-----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, SjpUXmINDLx7al0uoHKvVjDB5yGaL5QIwVZ2EKKYeUaWZ4Pw3G1pCQfr7HReqKd/ 1V6k0omgboVDy+dxpu+dFw== 0000912057-96-026348.txt : 19961118 0000912057-96-026348.hdr.sgml : 19961118 ACCESSION NUMBER: 0000912057-96-026348 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961114 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST MERCURY FINANCIAL CORP CENTRAL INDEX KEY: 0000929186 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 383164336 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 033-83382 FILM NUMBER: 96663923 BUSINESS ADDRESS: STREET 1: 29621 NORTHWESTERN HWY STREET 2: PO BOX 5096 CITY: SOUTHFIELD STATE: MI ZIP: 48034 BUSINESS PHONE: 8103584010 MAIL ADDRESS: STREET 1: 29621 NORTHWESTERN HGWY STREET 2: PO BOX 5096 CITY: SOUTHFIELD STATE: MI ZIP: 48086 10-Q 1 FORM 10-Q - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 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, 1996 Commission File Number 33-83382 FIRST MERCURY FINANCIAL CORPORATION (Exact name of registrant as specified in its charter) Delaware 38-3164336 (State or other jurisdiction (I.R.S. Employer Identification No.) of incorporation or organization) 29621 Northwestern Highway, P.O. Box 5096 Southfield, Michigan 48086 (Address of principal executive offices) (zip code) Registrant's telephone number, including area code: (810) 358-4010 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- The number of shares outstanding of the registrant's Common Stock, par value $.01, as of November 13, 1996 was 6,164.07. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- FIRST MERCURY FINANCIAL CORPORATION INDEX PART I. FINANCIAL INFORMATION PAGE NO. -------- Item 1. Financial Statements Condensed Consolidated Balance Sheets; September 30, 1996 (Unaudited) and December 31, 1995 2 Condensed Consolidated Statements of Operations (Unaudited); Three Months and Nine Months Ended September 30, 1996 and 1995 3 Condensed Consolidated Statements of Stockholders' Equity (Unaudited); Nine Months Ended September 30, 1996 and 1995 4 Condensed Consolidated Statements of Cash Flows (Unaudited); Nine Months Ended September 30, 1996 and 1995 5 Notes to Condensed Consolidated Financial Statements (Unaudited) 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7 Part II. OTHER INFORMATION 13 FIRST MERCURY FINANCIAL CORPORATION Condensed Consolidated Balance Sheets
September 30, December 31, ASSETS 1996 1995 ---- ---- (Unaudited) Investments: Debt securities available for sale, at market value $ 72,010,821 77,626,804 Preferred stocks, at market 3,182,487 3,694,910 Short-term investments 4,859,658 4,413,700 ------------- ------------- Total investments 80,052,966 85,735,414 Cash and cash equivalents 4,202,583 2,336,140 Premiums and reinsurance balances receivable 2,223,538 3,095,948 Accrued investment income receivable 799,469 905,699 Other receivables 856,217 300,000 Reinsurance recoverable on unpaid losses 6,359,926 3,556,940 Prepaid reinsurance premiums 2,615,729 705,870 Deferred acquisition costs 997,509 1,673,291 Deferred federal income taxes 2,180,193 1,813,631 Federal income taxes recoverable 863,336 1,199,775 Fixed assets, net of accumulated depreciation 2,008,966 1,654,401 Other assets 1,204,076 1,068,272 ------------- ------------- Total assets $ 104,364,508 104,045,381 ------------- ------------- ------------- ------------- LIABILITIES AND STOCKHOLDERS' EQUITY Loss and loss adjustment expense reserves $ 56,827,202 56,570,332 Unearned premium reserves 7,272,668 8,800,175 Long-term debt 10,000,000 10,000,000 Ceded reinsurance payable 128,838 254,657 Accounts payable and accrued expenses 4,147,496 2,015,347 ------------- ------------- Total liabilities 78,376,204 77,640,511 Minority interest 2,921 3,634 Stockholders' equity: Cumulative preferred stock, issued and outstanding 20,850 shares 209 209 Common stock, issued and outstanding 6,164.07 shares 62 62 Gross paid-in and contributed capital 3,474,872 3,474,872 Unrealized gains (losses) on marketable securities, net of federal income taxes (110,888) 1,270,614 Retained earnings 22,621,128 21,655,479 ------------- ------------- Total stockholders' equity 25,985,383 26,401,236 ------------- ------------- Total liabilities and stockholders' equity $ 104,364,508 104,045,381 ------------- ------------- ------------- -------------
2 FIRST MERCURY FINANCIAL CORPORATION Condensed Consolidated Statements of Operations (Unaudited)
Three Months Ended Nine Months Ended September 30, September 30, ------------------------ ------------------------ 1996 1995 1996 1995 ---- ---- ---- ---- Net earned premiums $ 3,639,467 7,336,732 18,116,994 21,532,907 Net investment income 1,294,354 1,932,035 4,004,187 4,610,643 Realized gains (losses) on the sale of investments 63,070 (34,268) 293,328 (251,170) Gain (loss) on assignment of non-standard automobile agency contracts (634,814) - 476,478 - Miscellaneous income 716,677 84,948 1,049,366 150,614 ------------ ------------ ------------ ------------ Total revenues and other income 5,078,754 9,319,447 23,940,353 26,042,994 ------------ ------------ ------------ ------------ Losses and loss adjustment expenses, net 2,198,670 6,040,692 14,613,139 16,736,252 Amortization of deferred acquisition expenses 675,238 1,358,130 3,692,607 4,203,602 Other underwriting expenses 722,652 1,283,099 2,834,674 3,687,070 Interest expense 298,809 275,000 904,700 822,029 ------------ ------------ ------------ ------------ Total expenses 3,895,369 8,956,921 22,045,120 25,448,953 ------------ ------------ ------------ ------------ Income before federal income taxes 1,183,385 362,526 1,895,233 594,041 Federal income taxes 329,774 (130,000) 585,559 (100,000) ------------ ------------ ------------ ------------ Net income $ 853,611 492,526 1,309,674 694,041 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Per-share earnings $ 138.48 79.90 212.47 112.59 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
3 FIRST MERCURY FINANCIAL CORPORATION Condensed Consolidated Statements of Stockholders' Equity (Unaudited)
Net Unrealized Gross Paid-in Gains (Losses), Preferred Common and Contributed Net of Federal Retained Stock Stock Capital Income Taxes Earnings Total ----- ----- ------- ------------ -------- ----- Balance at December 31, 1994 $ 209 62 3,437,372 (1,752,247) 22,051,234 23,736,630 Net income - - - - 694,041 694,041 Dividends paid to preferred stockholders - - - - (344,025) (344,025) Change in market values of marketable investment securities - - - 2,506,557 - 2,506,557 ------ ------ ------------ ------------ ------------ ------------ Balance at September 30, 1995 $ 209 62 3,437,372 754,310 22,401,250 26,593,203 ------ ------ ------------ ------------ ------------ ------------ ------ ------ ------------ ------------ ------------ ------------ Balance at December 31, 1995 $ 209 62 3,474,872 1,270,614 21,655,479 26,401,236 Net income - - - - 1,309,674 1,309,674 Dividends paid to preferred stockholders - - - - (344,025) (344,025) Change in market values of - - marketable investment securities - - - (1,381,502) - (1,381,502) ------ ------ ------------ ------------ ------------ ------------ Balance at September 30, 1996 $ 209 62 3,474,872 (110,888) 22,621,128 25,985,383 ------ ------ ------------ ------------ ------------ ------------ ------ ------ ------------ ------------ ------------ ------------
4 FIRST MERCURY FINANCIAL CORPORATION Condensed Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended September 30, ------------------------------------ 1996 1995 ---- ---- Net cash provided by (used in) operating activities $ (578,786) 917,701 Cash flows from investing activities: Cost of short-term investments acquired (24,609,445) (33,984,088) Proceeds from disposals of short-term investments 24,163,486 46,174,428 Cost of debt securities acquired (12,588,095) (39,689,955) Proceeds from maturities of debt securities 6,398,360 5,698,793 Proceeds from debt securities sold 10,299,246 19,281,339 Cost of equity securities acquired (868,078) (199,162) Proceeds from equity securities sold 1,288,984 - Proceeds from repayment of mortgage loan - 2,750,000 Other, net (470,204) (60,172) -------------- -------------- Net cash provided by (used in) investing activities 3,614,254 (28,817) -------------- -------------- Cash flows used in financing activities: Interest payments on senior subordinated notes (825,000) (736,389) Dividends paid to preferred stockholders (344,025) (344,025) -------------- -------------- Net cash used in financing activities (1,169,025) (1,080,414) -------------- -------------- Net increase (decrease) in cash and cash equivalents 1,866,443 (191,530) Cash and cash equivalents at beginning of period 2,336,140 2,290,376 -------------- -------------- Cash and cash equivalents at end of period $ 4,202,583 2,098,846 -------------- -------------- -------------- --------------
5 FIRST MERCURY FINANCIAL CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. The accompanying unaudited condensed consolidated financial statements of First Mercury Financial Corporation and subsidiaries (the "Company") have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. In management's opinion, all adjustments, consisting of normal recurring adjustments, which are necessary for a fair presentation of financial position and results of operations, have been made. It is recommended that these condensed consolidated financial statements be read in conjunction with the consolidated financial statements and notes related thereto included in the Company's December 31, 1995 annual report on Form 10-K. The results of operations for the nine month period ended September 30, 1996, are not necessarily indicative of the results to be expected for the full year. 2. Per share earnings are computed by dividing net income by the weighted average number of shares of common stock outstanding during the period. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS First Mercury Financial Corporation ("Mercury") is an insurance holding company incorporated in Delaware in December 1993 and engaged, through its subsidiaries, in the underwriting of specialty commercial lines and non-standard automobile insurance for individuals. Mercury's subsidiaries are First Mercury Syndicate, Inc. (the "Syndicate"), an Illinois business corporation and insurance syndicate member of the Illinois Insurance Exchange ("IIE"), First Mercury Insurance Company ("FMIC"), a newly formed Illinois property and casualty insurance company wholly owned by the Syndicate, and All Nation Insurance Company ("All Nation") and its wholly owned subsidiary, National Family Insurance Corporation ("National Family"), both Minnesota property and casualty insurance companies. Mercury and its subsidiaries are referred to herein as the "Company." National Family has been in rehabilitation under the supervision of the Minnesota Commissioner of Commerce and the Ramsey County District Court in Minnesota since 1966. Under generally accepted accounting principles, because All Nation currently lacks voting control over National Family, the financial statements of National Family are not consolidated with the financial statements of the Company. On April 30, 1996, an agreement was entered into between Mercury, All Nation, Allstate Insurance Company ("Allstate") and its wholly owned subsidiary, Deerbrook Insurance Company ("Deerbrook"), for the assignment of All Nation's independent agent contracts to Deerbrook and the ceding of associated prospective premium to Allstate on the agency-produced non-standard automobile business of All Nation. Neither Allstate nor Deerbrook are affiliates of Mercury or its subsidiaries. The agreement was effective May 1, 1996. The stated price for the independent agent contracts and associated prospective premium was $2.4 million with another $2.4 million paid by Allstate in exchange for a non-compete clause and various financial guarantees. On June 28, 1996, the Syndicate formed an Illinois property and casualty insurance subsidiary, FMIC, with an initial capitalization of $5 million, and several days later, contributed $15 million to the surplus of FMIC. The formation of FMIC, a licensed Illinois insurer, provided Mercury with an affiliated insurance company in which to place coverages previously offered by the Syndicate and in which to reinsure certain of the Syndicate's outstanding liabilities. Under a loss portfolio transfer effected June 28, 1996, the Syndicate transferred approximately $35 million in loss and loss adjustment expense reserves and corresponding assets to FMIC, resulting in net loss and loss adjustment expense reserves remaining in the Syndicate of approximately $4 million. In conjunction with the formation of FMIC and the loss portfolio transfer, on July 8, 1996, the Syndicate notified the IIE of its intention to withdraw from the IIE. Effective July 18, 1996, FMIC and Empire Fire and Marine Insurance Company ("Empire")agreed upon a quota share reinsurance arrangement whereby Empire writes on a direct basis the coverages previously offered by the Syndicate and cedes 50% of such business to FMIC. Empire will be performing claims handling services for this business as part of the reinsurance arrangement. On November 6 7, 1996, the Syndicate and the IIE executed the withdrawal agreement that sets forth the proposed terms of the Syndicate's withdrawal from the IIE. The formal withdrawal and other transactions contemplated in the withdrawal agreement will be consummated upon closing, which is expected to take place prior to year end. Several of the conditions to closing are dependent upon the approval of the Illinois Department of Insurance. In connection with the Syndicate's withdrawal, it is anticipated that the Syndicate will merge into FMIC, with FMIC being the surviving entity. Additionally, the withdrawal agreement provides that FMIC will establish a trust fund for the payment of claims under insurance policies issued and reinsurance agreements entered into by the Syndicate, including all claim liabilities transferred to FMIC under the loss portfolio transfer. In addition, $1 million will remain in a Guaranty Fund Account at the IIE for a period of three years. Any amounts remaining at the end of the three- year period will be paid to FMIC. The Syndicate is also required to pay withdrawal fees totaling $492,000 over a three year period, with one-third due upon closing and one-third at the annual anniversary dates. In connection with its withdrawal from the IIE, the Syndicate has voluntarily withdrawn from California and suspended operations in Florida, two states in which it was independently authorized to write premium or insurance. Following the withdrawal and merger, FMIC intends to pursue licensure or authority to write insurance business in a number of states. RESULTS OF OPERATIONS The following table reflects revenues of the Company for the three month and nine month periods ended September 30, 1996 and 1995:
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30, 1996 1995 1996 1995 ------------------- ------------------- ------------------- ------------------ AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT ------ ------- ------ ------- ------ ------- ------ ------- (DOLLARS IN THOUSANDS) ---------------------- NET PREMIUMS EARNED: Specialty commercial lines: Security, fire and alarm. . . . $2,158 59.3% 2,078 28.3% $6,347 35.0% 6,018 27.9% Police. . . . . . . . . . . . . 146 4.0 482 6.6 654 3.6 1,905 8.8 Public officials. . . . . . . . 145 4.0 223 3.0 501 2.8 765 3.6 Other . . . . . . . . . . . . . 331 9.1 357 4.8 844 4.7 956 4.5 Non-standard automobile lines: Agency auto liability . . . . . 400 11.0 2,853 38.9 6,782 37.4 8,479 39.4 Direct auto liability . . . . . 171 4.7 372 5.1 566 3.1 697 3.2 Agency auto physical damage . . 176 4.8 785 10.7 2,028 11.2 2,373 11.0 Direct auto physical damage . . 112 3.1 187 2.6 395 2.2 340 1.6 --- ---- ------ ----- ----- --- --- ---- Total net premiums earned. . . . . . $3,639 100.0% $7,337 100.0% $18,117 100.0% $21,533 100.0% ------ ------- ------ ------ ------- ------ ------- ------ ------ ------- ------ ------ ------- ------ ------- ------
NET PREMIUMS EARNED Net premiums earned for the three and nine months ended September 30, 1996 declined 50.4% and 15.9%, respectively, in comparison to the year earlier periods. The Company's specialty commercial lines, which are comprised of security, fire and alarm, police, public officials and miscellaneous commercial coverages, decreased 11.5% and 13.5%, respectively, for the three months and nine months ended September 30, 1996 versus the three months and nine months ended 7 September 30, 1995. Net premiums earned for security, fire and alarm coverages, however, increased 3.9% and 5.5%, respectively, in the third quarter of 1996 and in the first nine months of 1996, when compared to the same periods in the prior year. The Company has experienced a 42.7% increase in policy counts for the nine months ended September 30, 1996 in comparison to the year earlier period for security, fire and alarm coverages. This increase has been offset by declining premium rates in the first three quarters of 1996. The Company is writing these coverages under a quota share reinsurance agreement with Empire effective July 18, 1996. The Company believes that Empire's A+ (Superior) A.M. Best rating will allow it to write security, fire and alarm coverages at more profitable rates in the future. During the first quarter of 1996, the Company decided to non-renew a substantial amount of the police business, resulting in a 58.7% and 56.7% decrease in net premiums earned for police and public official coverages (often provided in tandem) for the three months and the nine months ended September 30, 1996 in comparison to the three months and nine months ended September 30, 1995. The Company has been actively pursuing a workers' compensation program as a complementary product to the security, fire and alarm coverages it provides. Net premiums earned for private passenger non-standard automobile coverages decreased 17.8% for the nine months ended September 30, 1996 in comparison to the year earlier period. For the three months ended September 30, 1996, net premiums earned for private passenger non-standard automobile coverages decreased 79.5% from the comparable period of the preceding year. The decrease in non-standard automobile net premiums earned resulted from the 100% reinsurance of all of the Company's agency-produced non-standard automobile premium with Allstate effective May 1, 1996. Net premiums earned for direct response non-standard automobile coverages have decreased slightly for the first nine months of 1996 versus the first nine months of 1995, however, the Company has refocused its efforts toward direct response coverages in the third quarter of 1996. NET INVESTMENT INCOME AND REALIZED INVESTMENT GAINS (LOSSES) Net investment income decreased approximately $638,000 for the three months ended September 30, 1996 as compared to the three months ended September 30, 1995. For the nine months ended September 30, 1996, net investment income decreased $606,000 in comparison to the same period of the preceding year. The primary reason for the decrease was the Company's recognition of a $500,000 yield maintenance fee on the early repayment of a mortgage loan in the third quarter of 1995. For the three months ended September 30, 1996, the Company realized a net gain on the sale of investments of $63,000 versus a net loss of $34,000 for the same period in the prior year. The Company recognized a net gain on the sale of investments of $293,000 for the nine months ended September 30, 1996 as compared to a $251,000 net loss for the nine months ended September 30, 1995. The net loss in 1995 primarily resulted from the Company's decision to reduce its investments in tax-exempt securities in the first quarter of 1995. At September 30, 1996, the unrealized loss on investments available for sale, net of tax, was 8 $111,000 in comparison to a $1.3 million unrealized gain as of December 31, 1995. The market value of the Company's portfolio has been adversely affected by the increase in interest rates over the first three quarters of 1996. GAIN ON ASSIGNMENT OF AGENCY CONTRACTS AND MISCELLANEOUS INCOME The Company recognized a gain on the assignment of the All Nation agency contracts of $476,000 for the nine months ended September 30, 1996. The gain recognized represents the net present value of the related payments from Deerbrook reduced by All Nation's estimated liability for losses under the quota share reinsurance contract and costs attendant with the sale of a line of business. The Company reevaluated its exposure under the risk-sharing clause of the quota share reinsurance agreement based on additional loss information and reduced the gain recognized by $635,000 in the third quarter of 1996. Revenue related to the non-compete clause of $134,000 has been recognized as of September 30, 1996 under a straight-line amortization over the 36 month term of the non-compete agreement. In the nine months ended September 30, 1996, All Nation also recognized approximately $464,000 of ceding fees under its quota share reinsurance arrangement with Allstate. LOSS AND LOSS ADJUSTMENT EXPENSES Loss and loss adjustment expenses incurred decreased 63.6% to $2.2 million for the three months ended September 30, 1996 from $6.0 million for the three months ended September 30, 1995. For the nine months ended September 30, 1996, loss and loss adjustment expenses incurred decreased 12.7% versus the comparable period in the preceding year. The loss and loss adjustment expense ratio for private passenger automobile coverages increased to 83.1% for the nine months ended September 30, 1996 as compared to 80.4% for the nine months ended September 30, 1995. The increase resulted primarily from declining rates during 1995 due to competitive pressures in the non-standard automobile business placed through independent agents. The Company implemented rate increases in all states during 1996 in an effort to recognize pricing inadequacies and results have improved from the 103% loss ratio experienced in the first quarter of 1996. Within the specialty commercial lines, the loss and loss adjustment expense ratio increased to 74.7% for the nine months ended September 30, 1996 versus 74.4% for the comparable period in the preceding year. The 1995 loss ratio reflects a release of reserve redundancies approximating $200,000. There were no reserve redundancy releases in the first nine months of 1996. AMORTIZATION OF DEFERRED ACQUISITION COSTS, OTHER UNDERWRITING EXPENSES AND INTEREST EXPENSE Amortization of deferred acquisition costs and other underwriting expenses represent the Company's costs to generate premium volume. For the third quarter of 1996, acquisition costs and other underwriting expenses decreased approximately $1.2 million to $1.4 million as compared to $2.6 million for the same period in the preceding year. For the nine months ended September 30, 1996, amortization of deferred acquisition costs and other underwriting expenses decreased $1.4 million to $6.5 million versus $7.9 million for the same period in the preceding year. The Company's underwriting expense ratio declined slightly in the first nine months of 1996 to 34.6% in comparison to 35.4% for the nine months ended September 30, 1995. The decrease in the 9 expense ratio occurred primarily due to reimbursed expenses under the Deerbrook service contract effective May 1, 1996. FEDERAL INCOME TAXES The effective tax rate for the nine months ended September 30, 1996 of 30.9% has increased from the effective tax rate for the first three quarters of 1995 of (16.8%). The Company has substantially eliminated tax-exempt securities in its portfolio since the first quarter of 1995, resulting in an effective tax rate closer to the federal tax rate of 34%. NET INCOME Net income for the three months ended September 30, 1996 was $854,000 compared to $493,000 for the same period in the preceding year, primarily due to improvement in All Nation's loss and loss adjustment expense ratio under the increased rates implemented in 1996 and revenue recognized under the non-compete agreement with Deerbrook and the quota share reinsurance contract with Allstate. For the first nine months of 1996, net income was $1,310,000 versus $694,000 for the nine months ended September 30, 1995. Net income for the first three quarters of 1996 includes the gain on the assignment of the agency contracts of $476,000, realized gains on investment sales of $293,000 and tax expense of $586,000 while the results for the nine months ended September 30, 1995 include realized losses on investment sales of $251,000 and a tax benefit of $100,000. Excluding these items, the Company recognized net income of $1,125,000 for the nine months ended September 30, 1996 as compared to net income of $845,000 for the nine months ended September 30, 1995, primarily due to the effects of the non-compete and quota share reinsurance agreements, as previously discussed. LIQUIDITY AND CAPITAL RESOURCES Mercury is a holding company whose principal assets are its investment in the capital stock of the Syndicate, FMIC and All Nation. Generally, Mercury is dependent upon the receipt of dividends from the Syndicate and All Nation to fund any necessary cash requirements, including debt service expenses. The insurance companies are restricted by regulation as to the amount of dividends they may pay without regulatory approval. The Syndicate's board of directors had authorized dividend payments from the Syndicate to Mercury of up to $2.0 million during 1996. No dividends were paid from the Syndicate to Mercury in the first nine months of 1996. In connection with the merger of the Syndicate into FMIC, the board has approved dividend payments from the Syndicate to Mercury of up to $2.4 million. In addition, Mercury anticipates cash payments from Deerbrook of $1.2 million each in 1996 and 1997, respectively, for the non- compete agreement. The Company believes these amounts are sufficient to meet Mercury's current cash flow requirements. The Company's subsidiaries' primary sources of cash flow are from premiums collected and amounts earned from the investment of this cash flow. The principal uses of funds are the payment of claims and related expenses and other operating expenses. The Company's insurance operations utilized cash of $579,000 during the nine months ended September 30, 1996 as compared to cash generated of $918,000 in the first three quarters of 1995. The decreased cash flow primarily 10 resulted from a decline in premium revenues at All Nation under the quota share reinsurance agreement with Allstate. At September 30, 1996, the insurance subsidiaries maintained cash and cash equivalents and short-term investments of $4.9 million to meet short-term payment obligations. In addition, the Company's investment portfolio is heavily weighted toward short-term fixed maturities and a portion of the portfolio could be liquidated without material adverse financial impact should further liquidity be necessary. As part of its investment strategy, and as required by debt covenants, the Company establishes a level of cash and highly liquid short- and intermediate- term securities which, combined with expected cash flow, is believed adequate to meet foreseeable payment obligations. As part of this strategy, the Company attempts to maintain an appropriate relationship between the average duration of the investment portfolio and the approximate duration of its liabilities. The weighted average maturity of the Company's fixed income portfolio as of September 30, 1996 was approximately three years. 11 FIRST MERCURY FINANCIAL CORPORATION PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company's subsidiaries are subject to routine legal proceedings in connection with their property and casualty insurance business. Neither Mercury nor any of its subsidiaries are involved in any pending or threatened legal proceedings which reasonably could be expected to have a material adverse impact on the Company's financial condition or results of operations. On November 6, 1996, an affiliate of the Company filed suit in the Circuit Court of Oakland County, Michigan, against several parties relating to such parties' roles in interfering with the July 1996 letter of intent to purchase a Michigan insurance agency. ITEM 2. CHANGES IN SECURITIES Not applicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the third quarter of 1996. ITEM 5. OTHER INFORMATION Not applicable. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K A. EXHIBITS 10.21 Withdrawal Agreement effective November 7, 1996 between the Syndicate and the IIE. 27 Financial Data Schedule. B. REPORTS ON FORM 8-K No report on Form 8-K was filed by the Registrant during the quarter ended September 30, 1996. 12 SIGNATURE 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. FIRST MERCURY FINANCIAL CORPORATION Date: November 13, 1996 By: /s/ William S. Weaver ------------------------------ William S. Weaver Chief Financial Officer (Principal Financial Officer and duly authorized to sign on behalf of the Registrant) 13 EX-10.21 2 EXHIBIT 10.21 WITHDRAWAL AGREEMENT WITHDRAWAL AGREEMENT Exhibit 10.21 THIS WITHDRAWAL AGREEMENT (this "Agreement") is made and entered into this 7th day of November, 1996, by and between the ILLINOIS INSURANCE EXCHANGE (the "IIE"), the ILLINOIS INSURANCE EXCHANGE IMMEDIATE ACCESS SECURITY ASSOCIATION (the "IASA"), the ILLINOIS INSURANCE EXCHANGE GUARANTY FUND, INC. (the "Guaranty Fund"), FIRST MERCURY SYNDICATE, INC. (the "Syndicate") and FIRST MERCURY INSURANCE COMPANY ("FMIC"). WHEREAS, the IIE operates as an insurance exchange pursuant to Article V 1/2 (215 ILCS 5/107.01 et seq.) of the Illinois Insurance Code (the "Code"); WHEREAS, the IASA is an Illinois not-for-profit corporation created pursuant to Section 107.26 of the Code; WHEREAS, the Guaranty Fund is an Illinois not-for-profit corporation created pursuant to Section 15.A.1. of the IIE Regulations (the "Regulations"); WHEREAS, the Syndicate, an Illinois business corporation, is a syndicate on the IIE; WHEREAS, FMIC, an Illinois stock property and casualty insurance corporation, is a wholly owned subsidiary and reinsurer of the Syndicate; WHEREAS, the Syndicate wishes to voluntarily withdraw from the IIE and cease operating as a syndicate on the IIE; and WHEREAS, this Agreement sets forth the terms of the Syndicate's voluntary withdrawal and plan for securing its claims and obligations, pursuant to Section 23 of the Regulations. NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth herein, and other good and valuable consideration, the receipt and sufficiency of which hereby are acknowledged, the parties hereto hereby agree as follows: ARTICLE 1 WITHDRAWAL OF THE SYNDICATE FROM THE IIE 1.1 WITHDRAWAL. Subject to the Syndicate being in compliance with and not in breach of any provisions of this Agreement, the IIE grants the Syndicate petition to withdraw as a syndicate on the IIE effective as of the Closing Date (as defined in Section 2.1 below), but the Syndicate or FMIC, as its successor, shall continue to be subject to the provisions of Sections 13, 15 and 22 of the Regulations. In this regard, the IIE, the IASA or the Guaranty Fund, as applicable, shall promptly notify FMIC of the receipt of any claim in connection with a policy issued by the Syndicate. FMIC shall have the right and duty to defend or settle, as it deems appropriate, any such claim against the IIE, the IASA or the Guaranty Fund. On and after the Closing Date, the IIE shall promptly report to FMIC all claims made 14 under policies issued by the Syndicate with respect to which the IIE receives notice. Also effective as of the Closing Date, the Syndicate shall be merged out of existence (as further described in Section 3.1 below) and thus shall conduct no further activity (I) as a syndicate on the IIE, nor (ii) as an independent entity. 1.2 WITHDRAWAL OF THE SYNDICATE. The Syndicate, as an independent entity, shall not engage in the underwriting of new or renewal insurance or reinsurance business on or after the date of this Agreement so long as this Agreement remains in effect. Subject to the terms and conditions of this Agreement and in accordance with the provisions of Section 23 of the Regulations, the Syndicate shall withdraw as an active syndicate of the IIE effective as of the Closing Date. Upon such withdrawal, the Syndicate and FMIC will not engage in any further activity as an insurance syndicate or member of the IIE. Notwithstanding the above, the Syndicate shall continue to be obligated for all claims, loss adjustment expenses, return premiums or any other matters arising from policies written or reinsurance agreements entered into while a member of the IIE. 1.3 NAME AND PURPOSE. As soon as practicable following the execution of this Agreement, the Syndicate shall be merged and dissolved out of existence, and the surviving corporation, FMIC, shall not include in its name or purpose any reference to "Syndicate," "Exchange" or "Illinois Insurance Exchange." ARTICLE 2 CLOSING 2.1 CLOSING. Subject to the terms and conditions hereof, the closing (the "Closing") of the transaction contemplated by this Agreement shall be held at the offices of the Illinois Insurance Exchange, 311 South Wacker Drive, Suite 400, Chicago, Illinois 60606, on such day and at such time as the parties hereto mutually shall agree, but in no event later than ten (10) days after the satisfaction or waiver of all of the conditions set forth in Articles 9 and 10 below. The date and time of the Closing is hereinafter referred to as the "Closing Date." ARTICLE 3 INSURANCE LIABILITIES 3.1 MERGER. As soon as practicable following the execution of this Agreement, subject to the approval of the Illinois Department of Insurance (the "Department"), the Illinois Secretary of State and any other applicable governmental or regulatory body, the Syndicate shall merge with and into FMIC, pursuant to Article X of the Illinois Insurance Code (the "Merger") with FMIC being the surviving entity, and simultaneously dissolve its corporate existence pursuant to the Illinois Business Corporation Act of 1983, as amended. Consequently, FMIC, as the surviving corporation, thereafter shall possess all of the assets, and assume all of the liabilities and obligations of the Syndicate, including those relating to the Syndicate's policyholders and reinsureds. The existing reinsurance agreement between FMIC and the Syndicate, dated June 28, 1996, will terminate by operation of law pursuant to the Merger. Immediately prior to the Merger and the Closing, the Syndicate shall pay a cash dividend to its shareholders in an aggregate amount not to exceed $2,400,000. The IIE hereby waives any applicable notice requirement regarding the dividend and any opportunity it may have to object to such 15 dividend. 3.2 TRUST FUND. (A) ESTABLISHMENT. As of the Closing Date, in order to ensure the satisfaction of the obligations of the Syndicate to its policyholders and reinsureds and of FMIC, as the surviving entity in the Merger, to the Syndicate's policyholders and reinsureds, FMIC shall establish a trust fund with the LaSalle National Trust, N.A. or such other bank as mutually agreed to by the parties for the payment of claims under insurance policies issued and reinsurance agreements entered into by the Syndicate (the "Trust Fund"). The Trust Fund shall be funded and administered in accordance with the terms of a Trust Agreement substantially in the form attached hereto as EXHIBIT A (the "Trust Agreement"), subject to the approval of the Illinois Department of Insurance. The Trust Fund shall be established solely for the benefit of the Syndicate's policyholders and reinsureds. As of the Closing Date, FMIC shall deposit into the Trust Fund cash or investments described in Sections 125.1a through and including 125.14a, and publicly traded investments described in Section 125.15b, of the Illinois Insurance Code, with an aggregate value equal to (1) 100% of the Syndicate's net loss and allocated loss adjustment expense reserves as reflected on the Syndicate's September 30, 1996 statutory financial statements, PLUS (2) 100% of FMIC's net loss and allocated loss adjustment expense reserves with respect to insurance business ceded to FMIC from the Syndicate, as reflected on FMIC's September 30, 1996 statutory financial statements, PLUS, (3) 100% of Syndicate's net loss and allocated loss adjustment expense reserves on all policies written and liabilities incurred by the Syndicate subsequent to September 30, 1996, PLUS, (4) 100% of FMIC's net loss and allocated loss adjustment expense reserves on business assumed from the Syndicate subsequent to September 30, 1996, PLUS, (5) 100% of the Syndicate's unearned premium reserves. The Syndicate shall provide to the IIE an original copy of the bank records verifying such deposits. (B) OPERATION. Subsequent to the Closing Date, FMIC shall collect and remit to the trustee of the Trust Fund, promptly upon receipt, cash or other admitted assets in an amount equal to the sum of the following: (1) 65% of all premiums, audit premiums or other consideration with respect to insurance policies issued and reinsurance assumed by the Syndicate; (2) any monies, credits, setoffs, allowances or commutation settlements, other than profit-sharing payments, received by FMIC from reinsurers with respect to reinsurance ceded by the Syndicate or FMIC with respect to Syndicate insurance business; and (3) all salvage and subrogation or any other recoveries arising from any policies issued and reinsurance agreements entered into by the Syndicate; LESS an amount equal to all reinsurance premiums paid on remaining reinsurance treaties with respect to reinsurance ceded by FMIC relating to Syndicate insurance business. Except for the payment of losses and allocated loss adjustment expenses under policies issued and reinsurance agreements entered into by the Syndicate, and except for the withdrawals expressly permitted hereunder, FMIC shall make no withdrawals from the Trust Fund. In the event FMIC enters into a commutation agreement with respect to Syndicate insurance business, FMIC promptly shall provide to the IIE either a copy of such commutation agreement or a summary providing pertinent information with respect to the commutation, at FMIC's option. (C) REPORTS. No later than on March 1, 1997, and periodically thereafter, FMIC shall provide to the IIE the following reports: 16 (1) a monthly report prepared by the trustee with respect to the Trust Fund in the form that typically is prepared by the trustee with respect to trusts of this type which, to FMIC's knowledge, will show remittances and disbursements from the Trust Fund together with a list of all assets in the Trust Fund and the market value of each asset; (2) an annual actuarial valuation as of December 31 of the prior year, conducted by an actuary who is either a member or fellow of the Casualty Actuarial Society or the American Academy of Actuaries ("Qualified Actuary"), that confirms that the Trust Fund contains assets equal to 100% of the undiscounted value of unpaid losses and allocated loss adjustment expenses with respect to policies issued and reinsurance assumed by the Syndicate LESS the amount of reinsurance ceded by FMIC (with respect to Syndicate insurance business) to unaffiliated reinsurers rated B+ (Very Good) or better by A.M. Best (the "Reserve Value"); and (3) an annual certification by an officer of FMIC that all disbursements and remittances have been made from and to the Trust Fund during the year ending the preceding December 31, only in accordance with the terms of this Agreement. The IIE shall not have the right to challenge the results or procedures used to generate such reports, or the individuals or entities which generate such reports. Nevertheless, the IIE shall have the right to ask questions of the trustee and the Qualified Actuary, each of whom shall be instructed by FMIC to respond as appropriate. Additionally, the IIE shall have the right to audit the Trust Fund, following reasonable notice to FMIC, at the IIE's sole expense. Notwithstanding the foregoing, in the event such an audit by the IIE reveals material deviations from FMIC's obligations pursuant to this Agreement, following FMIC's unsuccessful challenge of such audit results, FMIC shall reimburse the IIE for all of its audit expenses and the IIE shall retain all rights and remedies otherwise granted to the IIE under this Agreement. (D) WITHDRAWAL OF ASSETS. So long as the Trust Fund maintains assets equal to 100% of the most recently determined Reserve Value pursuant to Subsection (C)(2) hereof, FMIC shall have the right, at any time, to withdraw from the Trust Fund an amount less than or equal to all cumulative interest, dividends and earnings (including net realized capital gains) received with respect to the assets held in the Trust Fund (the "Investment Income") LESS trustee fees and Trust Fund expenses. Unless withdrawn pursuant to the terms of this Section, the remaining Investment Income and all monies received from the maturity, sale, redemption or other disposition of the assets shall be reinvested in the Trust Fund in a manner designated by FMIC, but only in cash or investments qualifying as admitted assets under the Illinois Insurance Code. In addition to the annual actuarial valuation described in Subsection (C)(2) above, FMIC may, at any time in its sole discretion, cause an actuarial valuation to be conducted by a Qualified Actuary to determine the Reserve Value. If, as a result of an actuarial valuation by a Qualified Actuary, it is determined that the balance of the Trust Fund exceeds the Reserve Value, FMIC also may withdraw from the Trust Fund the amount by which the balance of the Trust Fund exceeds the Reserve Value. Subsequent to such a withdrawal and so long as the Trust Fund maintains assets equal to 100% of the most recently determined Reserve Value pursuant to Subsection (C)(2) hereof, FMIC may withdraw all cumulative Investment Income subsequently received with respect to the assets in the Trust Fund. If the Reserve Value is determined to be greater than the balance of the Trust Fund by any amount, FMIC shall deposit assets into the Trust Account in an amount necessary such that the total assets in the Trust Fund equal 100% of the most recently determined Reserve Value, and FMIC may not 17 withdraw any further Investment Income from the Trust Fund until a subsequent actuarial valuation results in a determination that the balance of the Trust Fund exceeds the Reserve Value. (E) TERMINATION OF TRUST FUND. In the event that (I) an actuarial valuation by a Qualified Actuary results in a determination that the Reserve Value under policies issued or reinsurance assumed by the Syndicate is equal to or less than the lesser of $5,000,000 or 10% of the amount of the Trust Fund as of the Closing Date, and (ii) the policyholders' surplus of FMIC as of FMIC's most recent certified audit on file with the Illinois Department of Insurance is greater than $10,000,000, then the Trust Fund shall terminate and all remaining assets held in the Trust Fund shall immediately be paid to FMIC. The termination of the Trust Fund shall not extinguish any other obligation of the parties hereunder except for the reporting obligations set forth in Subsection (C)hereof and shall not terminate the obligation of FMIC to pay any and all claims under the policies issued or reinsurance assumed by the Syndicate. 3.3 CLAIMS HANDLING. During the period of runoff of the Syndicate's insurance liabilities, and until all such claims and liabilities have been settled and paid, FMIC shall assume all responsibility for the handling of insurance claims relating to the Syndicate's policyholders or reinsureds, including, but not limited to, salvage, subrogation, reinsurance notification and premium and reinsurance collections. ARTICLE 4 FUNDS HELD BY THE IIE, IASA AND GUARANTY FUND 4.1 LETTERS OF CREDIT. Upon the execution hereof and compliance with Section 9.1-C- of this Agreement, the IIE, IASA or Guaranty Fund shall cause the physical return to the Syndicate of the letters of credit listed on SCHEDULE 4.1. The return of such letters of credit shall constitute a partial release of the Syndicate's IASA Custodial Account. The parties agree that the letters of credit listed on SCHEDULE 4.1 constitute all letters of credit held by the IIE, IASA and Guaranty Fund with respect to the Syndicate. The IIE, IASA and Guaranty Fund each hereby represents, warrants and covenants that upon Closing it has, and in the future will have, no claim against or rights to the letters of credit referenced herein. 4.2 IASA ACCOUNT. At or prior to the Closing, the IIE and IASA shall take any and all necessary actions to cause the closure of the Syndicate's IASA Custodial Account and the release to the Syndicate or FMIC of all funds and assets deposited in or otherwise held in connection with the Syndicate's IASA Custodial Account. Subsequent to the Closing Date, neither the Syndicate nor FMIC shall have any further obligation to or with respect to the IASA. 4.3 GUARANTY FUND. (A) GUARANTY FUND ACCOUNT. Upon the execution hereof, the Syndicate shall fund its Guaranty Fund Custodial Account with cash or marketable securities having market value of not less than $1,000,000. All interest or other income accrued or paid with respect to the Guaranty Fund Custodial Account shall inure to the benefit of FMIC. So long as the Guaranty Fund Custodial Account remains at or above a market value of $1,000,000 LESS any amounts previously withdrawn by the Guaranty Fund, FMIC shall be permitted to withdraw at any time and from time to time all 18 interest or other income earned with respect to assets in its Guaranty Fund Custodial Account. FMIC agrees to maintain this Account with assets with a market value of no less than $1,000,000 LESS any amounts previously withdrawn by the Guaranty Fund, for the period of time required under this Agreement and the Regulations. The Syndicate's Guaranty Fund Custodial Account will continue to be available to the Guaranty Fund for a period of three (3) years from the date hereof (unless sooner released by resolution of the IIE Board of Trustees), to the extent provided in the Regulations. The Syndicate's Guaranty Fund Custodial Account shall be available for insolvencies determined prior to the date hereof or insolvencies dated within the three (3) year period following the date hereof, but only for losses arising on or before the date hereof. The Syndicate's Guaranty Fund Custodial Account shall be available for multiple insolvencies, but for any one insolvency only to the extent of no more than the lesser of (I) $500,000 or (ii) a proportional share of the Guaranty Fund's obligations determined by dividing the estimated Guaranty Fund's aggregate obligations by the number of syndicates whose custodial accounts are available as of the date hereof. Except as set forth herein, subsequent to the Closing Date, neither the Syndicate nor FMIC shall have any further obligation to or with respect to the Guaranty Fund. (B) RELEASE OF GUARANTY FUND CUSTODIAL ACCOUNT. At the next meeting of the IIE Board of Trustees following the execution of this Agreement, the Board shall adopt a standing resolution (a copy of which will be provided to FMIC promptly following adoption) authorizing the release to FMIC, on the third annual anniversary of the Closing Date, of all amounts remaining in the Syndicate's Guaranty Fund Custodial Account and not already finally determined to be available for insolvencies pursuant to the provisions of Section 4.3(A) hereof. In the event that a court of competent jurisdiction shall determine that any of the amounts released under this Section 4.3(B) should not have been released, FMIC shall indemnify the IIE, IASA or Guaranty Fund (as applicable) in the amount of the lesser of (I) the amount determined to have been improperly released, or (ii) the amounts released pursuant to this Section 4.3(B). In the event of any judicial proceeding seeking such determination, the IIE, IASA or Guaranty Fund (as applicable) promptly shall provide notice thereof to FMIC, and FMIC shall have the duty and right to defend the IIE, IASA and Guaranty Fund (as applicable) or to agree to any settlement thereof in FMIC's sole discretion. 4.4 OTHER FUNDS, ASSETS, ASSESSMENTS AND FEES. The IIE, IASA and Guaranty Fund waive any right to recover from the Syndicate or FMIC any special assessments or fees (other than regular premium assessments incurred by the Syndicate prior to the Closing Date) incurred by the Syndicate prior to, on or subsequent to the Closing Date. ARTICLE 5 WITHDRAWAL FEE 5.1 WITHDRAWAL FEE. The amount of the withdrawal fee pursuant to Section 23.B. of the Regulations is $492,151.50, and such withdrawal fee shall be payable, by corporate check, by the Syndicate or FMIC to the IIE as follows: (A) $164,050.50 shall be paid at the Closing; 19 (B) $164,050.50 shall be paid on the first annual anniversary date of the Closing Date; and (C) $164,050.50 shall be paid on the second annual anniversary date of the Closing Date. Such amounts payable by the Syndicate or FMIC shall be used by the IIE only as provided in Section 23.B. of the Regulations and not as part of a capitalization of or investment in any other entity. Additionally, if the IIE should declare a refund or distribution of assessments with respect to the 1996 year, the Syndicate shall be entitled to receive the fraction of the aggregate of such refund or distribution that the amounts paid by the Syndicate as assessments and withdrawal fees in 1996 bear to all assessments received by the IIE in 1996. Any such refund or distribution shall be made to the Syndicate simultaneously with that made to the other receiving parties. ARTICLE 6 REPRESENTATIONS AND WARRANTIES OF THE SYNDICATE AND FMIC 6.1 REPRESENTATIONS AND WARRANTIES. In order to induce the IIE, IASA and Guaranty Fund to enter into this Agreement and to perform their respective obligations hereunder, and acknowledging that the IIE, IASA and Guaranty Fund will have relied on the representations and warranties made by the Syndicate and FMIC in entering into this Agreement, the Syndicate and FMIC represent and warrant as follows: (A) ORGANIZATION. The Syndicate is a corporation duly organized, existing and in good standing under the laws of the State of Illinois. FMIC is an insurance corporation duly organized and existing under the laws of the State of Illinois. (B) DUE AUTHORIZATION; EXECUTION AND DELIVERY. The Syndicate and FMIC have the corporate power and authority to enter into and perform their obligations under this Agreement. The Syndicate and FMIC have taken all requisite corporate action to authorize the execution, delivery and performance of this Agreement. This Agreement is enforceable against the Syndicate and FMIC in accordance with its terms. (C) NO CONFLICTS. Except as provided elsewhere in this Agreement, the execution and delivery of this Agreement and the performance by the Syndicate and FMIC of their respective obligations hereunder will not conflict with, or result in a breach of, or constitute a default under, or result in the creation or imposition of any lien or charge under, any agreement or instrument to which the Syndicate or FMIC is a party or by which the Syndicate or FMIC may be bound, nor will any such action violate any statute, law, rule or regulation or any order, judgment, injunction or decree of any court or governmental authority binding upon or affecting the Syndicate or FMIC. (D) APPROVALS AND FILINGS. Except as provided elsewhere in this Agreement, to the Syndicate's or FMIC's knowledge, no approval, certification, authorization, consent, license, clearance or order of, declaration or notification to, or filing or registration with, any governmental, regulatory or other authority, body or entity, or court, is required to be obtained or made by either party hereto for the consummation of the transaction contemplated by this Agreement. (E) MISCELLANEOUS. To the Syndicate's knowledge: (I) all policies written by the Syndicate 20 have been reported to the IIE and all policies bound at the IIE actually have been issued; (ii) all known reported losses have been disclosed to the IIE, and all such losses and the current reserves for those losses as of September 30, 1996 are shown in SCHEDULE 6.1(E)(ii) attached hereto; (iii) the Syndicate has not entered into any agreements whereby it has assumed liabilities by reinsurance or otherwise that have not been disclosed in writing to the IIE; (iv) the Syndicate has not facultatively ceded any insurance liabilities other than those that have been disclosed in writing to the IIE; (v) none of the executive officers of the Syndicate nor its claims manager has actual knowledge of any circumstances that are likely to result in liability against the Syndicate or the IIE for bad faith claims handling or punitive damages; (vi) the Syndicate has no actual or potential material insurance claims that would not be reinsured by one or more of its reinsurance agreements because of late notice or any breach of condition; and (vii) the data, statistics, information and records provided to the IIE by the Syndicate were true, correct and complete in all material respects at the time provided. ARTICLE 7 REPRESENTATIONS AND WARRANTIES OF THE IIE, IASA AND GUARANTY FUND 7.1 REPRESENTATIONS AND WARRANTIES. In order to induce the Syndicate and FMIC to enter into this Agreement and to perform their obligations hereunder, and acknowledging that the Syndicate and FMIC will have relied on the representations and warranties made by the IIE, IASA and Guaranty Fund in entering into this Agreement, the IIE, IASA and Guaranty Fund represent and warrant to the Syndicate and FMIC as follows: (A) ORGANIZATION. The IIE is a not-for-profit corporation duly organized, validly existing and in good standing pursuant to the laws of the State of Illinois. The IASA and the Guaranty Fund are not-for-profit corporations duly organized, existing and in good standing under the laws of the State of Illinois. (B) DUE AUTHORIZATION; EXECUTION AND DELIVERY. Each of the IIE, IASA and Guaranty Fund has the power and authority to enter into and perform its obligations under this Agreement. Each of the IIE, IASA and Guaranty Fund has taken all requisite corporate action to authorize the execution, delivery and performance of this Agreement. This Agreement is enforceable against the IIE, IASA and Guaranty Fund in accordance with its terms. (C) NO CONFLICTS. Except as provided elsewhere in this Agreement, the execution and delivery of this Agreement and the performance by the IIE, IASA and Guaranty Fund of their obligations hereunder will not conflict with, or result in a breach of, or constitute a default under, or result in the creation or imposition of any lien or charge under, any agreement or instrument to which the IIE, IASA or Guaranty Fund is a party or by which the IIE, IASA or Guaranty Fund may be bound, nor will any such action violate any statute, law, rule or regulation or any order, judgment, injunction or decree of any court or governmental authority binding upon or affecting the IIE, IASA or Guaranty Fund. (D) APPROVALS AND FILINGS. Except as provided elsewhere in this Agreement, to the IIE's, IASA's and Guaranty Fund's knowledge, no approval, certification, authorization, consent, license, 21 clearance or order of, declaration or notification to, or filing or registration with, any governmental, regulatory or other authority, body or entity, or court, is required to be obtained or made by any party hereto for the consummation of the transaction contemplated by this Agreement. (E) OTHER FUNDS. None of the IIE, IASA or Guaranty Fund holds any funds of the Syndicate pursuant to Article V 1/2 of the Illinois Insurance Code or the Regulations, other than those specified herein. ARTICLE 8 SURVIVAL OF REPRESENTATIONS AND WARRANTIES 8.1 SURVIVAL. The foregoing representations and warranties of the Syndicate and FMIC and the IIE in Articles 6 and 7 of this Agreement, in other Articles or Sections of this Agreement, and in any document delivered to the other parties pursuant to the terms and conditions of this Agreement shall be deemed made upon the signing of this Agreement and again at the Closing and shall be fully effective and enforceable without time limit. ARTICLE 9 CONDITIONS TO THE IIE'S, IASA'S AND GUARANTY FUND'S OBLIGATIONS TO CLOSE 9.1 CONDITIONS TO CLOSING. The obligations of the IIE, IASA and Guaranty Fund to consummate the transaction contemplated by this Agreement shall be subject to the satisfaction, on or before the Closing Date, of each of the following conditions, unless otherwise waived in writing by the IIE, IASA and Guaranty Fund, as applicable: (A) MERGER. As of the Closing Date, the Department shall have approved the Trust Agreement, and the Syndicate and FMIC shall have received confirmation that the Articles of Dissolution of the Syndicate were filed with the Illinois Secretary of State and that the Agreement of Merger of the Syndicate and FMIC was filed with and approved by the Department, as described in Section 3.1 above. Copies of all documents mentioned in this paragraph and any amendments thereto, shall be provided to the IIE. (B) TRUST FUND. As of the Closing Date, the IIE shall have received a fully executed copy of the Trust Agreement, and evidence that FMIC shall have funded the Trust Fund in accordance with the provisions of Section 3.2(A) above. (C) GUARANTY FUND CUSTODIAL ACCOUNT FUNDING. As of the date of execution hereof: (1) the IIE shall have received evidence that the Syndicate has funded its Guaranty Fund Custodial Account with assets that qualify under Section 15.B. of the Regulations, which assets shall not include letters of credit; and (2) the Syndicate shall have sent a letter by certified U.S. mail to the custodian bank (and provided a copy to the IIE) stating that unless the custodian bank receives a certified 22 resolution from the IIE with different instructions, the custodian shall not distribute to the Syndicate, for a period of three (3) years from the Closing Date, assets or investment income if immediately thereafter the Guaranty Fund Custodial Account number 05-71600 would have assets with an aggregate fair market value of less than $1,000,000 LESS any amounts previously withdrawn by the Guaranty Fund pursuant to Section 4.3 hereof. The minimum required balance (except in the case of a reduced required balance resulting from the withdrawal of funds by the Guaranty Fund) can only be reduced pursuant to a certified resolution from the IIE Board of Trustees. (D) WITHDRAWAL FEE. At the Closing, the IIE shall have received from the Syndicate the first installment of the withdrawal fee, as described in Section 5.1 above. (E) REPRESENTATIONS AND WARRANTIES CERTIFICATE. The representations and warranties of the Syndicate and FMIC set forth in Article 6 of this Agreement shall be true and complete in all material respects as of the Closing Date, and the Syndicate and FMIC shall have materially performed and complied with all of their obligations, covenants, conditions and agreements under this Agreement to be performed or complied with by it on or prior to the Closing Date. At the Closing, the Syndicate and FMIC each shall deliver to the IIE a certificate duly executed by its President, dated as of the Closing Date, certifying that, to his knowledge: (I) the representations and warranties of each of the Syndicate and FMIC set forth in Article 6 of this Agreement are true and complete in all material respects as of the Closing Date; and (ii) each of the Syndicate and FMIC, respectively, has fully performed and complied with, in all material respects, all obligations, covenants, conditions and agreements required by this Agreement to be performed or complied with by it at or prior to the Closing. (F) RESOLUTIONS. At the Closing, each of the Syndicate and FMIC shall deliver to the IIE copies of each resolution adopted by the Syndicate's and FMIC's respective directors approving and adopting this Agreement, and approving and authorizing the consummation of the transaction contemplated hereby, accompanied by a certificate of the respective Secretaries of the Syndicate and FMIC, dated as of the Closing Date and certifying: (I) the date and manner of adoption of each such resolution; and (ii) that each such resolution is then in full force and effect, without amendment. (G) RESIGNATION. Upon the execution hereof, Jerome M. Shaw shall tender his resignation from his position as trustee on the IIE Board of Trustees. ARTICLE 10 CONDITIONS TO THE SYNDICATE'S AND FMIC'S OBLIGATION TO CLOSE 10.1 CONDITIONS TO CLOSING. The obligation of the Syndicate and FMIC to consummate the transaction contemplated by this Agreement shall be subject to the satisfaction, on or before the Closing Date, of each of the following conditions, unless otherwise waived in writing by the Syndicate: (A) MERGER. As of the Closing Date, the Department shall have approved the Trust Agreement, and the Syndicate and FMIC shall have received confirmation that the Articles of Dissolution of the Syndicate were filed with the Illinois Secretary of State and that the Agreement 23 of Merger of the Syndicate and FMIC was filed with and approved by the Department, as described in Section 3.1 above. (B) TRUST FUND. As of the Closing Date, the Syndicate or FMIC shall have received an executed acknowledgment of the IIE with respect to the Trust Agreement, as described in Section 3.2 above. (C) LETTERS OF CREDIT. Upon the execution hereof, the Syndicate shall receive physical possession of the letters of credit from the IIE, IASA or Guaranty Fund, as shown on SCHEDULE 4.1. (D) IASA ACCOUNT. At or prior to the Closing, the Syndicate or FMIC shall have received (I) evidence of the closure of the Syndicate's IASA Custodial Account, and (ii) all related funds and assets, as described in Section 4.2 above. (E) REPRESENTATIONS AND WARRANTIES CERTIFICATE. The representations and warranties of the IIE, IASA and Guaranty Fund set forth in Article 7 of this Agreement shall be true and complete in all material respects as of the Closing Date, and the IIE, IASA and Guaranty Fund shall have materially performed or complied with all of their respective obligations, covenants, agreements and conditions under this Agreement to be performed or complied with by them on or prior to the Closing Date. At the Closing, the IIE, IASA and Guaranty Fund each shall deliver to the Syndicate or FMIC a certificate duly executed by its Chief Executive Officer, dated as of the Closing Date, certifying that, to his knowledge: (I) the representations and warranties of each of the IIE, IASA and Guaranty Fund, respectively, set forth in Article 7 of this Agreement are true and complete in all material respects as of the Closing Date; and (ii) each of the IIE, IASA and Guaranty Fund, respectively, has fully performed and complied with, in all material respects, all obligations, covenants, agreements and conditions required by this Agreement to be performed or complied with by it at or prior to the Closing. (F) RESOLUTIONS. At the Closing, each of the IIE, IASA and Guaranty Fund shall deliver to the Syndicate and FMIC copies of each resolution adopted by the IIE's, IASA's and Guaranty Fund's respective directors approving and adopting this Agreement, and approving and authorizing the consummation of the transaction contemplated hereby, accompanied by a certificate of the respective Secretaries of the IIE, IASA and Guaranty Fund, dated as of the Closing Date and certifying: (I) the date and manner of adoption of each such resolution; and (ii) that each such resolution is then in full force and effect, without amendment. ARTICLE 11 RELEASES 11.1 SYNDICATE RELEASE. The Syndicate, for itself and its affiliates, officers, directors, employees, shareholders, attorneys, agents, predecessors, successors, heirs, executors, administrators, parents and subsidiaries, past and present, and assigns (collectively, the "Syndicate Releasing Parties"), fully and forever remise, release and discharge the IIE, IASA and Guaranty Fund, and all of their respective affiliates, officers, trustees, directors, employees, shareholders, attorneys, agents, predecessors, successors, heirs, executors, administrators, parents and subsidiaries, past and present, and assigns (collectively, the "IIE Released Parties"), of and from any and all manner of action or 24 actions, cause or causes of actions, suits, dues, sums of money, accounts, reckonings, bonds, bills, specialties, covenants, contracts, agreements, understandings, promises, claims, debts, proceedings, causes in action, controversies, costs, expenses, damages, and demands whatsoever (including, but not limited to, any claims that the Syndicate may have against the IIE, IASA or Guaranty Fund), of any kind or nature, in law, equity or otherwise, whether known or unknown, matured or unmatured, suspected or unsuspected (collectively, "Claims"), which any of the Syndicate Releasing Parties has had, now has or hereafter can, shall or may have against the IIE Released Parties or any of them, for or by reason of or arising out of or in any way related to the activities of the IIE Released Parties while the Syndicate was a syndicate on the IIE. Notwithstanding the foregoing, the Syndicate Releasing Parties expressly do not remise, release or discharge, and expressly retain, all Claims they now have or hereafter can, shall or may have against the IIE or the Guaranty Fund, for or by reason of or arising out of or in any way related to (1) a breach of obligations arising from this Agreement, or (2) any and all continuing obligations of the IIE or the Guaranty Fund with respect to all contracts of insurance or reinsurance entered into by the Syndicate while it was a syndicate on the IIE. 11.2 IIE, IASA AND GUARANTY FUND RELEASE. The IIE, IASA and Guaranty Fund, for themselves and their respective affiliates, officers, trustees, directors, employees, attorneys, agents, predecessors, successors, heirs, executors, administrators, parents and subsidiaries, past and present, and assigns (collectively, the "IIE Releasing Parties"), fully and forever remise, release and discharge the Syndicate and all of its affiliates, officers, directors, employees, shareholders, attorneys, agents, predecessors, successors, heirs, executors, administrators, parents and subsidiaries, past and present, and assigns (collectively, the "Syndicate Released Parties"), of and from any and all manner of action or actions, cause or causes of actions, suits, dues, sums of money, accounts, reckonings, bonds, bills, specialties, covenants, contracts, agreements, understandings, promises, claims, debts, proceedings, causes in action, controversies, costs, expenses, damages, and demands whatsoever (including, but not limited to, any claims that the IIE, IASA or Guaranty Fund may have against the Syndicate), of any kind or nature, in law, equity or otherwise, whether known or unknown, matured or unmatured, suspected or unsuspected, which any of the IIE Releasing Parties has had, now has or hereafter can, shall or may have against the Syndicate Released Parties or any of them, for or by reason of or arising out of or in any way related to the business engaged in by or the activities of the Syndicate while a syndicate on the IIE. Notwithstanding the foregoing, the IIE Releasing Parties expressly do not remise, release or discharge, and expressly retain, all Claims they now may have or hereafter can, shall or may have against the Syndicate or FMIC, for or by reason of or arising out of or in any way related to (1) a breach of obligations arising from this Agreement, or (2) any and all continuing obligations of the Syndicate or FMIC with respect to all contracts of insurance or reinsurance entered into by the Syndicate while it was a syndicate on the IIE. 11.3 FULL RELEASE. Except as noted above, these releases are intended to be effective as full and final accords, satisfactions and general releases of all past, present and future liabilities and obligations owed by each party to the others. ARTICLE 12 INDEMNIFICATION 12.1 INDEMNIFICATION. Each party hereto (the "Indemnifying Party") shall indemnify and defend the other parties and their shareholders, trustees, officers, directors, employees, attorneys, 25 agents, representatives, successors and assigns (collectively, the "Indemnified Parties") and hold the Indemnified Parties harmless from and against any and all loss, cost, damage, liability or expense (including, but not limited to, reasonable attorneys' fees ) suffered or incurred by the Indemnified Parties as a result of the Indemnifying Party's breach of any representation, warranty, covenant or agreement contained herein. The Indemnified Parties shall promptly notify the Indemnifying Party of any claim as to which recovery may be sought against the Indemnifying Party under this Section 12.1. Any notice given pursuant to this Section 12.1 shall contain a detailed statement of the nature and basis of the claim, the identity of the claimant, the demand and relief sought or requested by the claimant, and shall be accompanied by copies of all materials in the possession of the Indemnified Parties which reasonably relate to such claim. Subject to the foregoing provisions of this Section 12.1, the right to indemnification hereunder shall not be affected by failure of the Indemnified Parties to give such notice and related materials or delay by the Indemnified Parties in giving such notice or related materials unless, and then only to the extent that, the rights and remedies of the Indemnifying Party shall have been prejudiced as a result of the failure to give, or delay in giving, such notice or related materials. ARTICLE 13 TERMINATION 13.1 TERMINATION. This Agreement shall automatically terminate in the event that the Closing has not occurred within sixty (60) days after the date of this Agreement (unless the parties hereto agree in writing to extend such date). In such event, none of the parties hereto shall have any further rights or obligations hereunder. ARTICLE 14 MISCELLANEOUS 14.1 FURTHER ASSURANCES. From time to time on and after the Closing, each of the parties hereto shall use its reasonable efforts to take, or cause to be taken, all action and to do, or cause to be done, all things necessary, proper and advisable to consummate and make effective as promptly as practicable the transaction contemplated by this Agreement, in accordance with the terms and conditions hereof, including, but not limited to: (a) using reasonable efforts to remove any legal impediment to the consummation or effectiveness of such transaction; and (b) the execution and delivery of all such agreements, assignments and further instruments of transfer and conveyance necessary, proper and advisable to consummate and make effective the transaction contemplated by this Agreement in accordance with the terms and conditions hereof. 14.2 COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed an original, and such counterparts together shall constitute one instrument. 14.3 REMEDIES. In the event of any breach of the obligations imposed by this Agreement, the parties hereto shall have all rights and remedies available to them at law or in equity. In the event of any litigation among the parties hereto concerning the construction, breach or enforcement of any of the obligations of the parties hereunder, the prevailing party shall be entitled to recover attorneys' fees and other out-of-pocket costs incurred in investigating and prosecution or defending such 26 litigation; provided, however, that in the event that there shall be more than one prevailing party, such fees and costs shall be awarded in such a manner as the court shall determine to be most consistent with the relative merits and amount of the prevailing claims. 14.4 EXHIBITS AND SCHEDULES. Each of the exhibits and schedules referred to in or and attached to this Agreement is incorporated herein and made a part hereof by reference with the same effect as if set forth herein at length. 14.5 SUCCESSORS. The rights, duties and obligations set forth herein shall inure to the benefit of and be binding upon the parties hereto and their past, present and future officers, directors, employees, agents, representatives, attorneys, receivers, successors and assigns. 14.6 SEVERABILITY. The invalidity or unenforceability of any particular provision of this Agreement shall not affect the other provisions hereof, and this Agreement shall be construed in all respects as if such invalid or unenforceable provision were amended and reformed so as to make it valid and enforceable to the maximum extent permitted under law and within the general intent of the original provision. 14.7 HEADINGS. Section headings are included in this Agreement for convenience only and shall not affect the meaning or interpretation of this Agreement. 14.8 ENTIRE AGREEMENT AND AMENDMENTS. This Agreement, and the exhibits and schedules referred to in or attached to this Agreement, constitute the entire agreement of the parties with respect to the subject matter hereof, and unless otherwise stated herein, supersede any previous agreements, whether oral or written, regarding the subject matter hereof. This Agreement may be amended only by a written instrument signed by the parties hereto. 14.9 ASSIGNMENT. This Agreement and the rights and obligations of the parties hereunder shall not be assignable by any party hereto without the prior written consent of all of the other parties. 14.10 GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of Illinois, without regard to principles of conflicts of law. 14.11 WAIVER. No restriction, condition, obligation or provision contained in this Agreement shall be deemed to have been abrogated or waived by reason of any failure to enforce the same, irrespective of the number of violations or breaches thereof that may occur. 14.12 NOTICES OR OTHER COMMUNICATIONS. Any notice or other communication required to be sent to any party hereto pursuant to this Agreement shall be sent by facsimile transmission to be followed by U.S. Postal Service Express Mail, Next Day Service, overnight courier, or by personal delivery, as follows: (A) To the IIE, IASA or Guaranty Fund: 311 South Wacker Drive, Suite 400 Chicago, Illinois 60606 Attn: Gerald F. Murray, Esq. (B) To the Syndicate or FMIC: 27 First Mercury Insurance Company 29621 Northwestern Highway P.O. Box 5096 Southfield, Michigan 48086 Attn: Richard H. Smith with a copy to: Katten Muchin & Zavis 525 West Monroe Street Suite 1600 Chicago, Illinois 60661-3693 Attn: Richard M. Seligman, Esq. 14.13 NO THIRD PARTY BENEFICIARIES. No person or entity other than the parties hereto and their successors shall have any right to enforce or seek enforcement of this Agreement. 14.14 RECITALS. The recitals and prefatory phrases and paragraphs set forth above are incorporated in full in this Agreement. 28 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective duly authorized representatives as of the date first above indicated. ILLINOIS INSURANCE EXCHANGE By:\s\ James E. Tait ---------------------------------------- Name: James E. Tait -------------------------------------- Its: President ---------------------------------------- ILLINOIS INSURANCE EXCHANGE IMMEDIATE ACCESS SECURITY ASSOCIATION By:\s\ Gerald F. Murray ---------------------------------------- Name: Gerald F. Murray ---------------------------------------- Its: Secretary --------------------------------------- ILLINOIS INSURANCE EXCHANGE GUARANTY FUND, INC. By:\s\ Gerald F. Murray ---------------------------------------- Name: Gerald F. Murray -------------------------------------- Its: Secretary --------------------------------------- FIRST MERCURY SYNDICATE, INC. By:\s\ Jerome M. Shaw ---------------------------------------- Name: Jerome M. Shaw -------------------------------------- Its: President --------------------------------------- FIRST MERCURY INSURANCE COMPANY By:\s\ Richard H. Smith ---------------------------------------- Name: Richard H. Smith -------------------------------------- Its: President --------------------------------------- EX-27 3 EXHIBIT 27 FINANCIAL DATA SCHEDULE
7 1,000 9-MOS DEC-31-1995 JAN-01-1996 SEP-30-1996 72,011 0 0 3,182 0 0 80,053 4,203 411 998 104,365 0 7,273 56,827 0 10,000 0 0 0 3,475 104,365 18,117 4,004 293 1,526 14,613 3,693 2,835 1,895 586 1,310 0 0 0 1,310 212.47 212.47 53,013 16,023 (1,410) 5,366 11,793 50,467 0
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