to act on behalf of Target with respect to any Tax Claim for which Seller has the right of control under this Section 9, including, without limitation, the execution of appropriate powers of attorney or other required agreements. (h) Tax Withholding. Seller has withheld and paid all material Taxes required to have been withheld and paid in connection with amounts paid or owing to the Personal Lines Employees and Independent Agents. (i) Section 338(h)(10) Elections. (i) Seller and Purchaser shall make a joint election under Section 338(h)(10) of the Code and under any comparable provision of applicable state or local law with respect to Purchaser's acquisition of Shares pursuant to this Agreement (collectively, the "Section 338(h)(10) Elections"). Notwithstanding any other provision of this Agreement, if either Purchaser or Seller fails to properly effect the election under this Section 9(i)(i), then Purchaser or Seller shall indemnify Seller or Purchaser, as the case may be, for any Adverse Consequences of such failure. Any claim based upon this Section 9(i)(i) shall survive until expiration of the applicable statute of limitations for the taxable period that includes the Closing Date. (ii) The following provisions shall apply: (A) Subject to Section 9(i)(ii)(B) below, as soon as practicable after the Closing, the Parties shall mutually prepare a Form 8023-A (with all attachments) and any corresponding forms under comparable provisions of applicable state or local law (the Section "338(h)(10) Forms"), the Parties shall execute such Section 338(h)(10) Forms, and Purchaser shall promptly and timely file such executed Section 338(h)(10) Forms and provide written evidence of such filing to Seller. The Parties shall report the purchase of the Shares pursuant to this Agreement consistent with the Section 338(h)(10) Elections, and no Party shall take any position to the contrary thereto in any Tax Return, any proceeding before any taxing authority or otherwise, unless required to do so by applicable law pursuant to a determination as defined in Section 1313(a) of the Code. (B) Seller and Purchaser shall determine, as promptly as reasonably practicable following the Closing, the Modified Aggregate Deemed Sales Price (as defined under applicable Treasury Regulations) and the allocation of such Modified Aggregate Deemed Sales Price among the assets of the Target. Such allocation of the Modified Aggregate Deemed Sales Price shall be made in accordance with Section 338(b) of the Code and any applicable Treasury Regulations. The Parties (i) shall be bound by such allocation for purposes of determining any Taxes, (ii) shall prepare and file all Tax Returns (including, but not limited to, the Section 338(h)(10) Forms) to be filed with any taxing authority in a manner consistent with such allocation, and (iii) shall take no position inconsistent with such allocation in any Tax Return, any proceeding before any taxing authority or otherwise, unless required to do so by applicable law pursuant to a determination as defined in Section 1313(a) of the Code. In the event that such allocation is disputed by any taxing authority, the Party receiving notice of such dispute shall promptly notify and consult with the other Party concerning resolution of such dispute. To the extent that the Purchase Price is adjusted by reason of any payment under this Agreement, (i) the Modified Aggregate Deemed Sales Price shall be adjusted to reflect such change, (ii) the provisions of this Section 9(i)(ii)(B) shall be followed in redetermining the allocation of the Modified Aggregate Deemed Sales Price, and (iii) the Parties will, to the extent required by applicable law, file amended Tax Returns consistent with such revised allocation. (j) Limitation on Tax Indemnity. Notwithstanding the foregoing, Seller shall have no obligation to indemnify Purchaser under this Section 9 for any loss to which Purchaser would not have been entitled to indemnification had such obligation been treated as arising from a breach described in Section 16(b) of this Agreement. Section 10. Representations and Covenants of Parties With Respect to Personal Lines Employees. Each of the Parties hereby covenants as to itself, the following: (a) Hiring of Personal Lines Employees. Prior to the Closing Date, Purchaser shall offer to employ all of the Personal Lines Employees, such offer to be effective as of 12:01 a.m. on the day immediately following the Closing Date, on terms fair to Purchaser and the employees, including salaries equal to 100% of the salaries paid by Seller as of the Closing Date, and with employee benefits (including medical, disability, severance pay, and life insurance and retirement benefits) that are substantially the same as those provided to similarly situated employees of Purchaser and its subsidiaries who are engaged in its insurance operations; provided that, with respect to any person who is on short-term disability at such time, such employment shall not commence until such short-term disability period terminates. Seller shall remove from Seller's payroll system all Personal Lines Employees effective as of the end of the business day on the Closing Date. Seller makes no representations as to whether any employee will accept employment with Purchaser. The Personal Lines Employees who accept employment with Purchaser shall be referred to as the "Transferred Employees." Nothing in this Agreement shall be construed as limiting in any way the right of Purchaser after the Closing Date to terminate the employment of any Transferred Employee at any time, to change his or her salary or wages or to modify benefits or other terms and conditions of employment of Transferred Employees as long as any changes to salary or wages made are done in accordance with Purchaser's normal compensation practices and as long as any modification to benefits or other terms and conditions of employment of any Transferred Employee apply generally to employees of Purchaser's business, provided, however, that without limiting the right of the Purchaser or Target to terminate the employment of any Transferred Employee after the Closing Date, Purchaser shall not reduce the salary or wages of any Transferred Employee for at least twenty four (24) months following the Closing Date. (b) Seller's and Purchaser's Obligations With Respect to Personal Lines Employees. With respect to each Personal Lines Employee: (i) Seller shall be responsible for, and shall indemnify and hold harmless Purchaser against, any actions, claims or proceedings brought by or on behalf of any Personal Lines Employee at any time, including but not limited to, wrongful termination, breach of fiduciary duty, discrimination, sexual harassment, workers compensation or other employment-related matter ("Employee Claims"), to the extent such claims are based solely upon actions, events or circumstances which occurred before the Closing Date. Purchaser shall be responsible for, and shall indemnify and hold Seller harmless against, any Employee Claims, to the extent such claims are based solely upon actions, events or circumstances which occur after the Closing Date. (ii) Seller shall be responsible for all benefits provided pursuant to all of Seller's Employee Benefit Plans, including but not limited to deferred compensation, non-qualified and incentive plans or policies with respect to services rendered on or before the Closing Date. (iii) Seller's welfare benefit plans shall be responsible for welfare benefit claims relating to the Personal Lines Employees incurred on or prior to the Closing Date (in accordance with the terms of such plans) or during any period for which a Transferred Employee shall elect continuation coverage of the type described in Section 10(b)(iv)(C) of this Agreement with respect to a "qualifying event" occurring on or before the Closing Date, and Purchaser's welfare plans shall assume responsibility for all welfare benefit claims relating to Personal Lines Employees incurred after the Closing Date to the extent such claim is covered by such plans and the Transferred Employee was enrolled for such coverage. For this purpose, a claim is deemed incurred when the medical or other service giving rise to the claim is performed, except that in the case of death, a claim is incurred on the date of death. (iv) Purchaser shall cause all Transferred Employees to be covered by Purchaser's severance pay plan and each such Transferred Employee shall be credited with such employee's service with Seller for purposes of determining benefits under such plan, based on the years of service shown for such employee on Exhibit C hereto, provided that the crediting of such service for Transferred Employees who have incurred breaks in service shall, to the extent such crediting would not be permitted under Purchaser's severance pay plan, be subject to the approval of an amendment to such plan by Purchaser's board of directors permitting such crediting, and Purchaser shall use its best efforts to obtain such approval prior to the Closing Date. (v) With respect to each Transferred Employee: (A) Purchaser shall waive pre-existing condition exclusions, evidence of insurability provisions, waiting period requirements or any similar provisions under any employee benefit plan or compensation arrangements maintained or sponsored by or contributed to by Purchaser for such Transferred Employee on or after the Closing Date; provided such conditions, waiting periods, exclusions or similar provisions did not preclude coverage for such Transferred Employee as of the Closing Date under the comparable plans of Seller and, to the extent any such waiver is not permitted under any of Purchaser's employee benefit plans or compensation arrangements, such waiver will be subject to approval of amendment under such plans or arrangements by the Purchaser's board of directors permitting such waiver and Purchaser will use its best efforts to obtain such approval prior to the Closing Date. (B) Purchaser shall recognize the service of each Transferred Employee with Seller prior to the Closing Date for all purposes other than pension benefit accrual under each of Purchaser's employee benefit plans, programs and policies (including but not limited to vacation and severance) other than the Nationwide Insurance Enterprise Retirement Plan. Vesting service for purposes of the Nationwide Insurance Enterprise Savings Plan shall only be considered when applying those vesting provisions which are based on service, and not those based on participation in that plan. (C) Seller shall be responsible for satisfying obligations under Section 601 et. seq. of ERISA and Section 4980B of the Code ("COBRA"), to provide continuation coverage to or with respect to any Transferred Employee in accordance with law with respect to any "qualifying event" occurring on or before the Closing Date. Purchaser shall be responsible for satisfying obligations under COBRA to provide continuation coverage to or with respect to any Transferred Employee in accordance with law with respect to any "qualifying event" which occurs after the Closing Date. (D) Purchaser shall be responsible for, and shall indemnify and hold Seller harmless against, all workers compensation benefits paid or payable to the Transferred Employees after the Closing Date with respect to claims made by Transferred Employees after the Closing Date. (vi) Purchaser represents that it does not currently contemplate a plant closing involving, or mass lay-off of, Transferred Employees, or any terminations that in the aggregate would constitute a mass lay-off of Transferred Employees, within twelve (12) months following the Closing Date. Purchaser shall indemnify and hold Seller harmless against any Liability which may be incurred or suffered by Seller under the Worker Adjustment and Retraining Notification Act or any similar state law arising out of, or relating to, any actions taken by Purchaser with respect to the Transferred Employees on or after the Closing Date. Section 11. Covenants Pending the Closing. The Parties agree as follows with respect to the period between the execution of this Agreement and the Closing: (a) General. Each of the Parties shall use all reasonable efforts to take all actions and to do all things necessary, proper, or advisable in order to consummate and make effective the transactions contemplated by this Agreement. (b) Regulatory Approvals. Each of the Parties shall use all reasonable efforts, and shall reasonably cooperate with each other in such efforts, to obtain the approvals of all regulatory authorities required to be obtained by Seller or Purchaser or by any Affiliate of Seller or Purchaser in order to consummate the transactions contemplated by this Agreement. Seller and Purchaser shall make and cause their respective Subsidiaries to make all necessary filings as soon as practicable, including, without limitation, those required by the H-S-R Act and applicable insurance laws in order to facilitate prompt consummation of the transactions contemplated by the Agreement. In addition, Seller and Purchaser shall each use all reasonable efforts, and shall cooperate fully with each other, to comply as soon as practicable with all governmental requirements applicable to, or necessary for the consummation of, the transactions contemplated hereby. Seller and Purchaser shall use all reasonable efforts to provide such information and communications to governmental entities as such governmental entities may reasonably request. Each of the Parties shall provide to the other Party copies of all applications filed or submitted with governmental entities in connection with this Agreement and shall keep the other Party apprised of the status of matters relating to completion of the transactions contemplated hereby. (c) Access to Information. Seller and Target shall give to Purchaser and to Purchaser's accountants, actuaries, counsel, and other representatives (hereinafter "Purchaser's Representatives") access at all reasonable times in a manner so as not to interfere with the normal business operations of Target or the Business, throughout the period prior to the Closing, to all of Target's properties, books, contracts, commitments and records. During such period, Seller shall furnish to Purchaser all such information concerning the affairs of Target as Purchaser may reasonably request. Pending the Closing hereunder, Purchaser and Purchaser's Representatives will comply with the provisions of the Confidentiality Agreement between Purchaser and TIG Holdings, dated June 18, 1997. (d) Conduct of Business; Appointment of Independent Agents. Except as otherwise contemplated by this Agreement, Seller will not engage in any practice, take any action, or enter into any transaction outside the Ordinary Course of Business with respect to Target, the Acquired Assets, the Personal Lines Employees or the Business. Seller shall use commercially reasonable efforts to cause the appointment of all Independent Agents with Target prior to the Closing Date. Notwithstanding the immediately preceding sentence, Seller makes no express or implied representation that any Independent Agent appointed with Target prior to the Closing Date will continue to write the Business with Target prior to, at or after the Closing. (e) Insurance. Seller will use its reasonable efforts to maintain in effect insurance coverage against loss of or damage to the Acquired Assets and against the liabilities and risks of the Business in amounts and kinds not less favorable in any material respect than those currently in effect and use its reasonable efforts to maintain the same through the Closing Date. (f) Books of Account. Seller will, and Seller will cause Target to, maintain and continue to keep its books, accounts and records with respect to the Business in the Ordinary Course of Business. (g) Exclusivity. So long as this Agreement is in effect, Seller will not (i) solicit, initiate, or encourage the submission of any proposal or offer from any Person relating to the acquisition of any capital stock or other voting securities of Target, or any substantial portion of the Acquired Assets, the Business or Target (including any acquisition structured as a merger, consolidation, or share exchange) or (ii) participate in any discussions or negotiations regarding, furnish any information with respect to, assist or participate in, or facilitate in any other manner any effort or attempt by any Person to do or seek any of the foregoing. Seller will promptly notify Purchaser if any Person makes any proposal, offer, inquiry, or contact with respect to any of the foregoing. (h) Notice of Developments. Each Party will give prompt written notice to the other of any material matter causing a breach of any of its own representations and warranties in Sections 6, 7 and 8 above, as applicable . (i) Inter-Company Balances. Seller shall cause all intercompany balances between Seller and Target to be settled prior to the Closing Date. (j) Financial Statements. As promptly as practicable after an Annual Statement or Quarterly Statement is filed by Target with the California Insurance Department after the date hereof and prior to the Closing Date, Seller shall deliver to Purchaser a copy of such Annual Statement or Quarterly Statement. (k) Termination of Agreements. Except for the agreements contemplated by this Agreement, Seller shall cause Target to terminate or modify, on terms mutually agreeable and which do not have a Material Adverse Effect on the Acquired Assets or the Business, as of or prior to the Closing Date all agreements between Target and the TIG Holdings as of the Closing Date. (l) Certain Actions by Purchaser. Purchaser shall use all reasonable efforts to obtain (i) its own IVANS account and (ii) licenses to use any software loaded on any Acquired Assets, in each case prior to Closing. (m) Actions With Respect to Leases. The Seller shall use reasonable efforts to obtain consents to the assignment of the real property leases to Target set forth in Section 11(m) of the Disclosure Schedule to the extent that Purchaser and Seller mutually agree that such leases shall be assigned to Target. The assignment of one or all of such leases shall not be a condition of the obligation of the Purchaser or the Seller hereunder. Section 12. Post-Closing Covenants. The Parties agree as follows with respect to the period following the Closing. (a) Litigation Support. In the event and for so long as any Party actively is contesting or defending against any action, suit, proceeding, hearing, investigation, charge, complaint, claim, or demand in connection with (i) any transaction contemplated under this Agreement or (ii) any fact, situation, circumstance, status, condition, activity, practice, plan, occurrence, event, incident, action, failure to act, or transaction on or prior to the Closing Date involving Seller or Purchaser, each of the other Parties will cooperate with the contesting or defending Party and his or its counsel in the contest or defense, make available his or its personnel, and provide such testimony and access to his or its books and records as shall be reasonably necessary in connection with the contest or defense, all at the sole cost and expense of the contesting or defending Party (unless the contesting or defending Party is entitled to indemnification therefor under Section 16(b) below) and all at reasonable times and in a manner so as not to interfere with the other Party's business; provided, however, that the Party being requested to provide information and access shall not be required to provide such information and access unless the Party requesting such information agrees to abide by any reasonable requests on the part of the providing party with respect to the confidentiality of such information. (b) Covenant Not to Compete. At a time agreeable to Purchaser, Purchaser and Target shall take appropriate action to change the name of Target as promptly as possible to a name not likely to be confused with Seller. For a period of two (2) years after the Closing Date, no Subsidiary of TIG Holdings will directly write Independent Agent produced auto or homeowners business (the "Restricted Business"), except as permitted in the Target Quota Share Reinsurance Agreement, the Seller Quota Share Reinsurance Agreement or the Loss Portfolio Transfer Agreement; provided, however, TIG Holdings and its Subsidiaries shall be entitled to (i) continue to write non-standard auto business, (ii) continue to conduct Restricted Business to the extent required by law, (iii) write umbrella and excess business, and (iv) acquire and continue to operate any business or company from a third party, unless in the case this clause (iv), 25% or more of the net premium written by the business or company to be acquired in its most recently completed fiscal year was derived from Restricted Business, and such percentage represents at least $50 million of net premium written in which case after the consummation of such an acquisition, Seller shall notify Purchaser of the transaction and Purchaser shall have the right to offer to purchase that portion of the business or company so acquired that is derived from Restricted Business exercisable within thirty (30) days after receipt of such notice, which shall be accompanied by such due diligence material as would allow Purchaser to meaningfully evaluate the business or company within such thirty (30) day period. To the extent Purchaser does not make such an offer or the parties cannot agree on mutually acceptable terms for such a transaction, Seller shall use commercially reasonable efforts to sell the portion of the business or company derived from Restricted Business to a third party within one year of the acquisition thereof; provided that Seller shall not be deemed in breach of this Section after the expiry of such 1-year period if, in good faith, it has been unable to divest such business as of such expiration date and it continues in good faith to attempt to divest such business. This Section 12(b) shall terminate immediately following the acquisition of TIG Holdings, whether by merger, sale of stock or substantially all of the assets of TIG Holdings, by a third party or the merger of TIG Holding with or into a third party, including a "merger of equals" however accomplished. If the final judgment of a court of competent jurisdiction declares that any term or provision of this Section 12(b) is invalid or unenforceable, the Parties agree that the court making the determination of invalidity or unenforceability shall have the power to reduce the scope, duration, or area of the term or provision, to delete specific words or phrases, or to replace any invalid or unenforceable term or provision with a term or provision that is valid and enforceable and that comes closest to expressing the intention of the invalid or unenforceable term or provision, and this Agreement shall be enforceable as so modified after the expiration of the time within which the judgment may be appealed. (c) Non-Solicitation. The Parties hereby covenant and agree that for a period of twenty four (24) months following the Closing Date neither they nor any of their respective Affiliates shall, without the prior written consent of the other Parties, directly or indirectly, induce, encourage or solicit for employment or agency relationship any Transferred Employee on the part of Seller or any employee of Seller on the part of Purchaser or employ or enter into an agency relationship with any Transferred Employee or any employee of Seller as of the Closing Date; provided that the provisions of this Section 12(c) shall not apply to any Transferred Employee if Purchaser terminates such Transferred Employee, subjects such Transferred Employee to an indefinite lay-off, or such Transferred Employee or employee of Seller contacts the other Party on his or her own initiative without any direct or indirect solicitation by or encouragement by such Party (other than general solicitation in industry journals, national newspapers or other such publications). (d) Target Quota Share Reinsurance Agreement; Surplus. Immediately following the Closing, Purchaser shall cause Target to enter into the Target Quota Share Reinsurance Agreement in substantially the form of Exhibit G hereto and Seller shall cause the Subsidiaries of Seller party to such Agreement to execute and deliver such Agreement. Purchaser shall cause the statutory surplus of Target, calculated in accordance with statutory accounting principles prescribed or permitted by the California Insurance Department and after giving effect to the transactions contemplated hereby to exceed the minimum capital and surplus required by the California Insurance Department. Section 13. Conditions to Obligations of Seller. The obligation of Seller to consummate the transactions to be performed by it in connection with the Closing is subject to satisfaction of the following: (a) Accuracy of Representations and Warranties. The representations and warranties of the Purchaser in Section 8 hereof shall be true and correct in all material respects at and as of the Closing Date, except for representations and warranties made as of a specified date, which shall be true and correct in all material respects as of such date. (b) Performance by Purchaser. All of the obligations under this Agreement to be complied with and performed by Purchaser on or before the Closing Date shall have been complied with and performed in all material respects, including, without limitation, the delivery of each of the items to be delivered under Section 5(b) hereof provided that the covenant contained in Section 5(b)(i) shall have been complied with in all respects. At the Closing, Seller shall have received a certificate, dated the Closing Date and duly executed by an executive officer of the Purchaser (without personal liability to such officer) to the effect that the conditions set forth in Section 13(a) and (b) have been satisfied. (c) Legal Challenge. No suit, action or other proceeding shall be pending before any court or governmental agency, and no claim shall have been asserted, in which it is or will be sought to restrain or prohibit or to obtain damages or other relief in connection with this Agreement or the consummation of the transactions contemplated which, in the opinion of Seller's counsel, if successful would materially impair the ability of the Parties to consummate the transactions contemplated by this Agreement. (d) Approvals. The Parties shall have obtained all necessary approvals or assurances thereof from the Insurance Commissioners of the States of California and Michigan for the transfer of control of Target, and the transactions contemplated hereby, and the applicable waiting period under the H-S-R Act and rules and regulations promulgated thereunder shall have expired or early termination of the waiting period shall have been approved by the appropriate regulatory authority. Purchaser shall have obtained an IVANS account with respect to the Business and the software licenses referred to in Section 11(m). (e) Seller Quota Share Reinsurance Agreement; Loss Portfolio Transfer Agreement. The parties to the Seller Quota Share Reinsurance Agreement shall have entered into such Agreement in substantially the form of Exhibit H hereto and such Agreement shall be in full force and effect. The Loss Portfolio Agreement substantially in the form of Exhibit I hereto shall have been executed and delivered by the parties thereto and such agreement shall be in full force and effect. (f) Certificates. Purchaser will have furnished Seller with such certificates of its officers and others as Seller may reasonably request to evidence satisfaction of the conditions set forth in this Section 13, such certificates to be made without personal liability of such officer or other person signing such certificate. Seller may waive any condition specified in this Section 13 if it executes a writing so stating at or prior to the Closing. Section 14. Conditions to Obligations of Purchaser. The obligations of Purchaser to consummate the transactions to be performed by it in connection with the Closing is subject to satisfaction of the following conditions: (a) Accuracy of Representations and Warranties. The representations and warranties of the Seller in Sections 6 and 7 hereof shall be true and correct in all material respects at and as of the Closing Date, except for representations and warranties made as of a specified date, which shall be true and correct in all material respects as of such date. (b) Performance by Seller. All of the obligations under this Agreement to be complied with and performed by Seller on or before the Closing Date shall have been complied with and performed in all material respects, including, without limitation, the delivery of each of the items to be delivered under Section 5(a) hereof provided that the covenant contained in Section 5(a)(i) shall have been complied with in all respects. At the Closing, Purchaser shall have received a certificate, dated the Closing Date and duly executed by an executive officer of the Seller (without personal liability to such officer) to the effect that the conditions set forth in Section 14(a) and (b) have been satisfied. (c) Approvals. The Parties shall have obtained all necessary approvals and assurances thereof from the Insurance Commissioners of the States of California and Michigan for the transfer of control of Target, and the transactions contemplated hereby, and the applicable waiting period under the H-S-R Act and rules and regulations promulgated thereunder shall have expired or early termination of the waiting period shall have been approved by the appropriate regulatory authority. (d) Legal Challenge. No suit, action or other proceeding shall be pending before any court or governmental agency, and no claim shall have been asserted, in which it is or will be sought to restrain or prohibit or to obtain damages or other relief in connection with this Agreement or the consummation of the transactions contemplated hereby which, in the opinion of Purchaser's counsel, if successful would have a Material Adverse Effect on the Business, or would materially impair the ability of the Parties to consummate the transactions contemplated by this Agreement. (e) Transition Service Agreement; Loss Portfolio Agreement. The Transition Service Agreement in the form of Exhibit J hereto shall have been executed and delivered by the Seller and Target. The Loss Portfolio Agreement substantially in the form of Exhibit I hereto shall have been executed and delivered by the parties thereto and such agreement shall be in full force and effect. (f) Seller Quota Share Reinsurance Agreement. The parties to the Seller Quota Share Reinsurance Agreement shall have entered into such Agreement in substantially the form of Exhibit H hereto and such Agreement shall be in full force and effect. (g) Certificates. Seller will have furnished Purchaser with such certificates of its officers and others as Purchaser may reasonably request to evidence satisfaction of the conditions set forth in this Section 14, such certificates to be made without personal liability of such officer or other person signing such certificate. (h) Transfer of Acquired Assets. Subject to the Purchaser obtaining the consents referred to in Section 14(h) of the Disclosure Schedule, Seller shall have transferred to Target the Acquired Assets which are material to the Business. Purchaser may waive any condition specified in this Section 14 if it executes a writing so stating at or prior to the Closing. Section 15. Termination. (a) Termination of Agreement. The Parties may terminate this Agreement as provided below: (i) Purchaser and Seller may terminate this Agreement by mutual written consent at any time prior to the Closing. (ii) Purchaser may terminate this Agreement by giving written notice to Seller at any time prior to the Closing (A) in the event Seller has breached any material representation, warranty, or covenant contained in this Agreement in any material respect, Purchaser has notified Seller of the breach, and the breach has continued without cure for a period of thirty (30) days after the notice of breach or (B) if the Closing shall not have occurred on or before March 31, 1998, by reason of the failure of any condition precedent under Section 14 hereof (unless the failure results primarily from Purchaser itself breaching any representation, warranty, or covenant contained in this Agreement). (iii) Seller may terminate this Agreement by giving written notice to Purchaser at any time prior to the Closing (A) in the event Purchaser has breached any material representation, warranty, or covenant contained in this Agreement in any material respect, Seller has notified Purchaser of the breach, and the breach has continued without cure for a period of thirty (30) days after the notice of breach or (B) if the Closing shall not have occurred on or before March 31, 1998, by reason of the failure of any condition precedent under Section 13 hereof (unless the failure results primarily from Seller breaching any representation, warranty, or covenant contained in this Agreement). (b) Effect of Termination. If any Party terminates this Agreement pursuant to Section 15 above, all rights and obligations of the Parties hereunder shall terminate without any liability of any Party to any other Party (other than as a result of a willful breach of any covenant or agreement contained in this Agreement); provided, however that the confidentiality provisions contained in Section 11(c) above shall survive termination. Section 16. Survival; Indemnification. (a) Survival of Representations and Warranties. All of the representations and warranties of the Seller contained in Sections 6, 7 and 10 of this Agreement, and all of the representations and warranties of the Purchaser contained in Sections 8 and 10 of this Agreement, shall survive the Closing hereunder (unless the damaged Party knew or had reason to know of any misrepresentation or breach of warranty at the time of Closing) and continue in full force and effect for two (2) years thereafter. Notwithstanding any otherwise applicable statute of limitations, no claim, lawsuit, or other proceeding arising out of or related to the breach of any representation or warranty of the Parties contained herein may be made more than two (2) years after the Closing Date. (b) Remedies for Breaches of This Agreement. (i) Except in the case of any claim related to Taxes, for which the obligation of Seller to indemnify shall be governed solely by Section 9 hereof, in the event Seller breaches (x) any of its representations and warranties contained in Sections 6, 7 and 10 of this Agreement or (y) any of its covenants contained in this Agreement, and, if there is an applicable survival period pursuant to Section 16(a) above, provided that Purchaser makes a written claim for indemnification against Seller within such survival period, then Seller agrees to indemnify Purchaser from and against any Adverse Consequences Purchaser may suffer which are caused proximately by the breach; provided, however, that Seller shall not have any obligation to indemnify Purchaser from and against any Adverse Consequences caused by the breach of any representation or warranty of Seller contained in Sections 6 , 7 or 10 above and any loss otherwise indemnifiable under Section 9 of this Agreement (A) until Purchaser has suffered Adverse Consequences by reason of all such breaches in excess of a $1 million aggregate deductible (after which point Seller will be obligated only to indemnify Purchaser from and against further such Adverse Consequences) or thereafter (B) to the extent the Adverse Consequences Purchaser has suffered by reason of all such breaches exceeds the Purchase Price (after which point Seller will have no obligation to indemnify Purchaser from and against further such Adverse Consequences). Notwithstanding anything to the contrary in this Agreement, Seller will have no liability or obligation to Purchaser pursuant to this Section 16(b) or otherwise for any Adverse Consequences arising out of any breach of any representation or warranty made in this Agreement if disclosed in writing at or prior to the Closing. (ii) In the event Purchaser breaches (x) any of its representations and warranties contained in Sections 8 or 10 of this Agreement or (y) any of its covenants contained in this Agreement, and, if there is an applicable survival period pursuant to Section 16(a) above, provided that Seller makes a written claim for indemnification against Purchaser within such survival period, then Purchaser agrees to indemnify Seller from and against any Adverse Consequences Seller may suffer which are caused proximately by the breach; provided, however, that Purchaser shall not have any obligation to indemnify Seller from and against any Adverse Consequences caused by the breach of any representation or warranty of Purchaser contained in Sections 8 or 10 above (A) until Seller has suffered Adverse Consequences by reason of all such breaches in excess of a $1 million aggregate deductible (after which point Purchaser will be obligated only to indemnify Seller from and against further such Adverse Consequences) or thereafter (B) to the extent the Adverse Consequences Seller has suffered by reason of all such breaches exceeds the Purchase Price (after which point Purchaser will have no obligation to indemnify Seller from and against further such Adverse Consequences). Notwithstanding anything to the contrary in this Agreement, Purchaser will have no liability or obligation to Seller pursuant to Section 16(b) or otherwise for any Adverse Consequences arising out of any breach by Purchaser of any representation or warranty made in this Agreement if disclosed in writing at or prior to the Closing. (iii) Except in the case of any Tax Claim which shall be governed by Section 9(g) of this Agreement, if any third party shall notify any Party (the "Indemnified Party") with respect to any matter (a "Third Party Claim") which may give rise to a claim for indemnification against any other Party (the "Indemnifying Party") under this Section 16(b), then the Indemnified Party shall promptly (and in any event within five (5) business days after receiving notice of the Third Party Claim) notify each Indemnifying Party thereof in writing; provided, however, that no delay on the part of the Indemnified Party in notifying any Indemnifying Party shall relieve the Indemnifying Party from any obligation hereunder unless (and then solely to the extent) the Indemnifying Party thereby is materially prejudiced by such delay. (iv) The Indemnifying Party shall have the right, exercisable by giving notice to the Indemnified Party not later than thirty (30) days after receipt of the notice described in (iii) above, to assume the control of the defense, compromise or settlement of the Third Party Claim. (v) Upon the assumption of control by the Indemnifying Party as aforesaid, the Indemnifying Party shall, at its expense, diligently proceed with the defense, compromise or settlement of the Third Party Claim at the Indemnifying Party's sole expense, including employment of counsel, and in connection therewith, the Indemnified Party shall cooperate fully, but at the expense of the Indemnifying Party, to make available to the Indemnifying Party all pertinent information and witnesses under Indemnified Party's control and to make such assignments and take such other steps as in the opinion of counsel for the Indemnifying Party are necessary to enable the Indemnifying Party to conduct such defense, provided always that the Indemnified Party shall be entitled to reasonable security from the Indemnifying Party for any expense, costs or other liabilities to which it may be or may become exposed by reason of such cooperation. (vi) The final determination of any such Third Party Claim, including all related costs and expenses, will be binding and conclusive upon the parties hereto as to the validity or invalidity, as the case may be, of such Third Party Claim against the Indemnifying Party hereunder. (vii) Should the Indemnifying Party fail to give notice to the Indemnified Party as provided in clause (iv) hereof or in the event the Indemnifying Party declines to undertake the defense of any Third Party Claim, action or proceeding when first notified thereof, the Indemnified Party shall keep the Indemnifying Party advised as to the current status and progress thereof. The Indemnified Party agrees not to make any offer of settlement without first having provided five (5) days advance written notice thereof to the Indemnifying Party. In no event will the Indemnified Party consent to the entry of any judgment or enter into any settlement with respect to the Third Party Claim without the prior written consent of the Indemnifying Party (not to be unreasonably withheld). (viii) In the event the Indemnifying Party undertakes the defense of any such claim, action or proceeding, the Indemnified Party shall nevertheless be entitled to participate in (but not direct) the defense thereof with counsel of its own choice and at its own expense, and the parties agree to cooperate fully with one another in connection with the defense and/or settlement thereof; provided, however, that any decision to settle any such claim, action or proceeding shall be at the Indemnifying Party's sole discretion. From and after delivery of the notice referred to in clause (iii) above, the Indemnifying Party shall be relieved of the obligation to reimburse the Indemnified Party for any other legal, accounting or other out-of-pocket costs and expenses thereafter incurred by the Indemnified Party with respect to the defense of such claim, action or proceeding notwithstanding any participation by the Indemnified Party therein. (ix) If the Indemnified Party subsequently recovers all or part of the Third Party Claim from any other person legally obligated to pay the claim, the Indemnified Party shall forthwith repay to the Indemnifying Party the amounts recovered up to an amount not exceeding the payment made by the Indemnifying Party to the Indemnified Party by way of indemnity. (c) Mitigation. In the event that any Party suffers damage or loss in respect of which it has or makes a valid claim against another Party for indemnification, it must take reasonable steps to mitigate its loss or damage. (d) Determination of Adverse Consequences. The Parties shall make appropriate adjustments for tax benefits and insurance coverage in determining Adverse Consequences for purposes of this Section 16. All indemnification payments under Section 9 hereof or under this Section 16 shall be deemed adjustments to the Purchase Price. (e) Exclusive Remedy. Each Party, on behalf of itself and its Affiliates (and its partners, officers, directors and employees), hereby acknowledges and agrees that the sole and exclusive remedy with respect to any and all claims against the other Party and its Affiliates relating to the acquisition of Target and the Business or any other issue relating to the subject matter of this Agreement or the transactions contemplated hereby shall be pursuant to the indemnification provisions contained in Section 9 hereof and this Section 16. Purchaser, on behalf of itself and its Affiliates (and its partners, officers, directors and employees), hereby (i) waives and releases the Seller and its Affiliates (and their shareholders, officers, directors and employees) from any statutory or other rights of contribution or indemnity (except as set forth in this Section 16) with respect to the transactions contemplated hereby and the ownership of the Business and Target and (ii) waives and releases all rights of subrogation with respect to claims relating thereto. Notwithstanding the foregoing, each party shall have the right to pursue remedies against the other Party outside of this Section 16 to enforce covenants of such other party contained in the Transition Services Agreement, the Target Quota Share Reinsurance Agreement, the Seller Quota Share Reinsurance Agreement and the Loss Portfolio Transfer Agreement. Section 17. Press Releases. Each of the Parties to this Agreement hereby agrees with each other Party that no press release or similar public announcement or communication will be made or caused to be made prior to the Closing concerning the execution or performance of this Agreement or the transactions contemplated hereunder unless specifically approved in advance by the other Party. It is understood and agreed that no Party hereto shall disclose any facts or information with respect to this Agreement and the transactions contemplated herein prior to the Closing, except disclosures to insurance regulatory authorities, other governmental authorities, Seller's or Purchaser's representatives (in which case the disclosing Party shall use its reasonable best efforts to consult with the other Party before making the disclosure and to allow the other Party to review the text of the disclosure before it is made). Section 18. Expenses. Each of the Parties shall pay its own expenses incurred in connection with this Agreement and the consummation of the transactions contemplated hereby. Purchaser shall be responsible for paying all filing fees in connection with any H-S-R Act filing required to consummate this transaction. Seller shall be required to pay and shall indemnify Purchaser and Target against all transfer taxes payable in connection with the transfer of the Acquired Assets and the Shares hereunder Section 19. Cooperation Clause. Each Party agrees to execute and deliver, or cause to be executed and delivered, at or after the Closing, such additional or further transfers, assignments, resolutions, endorsements, power of attorney, and other instruments or documents as may reasonably be requested by the other for the purpose of carrying out the intentions of the Parties hereto. Any reasonable out-of-pocket expense associated with preparing or obtaining the requested material shall be borne by the requesting Party. Each Party agrees to cooperate with the other in effecting the transactions contemplated hereunder. Section 20. Waiver of Covenants and Conditions. At any time prior to the Closing Date or at the Closing, any Party hereto may waive compliance by a written instrument in any particular instance with any covenant or condition by, or breach of any representation or warranty by, any other Party hereto. No waiver of any term, provision or condition of this Agreement, whether by conduct or otherwise, in any one or more instances shall be deemed or construed as a further or continuing waiver of any such term, provision or condition. Section 21. Notices. All notices, requests, demands, claims and other communications hereunder shall be in writing and shall be deemed to have been duly given at the time hand delivered, mailed, certified mail-return receipt requested, or telefaxed, with hard copy mailed first class, postage prepaid, to the parties at the following addresses: (a) if to Seller, to: TIG Holdings, Inc. 65 East 55th Street, 28th Floor New York, New York 10022 Attention: Peter M. Acton Telephone: (212) 446-2705 Facsimile: (212) 371-8574 In the case of any notices, requests, demands, claims and other communications relating to any Tax matters covered described in Section 9 hereof, an additional copy to: Cynthia D. Crandall Vice President and Director of Tax TIG Insurance Company 5205 North O'Connor Blvd. Irving, TX 75039 with a copy to: Willkie Farr & Gallagher One Citicorp Center 153 East 53rd Street New York, New York 10022 Attention: Michael G. Marks Telephone: (212) 821-8000 Facsimile: (212) 821-8111 (b) if to Purchaser, to: Nationwide Mutual Insurance Company One Nationwide Plaza Columbus, Ohio 43215 Attention: David A. Diamond Vice President-Enterprise Controller Telephone: 614-249-4462 Facsimile: 614-249-3003 and: Office of General Counsel Mark B. Koogler Vice President and Associate General Counsel Telephone: 614-249-4649 Facsimile: 614-249-2418 or to any such other address as designated in writing by the appropriate party. Section 22. Assignment. None of the rights or obligations of any party hereto may be assigned or delegated in whole or in part without the consent in writing of the other party hereto. Section 23. Entire Agreement; Construction. This Agreement and the Exhibits, Disclosure Schedule and Purchaser Disclosure Schedule attached hereto embody the entire agreement and understanding between Seller and Purchaser with respect to the subject matter hereof and supersedes all prior agreements and understandings relating to such subject matter. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect any of the terms or provisions hereof. The Parties have participated jointly in the negotiation and drafting of this Agreement. In the event an ambiguity or question of intent or interpretation arises, this Agreement shall be construed as if drafted jointly by the Parties and no presumption or burden of proof shall arise favoring or disfavoring any Party by virtue of the authorship of any of the provisions of this Agreement. Any reference to federal, state or local statute or law shall be deemed also to refer to all rules and regulations promulgated thereunder, unless the context requires otherwise. The word "including" shall mean including without limitation. This Agreement may be amended only by a writing signed by all parties hereto. Section 24. Representations and Warranties; Disclosure Schedule. Neither the specification of any dollar amount in the representations and warranties set forth in Sections 6, 7, 8 and 10 nor the indemnification provisions of Section 16 nor the inclusion of any items in the Disclosure Schedule or the Purchaser Disclosure Schedule to this Agreement will be deemed to constitute an admission by Seller or Purchaser, or otherwise imply, that any such amounts or the items so included are material for the purposes of this Agreement. All documents or information disclosed in any section of the Disclosure Schedule or the Purchaser Disclosure Schedule to this Agreement are intended to be disclosed for all purposes under this Agreement and will also be deemed to be incorporated by reference in each of the other sections of the Disclosure Schedule or the Purchaser Disclosure Schedule to this Agreement to which they may be relevant. For purposes of this Agreement, the determination as to whether any item, event, circumstance or amount is "material" shall be made with reference to the Business and Target, taken as a whole. Purchaser acknowledges and agrees that the failure of the Independent Agents to continue to write Business prior to, at or after Closing shall not constitute a Material Adverse Effect, material adverse change or a material event for any purpose under this Agreement. Section 25. No Agreement until signed by all Parties. Nothing in this document will constitute an offer capable of acceptance or an agreement of any kind until this document is executed and delivered by each of the Parties. Section 26. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York without regard to conflict of law principles and shall be binding upon and shall inure to the benefit of the parties hereto and their successors and assigns. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly entered into as of the date first above written. PURCHASER: NATIONWIDE MUTUAL INSURANCE COMPANY By: /s/ Mark B. Koogler Name: Mark B Koogler Title: Vice President and Associate General Counsel SELLER: TIG INSURANCE COMPANY By: /s/ William H. Huff Name: William H. Huff, III Title: Senior Vice President and General Counsel EX-11 5 EXHIBIT 11 TIG HOLDINGS, INC. COMPUTATION OF EARNINGS PER SHARE (Unaudited) Exhibit 11
Three Months Nine Months Ended September 30, Ended September 30, (In millions, except per share data) 1997 1996 1997 1996 - --------------------------------------------------- ----------- ------------ ------------ ----------- Primary: Weighted average shares outstanding 51.2 55.3 52.2 57.1 Net effect of dilutive stock options - based on the treasury stock method using average market price 2.6 2.5 2.6 2.8 - --------------------------------------------------- ----------- ------------ ------------ ----------- Total primary common shares 53.8 57.8 54.8 59.9 - --------------------------------------------------- ----------- ------------ ------------ ----------- Net income $39.8 $37.3 $115.0 $40.0 Less preferred stock dividend requirements (0.5) (0.5) (1.5) (1.5) - --------------------------------------------------- ----------- ------------ ------------ ----------- Net income available to common stock $39.3 $36.8 $113.5 $38.5 - --------------------------------------------------- ----------- ------------ ------------ ----------- Net income per common share $0.73 $0.64 $2.07 $0.65 - --------------------------------------------------- ----------- ------------ ------------ ----------- Fully Diluted: Weighted average shares outstanding 51.2 55.3 52.2 57.1 Net effect of dilutive stock options - based on the treasury stock method using higher of average or end of period market price 3.2 2.9 3.1 2.9 - --------------------------------------------------- ----------- ------------ ------------ ----------- Total fully diluted common shares 54.4 58.2 55.3 60.0 - --------------------------------------------------- ----------- ------------ ------------ ----------- Net income $39.8 $37.3 $115.0 $40.0 Less preferred stock dividend requirements (0.5) (0.5) (1.5) (1.5) - --------------------------------------------------- ----------- ------------ ------------ ----------- Net income available to common stock $39.3 $36.8 $113.5 $38.5 - --------------------------------------------------- ----------- ------------ ------------ ----------- Net income per common share $0.72 $0.63 $2.05 $0.64 - --------------------------------------------------- ----------- ------------ ------------ -----------
TIG HOLDINGS, INC. SIGNATURES - -------------------------------------------------------------------------------- Pursuant to the requirements 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. Dated: November 14, 1997 TIG HOLDINGS, INC. By: /s/CYNTHIA B. KOENIG Name: Cynthia B. Koenig Title: Controller of TIG Insurance Company (Chief Accounting Officer) By: /s/EDWIN G. PICKETT Name: Edwin G. Pickett Title: Executive Vice President (Chief Financial Officer) EX-27 6 FDS --
7 (Replace this text with the legend) 0000897430 TIG Holdings, Inc. 1,000,000 US Dollars 3-Mos DEC-31-1997 Jun-01-1997 SEP-30-1997 1.000 0 4,218 4,218 0 0 0 4,405 5 1,334 171 6,832 3,238 759 0 0 124 25 0 1,230 (11) 6,832 380 71 1 0 259 0 122 55 (15) 40 0 0 0 40 0.73 0.72 3,691 0 0 0 0 3,691 0
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